ISSUED: December 30, 1996

BEFORE THE PUBLIC UTILITY COMMISSION

OF OREGON

ARB 7

BACKGROUND

On September 6, 1996, Western Wireless Corporation, dba VoiceStream (WW) filed a petition for arbitration with U S WEST Communications, Inc. (USWC). The petition was filed pursuant to Section 252(b)(1) of the federal Telecommunications Act of 1996 (Act). On October 1, 1996, USWC filed its response to the petition.

In its response to the petition for arbitration, USWC included a motion to dismiss Issue 1. WW responded to the motion on October 14, and I denied the motion on October 16.

On October 1, I presided over a procedural conference. On October 21, the parties filed a joint position statement setting out the issues in dispute. On November 21 and 22, 1996, I presided over an arbitration hearing in this matter in Salem, Oregon. The following appearances were entered:

For WW:

Beth Kaye, Gene DeJordy, and Jonathan E. Canis

For USWC:

Molly Hastings

This arbitration is being conducted under 47 U.S.C. Sec. 252(b) of the Act. Section 252(c) of the Act sets out a state Commission’s task in arbitrating an interconnection agreement as follows:

In resolving by arbitration under subsection (b) any open issues and imposing conditions upon the parties to the agreement, a State commission shall--

(1) ensure that such resolution and conditions meet the requirements of section 251, including the regulations prescribed by the Commission [Federal Communication Commission] pursuant to section 251;

(2) establish any rates for interconnection, services, or network elements according to subsection (d); and

(3) provide a schedule for implementation of the terms and conditions by the parties to the agreement.

On August 8, 1996, the Federal Communications Commission (FCC) issued rules on interconnection pursuant to §§ 251 and 252 of the Act. (47 C.F.R. § 51.100 et seq. FCC Order 96-325). On September 27, 1996, the U. S. Court of Appeals, Eighth Circuit, temporarily stayed the effective date of the FCC’s rules. On October 15, 1996, the Court stayed the operation of the portions of those rules that relate to pricing and the "pick and choose" provisions. Iowa Utilities Board v. Federal Communications Commission et al., Case Nos. 96-3321 et seq. (8th Cir., October 15, 1996) (Order Granting Stay Pending Judicial Review). In an order on reconsideration, dated November 1, 1996, the court lifted the stay on §§ 51.701, 51.703, and 51.717. I have read and considered the stayed FCC pricing rules, but do not consider them to be binding on this arbitration.

WW is classified as a Commercial Mobile Radio Service (CMRS) provider by the FCC. Through its subsidiaries, WW holds radio licenses from the FCC to provide wireless cellular radio telephone service (cellular), personal communications service (PCS), specialized mobile radio (SMR) service, and paging and radiotelephone service (PARS) to consumers in 19 western states. In Oregon, WW is authorized to provide PCS to all of the state except areas bordering the states of Washington and Idaho in northeast and eastern Oregon. WW began providing service in Oregon on July 1, 1996.

USWC is a telecommunications carrier providing local and intraLATA telephone service in Oregon and other states. It meets the definition of a local exchange carrier (LEC) under the Act.

In its petition, WW identified three open issues for arbitration: the rate for interconnection and transport and termination of traffic between WW and USWC; the amount or percentage of USWC traffic that terminates on WW’s network; and, the definition of, and applicable charges for, non-local traffic. At the hearing, the parties agreed to divide the first issue into two parts, the second part addressing the date reciprocal compensation obligations should begin. The parties are not requesting that the Commission arbitrate a complete interconnection agreement between them. Rather, they are requesting that the Commission resolve the disputed issues, and then the parties will amend the current agreement between them to comply with the decisions made by the Commission.

ISSUES IN DISPUTE

1. Rates for Interconnection and Transport and Termination of Traffic.

Telecommunications Act. Section 251(b)(5) imposes a duty on LECs to establish reciprocal compensation arrangements for the transport and termination of telecommunications. Section 252(d)(1) provides that interconnection and network element charges shall be based on the cost (determined without reference to a rate-of-return or other rate-based proceeding) of providing the interconnection or network element, be nondiscriminatory, and may include a reasonable profit. Section 252(d)(2) tells state commissions not to consider reciprocal compensation terms for transport and termination of traffic to be just and reasonable unless they provide for the mutual and reciprocal recovery by each carrier of costs associated with the transport and termination on each carrier’s network facilities of calls that originate on the network facilities of the other carrier. In addition, the costs must be based on a reasonable approximation of the additional costs of terminating the calls.

