` ISSUED December 6, 1996

BEFORE THE PUBLIC UTILITY COMMISSION

OF OREGON

ARB 3

ARB 6

Procedural History

On July 29, 1996, AT&T Communications of the Pacific Northwest, Inc. (AT&T), filed a petition with the Public Utility Commission of Oregon (Commission) to arbitrate a contract for network interconnection with U S WEST Communications, Inc. (USWC) pursuant to 47 U.S.C. §§251 and 252 of the Communications Act of 1934, as amended by the Telecommunications Act of 1996 (Act). On August 19, 1996, MCI Metro Access Transmission Services, Inc., (MCI) also filed a petition to arbitrate a contract for interconnection with USWC pursuant to the Act.

On August 14 and August 29, 1996, prehearing conferences were held in these cases to establish a procedural schedule. On September 3, 1996, the Arbitrator issued a ruling consolidating the petitions of AT&T and MCI. A final prehearing conference was held on October 10, 1996.

A hearing was held in these cases on October 14-15, 1996, in Salem, Oregon before Samuel J. Petrillo. The following appearances were entered:

For petitioner AT&T:

Mark P. Trinchero, Davis Wright Tremaine, Portland, OR

Susan D. Proctor, AT&T, Denver, CO, Appearing pro hac vice

Richard E. Thayer, AT&T, Denver, CO, Appearing pro hac vice

For petitioner MCI:

Lisa Rackner, Lindsay, Hart, Neil & Weigler, LLP, Portland, OR

Rogelio E. Pena, MCI, Denver CO, Appearing pro hac vice

Michelle Berkovitz, MCI, Arlington, VA, Appearing pro hac vice

For USWC:

Molly K. Hastings, USWC, Seattle, WA, Appearing pro hac vice

On November 4, 1996, the parties filed post hearing briefs, a Joint Position Statement in the form of a matrix, and last best offers. Revised versions of the Joint Position Statement were filed on November 14 and November 26, 1996.

This proceeding is being conducted under 47 U.S.C. § 252(b). The standards for arbitration are set forth in 47 U.S.C. § 252(c):

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 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 47 U.S.C. §§ 251 and 252. 47 C.F.R. § 51.100 et seq. (hereafter the FCC Order).

On October 15, 1996, the Eighth Circuit Court of Appeals stayed the operation of the portions of the FCC 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). Because of the stay, I have considered the FCC pricing rules to be advisory and not binding on this arbitration.

On November 1, 1996, the Commission issued two orders that bear directly on this proceeding. In Order No. 96-283 (Reopened UM 351, Phase II), the Commission unbundled additional network elements in accordance with the FCC Order, and revised unbundled element prices established in Order No. 96-188. In Order No. 96-284 (UM 773), the Commission approved a revised cost methodology that will be used to update the prices for unbundled network elements. The timeline for pricing network elements using the new methodology has not been determined.

Choice of Contract

The interconnection agreement submitted by AT&T as Exhibit No. 6--and subsequently revised and resubmitted as AT&T’s Last Best Offer on November 4, 1996 (AT&T LBO)-- is adopted, with a number of revisions discussed below. The contracts submitted by AT&T and MCI are more consistent with my findings on the disputed issues than is the USWC contract. Since AT&T and MCI take the same position on the vast majority of the issues, they should be indifferent to whether the AT&T or MCI contract language is adopted.

In addition to modifications noted elsewhere in this decision, I adopt the following changes to the AT&T LBO:

Iowa Modifications---Except as indicated herein, I adopt the revisions to the AT&T contract included in the preliminary arbitration decision issued by the State of Iowa, Department of Commerce Utilities Board in Docket Nos. ARB-96-1 and ARB-96-2, issued October 18, 1996 (hereafter the "Iowa contract revisions"). Upon review, I find that the Iowa contract revisions include more reasonable compliance dates, clarify payment responsibilities and delete several contract provisions that are one-sided.

Section 15—Branding. The substantive revisions to §15 made by the Iowa Board are not adopted. See discussion of Issue 30 and 30a.

Section 37—Bona Fide Request Process. The AT&T LBO deletes the last two paragraphs of §37.12 of the proposed contract submitted as AT&T Exhibit No. 6. In place of these paragraphs AT&T proposes a bona fide request (BFR) process in §§37.13 through 37.13.13. These new sections are adopted. All references in §37.13 to USWC and AT&T shall be changed to "the ILEC" and "the CLEC", respectively, to comport with the Iowa contract revisions.

