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Before the
Federal Communications Commission
Washington, D.C. 20554
In the Matters of
GTE Corporation, Transferor,
And
Bell Atlantic Corporation, Transferee, For Consent to
Transfer Control of Domestic and International
Sections 214 and 310 Authorization and 310
Authorizations and Application to Transfer Control
of a Submarine Cable Landing License
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CC Docket No. 98-184
MEMORANDUM OPINION AND ORDER
Adopted: May 19, 2003 Released: May 20,
2003
By the Chief, Enforcement Bureau:
I. INTRODUCTION
In this Order, we deny Verizon Communications, Inc.'s
(``Verizon'') request to overturn or modify an
Investigations and Hearings Division (``Division'')
interpretation regarding certain compliance requirements in
the Bell Atlantic/GTE Merger Order.1 Specifically, we
uphold the Division's interpretation of the formula Verizon
must use to calculate certain voluntary payments that it
makes under the Bell Atlantic/GTE Merger Order's Carrier-to-
Carrier Performance Plan (``Performance Plan'').
II. BACKGROUND
In the Bell Atlantic/GTE Merger Order, the Commission
adopted, with modifications, certain voluntary conditions
submitted by Bell Atlantic and GTE intended to mitigate any
public interest harms that might otherwise arise from the
merger.2 Under Condition V of the merger conditions - the
Performance Plan - the merged company, now Verizon, must
report performance measurements designed to help the
Commission assess the quality of service elements that
Verizon provides to competitive local exchange carriers
(``CLECs'').3 The Performance Plan acts as a self-executing
mechanism to offset the risk that Verizon would discriminate
against CLECs in the provision of unbundled network elements
and other telecommunications services.4 The Performance
Plan consists of two parts. First, Verizon must report
monthly performance data that measures the quality of
service that Verizon provides to CLECs. 5 Second, if
Verizon fails to meet certain performance goals established
in the Performance Plan, it must make voluntary
contributions to the U.S. Treasury.6 The merger conditions
provide detailed instructions on how to calculate Verizon's
voluntary payment obligations based on its monthly
performance data.7
Verizon's compliance with the merger conditions, including
the Performance Plan, is subject to an annual independent
audit.8 In discussions with the audit staff of the
Division, the independent auditor requested an
interpretation of one provision of the Performance Plan's
voluntary payment formula.9 Specifically, the independent
auditor asked whether the payment formula for measurements
using averages or means (e.g., Trouble Duration Interval,
OSS Response Time) permits Verizon to apply a cap¾in
addition to other caps included in the calculation
formula¾to a factor in the payment formula midway through
the calculation process.10 On May 29, 2002, the Division
responded that the formula does not allow Verizon to apply
such a cap, i.e., to cap the difference between the actual
average service to CLECs and a certain calculated average
reflecting the minimum acceptable level of Verizon's
service.11 On September 20, 2002 and October 3, 2002,
Verizon submitted requests to the Bureau seeking review of
the Division's interpretation.12 Verizon contends that the
voluntary payment formula allows the use of an additional
cap and that the Bureau should apply such a cap for Verizon
because the Common Carrier Bureau had approved a similar cap
for SBC Communications, Inc.'s (``SBC'') Carrier-to-Carrier
Performance Plan mandated by the SBC/Ameritech Merger
Order.13
III. DISCUSSION
We conclude that the merger conditions do not permit Verizon
to apply an additional cap midway through the calculation
process for performance measures using averages or means.14
In so ruling, we reject Verizon's claim that application of
the formula without an additional cap will cause Verizon to
make more voluntary payments than actual occurrences of the
inadequate service. Finally, we disagree with Verizon that
it is similarly situated to SBC, thereby warranting the
requested cap. As discussed below, the public policy
considerations that led to a modification of SBC's
Performance Plan are not present here.15
A. The language and rationale of the voluntary payment
formula do not require an additional cap to ensure that
Verizon does not make contributions for more than the
actual number of observations.
