In the Matter of )
)
Access Charge Reform ) CC Docket No. 96-262 )
Price Cap Performance Review ) CC Docket No. 94-1
For Local Exchange Carriers )
)
Transport Rate Structure ) CC Docket No. 91-213
and Pricing )
)
Usage of the Public Switched ) CC Docket No. 96-263
Network by Information Service )
and Internet Access Providers )
COMMENTS OF THE ASSOCIATION
FOR LOCAL TELECOMMUNICATIONS SERVICES
<
Richard J. Metzger
Emily M. Williams
Association for Local
Telecommunications Services
1200 19th Street, N.W.
Suite 560 Washington, D.C. 20036 (202) 466-3046
January 29, 1997
SUMMARY
The impressive batting average established by the Commission
in the Local Competition Order and Universal Service NPRM
proceedings took a beating when the Commission stepped up to the
plate in the present Access Charge Reform NPRM docket. Under the
so-called market-based deregulation scenario, the Access Charge
Reform NPRM proposes to virtually eliminate regulation of access
charges of incumbent local exchange carriers ("ILECs") based on
the belief -- never supported or questioned anywhere in the NPRM
-- that effective access competition already exists, or is just
around the corner. The blunt fact is that new entrants currently
have less than 3% of the total interstate and intrastate access
market.(1) While new entrants certainly hope to increase that
percentage, the size and speed of their success cannot be
predicted without first knowing the outcome of the pending
Expanded Interconnection proceedings, or the ultimate application
of the interconnection rules promulgated in the Local Competition
Order.(2) However, Expanded Interconnection remains uncompleted almost ten years after its start (see the timeline of Expanded
Interconnection events appended as Attachment A), and the
authority of the Local Competition Order's interconnection rules
is uncertain in light of the Eighth Circuit's pending review
proceeding.
While some of these problems may be outside the Commission's
authority, the market-based deregulation approach proposed in the
Access Charge Reform NPRM is fully within its control. But,
unfortunately, the NPRM has the ILEC deregulation cart way, way
ahead of the CLEC horse because it proposes to remove ILEC access
regulation long before complete removal of access entry barriers
for new entrants. And bad deregulation is indeed far worse than
bad regulation.
The market-based approach also suffers from fatal defects in
not insisting upon quantitative market share measurements in its
Phase 1 (or in any other phase). And it fails to properly
sequence ILEC access deregulation. Two examples leap from the
page. First, the Access Charge Reform NPRM proposes that special
access services be "immediately removed from price cap
regulation" (at ¶ 107), although elsewhere the Commission relies
on SWB's representation that dedicated transport costs five times
as much in non-urban areas than in more dense locations (at
¶ 114). Obviously, if the cost structure of special access is
actually so skewed, immediate removal of special access from
price cap regulation based on the existence of substantial
competition cannot possibly be justified. A second example is
the proposal that ICB and contract authority be granted to the
ILECs in Phase 1 without any finding of substantial competition,
even though the Price Cap Second FNPRM and the Interexchange
Order required substantial competition prior to granting that
level of deregulation -- requiring a 55% market share in the case
of AT&T.
The Access Charge Reform NPRM's prescriptive approach to
access charge reform is similarly unavailing. ALTS would be the
first organization to applaud a flash-cut in access prices which
was driven by effective access competition. But it makes no
sense to artificially reduce ILEC access margins -- and thus
retard market entry by new entrants -- before the remaining
significant regulatory barriers to effective competition have
been removed. The Access Charge Reform NPRM's claim that the
prescriptive approach would help "develop" access competition is
thus pure "voodoo regulation."
Concerning the rate structure proposals, ALTS generally
supports the Commission's proposal to move ILEC rate structures
closer to cost because this will enhance competition for rate
elements that have previously been underpriced, such as tandem
transport and switching.
Finally, ALTS shows there is no need for any regulation of new entrants. The "multi-bottleneck" referenced in the Access Charge Reform NPRM is unsupported in fact or economic theory. The central fact in any competitive market is that repeated attempts to exploit temporary market power -- and ALTS insists that no such power exists as to competitive terminating access -- are doomed to failure, and do not require regulatory intervention.