Section 42—Charges for Network Elements. The language of this section should be revised to indicate that the charges for network elements will be based on the prices approved by the Commission in Order No. 96-283. These prices shall be changed once the Commission develops new network element prices based on the revised cost methodology recently aproved in Order No. 96-284.

Where the Commission has not yet developed prices for network elements (e.g., subloop elements, signal transfer points), the applicable prices are those set forth in Schedule 2 of the AT&T LBO. The Schedule 2 prices are interim in nature and shall remain in effect only until new prices for these elements are developed by the Commission in accordance with Order No. 96-284. See discussion of Issues 77-84.

Attachment 1—Dispute Resolution. The dispute resolution provisions in Attachment 1 of the AT&T LBO are not adopted. Instead, the dispute resolution procedure set forth in Part A, §23 of the MCI contract shall be substituted for the existing provisions in Attachment 1of the AT&T LBO. The MCI dispute resolution procedure should be modified to include a "loser pays" provision in the event that disputes cannot be resolved informally. See discussion of Issues 75 and 76.

Attachment 3, Section 4. This section contemplates that subloop unbundling will occur only through the BFR process. It should be revised consistent with the findings on Issue 16. In other places, the Iowa contract revisions delete reference to loop distribution as an unbundled element. Those references should be restored consistent with the findings in this decision regarding subloop unbundling.

Attachment 11, Section 3, Appendix A. The Iowa contract revisions retain certain performance credits proposed by AT&T. This decision does not adopt the quality measures and performance credits discussed in Attachment 8, Appendix 1; Attachment 11, §3 and Appendices A and B. Contract references to these provisions should be deleted. See Issues 73 and 74.

Issues

The parties identified 95 issues in the Joint Issue Statement submitted in this matter. Several of those issues have since been resolved by negotiation. Where the parties have agreed upon contract language, that language is adopted. Where the parties agree in principle but have not settled upon specific contract language, I have designated the contract language to be used. My decision on all issues, is set forth in the last column of the Revised Joint Issue Statement attached to this Order as Appendix A. The rationale for my decision on each issue is the supporting testimony, exhibits, FCC and OPUC rules and decisions, and transcript references listed in Appendix A. In addition to the discussion in Appendix A, several issues are discussed below:

Issue 8---Meet Points for Access to Unbundled Elements. The parties agree in principle on this issue but have not proposed contract language. I agree with the FCC’s findings on this issue. Paragraph 553 of the FCC Order states:

In a meet point arrangement each party pays its portion of the costs to build out the facilities to the meet point. We believe that, although the Commission has authority to require incumbent LECs to provide meet point arrangements upon request, such an arrangement only makes sense for interconnection pursuant to section 251(c)(2) but not for unbundled access under section 251(c)(3). New entrants will request interconnection pursuant to section 251(c)(2) for the purpose of exchanging traffic with incumbent LECs. In this situation, the incumbent and the new entrant are co-carriers and each gains value from the interconnection arrangement. Under these circumstances, it is reasonable to require each party to bear a reasonable portion of the economic costs of the arrangement. In an access arrangement pursuant to section 251(c)(3), however, the interconnection point will be a part of the new entrant's network and will be used to carry traffic from one element in the new entrant's network to another. We conclude that in a section 251(c)(3) access situation, the new entrant should pay all of the economic costs of a meet point arrangement.

 

Based on the foregoing, USWC must share the cost of meet point facilities required for interconnection. This is consistent with the decision reached by the Commission in Order No. 96-021 at 69. USWC is not required, however, to share the cost of meet point facilities that are required by an entrant in order to obtain access to unbundled elements. In that case, the entrant must pay all of the costs of the meet point arrangement.

USWC does not propose contract language regarding this issue. AT&T’s proposed contract language should be modified to the extent that it differs from this decision.

Issue 9---Types of Collocated Equipment. AT&T seeks to collocate Remote Switching Modules (RSMs) and Digital Cross Connect Systems (DCS), including the ability to remotely configure the DCS. MCI seeks to collocate any and all equipment it deems necessary. USWC agrees to collocate all types of equipment except RSMs. It argues that switching equipment is (a) not "necessary," as required by ¶251(c)(6) of the Act; (b) has not been required by the FCC, and; (c) will exacerbate space limitation problems at USWC end offices.