First, the formula for calculating voluntary payments for
performance measurements using averages or means does not
allow Verizon to apply an additional cap midway through the
process. The Performance Plan requires Verizon to make
voluntary payments to the U.S. Treasury based on the quality
of its performance, the volume of activity in the service in
question, and the dollar value assigned to each category of
service.16 The Performance Plan spells out a four-step
process for calculating the amount of Verizon's payments.17
First, Verzion must calculate the average or mean for the
measurement that would yield a minimum acceptable value
(referred to as ``the Critical Z-value'' in the technical
language of the Performance Plan) that represents Verizon's
minimum provision of service that, at the least, would not
result in a voluntary payment obligation.18 Second - and
this is the step at issue - Verizon must calculate ``the
percentage difference between the actual average and the
calculated average'' (i.e., the ``percentage difference'').
This second step measures the quality of Verizon's
performance.19 Third, Verizon must multiply the total
number of data points (i.e., the volume of activity, also
referred to as the number of ``occurrences'' or
``observations'') by the percentage difference.20 Finally,
the payment formula requires Verizon to multiply the result
derived from the previous three steps by the dollar value
for each category of measurement.21 Pursuant to the merger
conditions, Verizon must execute this process on its own
and, to the extent it misses its minimum acceptable
performance levels for three months in a row, make the
appropriate voluntary payments to the U.S. Treasury by a
certain deadline.22
In short, there is simply nothing in the plain language of
the formula that supports Verizon's use of an additional cap
in the second step, i.e., a cap of 100% on the percentage
difference in the second step.23 The merger conditions
state that Verizon must ``[c]alculate the percentage
difference between the actual average and the calculated
average.'' Nowhere does this instruction state or suggest
that Verizon may limit the calculated result from this step
to 100% or less. As the independent auditor correctly
noted, the payment formula ``does not explicitly cap the
percentage difference between the actual means/averages and
the relevant [minimum acceptable performance value].''24 We
note that the merger conditions expressly provide for the
use of caps in other aspects of the instructions for
calculating voluntary payments.25 Given the express
language of the payment formula, the omission of any
language in the second step suggesting that an additional
cap may be used, and the explicit provision for caps to the
voluntary payments in other sections of the payment formula,
we conclude that the condition does not allow the use of an
additional cap.
Notwithstanding the plain language of the Bell Atlantic/GTE
Merger Order, Verizon argues that an additional cap in the
second step is necessary to ensure that Verizon will not pay
for more observations of poor performance than the number
that actually occurred.26 As detailed above, the overall
structure of the formula makes the amount of Verizon's
voluntary payment a function of the minimum acceptable level
of performance, the actual level of performance, the volume
of activity, and the assigned dollar value for the
measurement.27 In this way, the Performance Plan recognizes
that significantly poor performance and substantial activity
(e.g., many trouble reports) warrant an appropriately larger
payment to the U.S. Treasury.
According to Verizon, because poor performance could (as a
practical matter of mathematics) result in a final payment
amount equal to a payment amount for a greater number of
occurrences in the formula, Verizon argues that it should be
allowed to limit the effect of its poor performance on its
voluntary payments. In essence, Verizon is mixing the
second and third steps of the payment formula. The steps in
the formula must be distinguished from one another and
applied in the proper sequence. The voluntary payment
formula is precise¾in the second step, Verizon calculates
``the percentage difference'' between its actual performance
and its minimum acceptable performance (i.e., the latter
factor being the result of the first step). To the extent
Verizon fails the minimum acceptable level of performance in
the second step by a larger margin, the percentage
difference will be larger, and, in turn, the voluntary
payment will be larger. In cases of seriously poor
performance, Verizon could calculate a percentage difference
of greater than 100 percent.28 However, the second step
calculation reflects only the relative quality of
service¾i.e., the gap between ideal performance and
Verizon's actual performance¾and has nothing to do directly
with the number of occurrences or observations. It is only
after this second-step computation of the percentage
difference that Verizon should proceed to the third step, in
which it factors in the number of occurrences (e.g., the
number of trouble reports fixed during the reporting
period). Thus, a cap on the second step percentage
difference midway through the computation is not justified
as a way of limiting the amount of Verizon's voluntary
payments to the number of occurrences. Instead, the payment
formula expressly provides for that limitation in the third
step.29
In any case, other mechanisms under the plan address
Verizon's concerns about excessive payments under the
Performance Plan. In particular, Verizon's voluntary
payments are capped by state and by time.30 In addition,
the calculation methodology at issue - that is, the very
formula related to performance measurements using averages
or means - also protects Verizon from potential run-away
payments by relying on the use of average performance.31
B. Issues of comity and administrative efficiency do
not support the use of an additional cap.