TABLE OF CONTENTS
SUMMARY .................................................... i
I. THE COMMISSION'S MARKET-BASED PROPOSA FOR
REFORMING ACCESS CHARGES IS FATALLY FLAWED .............. 1
A. Market-Based Deregulation Must Conform
To Three Basic Principles .......................... 2
(1) All Essential Pro-Competitive Regulatory
Initiatives Must be Identified and Completed . 2
(2) Quantitative Market Measurements Must
Be Employed .................................. 3
(3) There Must Be A Logical Sequencing of ILEC
Access Deregulation in Each Phase of a
Market-Based Approach ........................ 4
B. The Access Charge Reform NPRM's Proposed Market-
Based Approach Flunks All Three of the Above
Principles ......................................... 4
1. The Commission Must First Remove Existing
Barriers to Access Competition Before
Commencing Any Appreciable Reform of ILEC
Access Charge Regulation ..................... 5
Expanded Interconnection ............... 5
Interconnection Rules .................. 8
Section 271 Compliance ................. 9
"Fresh Look"............................. 10
Other Significant Entry Barriers ....... 11
Universal Service and Separations
Implementation ......................... 14
2. The Proposed Market-Based Approach Substitutes
Assumptions about Effective Competition for
Actual Measurements........................... 14
3. The Proposed Sequencing of ILEC Access
Deregulation is Anti-Competitive and Fails
to Incent ILEC Compliance with Remaining
Regulation ................................... 17
C. The Commission Should Abandon Its So-Called Market-
Based Approach and Return to the Task of Removing
Competitive Barriers ............................... 20
II. THE PRESCRIPTIVE APPROACH IS UNNECESSARY AND
UNDESIRABLE IF THE COMMISSION CURES ITS MARKET-BASED APPROACH. IF NOT, THE PRESCRIPTIVE APPROACH SHOULD
ONLY BE IMPLEMENTED VIA AN EXTENDED PHASE-IN .......... 21
III. RATE STRUCTURE ISSUES ................................. 23
A. SLC and CCL Restructuring ..................... 24
B. Tandem Rate Structures ........................ 25
C. Transport Interconnection Charge .............. 26
D. Local Switching ............................... 27
E. Takings Issues ................................ 28
IV. REGULATION OF NEW ENTRANTS ............................. 28
CONCLUSION ................................................. 29
ATTACHMENT A - Timeline of Expanded Interconnection
ATTACHMENT B - Local Telecommunications: Competition and
Bottlenecks - A Response to Gillan and Rohrbach;
Brenner and Woodbury
In the Matter of )
)
Access Charge Reform ) CC Docket No. 96-262 )
Price Cap Performance Review ) CC Docket No. 94-1
For Local Exchange Carriers )
)
Transport Rate Structure ) CC Docket No. 91-213
and Pricing )
)
Usage of the Public Switched ) CC Docket No. 96-263
Network by Information Service )
and Internet Access Providers )
COMMENTS OF THE ASSOCIATION
FOR LOCAL TELECOMMUNICATIONS SERVICES
Pursuant to the Notice of Proposed Rulemaking, Third Report
and Order, and Notice of Inquiry released December 24, 1996, in
the above dockets ("Access Charge Reform NPRM"), the Association
for Local Telecommunications Services ("ALTS") hereby comments on
the Commission's proposed reform of its current regulation of
interstate access charges.(3)
I. THE COMMISSION'S MARKET-BASED PROPOSAL FOR
REFORMING ACCESS CHARGES IS FATALLY FLAWED.
Driving the interstate access charges of incumbent local
exchange carriers ("ILECs") down to competitive cost levels
through effective competition in access markets is a great idea,
at least in theory, from the viewpoint of ALTS and its members. The reason for ALTS' enthusiasm is simple. The facilities-based
competitive members of ALTS share an important and central goal
in all their business plans: penetrating existing access markets
as quickly and effectively as they can, thereby moving rates
closer and closer to true competitive levels. ALTS' members are
thus dedicated to the same ultimate goal as the Commission's
market-based approach: letting competition, rather than
regulation, determine the level of access charges.
But effectively reforming a regulatory regime through market
forces requires much more than a simple declaration of open
competition. Indeed, the Commission has had considerable hands-on experience with such initiatives in: (1) the deregulation of
long-distance markets; (2) the elimination of dominant carrier
status for AT&T; and (3) the deregulation of customer premises
equipment ("CPE") and inside wiring. These experiences
demonstrate there are fundamental principles that govern market-based deregulatory approaches.
A. Market-Based Deregulation Must
Conform To Three Basic Principles.
Replacing regulation with market forces only makes sense if the following three fundamental considerations are fully implemented:
(1) All Essential Pro-Competitive Regulatory Initiatives
Must Be Identified and Completed. Any market-based approach to
access charge reform must insure that all the regulatory
requirements needed for effective competition in access markets
are either already in place, or else are firmly scheduled to be
implemented prior to, or contemporaneously with, ILEC access
deregulation. The Commission, at a minimum, must first ascertain
the "cause and effect" relationship that exists between these
regulatory barriers and the creation of effective competition in
various access markets, and then assure itself that all
regulatory initiatives having an appreciable effect on access
competition are being implemented on a known schedule, and that
everything reasonable is being done to expedite that
implementation. Indeed, the Access Charge Reform NPRM expressly
recognizes this fact (at ¶ 144): " ... if barriers to competition
are not eliminated, a market-based approach to access reform
likely would not work."
(2) Quantitative Market Measurements Must Be Employed. A
market-based approach to deregulation must link any proposed
changes in ILEC access regulation with the emergence of effective
competition in access markets. The only sound basis for
concluding that regulation can be replaced with competition is a
factual, quantitative determination that competition has reached
a level of effectiveness where it functions better than
regulation in setting prices, controlling entry and exit,
fostering product innovation, etc. The key role played by the
extent of competition in such an approach thus mandates that the
Commission utilize accurate quantitative measurements of the
extent of access competition in each relevant access submarket
(see, e.g., the Commission's the phased-in removal of dominant
carrier regulation for AT&T as its market share declined in
various markets).(4)
(3) There Must Be a Logical Sequencing of ILEC Access
Deregulation in Each Phase of a Market-Based Approach. A phased-in implementation of a market-based approach requires the
Commission to select carefully the particular changes in
incumbent regulation that will be made in each phase. If the
Commission elects to start phasing-in some changes in ILEC access
regulation before incumbents are required to complete fully their
own pro-competitive tasks (such as number portability, Section
251 interconnection agreements, Section 271 compliance, etc.),
then the changes in incumbent regulation most desired by the
ILECs must be placed in the final phase to assure the ILECs
finish their job. Furthermore, any changes that would allow
anti-competitive behavior by incumbents (such as ICB and contract
authority) should only be allowed after the phase-ins are
completed, and at a point at which the level of competition is
sufficient to insure competition could survive and defeat any
anti-competitive efforts.
B. The Access Charge Reform NPRM's Proposed Market-Based
Approach Flunks All Three of the Above Principles.
Unfortunately, the Commission's proposed market-based
approach fails all three of the above principles.
1. The Commission Must First Remove Existing Barriers to Access Competition Before Commencing Any Appreciable Reform of ILEC Access Charge Regulation.
In order to prevent fundamental structural distortions, it
would be necessary for the Commission to remove all appreciable
regulatory barriers to competition in access markets even if
there were already significant competition in those markets. But
the blunt fact is that new entrants currently have less than 3%
of the total interstate and intrastate access markets.(5) Plainly,
the task before the Commission should be the swift removal of
remaining regulatory barriers, not the elimination of ILEC access
regulation.