The FCC defines the term "necessary" to mean "used or useful" to provide interconnection or access to unbundled elements. FCC Order at ¶¶579-581. The record shows that collocation of RSMs is clearly "used and useful" in accommodating interconnection because it will substantially increase efficiency in the transmission and routing telecommunications traffic. See e.g., Tr. 129-133. With respect to the use of collocation space, the record also shows that RSMs will not occupy a significant amount of space or power. USWC has not satisfied its burden of proving that collocation of this equipment is not technically feasible or used and useful. FCC Order at ¶580.

AT&T and MCI should be allowed to collocate all used and useful equipment, including RSMs, provided that RSM equipment is not used to avoid payment of switched access charges. The decision to permit collocation of RSMs is consistent with Commission policy. See Order No. 96-079 at 12. The parties should submit contract language in accordance with this decision.

Issue 16---SubLoop Unbundling. Based on the record, I find that subloop elements, including feeder, distribution, feeder-distribution interface (FDI), and network interface device (NID) should be unbundled. The evidence shows that, in many instances, it may be more efficient for CLECs to self provision feeder plant and only purchase the distribution plant that runs between the FDI and the customer premises. For example, MCI points out that its network runs past many buildings that are near, but not directly on its network. In many cases, only loop distribution is needed to extend MCI’s network to multiple customers’ premises. Denying access to unbundled loop distribution in these circumstances would force MCI to unnecessarily purchase the entire loop. Such an inefficient and costly practice would also deter local market entry and deny consumers the benefit of more efficient network architecture using innovative technologies.

USWC has not produced clear and convincing evidence that access to loop distribution would result in specific and significant adverse network reliability impacts. The evidence shows that subloop unbundling is technically feasible and has been occurring in some jurisdictions for years. Tr. 109-110. In order to forestall network reliability concerns relating to contamination of outside plant facilities, MCI and AT&T agree that only USWC technicians should have access to the FDI box.

USWC acknowleges that subloop unbundling is possible, but recommends that such unbundling should be authorized only on a case by case basis through the BFR process. AT&T also proposes use of the BFR process. I agree with MCI that requiring a CLEC to utilize the BFR process for each location where it seeks unbundled feeder or distribution, would unreasonably delay access. Subloop elements should be unbundled unless the LEC can demonstrate that it is not technically feasible. Accordingly, the CLEC should specify those locations where it seeks unbundled subloop elements. If USWC believes that it is not technically feasible to provide unbundled access at certain locations, it should notify the CLEC. If the CLEC disagrees with USWC’s determination, the parties should use the dispute resolution procedures set forth in the contract.

Issue 22---Dark Fiber. USWC argues that dark fiber is not a "network element" as that term is defined in §3(45) of the Act, because dark fiber is not a facility or equipment "used" to provide telecommunications service. USWC apparently contends that fiber optic lines are only used when they are "lit" by USWC-supplied electronics.

USWC’s argument is without merit. Under this rationale, any element that (a) has been installed but is currently unused (e.g., unused switching capacity or cross connects) or (b) must be used in conjunction with other elements to provide telecommunications service, would not qualify as a network element. Dark fiber is equipment--i.e., a fiber optic line--that provides transmission functionality when used in conjunction with other network facilities. It functions in the same manner as copper loop facilities which also require added electronics to transmit telecommunications. Both fiber and copper are used in the provision of telecommunications service and fall squarely within the definition of "network element."

In addition, I am persuaded by the evidence that the provision of dark fiber is necessary to provide new entrants with the flexibility to expand the reach of their networks and employ new technologies. Without dark fiber, entrants would be required to either undertake the expensive and time consuming process of installing their own fiber optic lines or purchase the use of "lit" fiber services from USWC. As MCI witness David Agatston explained, it does not make sense for new entrants to purchase ILEC electronics where spare fiber capacity is available, particularly if using ILEC electronic technology forces the entrant to adhere to the ILEC’s network technology and design instead of newer, more efficient technologies that may be available.

For these reasons, I find that dark fiber that has been installed by USWC should be unbundled and made available to AT&T and MCI. The Commission reached a similar conclusion in Order No. 96-188 at 40-41.