FCC Rules. Section 51.305(a)(5) requires incumbent local exchange carriers (ILECs) to provide interconnection of facilities and equipment that is just, reasonable, and nondiscriminatory. The Eighth Circuit Court of Appeals has stayed the FCC's pricing rules.

Parties' Positions. Offer/Acceptance. In its response to the petition for arbitration, USWC included an executive summary of its Total Element Long Run Incremental Cost (TELRIC) study and a one-page chart showing resulting rates for the interconnection and transport and termination of calls. On October 16, WW filed a document in which it agreed to the transport and termination rates shown on USWC's chart. WW contends that the rates shown on the chart should be the rates adopted in this arbitration. USWC disagrees, saying it offered the proposed rates only because the FCC’s rules adopted national pricing standards. USWC felt it had to propose rates complying with the FCC’s directive. The pricing (and "pick and choose") provisions of the FCC’s rules have been stayed by the Eighth Circuit Court of Appeals. USWC argues that it cannot be bound by an offer it was obligated to make under rules that now have no force and effect. It argues that the Arbitrator should not consider the FCC rules at all. WW argues, on the other hand, that the FCC rules provide guidance for this arbitration.

Standard for Prices. For transport and termination of calls, WW argues that the Act's "additional cost" standard mandates an incremental cost methodology. USWC’s basic contention is that transport and termination charges should be based on its TELRIC costs plus an amount to recover its depreciation reserve deficiency, although in its post-hearing brief USWC recommended the use of the rates established in UM 351.

WW Switch. WW recommends that USWC's tandem interconnection rate apply to traffic terminated by WW. WW contends that its switch is comparable to USWC's tandem switch and serves a larger area. USWC disagrees, contending that WW’s switch is not comparable to a tandem switch because it does not connect trunks to trunks, nor does it put out dial tones and receive dial tone pulses, functions which a tandem switch performs. USWC contends that WW’s switch is comparable to a USWC end-office switch.

Resolution

USWC is not bound by the offer it made pursuant to the now-stayed FCC rule. A company should not be penalized for complying with a regulatory directive, especially when the company isagrees with the directive.

In Orders numbered 96-324 and 96-325 (Docket Nos. ARB 1 and ARB 2), the Commission decided that the switches of the new entrants were not comparable to the ILECs’ tandem switches. The Commission concluded "that the Act requires that the classification of a switch be determined by functionality, not mere geographic scope of service."

WW’s switch is not functionally equivalent to USWC’s tandem switch. It does not provide the trunk-to-trunk function of a tandem switch, and is more comparable to an end-office switch used by USWC and other ILECs. I conclude that USWC is obligated to pay WW at the end-office rate established for USWC's end-offices.

In Order 96-324 (ARB 1) the Commission adopted the use of the rates established in Docket No. UM 351, Phase II, Order No. 96-283. Revised Appendix C to that order lists the rates for switching functions, including tandem and end-office switching. Those rates are adopted in this arbitration. They are the result of far more extensive examination and review than was possible in this arbitration. The evidence supporting the rates suggested in this proceeding was cursory, was not subjected to intensive examination, and lacked sufficient basis for adoption. The rates adopted in this proceeding will remain in effect until the Commission approves rates for unbundled elements in compliance with the revised cost methodology adopted in Order No. 96-284 in Docket No. UM 773. Rates for unbundled elements applicable to USWC are expected to be established in Docket No. UT 125 currently being considered by the Commission.

2. Effective Date for Reciprocal Compensation.

Telecommunications Act. Section 251(b)(5) imposes a duty on LECs to establish reciprocal compensation arrangements for the transport and termination of telecommunications.

FCC Rule. Section 51.717 provides that from the date that a CMRS provider requests re-negotiation of a contract that provides for non-reciprocal compensation until a new agreement has been approved by a state commission, the CMRS provider is entitled to assess the same rates for transport and termination as the ILEC assesses the CMRS. This rule was adopted by the FCC on August 8, 1996, and subsequently stayed by the Eighth Circuit Court of Appeals. The stay was lifted on November 1, 1996.