There are three kinds of regulatory barriers that require
removal in access markets: (1) ILEC control over bottleneck
facilities (currently at issue in the Expanded Interconnection
proceedings, and the Local Competition order); (2) legal
requirements inconsistent with the Telecommunications Act of 1996
imposed by state or local governments; and (3) competitive
barriers to effective competition outside the control of the
ILECs (most notably local government, building owners and
utilities). Unfortunately, none of these critical tasks are even
close to completion.
Expanded Interconnection - It has been almost ten years
since TCG and MFS first asked the Commission to implement
expanded interconnection arrangements (see Expanded
Interconnection with Local Telephone Company Facilities, CC
Docket No. 91-141, n.7). Yet the Commission has not yet
completed either its Phase I or Phase II investigations of the
ILECs' special and switched Expanded Interconnection tariffs (see
Local Competition at ¶ 558, n. 1358: "Our review of the LECs'
initial physical and virtual collocation tariffs raised
significant concerns regarding the implementation of our Expanded
Interconnection requirements and resulted in the designation of
numerous issues for investigation. The Commission has not yet
reached decision on most of these issues, though it has found
that certain rates for virtual collocation were unlawful"
(emphasis supplied).(6) And other significant related issues
remain unresolved. For example, competitive local exchange
companies ("CLECs") are still prevented from purchasing the
ILECs' term and volume discounted offerings, and ALTS and MCI's
appeal of SWB's FOIA request concerning its Expanded
Interconnection cost support has been pending for over two years!
While the Commission cannot fully control its own schedule,
and the passage of the Telecommunications Act certainly imposed
unprecedented demands on its resources, the inescapable fact
remains that Expanded Interconnection has not been completed,
thereby retarding the development of effective access
competition. Any suggestion of appreciable deregulation of ILEC
access charges would be irresponsible until this, and the other
proceedings discussed below, have been completed.
There is no question that Expanded Interconnection is
critical to the creation of effective access competition (In the
Matter of Expanded Interconnection with Local Telephone Company
Facilities, 9 FCC Rcd 5154, 5155 (1994); emphasis supplied): "Our
decisions mandating expanded interconnection and collocation are
fundamental to opening the interstate special access and switched
transport markets to greater competition." Indeed, ALTS pleaded
with the Commission to cure just a few of the outstanding
Expanded Interconnection issues in its Local Competition
proceeding (letter dated April 26, 1996). These include:
Immediate reissuance of the Commission's "physical
collocation" rules.
Immediate adoption of the portions of the virtual
collocation rules not included in the Commission's Virtual
Collocation order on remand out of the concern they
resembled "physical collocation," such as:
The requirement that ILECs offer a "$1 leaseback"
arrangement for interconnector designated equipment
("IDE"); and,
Rules allowing interconnector-competitors to use
non-ILEC personnel to install, maintain and repair
virtual collocation equipment at their option.
Preliminary refunds, with interest, of identified overcharges.
Resolution of ALTS' motion for expedited discovery of US
West's reports to DOJ concerning its compliance with the
antidiscrimination provisions of the MFJ in connection with
its new services, including virtual collocation.(7) (Section
251(j) of the 1996 Act transfers enforcement responsibility
over the substantive requirements of the MFJ to the
Commission until such time as the Commission expressly
supersedes those requirements.)
None of these requests were addressed in the Local Competition
order.(8)
Interconnection Rules - There is little need to belabor the
critical function of the interconnection rules established in the
Local Competition order. The Commission found it "critical ...
to establish among the states a common, pro-competition
understanding of the pricing standards for interconnection and
unbundled elements [and] resale ..." (at ¶ 618). However, the
Eighth Circuit has stayed the effectiveness of the Commission's
pricing rules, thereby making it uncertain whether they will ever
take effect.
Whatever the ultimate outcome of the current dispute over
the Commission's ability to adopt mandatory pricing standards,
the uncertain current situation creates significant issues for
new access entrants, particularly those that have not already
completed satisfactory interconnection agreements. As the
Commission knows, new entrants may enter access competition
first, but the speed and scale of their entry turns heavily on
the prognosis for their ultimate entry into local services. Even
if the Eighth Circuit's decision on the merits has no effect on
the portions of the Local Competition order dealing directly with
access competition -- and there is no basis for making such an
assumption at the present -- the obvious and substantial
contingency hanging over adjacent markets is a significant
barrier that must be cured prior to any appreciable relaxation of
ILEC access regulation.
Section 271 Compliance - The Telecommunications Act of 1996
does not require the Commission to carry out reform of ILEC
access charge regulation, but the Access Charge Reform NPRM
concludes that various: " ... fundamental changes in the
structure and dynamics of the telecommunications industry wrought
by the 1996 Act now necessitate that the Commission review
existing access charge regulations to ensure that they are
compatible with the 1996 Act's far-reaching changes" (at ¶ 5).
Among the factors cited by the Commission is the "competitive
checklist" imposed by Congress to insure effective local
competition prior to RBOC entry into in-region interLATA service.
The Commission is clearly correct as to its inherent
discretion to reform ILEC access regulation, and as to Section
271 as a source of authority as well as direction for the
Commission for certain of the elements needed for market-based
deregulation of ILEC access charges.