Issue 30, 30a, and 62---Branding. The parties agree in principle to the rebranding of operator services and directory assistance (Issues 30 and 62). USWC agrees to rebrand these services on the condition that it recover any costs from AT&T and MCI. USWC is entitled to recover legitimate costs incurred in complying with requests for rebranding, but it is not clear that the cost of rebranding directory assistance and operator services will be as great as USWC claims. USWC has the burden of justifying any rebranding expenses it incurs.

Disagreement also surrounds the rebranding of installation and repair service; specifically, the procedures USWC must follow when interacting with CLEC customers on behalf of the CLEC. USWC has suggested that the contract provisions proposed by AT&T and MCI may be interpreted to require USWC personnel to change placards on USWC vehicles or remove uniforms bearing the USWC logo. The record indicates that AT&T did not intend such steps be taken by USWC. Tr. 492-493. The contract should be interpreted accordingly.

Issues 31, 32, 35 and 37---Wholesale Rate Discount. USWC argues that the wholesale discount applied to resold services must be calculated using only those costs that are actually avoided in selling the service at wholesale. AT&T and MCI, on the other hand, maintain that the discount should include those costs which have been identified by the FCC as avoidable. I find that USWC’s "actually avoided" standard is inconsistent with the goal of economically efficient pricing and will not encourage cost avoidance. It is more appropriate to calculate the discount using those costs that may be reasonably avoided by an efficient telecommunications firm selling services at wholesale. FCC Order at ¶911.

With respect to the calculation of the avoided cost rate, I find that the MCI Avoided Cost Model reflects the economic principles upon which the Act is based and should be adopted. MCI’s approach is a straightforward calculation that incorporates expenses that may be reasonably avoided by an efficient firm selling at wholesale. It treats direct costs of providing retail services as fully avoidable and indirect costs as partially avoidable in the proportion of direct retail expenses to total expenses. It also credits USWC for additional costs, such as customer services that will be incurred as a result of making wholesale sales, by reducing avoided costs in certain categories.

The MCI Avoided Cost study produces a 22 percent wholesale discount. This approach is more conservative than that proposed by AT&T--which produces a wholesale discount of 36.78 percent--because it considers only those retail costs that the FCC identified as presumptively avoidable. While AT&T’s method may have merit, more review is necessary to determine if the additional expenses included in its calculation may be avoided. The Commission has stated that it will open a docket to investigate issues relating to the calculation of LEC avoided costs. Order No. 96-283 at 14.

I find that USWC’s avoided cost methodology--which produces wholesale discounts ranging from one to eight percent--is not reasonable for the reasons described by AT&T witnesses Zepp and Dodds and MCI witness Gates.

Issue 33—Resale of Discounted Services. USWC argues that services already subject to volume or term discounts are "a type of wholesale service" and should not be subject to additional avoided cost discounts. MCI emphasizes that retail volume discounts differ from wholesale pricing discounts. While volume discounts recognize network and operational efficiencies associated with large volume customers, wholesale discounts represent avoided costs associated with resale.

As a practical matter, there is no way to determine what combination of costs are avoided by a LEC without analyzing the circumstances surrounding each discount offering. For example, a given discount price may reflect operational efficiencies associated with high volumes as well as cost savings realized because the service is not widely marketed. Notwithstanding this fact, it is likely that an LEC will still incur significant sales and promotional expenses when marketing its discount services to customers.

Under the circumstances, I find that the wholesale discount for services already subject to volume or term discounts should equal one half of the authorized wholesale rate, or 11 percent. In no event should the total discount on any retail service be less than the 22 percent wholesale discount authorized in this decision.

Issue 34—Resale of Residential Service. USWC argues that the wholesale discount should not apply to residential service because it is priced below cost. It argues that forcing an incumbent to offer services at prices below cost is confiscatory and violates constitiutional requirements. USWC further maintains that such a policy will: (a) subsidize competitors at the expense of Oregon consumers, (b) eliminate incentives for competitors to construct their own facilities; and (c) permit AT&T and MCI to dominate the local exchange market. USWC recommends that the Commission should act to raise residential rates to cover their economic cost. In the interim, it recommends that the wholesale discount for residential service be set at zero.