Finally, we reject Verizon's argument that this Bureau
should apply the same payment methodology to Verizon as the
methodology applied to SBC pursuant to the SBC/Ameritech
Merger Order.32 In its October 3, 2002 Letter, Verizon
notes that the Common Carrier Bureau issued a letter that
permitted SBC to cap the percentage difference in the second
step, as Verizon wishes to do here.33 In that letter,
however, the Common Carrier Bureau stressed that the plain
language of the merger conditions did not permit the company
to cap the percentage difference at the second step.34 As
the Common Carrier Bureau noted, adding in another cap at
the second step of the formula could reduce the voluntary
payments paid for poor performance.35 However, the Common
Carrier Bureau found compelling policy reasons to allow the
company to apply such a cap because of actions taken by the
Texas Public Utility Commission (``Texas Commission'') to
permit the use of such a cap for purposes of the Texas state
plan. The Common Carrier Bureau concluded ``that
administrative efficiency would be served if SBC were
permitted to apply this payment calculation in a fashion
that mirrors the Texas performance plan'' because part of
the federal performance plans for most SBC states are
expressly modeled after the Texas Commission plan.36
Verizon argues that it is similarly situated to SBC in terms
of comity and administrative efficiency, and that it would
be unreasonable to permit SBC to apply an additional cap to
the federal plans of other SBC states than Texas, while
denying Verizon the ability to use that same cap. Verizon
claims that, if the treatment of the federal plans in all
Verizon states is not the same as the treatment of the
federal plans in all SBC states other than Texas, then
Verizon would be subject to an arbitrary distinction between
similarly situated parties.37
1. We reject this argument. By their express terms,
the Verizon merger conditions require Verizon to apply the
performance measurement plans and procedures adopted by the
New York and California Commissions to the federal plans of
the states in Verizon's service territory.38 In a similar
manner, the SBC/Ameritech Merger Order conditions require
SBC to apply the performance measurements plans and
procedures adopted by the Texas Commission to the federal
plans of ten of its thirteen states, i.e., Texas, Oklahoma,
Arkansas, Missouri, Kansas, Illinois, Michigan, Ohio,
Wisconsin, and Indiana.39 Under each merger order, changes
adopted by the relevant state commissions may be imported
into the Performance Plan required by the federal merger
conditions.40
2. Unlike the circumstances facing SBC, we are not
aware of any modifications allowing an additional cap midway
through the payment formula in the New York or California
state plans, and Verizon has not argued that these state
commissions have made such modifications to their states
plans. Accordingly, the considerations of comity and
administrative efficiency on which Verizon relies are not in
fact applicable to Verizon, and, therefore, SBC and Verizon
are not similarly situated in the relevant sense.
Furthermore, the Bell Atlantic/GTE Merger Order and the
SBC/Ameritech Merger Order use different approaches to
address unique harms that the Commission found in each case.
As a result, their merger conditions differ in a variety of
respects, including the details of the respective
Performance Plans. We note that, to the extent the New York
or California state commissions modify the payment formula,
Verizon remains free to request comparable treatment at the
federal level in accordance with the process that the
Commission established in the merger conditions.
C. Conclusion
In sum, we conclude that neither the voluntary payment
formula, an alleged excess of payments relative to
occurrences, nor any comity or administrative considerations
support allowing Verizon to cap the percentage difference
term in the second step of the computation. Accordingly, we
uphold the Division's earlier interpretation and deny
Verizon's request.
IV. ORDERING CLAUSES
3. For the reasons discussed above, IT IS ORDERED
that, pursuant to sections 1, 4(i), and 4(j), of the
Communications Act of 1934, as amended, 47 U.S.C. §§ 151,
154(i), 154(j), the requests dated September 20, 2002 and
October 3, 2002, of Verizon Communications, Inc. ARE DENIED.