However, as shown by the discussion supra of the incomplete
Expanded Interconnection proceedings, and the discussion infra of
other access market entry barriers, the Section 271 checklist is
not an exhaustive list of the barriers that require removal prior
to ILEC access charge deregulation. In any event, no RBOC or
ILEC has yet demonstrated full Section 271 compliance. Indeed,
only one Section 271 application has even been filed, and ALTS
has filed a motion to dismiss that application for its failure to
state even a colorable claim of compliance.(9)
"Fresh Look" - Access competition will never be fully
successful if customers are penalized when they consider using
competitive carriers. This can happen if the ILECs have signed
long term contracts with customers that contain significant
penalties for early termination. There is evidence that in
anticipation of emerging competition, the incumbent LECs have
been aggressively pursuing long term contracts with their
customers.(10)
In the original Expanded Interconnection proceedings, the
Commission decided to limit the charges an incumbent local
exchange carrier could impose on customers terminating a long-term arrangement to an amount that would place the customer and
the incumbent local exchange carrier in the same position they
would have been in had the customer originally chosen a shorter
term arrangement. The "fresh look" option was limited to
customers with contracts of at least three years, and entered
into prior to the adoption of the initial Expanded
Interconnection Order.
Given the long delay in fully implementing Expanded
Interconnection, the Commission should renew its "fresh look"
period in order to insure its original goal of enabling effective
access competition has not been impaired by the long delay in
implementation.
Other Significant Entry Barriers - Significant entry
barriers to effective access competition are hardly limited to
the matters currently before the Commission in the above
proceedings. The Commission is well aware that despite the
provisions of Section 253 of the 1996 Act, which sought to
eliminate all state and local barriers to entry, CLECs attempting
to enter many markets are being thwarted by policies and rules
that either specifically or effectively prohibit their entry.
The Commission has ruled on at least two petitions for preemption
(See Classic Telephone, Inc., CCBPol 96-10 (1996), application
for review pending, No. 96-1498 (D.C. Cir. 1996); New England
Public Communications Council, Memorandum Opinion and Order, FCC
96-470 (1996)), and has several others pending. A year after
passage of the Act there are still statutes on the books that
prohibit outright the provision of service by any company other
than the ILEC, unless the ILEC consents. See Wyoming Stat. § 37-15-20.
More prevalent than statutes that discriminate against
competitors of the ILECs are local rules and regulations that
severely disadvantage or prohibit service by new entrants. It is
clear that many municipalities see the new entrants as a
substantial source of income for them (see National League of
Cities, The Telecommunications Act of 1996: What it Means to
Local Governments (1996)) and thus attempt to negotiate high
"franchise" fees or "rental rates" for use of the public rights of
way. These municipalities often do not seek similar fees from
the incumbents. Therefore, in seeking to provide service in many
municipalities the CLEC is presented with the option of either
suing the municipality for discrimination (which causes, at best,
extreme hard feelings with local officials with whom the company
would like to do business; see, e.g., GST Tucson Lightwave, Inc.
v. City of Tucson, No. CV 96-326 T-JMR (1996)), paying a fee that
its competitor (who has 100 percent of the market) does not pay,
or else giving up. Obviously these are not options with which
any business person would want to be faced. Until these types of
situations are no longer the norm, competitive provision of
access services will remain sporadic and a small percentage of
the overall market.
There are also severe restraints on the provision of
competitive access services caused by private parties. There are
many times that service cannot practically be provided unless a
competitive access provider has access to existing poles, ducts
and conduits of other carriers and utilities. That is precisely
why Congress amended the pole attachment provisions of the
Communications Act to ensure that new competitors have such
access. However, the ease with which CLECs have been able to
negotiate pole attachments with utilities has not increased
significantly since the passage of the Act and, in fact, a number
of utilities are challenging those portions of the Act in federal
court. See Gulf Power v. United States, Civ. No. 3:96 CV 381/LAC
(N.D. Fla. 1996).
Finally, the Commission must be cognizant of the
difficulties that competitive access providers have in obtaining
access to private buildings. ALTS recognizes that the 1996 Act
did not give competitive access providers specific rights to
privately owned buildings. At the same time, it is clear that
the difficulties that competitive providers have in getting to
potential customers when a building owner refuses access is going
to have a substantial effect upon the carriers' ability to
provide service.
Universal Service and Separations Implementation - If and
when the regulatory barriers to competitive access entry were
fully removed, it would still be necessary to coordinate the
phase-in of any ILEC access deregulation with the implementation
of the new universal service fund and proposed separations
changes. It makes no sense for the Commission to attempt to
craft fundamental changes in ILEC access charge regulation before
it can even assess the implications of such changes in light of
these fundamental factors. It is obvious that issues such as
combined interstate and intrastate revenue funding of a universal
service fund versus strictly interstate funding, could have
significant implications for access reform, as would the scope of
any separations changes. Instead of trying to speculate about
these effects, the Commission should pause until they are
reasonably well known and can be properly incorporated in any
access charge reform plan.
2. The So-called Market-Based Approach
Substitutes Assumptions about Effective
Competition for Actual Measurements.
Perhaps the most conspicuous omission in the Commission's
proposed market-based approach is its utter nonchalance as to the
need for accurate measurements of actual access competition in
Phase 1, or in any other phase of its proposal, for that
matter.(11)
But the "other factors" are far less determinative of
effective competition than market share, given the ILECs' control
over bottleneck facilities. It wouldn't make sense for
firefighters to pull up in front of a flaming building, and
proceed to ask bystanders whether various "other factors" suggest
the existence of a roaring conflagration. The Access Charge
Reform NPRM's market-based approach commits exactly the same
error by proposing to rely on such "other factors" and regulatory
changes as a surrogate for the direct measurement of actual
effective competition.(12)
With all due respect, the Access Charge Reform NPRM simply
has its logic upside-down on this point. It wouldn't matter if
the ILECs could summon up the ghost of Theodore Vail to testify
they had removed all regulatory barriers to effective
competition. The only bearing that removal of regulatory
barriers has on ILEC access deregulation is whether it actually
results in effective competition, and the only way to assess the
existence of effective competition is to measure it.(13)
The Access Charge Reform NPRM's reliance on the Price Cap
Second FNPRM to support its disregard for market data is
unavailing, since the issue there was whether AT&T's
approximately 50% market share -- combined with its lack of any
control over bottleneck facilities -- was "incompatible" with a
highly competitive market, and "hence, does not by itself
demonstrate that a firm possess market power" (at ¶ 142). Here
the issue is whether firms with over 97% market share and control
over bottleneck facilities could lack effective control over the
access markets. In this context, the role of actual competitive
market share must be paramount.