The FCC rejected the argument that below-cost services should not be subject to the wholesale rate obligation under §251(c)(4) of the Act. I agree with the rationale articulated in ¶956 the FCC Order:

First, the 1996 Act applies to "any telecommunications service" and thus, by its terms, does not exclude these types of [below-cost]services. Given the goal of the 1996 Act to encourage competition, we decline to limit the resale obligation with respect to certain services where the 1996 Act does not specifically do so. Second, simply because a service may be priced at below-cost levels does not justify denying customers of such a service the benefits of resale competition. We note that, unlike the pricing standard for unbundled elements, the resale pricing standard is not based on cost plus a reasonable profit. The resale pricing standard gives the end user the benefit of an implicit subsidy in the case of below-cost service, whether the end user is served by the incumbent or by a reseller, just as it continues to take the contribution if the service is priced above cost. So long as resale of the service is generally restricted to those customers eligible to receive such service from the incumbent LEC, as discussed below, demand is unlikely to be significantly increased by resale competition. Thus, differences in incumbent LEC revenue resulting from the resale of below-cost services should be accompanied by proportionate decreases in expenditures that are avoided because the service is being offered at wholesale.

 

Furthermore, it is not clear that USWC’s residential service is, in fact, priced below cost. Testimony presented in docket UM 351 indicates that USWC’s residential service rates recover the overall cost of providing that service. According to MCI witness Dr. Nina Cornell, revenues received from residential customers in the dense and intermediate zones offset the revenue deficiency from residential customers in the low density zones. See Order No. 96-188 at 70. Under these circumstances, USWC will be disadvantaged only if resale increases the demand for residential lines in low density areas. However, I agree with the FCC that resale competition is unlikely to significantly impact the demand for residential service, provided cross-class restrictions are in place.

Even if resale does stimulate residential demand, significant demand growth is unlikely to occur in the short term. The Commission has ordered USWC to submit geographic deaveraging proposals in its pending rate case, docket UT 125. Since deaveraged residential rates will be considered in the near future, there is very little likelihood that USWC will experience significant revenue loss.

Issues 41-45--- Electronic Interfaces---§51.319 of the FCC rules requires ILECs to unbundle and provide nondiscriminatory access to operations support system (OSS) functions no later than January 1, 1997, under the same terms and conditions that the ILEC provides to itself. OSS functions include pre-ordering, provisioning, maintenance, repair, and billing functions supported by ILEC databases and information. The Commission reiterated the FCC’s unbundling requirement in Order No. 96-283 at 3.

While the parties agree that real-time electronic access via a nationally standardized gateway is the appropriate long term solution to providing OSS functions, they disagree on the interfaces that should be adopted in the interim and the timeframe for implementating those mechanisms. USWC proposes to use a Web page interface for pre-ordering, ordering, provisioning, and maintenance and repair functions until a national gateway solution can be established. AT&T is willing to consider the Web page option as an interim solution for pre-ordering if USWC provides the necessary specifications and meets the January 1, 1997 deadline. However, AT&T maintains that Electronic Data Interchange (EDI) should be used as the interface for ordering, Electronic Bonding-Trouble Administration (EBTA) should be used as the interface for maintenance and repair, and Interexchange Access Billing System (IABS) should be used for wholesale billing. While MCI does not specify specific interfaces, it requests that USWC provide real-time electronic interfaces for all receiving information and executing transactions for all business functions.

I find that AT&T’s proposal should be adopted. Of the options presented, AT&T’s approach will best facilitate competitive entry without compromising the goal of developing standardized, national interfaces for OSS functions. I am persuaded that USWC’s Web page proposal suffers from a number of infirmities. See e.g.,Tr. at 192-194, AT&T Brief at 21-22. In addition, I agree that the Web page is not the optimal interim solution for ordering, provisioning, maintenance and repair functions. Unlike the Web page proposal, EDI and EBTA were designed according to industry standards and have the potential to evolve into a long term interface solution. The record shows that four regional Bell operating companies (RBOCs) have already agreed to use the EDI and EBTA interfaces. Likewise, it makes sense to use IABS for billing purposes because it is a standard nationally-recognized carrier-to-carrier billing. At least two other RBOCs have agreed to use IABS for local service billing. Tr. 202-203.

From a pricing standpoint, OSS functions should be treated like any other unbundled network function; that is, prices should be based on TELRIC and include a reasonable contribution to forward-looking common costs. Since the Commission has not developed prices for OSS functions yet, I find that AT&T’s pricing proposal should be implemented on an interim basis. AT&T’s recommendation that each party pay the cost of its own gateway is a competitively neutral means of allocating cost responsibility. Usage charges should be based on cost. The parties should negotiate reasonable interim usage charges until the Commission is able to establish prices based on the cost methodology adopted in Order No. 96-284.