IT IS FURTHER ORDERED that a copy of this Order shall be
sent by Certified Mail/Return Receipt Requested to Verizon
Communications, Inc., Joseph DiBella, Regulatory Counsel,
1515 North Courthouse Road, Suit 500, Arlington, Virginia
22201.
FEDERAL COMMUNICATIONS COMMISSION
David H. Solomon
Chief, Enforcement Bureau
_________________________
1 Applications of GTE Corporation, Transferor, and Bell
Atlantic Corporation, Transferee, For Consent to Transfer
Control of Domestic and International Sections 214 and 310
Authorizations and Application to Transfer Control of a
Submarine Cable Landing License, CC Docket No. 98-184,
Memorandum Opinion and Order, 15 FCC Rcd 14032 (2000)
(``Bell Atlantic/GTE Merger Order'').
2 Id. at para. 96. The merger conditions are contained
primarily in Appendix D of the Merger Order.
3 In particular, the Performance Plan requires Verizon to
report on 17 categories of measurements: OSS Response Time;
OSS Availability; Order Confirmation Timeliness; Reject
Timeliness; Percent Flow Through/Achieved Flow Through;
Completed within Specified Number of Days (1-5 Lines);
Missed Appointments; Facility Missed Orders; Installation
Quality; Hot Cut Loops; Trouble Report Rate; Missed Repair
Appointments; Trouble Duration Intervals; Repeat Trouble
Reports; Percent Final Trunk Group Blockage; Collocation
Performance; Timelines of Carrier Bill. See id. at
Appendix D, Attach. A-1a, Attach. A-1b.
4 Bell Atlantic/GTE Merger Order at para. 279-80.
5 Id. at para. 279; see id. at Appendix D, para. 16
(describing Performance Plan), Attach. A (describing
business rules for performance measurements). These
measures were developed in state collaborative proceedings
in New York and California under the auspices of their
state public utility commissions. See Bell Atlantic/GTE
Merger Order at para. 281.
6 Id. at para. 280; see id. at Appendix D, para. 16.
7 Id. at Appendix D, Attach. A-3, Attach. A-4, Attach. A-5.
8 Id. at Appendix D, paras. 56-57. The audit function
under the merger conditions was originally delegated to the
Accounting Safeguards Division of the former Common Carrier
Bureau. Effective March 25, 2002, this function was
transferred to the Investigations and Hearings Division of
the Enforcement Bureau. The review of Verizon's request
for interpretation at issue here falls under that audit
responsibility. See Establishment of the Media Bureau, the
Wireline Competition Bureau and the Consumer and
Governmental Affairs Bureau, Reorganization of the
International Bureau and Other Organizational Changes,
Order, 17 FCC Rcd 4672 (2002) (reorganizing the former
Common Carrier Bureau into the Wireline Competition Bureau
and delegating to the Enforcement Bureau certain audit
functions formerly delegated to the Common Carrier Bureau).
e
9 See Letter from John Horan, PricewaterhouseCoopers, LLC,
to Anthony Dale, Assistant Chief, Investigations and
Hearings Division, Enforcement Bureau, FCC (April 1, 2002)
(``April 1, 2002 Auditor Letter'').
10 See id. at 1-2. Verizon's voluntary payment amount is
also subject to specific caps identified in the merger
conditions and labeled as such. See Bell Atlantic/GTE
Merger Order at Appendix D, Attach. A-4.
11 See Letter from Maureen F. Del Duca, Deputy Chief,
Investigations and Hearings Division, Enforcement Bureau,
FCC to William M. Coburn and John Horan,
PricewaterhouseCoopers, LLC (May 29, 2002) (``Division May
29, 2002 Letter'').
12 See Letter from Joseph DiBella, Regulatory Counsel,
Verizon, to David Solomon, Chief, Enforcement Bureau, FCC
(September 20, 2002) (``Verizon September 20, 2002
Letter''); Letter from Joseph DiBella, Regulatory Counsel,
Verizon, to David Solomon, Chief, Enforcement Bureau, FCC
(October 3, 2002) (``Verizon October 3, 2002 Letter'').
Verizon seeks Bureau review of the Division interpretation
that will result in a formal Bureau order reviewable by the
Commission under Section 1.115 of the Commission's rules.
See Verizon September 20, 2002 Letter at 1.