In addition to proposing no concrete competitive analysis in
Phase 1 of its market-based proposal, the Access Charge NPRM
refuses to acknowledge the compelling need for quantitative
analysis of market share in Phase 2 (at ¶ 203):
"As we observed in the Price Cap Second FNPRM, we previously
have used market share as one factor in measuring the
presence of competition. Nevertheless, there are drawbacks
to using market share. An analysis of the level of
competition for incumbent LEC services based solely on an
incumbent LEC's market share at one time may not provide an
adequate basis for us to conclude that a competitive
presence truly exists. Further, we lack data on the
relative market shares of incumbent LECs and their rivals,
and thus would need to develop reasonable and nonburdensome
ways to gather that information if we were to rely on it."
(Footnotes omitted; emphasis supplied.)
The first point here is that market share may not be
adequate to demonstrate the existence of a competitive market,
but it is entirely adequate to demonstrate the absence of a
competitive market, given the admitted continued existence of
ILEC control over bottleneck facilities. ALTS is unaware of any
economic literature or theory which holds to the contrary.
The second point is that the Commission has already
recognized the importance and feasibility of gathering market
information in Local Competition Data Collection, CCB-AID 95-110,
released November 3, 1995, which is still pending. While that
proposal failed to link the requested information properly to
pertinent Commission tasks, and suffered from an unduly granular
approach, the Commission clearly recognized there that this kind
of information could be collected and used on a regular basis.
3. The Proposed Sequencing of ILEC Access Deregulation Is Anti-Competitive and Fails to Incent ILEC Compliance With Remaining Regulation.
The proper sequencing of ILEC access deregulation in any
market approach is quite important. As Congress recognized in
Section 271, ILECs need an incentive to remove barriers and
bottlenecks, and thereby create an effective competitive access
market by the end of the process. Furthermore, potentially anti-competitive deregulatory measures, such as RFP and contract rate
authority, should be placed at the end of the phase-ins, not at
the beginning.
The original phase-in proposed in the Price Cap Second FNPRM
seemed to understand better the importance of sequencing. Phase
I would have simplified the treatment of new and innovative
offerings and removed lower service band indices, and perhaps
requiring a certain measure of competition "for a particular
service or service within a prescribed geographic market before
the proposal would be effective" (¶ 2). At Phase 2, upon
demonstration of "substantial competition," ILECs could place
services under streamlined regulation permitting the filing of
tariffs on 14 days' notice without cost support or upper or lower
service band indices. Not until Phase 3 would ILECs have
received nondominant carrier treatment, thereby permitting
geographic deaveraging (id.). In particular, the Commission
reaffirmed its existing limitations on ICB and contract pricing
(at ¶ 61-65).
The difference in sequencing in the Access Charge Reform
NPRM is staggering. Lower service band indices are jettisoned
immediately, special access is proposed to be deregulated
immediately (¶ 153), and ICB and contract pricing would be
granted in Phase I! Nowhere in the Access Charge Reform NPRM is
there any explanation for this total reversal in sequencing, nor
could there be any logical explanation.
Adoption of the Telecommunications Act of 1996 certainly
cannot explain this 180 degree about-face, since the key pro-competitive aspect of the 1996 Act, the Commission's Section 251
and Section 252 regulations, have been stayed by the Eight
Circuit, and may be set aside in their entirety.
Nor is there any new market data or analysis supporting this
flip-flop. Indeed, the Access Charge Reform NPRM is internally
inconsistent. It asks whether special access services "should be
removed immediately from price cap regulation," while elsewhere
it relies on SWB's representation that dedicated transport costs
"five times more in low-density area than in high-density areas"
(at ¶ 107) to support a proposal that the ILECs be granted a
"transitional mechanism" under which they could "deaverage its
rates downward in high-density areas to permit [them] to respond
to competition, while leaving its other rates unchanged in order
to permit it to continue recovering the existing contribution
included in those rates" (at ¶ 114).
The assumptions underlying these proposals are fundamentally
inconsistent. If the ILECs can sustain huge disparities in
dedicated transport rates (i.e., maintain significant price
discrimination), then it is impossible for the Commission to
conclude there is adequate competition to support the immediate
deregulation of all special access services.
Finally, the Access Charge Reform NPRM proposes granting ICB
and contract authority to the ILECs in Phase 1, stating (at
¶ 195): "Parties advocating that we should delay contract
carriage until Phase 2 or until substantial completion has been
reached should identify and quantify their concerns with
implementing this reform at Phase 1." ALTS hereby strenuously
objects to this proposal as unexplained and utterly inconsistent
with the Commission's Interexchange Order and the Price Cap
Second NPRM. The Interexchange Order only permitted AT&T to
streamline its business services upon a finding of substantial
competition -- that its market share had dropped to 39%-55% (at
¶ 112, n. 178). Here the only market data of record shows the
ILECs provide over 97% of all access, in addition to their
continued control of bottleneck facilities.
C. The Commission Should Abandon Its So-Called Market-Based Approach and Return to
the Task of Removing Competitive Barriers.
The defects in the Commission's current market-based approach are so profound that the Commission should abandon it entirely, and return to the approach urged by ALTS in the Price Cap Second FNPRM:
First and foremost, the Commission must correct the
deficiencies and problems still outstanding in its Expanded
Interconnection proceeding.
The Commission should employ quantitative analysis and quantitative phase-in triggers linked to specific access markets, much as it did in the gradual deregulation of AT&T.