Parties’ Positions. WW argues that the obligation for reciprocal compensation predates the 1996 Act, and the Act merely reinforced that obligation. WW argues that USWC should be required to compensate WW at the existing transport and termination rates from the date the Act became effective, February 8, 1996, until the Commission adopts new rates in this proceeding. WW contends that the new rates should then become effective immediately.

USWC argues that neither the Arbitrator nor the Commission have authority to abrogate the existing contract between USWC and WW, nor do they have the authority to retroactively set rates. It contends that this proceeding can only determine new rates on a forward-looking basis. It contends that WW has not requested re-negotiation of the existing contract pursuant to FCC rule 51.717, but instead filed for arbitration. USWC also contends that any violation of reciprocal compensation obligations alleged by WW would have to be addressed in another forum, not in this proceeding. However, USWC offers to retroactively amend as of November 1, 1996, its agreement with WW and pay the existing termination rates for traffic originating on USWC's network and terminating on WW's network.

Resolution

USWC has an obligation to pay WW for terminating traffic originating on USWC's network as of the effective date of FCC rule §51.717. That rule became effective on August 8, 1996, but was the subject of judicial action on September 27, October 15, and November 1, 1996. It was stayed from September 27 until November 1, 1996. November 1 is when the obligation became definite. Adopting that date also is administratively simpler than adopting the August 8 date with an interruption in effectiveness during the stay.

I adopt November 1, 1996, as the date when USWC became obligated to pay WW the existing rates for termination of traffic originating on USWC's network. The rates established in Commission Order No. 96-283 shall become effective at the time the Commission issues its final decision in this arbitration proceeding.

3. Percentage of Traffic that WW Terminates for USWC Customers.

When a WW PCS wireless customer calls a USWC wireline customer, USWC records specific information about the call and bills WW for USWC's services. WW does not have similar capability to record information about calls USWC customers make to WW wireless customers. WW is a new company that has not yet developed the system required to record and bill for those calls. In lieu of specific information for each landline-to-mobile call made, WW requests that a certain percentage of the calls crossing its network be assumed to be made by USWC landline customers. The requested percentage is called an administrative factor.

Telecommunications Act. Section 252(d)(2)(A)(i) tells state commissions not to consider reciprocal compensation agreements to be just and reasonable unless they provide for the mutual and reciprocal recovery by each carrier of costs associated with the transport and termination on each carrier's network facilities of calls that originate on the network facilities of the other carrier.

Parties' Positions. WW contends that it should be compensated by USWC for all local calls it terminates that originated from USWC customers or that originated from another telecommunications carrier if USWC received terminating compensation (including bill and keep arrangements) from the other carrier. WW contends that the administrative factor should be 24 percent. That is, WW requests a determination that 24 percent of the calls going over its switch involving the local public switched network are chargeable to USWC.

USWC contends that it is not required to accept any administrative factor for billing purposes in lieu of actual traffic measurement. However, it is willing to accept a reasonable administrative factor as an accommodation to WW until WW develops the capability to accurately measure and bill for traffic it handles. USWC contends that it should not be charged for calls that originate from a customer of another LEC and are routed through USWC's network on their way to WW. USWC originally contended for an administrative factor of 17 percent. The 17 percent administrative factor assumes that 75 percent of total traffic is mobile-to-land, and 17 percent originates on USWC’s network. USWC contends that that administrative factor should be adopted for the time period of November 1, 1996, until the current contract between USWC and WW terminates, December 31, 1996. In its post-hearing brief and last best offer, USWC said it is willing to assume an administrative factor of 18 percent for 1997 and 18½ for 1998. The 1997 and 1998 factors are based on the assumption that 70 percent of the traffic is mobile-to-land.

Resolution

The first part of this issue -- whether USWC is responsible for calls it transmits between the originating carrier and WW -- is resolved by the language of the Act. The Act provides for reciprocal recovery of costs between the terminating carrier and calls that originate on the network facilities of the other carrier. When USWC performs a transit function in the middle of a call that originates on another carrier's network and terminates on WW's network, it is not the originating carrier; the call has not originated on USWC's network. It therefore is not responsible to pay WW for terminating the call.