13 See Applications of Ameritech Corp., Transferor, and SBC
Communications, Inc., Transferee, For Consent to Transfer
Control of Corporations Holding Commission Licenses and
Lines Pursuant to Sections 214 and 310(d) of the
Communications Act and Parts 5, 22, 24, 25, 63, 90, 95 and
101 of the Commission's Rules, CC Docket 98-141, Memorandum
Opinion and Order, 14 FCC Rcd 14712 (1999 (``SBC/Ameritech
Merger Order'').
14 The Bell Atlantic/GTE Merger Order's Performance Plan
authorizes the use of two types of payment caps. First, the
Performance Plan allows for ``monthly state-specific caps''
that total, across all states, as much as $259 million in
the first year, $389 million in the second year, and $516
million in the third year (i.e., a total of up to $1.164
billion over three years). Bell Atlantic/GTE Merger Order
at para. 280. The amount of the monthly state-specific caps
is contained in an attachment to the Performance Plan. See
id. at Appendix D, Attach. A-6. Second, the Performance
Plan allows for ``Per Measurement/Per Occurrence Caps,''
which cap the voluntary payment amount Verizon makes for
each measurement. The amount of the Per Measurement/Per
Occurrence Caps varies depending on the dollar value of the
measurement (i.e., High, Medium, or Low) and the size of the
state in which Verizon failed the relevant performance
standards. See id. at Appendix D, Attach. A-4.
15 The practical effect of this decision applies to only a
limited subset of measurements in the Performance Plan.
Specifically, this decision governs the calculation of
Verizon's voluntary payments for the three categories of
performance measurements¾Trouble Duration Interval, OSS
Response Time, and Missed Appointments¾that use averages or
means. Of the 159 submetrics in the Performance Plan,
these three categories account for eight submetrics, or 5%
of the total. Moreover, under the terms of the merger
conditions, the Performance Plan is no longer applicable in
fourteen of Verizon's states. See Verizon No Longer
Required to Report Rhode Island, Vermont, Maine, New
Jersey, New Hampshire, Delaware, Virginia, Maryland,
Washington D.C., and West Virginia Performance Measurement
Results under Bell Atlantic/GTE Merger Conditions, Public
Notice, DA 03-1114 (WCB 2003). See also Bell Atlantic/GTE
Merger Order at Appendix D, para. 17. In addition to the
states listed in the foregoing Public Notice, Verizon no
longer must report performance measurements for
Massachusetts, Connecticut, Pennsylvania, and New York.
16 Bell Atlantic/GTE Merger Order at para. 280; see id. at
Appendix D, para. 16.
17 The calculation formula varies slightly depending on
whether the performance measurement uses an average (or
means) or whether it uses some other number, such as a
percentage. The payment formula discussed in this Order is
used for the three measurements listed above, i.e., Trouble
Duration Interval, OSS Response Time, and Missed
Appointments.
18 In the technical language of the merger conditions, the
Critical Z-value is the level at which Verizon could
provide service to CLECs without incurring an obligation to
make voluntary payments. See Verizon September 30, 2002
Letter at 2 (describing the Critical Z-value). In other
words, the Critical Z-value establishes the minimum
performance standard - if Verizon's service quality drops
below the Critical Z-value, it incurs payment obligations;
if it meets or exceeds the Critical Z-value, Verizon incurs
no payment obligations.
19 If Verizon's performance fails to reach the minimum
level by a wide margin, the resulting percentage difference
could exceed 100%, and thereby yield a correspondingly
large voluntary payment obligation. See paragraph 8,
infra.
20 Bell Atlantic/GTE Merger Order at Appendix D, Attach.
A-3. Specifically, the language of the merger conditions
states:
Step 1: Calculate the average or the mean for
the measurement for the CLEC that would yield the
Critical Z-value for the third consecutive month.
Use the same denominator as the one used in
calculating the Z-statistic for the measurement.
Step 2: Calculate the percentage difference
between the actual average and the calculated
average (or benchmark value for benchmark
measures) for the third consecutive month.
Step 3: Multiply the total number of data points
by the percentage calculated in the previous
step. Calculate the average for three months and
multiply the result by $1500, $900, and $600 for
Measurements that are designated as High, Medium,
and Low respectively, to determine the applicable
assessment payable to the U.S. Treasury for that
measure.