The Commission should radically rearrange the phases of
its proposed ILEC access regulation relief to resemble those
originally proposed by ALTS in CC Docket No. 94-1.
II. THE PRESCRIPTIVE APPROACH IS UNNECESSARY AND UNDESIRABLE IF THE COMMISSION CURES ITS SO-CALLED MARKET-BASED APPROACH. IF NOT, THE PRESCRIPTIVE APPROACH
SHOULD ONLY BE IMPLEMENTED VIA AN EXTENDED PHASE-IN.
The Access Charge Reform NPRM never offers any justification
for pursuing a prescriptive approach to access charge reform
rather than a properly constructed market-based approach. The
reason for this silence, of course, is that no justification
exists. The central reason both Congress and the Commission have
concluded markets should be relied upon to set prices rather than
regulation is that regulation, despite the best efforts of the
regulators, has proven totally unable to replicate competitive
results. Lapsing back now to "prescriptive" regulation is a
white flag of surrender totally inconsistent with the
Telecommunications Act of 1996, as well as with the Commission's
longstanding goal of furthering competition. The prescriptive
approach should only be used if the Commission is unwilling or
unable to correct the errors in its market-based approach, and
then it should only be applied after the Commission has completed
the removal of the entry barriers described supra in Part I.
The Access Charge Reform NPRM asserts that "[i]n both the
prescriptive approach to access reform discussed in this Section
and the market-based approach discussed in Section V, we seek to
develop competition for interstate access services, which will
ultimately result in the deregulation of these services" (at
¶ 220). But this is patently untrue of the prescriptive
approach, which would lower the prices of incumbent access
charges, and thus reduce incentives for competitive entry.
In opposing the prescriptive approach, ALTS wishes to make
it clear it is not seeking "umbrella pricing" from the
Commission. ALTS and its members would be the principal
beneficiaries if regulatory barriers could be removed and
effective competition implemented overnight. But until those
happy goals are achieved, ALTS will strenuously object to the
"voodoo" regulation reflected in the prescriptive approach, where
reductions in ILEC access prices are supposed to foster access
competition.
There is nothing sinister or underhanded in new entrants
first attacking higher profit markets, and then migrating to
adjacent markets. This is precisely the pattern followed by MCI
and other long-distance competitors, and it follows the ordinary
pattern whenever competition in injected into monopoly markets.
Mandating an arbitrary and unsupported reduction in the current
margins of the access markets will unnaturally retard the
emergence of access competition -- not assist it.
In addition to the anti-competitive effect of a prescriptive
approach as compared to a properly constructed market approach,
it is clear a prescriptive approach could not be justified as
more immediately bringing benefits to long distance consumers.
End user prices in the long-distance industry are set
competitively, not by regulation. Any attempt to link a
prescriptive reduction in ILEC access charges to a mandatory
reduction in long distance rates would be doomed to failure, even
if it were within the Commission's existing authority.
Finally, the costing models currently proposed for use in a
prescriptive approach are not adequate to be totally relied upon
to shift the huge amounts of revenue that would be reallocated in
a prescriptive approach to ILEC access charge reform, amounts
which totally dwarf the modest levels involved in the Local
Competition Order's use of cost models, such as Hatfield and BCM.
ALTS applauds the Commission's industrious inquiry into cost
modeling, and looks forward to improvement in all current
approaches, including the upcoming Hatfield version 3, but it
clearly is premature to place massive reliance on the precision
of current modeling when a properly constructed market-based
approach provides an even better way of achieving effective
access competition.
Based on the foregoing, ALTS opposes any use of a
prescriptive approach instead of a properly constructed market-based approach. If the Commission does adopt a prescriptive
approach, ALTS asks that it employ a phase-in of at least five
years like that recommended by Ameritech (at ¶ 114).
III. RATE STRUCTURE ISSUES
ALTS supports the overall thrust of the Access Charge Reform
NPRM to move ILEC access charge rate structures closer to their
underlying economic cost. Cost-based ratemaking is not just a
theoretical goal, it is a practical necessity if substantial
competition is really to develop in all access markets.
A. SLC and CCL Restructuring
ALTS agrees with the Access Charge Reform NPRM's proposal to
shift more recovery of interstate non-traffic sensitive ("NTS")
loop costs from the minute-of-use ("MOU")-based Carrier Common
Line ("CCL") charges to end users via removal of current caps on
Subscriber Line Charges ("SCLs") for non-primary residence lines
and business lines in general.
The ILECs have long contended that the recovery of non-traffic costs via a traffic-sensitive charge imposed a burden
upon the ILECs' ability to compete for high toll volume access
customers (a burden that could not have been too extreme, given
that competitive providers have claimed only 2.7% of the total
access market). Mitigation of this burden will cure a major
complaint of the ILECs concerning supposedly unfair competition.
For those ILECs where removal of these particular SLC caps
fails to achieve full interstate NTS recovery, the Commission
needs to be careful in deciding how their remaining NTS costs
will be recovered. In particular, the Commission should not try
to solve such problems by means of capacity plans (sometimes
referred to as "bulk billing" plans) because the trailing
recovery component of such plans deters customers from switching
to competitive access competitors (i.e., because all capacity
plans necessarily rely on historical performance, IXCs would
still have to pay some amount to ILECs for past traffic even
after switching that traffic to a competitive provider of
access).
B. Tandem Rate Structures
ALTS agrees with the Access Charge Reform NPRM's proposal
that dedicated flat-rated charges should apply to all facilities
serving dedicated traffic. Currently, IXCs have the choice of
either paying MOU charges for transport from the serving wire
center ("SWC") to end offices based on airline mileage from the
IXC location to the end office, or paying flat-rated charges for
the transport from the SWC location to the tandem, and then MOU
charges from the tandem to the end offices (at ¶ 87).