Although USWC is required to make pre-ordering, ordering, maintenance, repair and billing interfaces available by January 1, 1997, the record suggests that it will have difficulty complying with this mandate. If USWC fails to make the January 1, 1997 deadline, it shall file monthly progress reports with the Commission. AT&T and MCI may comment on such reports, and the Commission may take any steps that it finds appropriate to hasten the provision of the necessary OSS interfaces.

Issue 50---Pricing of Interim Number Portability. Section 251(e)(2) of the Act provides that the costs of number portability shall be "borne by all telecommunications carriers in a competitively neutral basis as determined by the [FCC]." AT&T and MCI advocate interim number portability (INP) costs should be recovered either on a bill and keep basis, or by allocating the costs to all working telephone numbers based on relative market share. The FCC has found that both methods of INP cost recovery comply with the competitive neutrality criteria in the Act. See FCC Order 96-286 at ¶¶131-136. USWC disagrees with the cost recovery rules adopted by the FCC and advocates that all costs of INP be borne by new entrants.

I agree with AT&T and MCI that INP costs should be recovered on a bill and keep basis. As MCI points out, bill and keep is the simplest and most direct mechanism for INP cost recovery consistent with FCC requirements. Under this approach, each carrier will pay the cost of its currently available number portability measures. This mechanism has the significant advantage of not requiring carriers to make special reports to one another of revenues, minutes of use or customer telephone numbers. It is also appropriate because interim cost recovery measures will soon be replaced by permanent local number portability. See FCC Order No. 96-286 at ¶70. Given the short period of time INP measures will be in place, it would be inefficient to develop and monitor the accounting and reporting systems necessary to implement more complicated cost recovery mechanisms.

Issue 54—Modification of Facilities. I agree with AT&T and MCI that the requirements set forth in ¶¶1161-1164 of the FCC order should be adopted. USWC must take all reasonable steps to accommodate requests for access to its facilities, including modifying or rearranging facilities to increase capacity. In situations where it is difficult to accommodate requests for access (e.g., those described in ¶1163 of the FCC order), USWC must explore potential accommodations in good faith with the requesting party before access is denied for lack of capacity. In the event of a dispute regarding USWC’s efforts to accommodate access, USWC shall have the burden of showing that access is not technically feasible or other compelling reasons why access cannot be provided. The parties should submit contract language in accordance with this decision.

Issue 60---Dialing Parity for IntraLATA Calls. AT&T and MCI request dialing parity (i.e., 1+ presubscription) for intraLATA toll calls. USWC states that, if AT&T or MCI customers place calls from an AT&T or MCI switch, they will be able to dial the same 1+ ten digit dialing pattern dialed by USWC customers. However, if AT&T and MCI offer service through resale of USWC exchange services or unbundled switching, AT&T and MCI customers will be offered resold USWC intraLATA long distance service until USWC implements 1+ presubscription. Until that time, AT&T and MCI customers will be able to use a competing provider of intraLATA toll only by dialing the appropriate 10XXX access code.

The Commission is currently considering intraLATA dialing parity in docket UT 132. A decision in that case is likely within the next six months. The Commission’s decision in UT 132 should be incorporated into the contract between USWC, AT&T and MCI.

Issues 73 and 74---Quality Standards and Performance Credits. The AT&T LBO includes a comprehensive set of quality standards that must be met by USWC. AT&T also proposes a series of performance credits that USWC must make if service quality does not meet the standards specified. See Attachment 8, Appendix I; Attachment 11, Appendices A and B.

The record in this proceeding does not provide a sufficient basis upon which to judge the reasonablenss of AT&T’s proposed quality standards and performance measures. AT&T’s proposal is exhaustively detailed and imposes substantial penalties if USWC fails to meet the specified quality standards. In my opinion, far more extensive review and analysis is necessary before AT&T’s proposal can be reasonably evaluated. In addition, it is not clear whether AT&T is requesting a level of service quality that exceeds that which USWC provides to itself. To the extent that AT&T or MCI seek a superior level of service quality, they should use the BFR process to negotiate quality levels and performance standards that exceed USWC’s existing levels.