The second part of this issue -- the correct administrative factor -- is harder to resolve. WW is a new company with little evidence supporting its request for a 24 percent factor. A WW witness testified about a one-day study of traffic performed two days prior to the arbitration hearing. The study looked at calls that were handed off to WW's network by USWC's network and found that approximately 46 percent of the traffic on WW's switch came from the USWC network. However, the study only counted the number of calls transmitted and not the minutes of usage. Transport and termination rates are based on minutes of use rather than calls made. The study also included calls USWC routed for other carriers. Earlier, WW had estimated that 20 percent of traffic went from landline phones to wireless phones. But that was an industry estimate made prior to WW commencing operations.

USWC's contention that a 17 or 18 percent factor should be adopted is based primarily on information from and negotiations with other wireless carriers. Traffic studies have been done during those negotiations (primarily cellular carriers) and they support a finding in the 17 to 18 percent range.

The evidence supporting the 18 percent administrative factor proposed by USWC is stronger than the evidence supporting WW's position. The WW study discussed at the hearing was a one-day snapshot, included calls that are not properly chargeable to USWC, and counted the calls rather than the minutes of use. In addition, the study itself has not been made available to USWC or the Arbitrator, so there has been little opportunity to review it. WW presented no evidence to support its specific 24 percent factor.

Evidence in support of USWC's proposed 17 and 18 percent factors is not strong either. However, those factors appear to be a reasonable attempt to accommodate WW until WW can accurately identify and measure the calls coming into its switch. USWC's recommended factors are supported by studies in several states involving landline-to-mobile calls.

The evidence supporting USWC’s recommended administrative factors is more strongly supported and more persuasive than is WW’s evidence. USWC’s recommended administrative factor of 18 percent is adopted.

4. What is the Local Calling Area?

Telecommunications Act. The act does not define the local calling area.

FCC Rules. Section 51.701(b) provides that local telecommunications traffic includes calls between a LEC and a CMRS provider that, at the beginning of the call, originates and terminates within the same Major Trading Area (MTA). As applied to Oregon, the MTA includes all of Oregon except a sparsely populated area of eastern Oregon.

Parties’ Positions. WW contends that the FCC rules apply, making most of Oregon a local calling area. USWC contends that the applicable FCC rule is unfair because it would cause wireless carriers to pay less in interconnection charges than landline carriers would pay, thus contradicting the FCC’s own policy of treating all types of telecommunications technologies equally. USWC argues that the applicable FCC rule is on appeal and unlikely to withstand appellate review. USWC requests that the FCC rule be ignored and the traditional local calling area boundaries be adopted for this proceeding.

Resolution

The definition of a local call is important because local calls do not incur access charges; long-distance calls incur access charges. An LEC that receives a significant amount of revenue from access charges is advantaged if the definition of a local call includes as small an area as possible. On the other hand, a provider such as WW that pays access charges to LECs is advantaged if the local calling area is defined as broadly as possible. Because all the territory in Oregon that WW is authorized to serve is defined by the FCC to be a local calling area, WW would not have to pay access charges to USWC for intrastate calls if the FCC rule is adopted.

The FCC definition of a local calling area is adopted. I feel bound by the FCC rules that have not been stayed by judicial decision. The Oregon Public Utility Commission has historically defined local calling areas by discrete areas defined by specific boundaries. However, old definitions must yield to new legislation and rules properly adopted pursuant to the legislation. The FCC rule defining a local calling area is in effect as of now, and is adopted for this proceeding.

IT IS ORDERED that:

The effective date for USWC to pay WW the current rates for terminating traffic originating on USWC's network is November 1, 1996;

The rates for interconnection and transport and termination of traffic to be paid after the Commission issues its final decision in this proceeding shall be the rates established by the Commission in Order No. 96-283 in Docket No. UM 351, subject to the establishment of revised rates for USWC by the Commission pursuant to the cost methodology established in Order No. 96-284 in Docket No. UM 773;

For purposes of calculating the amount of local traffic originating and terminating between the networks of USWC and WW, an administrative factor of 18 percent USWC-to-WW is adopted;

The local calling area applicable to WW in Oregon is the Major Trading Area established by the FCC and adopted in the rules it issued on August 8, 1996.

Dated at Salem, Oregon, this _____day of December, 1996.

____________________________

Lowell Bergen

Arbitrator