The Access Charge Reform NPRM is clearly correct that such a
choice is anti-competitive. Correcting this distortion by
requiring that the ILEC facility between the IXC and the tandem
switch be rated as a Dedicated Transport facility would help
create important opportunities for competition in these markets.
As to the elimination of the MOU pricing option for the
Common Transport portion of tandem access, ALTS does not oppose
the creation of a flat-rate option, provided that Common
Transport revenues were also unbundled from all other parts of
tandem transport and switching.
C. Transport Interconnection Charge
There is little question the D.C. Court of Appeals was
correct in remanding the current Transport Interconnection Charge
("TIC") back to the Commission. Competitive Telecommunications
Association v. FCC, 87 F.3d 522 (1996). The readily correctable
cost misallocations include 80% of the tandem switching revenue
requirement, some SS7 costs, and some assumptions regarding the
comparability of direct trunked transport costs and special
access.
ALTS believes the Commission should quantify and eliminate
all readily correctable cost misallocations in its current access
tandem switching regime (in particular, by creating a NTS
switching element similar to that endorsed below for local
switching), and in its tandem transport rate structure. Once
this is accomplished, the Commission should rely on market-based
forces to reduce any remaining TIC, relying on a long-term phase
down only as a fall-back. All of these changes could serve to
make tandem switched access markets more open to competition.
D. Local Switching
ALTS agrees with the Access Charge Reform NPRM's proposal to
disaggregate switching costs into traffic-sensitive and non-traffic sensitive portions, and to allocate non-traffic sensitive
costs, such as switch ports, to the latter.
E. Takings Issues
ILECs continue to insist that any reductions in their access revenues, whether by a market-based approach or a prescriptive approach to access charge deregulation, would constitute a Fifth
Amendment "taking." But it is plainly premature for the
Commission to attempt now to address such claims in the absence
of any quantification from the ILEC industry.
Once the final version of access charge reform is ready for
implementation, the ILECs will then be in a position to raise
their Fifth Amendment taking issues concretely. In particular,
the ILECs should be free to charge their end users for any
amounts that are necessary to insure their constitutionally
minimal recovery provided that any such charges are: (1) clearly
identified to end users; (2) supported by public calculations of
the "shortfall" which identify the under-recovery involved, and
the relevant time periods; and (3) are shown not to have been
recovered in any other charges or manner.
IV. REGULATION OF NEW ENTRANTS
There is absolutely no need for the Commission to impose
regulation on new entrants. The cost of compliance would be yet
an additional structural regulatory barrier to companies that
comprise less than 3% of the total access market.
There is no economic rationale in the Access Charge Reform
NPRM for imposing regulation on competitive access. The only
factor mentioned in the Access Charge Reform NPRM in support of
such regulation is the assertion that "new entrants appear to
possess market power over IXCs needing to terminate calls" (at
¶ 279).
This is balderdash. Putting aside the issue of ILEC market
power over terminating access in the absence of competitive
alternatives, there is no such power for competitive providers.
Take the simple example of a person who builds and leases a
business park. If local law or leases do not control the prices
and availability of certain essential utilities (say
electricity), the landlord might think she could permanently
increase the value of her property by providing electricity to
the tenants at greatly inflated prices.
The outcome of such a plan is obvious. Tenants with escape
clauses in their leases would move, or threaten to move unless
they obtained reductions. And those who were stuck would express
their displeasure so vocally that the landlord would forced to
abandon her strategy when the leases came up for renewal. Rather
than increasing the value of her property, such a strategy would
probably decrease its value so long as it remained under her
management.
The same fundamental factors are equally applicable to the
competitive access industry. The first competitive access
provider foolish enough to attempt to exploit any perceived
market power over terminating access would find itself quickly
brought into line. For example, its access customer might start
getting letters from end users who had been informed they could
no longer reach the access customer, or else would be surcharged
for such calls. Given that most current competitive access
customers are businesses, such letters would not be well
received. Further, the CLEC might find itself slapped by
surcharges on any originating traffic it subsequently tried to
deliver to an "exploited" IXC, again angering its underlying
customer. A more scholarly explanation is provided in Local
Telecommunications: Competition and Bottlenecks - A Response to
Gillan and Rohrbach by Brenner and Woodbury (appended as
Attachment B), but the simple fact is that free markets are very
good at disciplining bad actors who cannot run away from large
fixed capital assets.
CONCLUSION
For the foregoing reasons, ALTS requests that the Commission reform the current ILEC access charge regime consistent with the pro-competitive intent of Congress reflected throughout the 1996 Act.
Respectfully submitted,
By: ________________________
Richard J. Metzger
Emily M. Williams
Association for Local
Telecommunications Services
1200 19th Street, N.W. Suite 560 Washington, D.C. 20036 (202) 466-3046 January 29, 1997
CERTIFICATE OF SERVICE
I hereby certify that the foregoing Reply Comments by the
Association for Local Telecommunications Services was served
January 3, 1997, on the following persons by first-class mail or
hand service, as indicated.
________________________
M. Louise Banzon
Thomas J. Beers
Deputy Chief, Legal, IAD
Common Carrier Bureau
Commission, Room 500
2033 M St., N.W.
Washington, D.C. 20554
Scott K. Bergmann
IAD
Common Carrier Bureau, Room 500
2033 M Street, N.W. 20554
Washington, D.C. 20554
Kalpak Gude
Common Carrier Bureau
FCC, Room 544
1919 M St., N.W.
Washington, D.C. 20554
ITS Inc.
2100 M Street, N.W., Suite 140
Washington, D.C. 20037
Lawrence Fenster
MCI Telecommunications Corp.
1801 Pennsylvania Ave., N.W.
Washington, D.C. 20006
Mark C. Rosenblum
Peter H. Jacoby
AT&T Corp.