Bell Atlantic/GTE Merger Order at Appendix D, Attach. A-3
(at pg. A-3-4). Step 3 above actually consists of two sub-
steps: (a) multiplying the result of Step 2 by the number
of data points (also referred to as ``occurrences'' or
``observations'' ); and (b) multiplying that result by one
of the three monetary amounts.
21 The performance measurements are divided into three
categories for assessing a dollar value for the purposes of
voluntary payments. Verizon multiplies the result by
$1,500 for ``High'' category measurements, by $900 for
``Medium'' category measurements, and by $600 for ``Low''
category measurements. See Bell Atlantic/GTE Merger Order
at Appendix D, Attach. A-4.
22 Under the merger conditions, Verizon only makes
voluntary contributions for poor performance if it failed
the minimum acceptable performance levels for three months
in a row. In these circumstances, the merger conditions
require Verizon to make the payment approximately 60 days
after the end of the three-month period. Thus, if Verizon
misses the minimum acceptable performance levels for
January, February, and March, it must make the correct
voluntary payments in May.
23 Verizon September 20, 2002 Letter at 2.
24 April 1, 2002 Auditor Letter at 2.
25 Ultimately, Verizon's voluntary payment amount is
subject to the monthly state-specific caps and Per
Measurement/Per Occurrence caps identified in the merger
conditions and labeled as such. See Bell Atlantic/GTE
Merger Order at para. 280; see also id. at Appendix D,
Attach. A-4.
26 Verizon September Letter at 2.
27 See note 25, supra.
28 For example, assume that, in a given month, Verizon
actually provides circuits to CLECs in an average period of
nine days and it provides circuits to itself in a
calculated period of three days. Then the computation is:
([9-3]/3) = 2 x 100 = 200%. In these terms, Verizon is
contending that the 200% figure reflects more payments than
occurrences. With the proposed cap, the 200% difference
between the actual average number of days and the
calculated number of days would be reduced to 100%,
effectively reducing by one-half the calculated payment.
29 Verizon also claims that when it proposed the
Performance Plan, its understanding was that payments would
not exceed the per-occurrence amount times the number of
occurrences for any performance measurements. Verizon
September Letter at 2. However, Verizon makes no real
showing that this logical and natural ramification of the
formula was unforeseeable.
30 See note 25, supra.
31 By using average performance for certain measurements,
the Performance Plan recognizes that, in many instances,
Verizon may perform far worse than the minimum acceptable
level of performance. At the same time, the Performance
Plan recognizes that Verizon may perform far better than
that level of performance. To implement this recognition,
the Performance Plan only requires Verizon to make voluntary
payments for measurements using averages or means (e.g.,
Trouble Duration Interval) when Verizon's average
performance falls below a certain specified level. In this
way, the use of averages allows good performance to offset
poor performance.
32 Verizon October 3, 2002 Letter at 2-3.
33 Id. at 2.
34 Letter from Carol Mattey, Deputy Chief, Common Carrier
Bureau, FCC to Caryn Moir, Vice President - Federal
Regulatory, SBC Telecommunications, Inc., 3 (Feb. 6, 2002).
The letter states that ``[t]he Performance Plan does not,
on its face, cap the difference between the levels of
service SBC provides to CLECs and the relevant performance
standard (i.e., the `performance gap').'' Id. at 2.
35 Id.
36 Id. at 2-3.
37 Verizon October 3, 2002 Letter at 2-3, citing Petroleum
Communications, Inc, v. FCC, 22 F.3d 1164, 1172 (D.C. Cir.
1994); McElroy Electronics v. FCC, 990 F.2d 1351, 1365.
38 Bell Atlantic/GTE Merger Order at para. 281.
39 SBC/Ameritech Merger Order at para. 379.
40 See Bell Atlantic/GTE Merger Order at App. D, Attach. A,
para. 4 (allowing changes adopted in the New York and
California state plans to be imported into the Verizon
Performance Plan); SBC/Ameritech Merger Order at Appendix
C, Attach. A, para. 4 (allowing changes adopted in the
Texas and California state plans to be imported into the
SBC Performance Plan).