Although the quality measures and performance credits proposed by AT&T are not adopted, the supplier performance quality management procedures in §1-2 of Attachment 11 of AT&T LBO should be implemented. These sections establish a process for determining accountability for service quality, a system for measuring and collecting data, procedures for evaluating service improvements and management interaction, and protocols relating to communication, emergency service restoration and complaint resolution. All of these procedures will be important in resolving service quality issues that will arise as a consequence of the working relationship between these parties.

In addition, USWC should be required to prepare detailed specifications showing all of its existing service quality and performance standards. This requirement is necessary to provide a benchmark for facilitating resolution of service quality issues. Service quality concerns that cannot be addressed through informal processes may be dealt with through the dispute resolution process in the contract, the formal complaint procedures established by the Commision, or other available forums.

Issues 75 ---Dispute Resolution. As noted elsewhere, I have adopted MCI’s proposed dispute resolution procedure. I agree with MCI that the Commission must play a significant role in resolving conflicts that arise under carrier interconnection agreements. Continued Commission involvement will insure that decisions are rendered consistent with Oregon law and the telecommunications regulatory policy adopted by the Commission. Additionally, both the AT&T and USWC proposals contemplate that hearings will take place in Denver, Colorado, effectively precluding any participation by Oregon customers impacted by the terms to this agreement.

Issue 76---"Loser Pays" Provision. AT&T proposes that the contract include a "loser pays" provision, such that the losing party should pay the cost of any future arbitration proceeding. MCI and USWC recommend that each party bear its own cost of dispute resolution.

I find that each party should bear its own cost of dispute resolution where the dispute is resolved informally. Given that this agreement provides for a new and comprehensive working relationship, it is reasonable to expect that the parties may occasionally have legitimate differences as to interpretation of their contractual obligations. Parties should not be penalized for seeking informal resolution of disputes through facilitation or mediation.

At the same time, a "loser pays" provision is appropriate if disputes must be resolved through the arbitration, formal complaint procedures or litigation. In these circumstances, a "loser pays" provision will encourage the parties to cooperate in finding constructive solutions to disputes. Such a provision will also discourage anticompetitive conduct and provide a continuing incentive to engage in fair business practices.

Issue 77---Pricing for Unbundled Elements and Interconnection. Section 252(d)(1) of the Act requires that rates for interconnection and network elements must be based on cost, without reference to rate of return, and may include a reasonable profit. For purposes of this arbitration, I find that the prices for unbundled elements and interconnection shall be based on the prices established by the Commission in docket UM 351, Order No. 283, issued November 1, 1996 (UM 351 prices). New unbundled element prices shall be implemented once the Commission reviews USWC cost estimates filed in accordance with the revised cost methodology recently approved in docket UM 773. See Order No. 96-284, issued November 1, 1996.

The UM 351 prices are based on a TELRIC methodology and include a reasonable contribution to forward-looking common costs. These prices are the result of an extensive investigation into unbundling and incremental cost pricing that began over six years ago in Order No. 90-920. During the course of its investigation the Commission considered extensive evidence and expert testimony from all facets of the telecommunications industry. The Commission’s evaluation of unbundling, costing and pricing issues is an ongoing process. As noted, the TELRIC cost methodology developed in UM 351 was recently revised in docket UM 773, and will lead to the establishment of new unbundled element prices.

In contrast to the exhaustive analysis underlying development of the UM 351 prices, neither the USWC TELRIC Cost Study nor the Hatfield Cost Model sponsored by AT&T and MCI, have been subjected to careful scrutiny by the Commission. As a consequence, it is not possible to determine whether critical inputs and assumptions to the models can be justified. Both models were criticized for containing unrealistic assumptions regarding depreciation, fill factors, and construction costs. USWC’s model, for example, produces an average loop cost more than three times greater than that calculated in UM 351. Given the level of uncertainty, the costs studies presented by the parties are not adopted.

Arbitrator’s Decision

1. Within 30 days of the Commission’s final order in this matter, AT&T and MCI shall each submit to USWC an executed contract incorporating the Commission’s findings. USWC shall execute the contracts within five days of receipt and deliver copies to the Commission. The fully executed contracts shall be effective immediately.

 

2. Consistent with the policy adopted by the Commission, any member of the public may submit written comments on this decision. Comments must be filed with the Commission no later than December 16, 1996.

 

Dated at Salem, Oregon this 6th day of December, 1996.

_______________________

Samuel J. Petrillo

Arbitrator