295 Maple Avenue
Room 3245H1
Basking Ridge, NJ 07920
Jay C. Keithley
Sprint Corporation
1850 M St., N.W.
Suite 1100
Washington, D.C. 20036
Michael J. Shortley, III
Frontier Corp.
180 South Clinton Avenue
Rochester, NY 14646
James S. Hamasaki
Lucille M. Mates
Pacific Telesis
140 New Montgomery St., 1526
San Francisco, CA 94105
Gail L. Polivy
GTE Service Corp.
1850 M St., N.W.
Suite 1200
Washington, D.C. 20036
Robert M. Lynch
Durward D. Dupre
Southwestern Bell
One Bell Center, Suite 3520
St. Louis, MO 63101
Alan N. Baker
Ameritech
2000 West Ameritech Center Dr.
Hoffman Estates, IL 60196
Cambell L. Ayling
NYNEX
1111 Westchester Avenue
White Plains, NY 10604
M. Robert Sutherland
A. Kirven Gilbert III
BellSouth Corporation
Suite 1700
1155 Peachtree Street, N.E.
Atlanta, GA 30309-3610
David L. Brenner
Neal M. Goldberg
David L. Nicoll
NCTA
1724 Massachusetts Ave, N.W.
Washington, D.C. 20036
Glen S. Rabin
ALLTEL
Suite 220
655 15th St., N.W.
Washington, D.C. 20005
Margot Smiley Humphrey
Koteen & Naftalin, LLP
1150 Connecticut Ave, N.W.
Suite 1000
Washington, D.C. 20036
David Cosson
NTCA
2626 Pennsylvania Ave., N.W.
Washington, D.C. 20037
Lisa M. Zaina
OPASTCO
21 Dupont Circle, N.W.
Suite 700
Washington, D.C. 20036
Robert B. McKenna
US WEST, INC.
Suite 700
1020 19th St., N.W.
Washington, D.C. 20036
Mary McDermott
Linda Kent
Charles D. Cosson
Keith Townsend
1401 H St., N.W., Suite 600
Washington, D.C. 2005
USTA
1. 1 Table 1 of the Access Charge Reform NPRM indicates that total 1995 interstate and intrastate access charge revenue is $30.7 billion for Class A ILECs. The 1997 Annual Report on Local Telecommunications Competition (New Paradigm Resources Group, Inc. and Connecticut Research, 8th Ed. 1997) reports that year-end 1996 total competitive access charges revenues were $890 million (at 27). Assuming ILEC access revenues grew 6% by year-end 1996, this means CLECs have only 2.7% of the total access market by revenue, and less than one percent of the total telecommunications market. If ILEC switched access represents 80% of total ILEC access revenues, CLEC switched access revenues of $282 million are barely 1 percent of that amount.
2. 2 Recent press reports also suggest that facilities-based access competitors are a more significant near-term source of competition than resellers. See Wall Street Journal, "Big Carriers Are Slow to Enter Local Markets," January 28, 1997, at B-1.
3. 3 ALTS is the national trade association of more than thirty facilities-based providers of competitive access and local telecommunications services.
4. 4 See Revisions to Price Cap Rules for AT&T Corp., 10 FCC Rcd 3009, 3015 (1995)(relying on reductions in AT&T's share of commercial services market to 39%-54% level).
5. 5 See n.1, supra.
6. 6See also In the Matter of Southwestern Bell Telephone Company, Transmittal No. 2524, released January 24, 1997, designating supplemental Phase II issues for investigation and creating a schedule for direct case, oppositions, and rebuttal.
7. 7 These documents exist because US West violated the anti-discrimination provisions of the MFJ, was required to pay a $10,000,000 fine, and was forced to put into place and fully document specific business processes which would detect any future attempt at discrimination against services used by US West's competitors, including the virtual collocation services at issue in the Phase II Order, and to report these analyses to the United States Department of Justice.
8. 8 See Local Competition at ¶ 566: "We believe that, in light of the expedited statutory time frame for this rulemaking and limited record addressing the specific terms and conditions for collocations under section 251 in this proceeding, it would be impractical and imprudent to develop a large number of new substantive collocation requirements in this order."
9. 9 See ALTS Motion to Dismiss filed January 14, 1997, in CC Docket No. 97-1.
10. 10 See Telecommunications Reports, September 23, 1996, at 11, quoting the Vice President of marketing of SBC Communications Corp., as seeking long-term contracts with large customers as a means of preparing for competition; Indiana Utility Regulatory Commission, Cause No. 40612, wherein the Indiana Commission has commenced a proceeding to investigate whether Ameritech's raising of the rates for short-term Centrex service (while leaving untouched the rates for long-term service) is a barrier to competition at the local level; See also Comments of Intermedia Communications, Inc. in CC Dkt 96-98, at 15 (filed May 16, 1996).
11. 11 Access Charge Reform NPRM at ¶ 158: "While we do not propose to ignore market share data in assessing the level of competition for incumbent LEC services, we propose to consider market share in conjunction with other factors, including, but not necessarily limited to, supply and demand elasticities and pricing trends."
12. 12 Access Charge Reform NPRM at ¶ 140): "This [market-based] approach could be implemented incrementally, first eliminating certain regulatory constraints as incumbent price cap LECs demonstrate through credible, verifiable evidence that the conditions necessary for efficient local competition to develop in their service areas exist."
13. 13 The conceptual confusion of the Access Charge Reform NPRM on this point may have its origins in the current debate over the role of metrics in Section 271 applications, where RBOCs claim, based on their interpretation of the legislative history, that in-region interLATA does not require any particular level of competition (see Ameritech's Brief in CC Docket No. 97-1 at 46-47). But even if the RBOCs were correct in their interpretation of Section 271 (and they are not correct for the reasons discussed in ALTS' December 13th letter to the Department of Justice concerning Section 271), that argument has no bearing on the Commission's consideration of ILEC access charge reform.