ORDER NO. 97-003

` ENTERED JAN 06 1997

This is an electronic copy. Attachments may not be included.

BEFORE THE PUBLIC UTILITY COMMISSION

OF OREGON

ARB 3

ARB 6

COMMISSION DECISION

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 under the Act. Pursuant to an agreement by the parties, the petitions of AT&T and MCI were consolidated.

On October 14 and 15, 1996, Samuel Petrillo, an Administrative Law Judge for the Commission, held an arbitration hearing in this matter in Salem, Oregon. Briefs were filed on November 4, 1996.

On December 6, 1996, the Arbitrator issued his decision. On December 16, 1996, USWC filed exceptions and AT&T/MCI filed joint comments regarding the Arbitrator’s decision. Sprint Communications Company L.P. filed comments supporting the Arbitrator’s decision.

Standards for Arbitration

This arbitration was conducted under 47 U.S.C. §252 of the Act. Subsection (c) provides:

Standards for Arbitration--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.

Commission Review

Section 252 (e)(1) of the Act requires that any interconnection agreement adopted by negotiation or arbitration shall be submitted for approval to the State commission. Section 252 (e)(2)(B) provides that the State commission may reject an agreement (or any portion thereof) adopted by arbitration only "if it finds that the agreement does not meet the requirements of section 251, including the regulations prescribed by the Commission pursuant to section 251, or the standards set forth in subsection (d) of this section." Section 252 (e)(3) further provides:

Notwithstanding paragraph (2), but subject to section 252, nothing in this section shall prohibit a State commission from establishing or enforcing other requirements of State law in its review of an agreement, including requiring compliance with intrastate telecommunications service quality standards or requirements.

On August 8, 1996, the Federal Communications Commission (FCC) issued rules pursuant to §§ 251 and 252 of the Act. (47 C.F.R. § 51.100 et seq. FCC Order 96-325). On October 15, 1996, the U. S. Court of Appeals, Eighth Circuit, stayed the operation of the FCC rules relating 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). On November 12, 1996, the United States Supreme Court issued a decision declining to set aside the stay.

Commission Conclusion

The Commission has reviewed the Arbitrator’s decision and the exceptions and comments under the standards set out above. Except as indicated below, we conclude that the Arbitrator’s decision comports with the requirements of the Act, applicable FCC rules, and relevant state law and regulations. We have also provided clarification or additional explanation of the Arbitrator’s decision where appropriate.

USWC Exceptions

Reliance on FCC pricing Rules. USWC claims that the Arbitrator erred by placing undue reliance upon FCC pricing rules and proxy rates that have been stayed by the federal court. The Commission finds no basis for this conclusion. The Arbitrator’s decision is based on an independent analysis of the evidence presented. Furthermore, it is not error for the Arbitrator to concur with the reasoning set forth in the FCC Order.

Choice of Contract. USWC claims that the Arbitrator erred by adopting the interconnection agreement submitted by AT&T. USWC argues that the AT&T contract contains hundreds of technical provisions for which there is an inadequate evidentiary basis and which (a) impose extraordinary burdens and costs; (b) interfere with USWC management; (c) diverge from contractual provisions agreed to by the parties, and (d) exceed the authority of the Arbitrator. The Commission is not persuaded by USWC’s claims. In particular, we note the following:

(a) USWC agreed to a procedure that called for each of the parties to submit a proposed interconnection agreement for possible approval by the Arbitrator. All parties, including USWC, filed contracts that were received into evidence as exhibits in this proceeding. USWC’s claim that the AT&T contract cannot now be considered contravenes both the rules of evidence and the procedures USWC agreed to follow in this case.

(b) USWC’s claim that it is improper for the Arbitrator to consider certain issues (e.g., service quality standards and dispute resolution procedures) ignores the fact that USWC presented these issues to the Arbitrator for decision. The Arbitrator’s decision tracks the Joint Issue Statement that was prepared and submitted by the parties. USWC cannot unilaterally take those issues off the table at this stage in the proceeding.

(c) There is no merit to USWC’s claim that the Arbitrator abused his authority by adopting "hundreds of contractual provisions" in the AT&T contract without discussion. As explained above, the AT&T contract is part of the evidentiary record in this case. Second, all parties were on notice that the Arbitrator intended to adopt one of the contracts submitted by the parties. Third, the Arbitrator’s obligation was to decide all of the disputed issues identified by the parties. USWC was obligated to identify all provisions in the AT&T and MCI contracts where USWC did not agree.

(d) USWC’s claim that the AT&T contract diverges from agreements reached during negotiation has not been substantiated.

Issue 1a--Single Point of Interconnection. The Arbitrator found that AT&T and MCI should be able to designate a single interconnection point in each LATA. This finding is consistent with §251(c) of the Act, which requires that incumbent local exchange carriers (ILECs) must provide interconnection or access to unbundled elements at any technically feasible point within the incumbent’s network.

USWC argues that the Commission should revise the Arbitrator’s decision to require that AT&T and MCI must establish a point of interconnection (POI) within each local calling area in which they offer facilities-based local exchange service. USWC argues that it may have to route local calls a long distance over toll trunks if AT&T and MCI are permitted to establish only one POI within each LATA. USWC further contends that it may not be adequately compensated under such an arrangement and that its toll facilities may be exhausted prematurely.

The Commission is not persuaded that this issue is ripe for decision. There is no indication that AT&T and MCI intend to establish network interconnections in a manner that will result in the inefficient use of network facilities. We presume that AT&T and MCI will seek interconnection arrangements that enhance, rather than compromise, network capabilities.

The Commission is not prepared to adopt USWC’s proposal to require all carriers to interconnect within each local calling area, because we are concerned that such an approach may impair the ability of competing carriers to implement more advanced network architectures. On the other hand, a reasonable argument can be made that additional compensation should be required of a carrier that seeks to interconnect in a manner that is extremely inefficient or exhausts existing network facilities. If USWC believes a particular request for interconnection will impair network facilities or cause it to incur extraordinary costs, it may seek Commission resolution of the matter under the dispute resolution procedures in the contract.

Issue 9--Types of Collocated Equipment. The Arbitrator concluded that AT&T and MCI should be permitted to collocate remote switching modules (RSMs), provided they are not used to avoid switched access charges. USWC agrees that RSMs should not be used to avoid switched access charges, but claims AT&T and MCI will violate this requirement.

Where RSMs are collocated, it is possible for the collocating carrier to avoid payment of switched access charges by misreporting toll/access minutes of use as local minutes (i.e., misreporting PLU factors). However, interexchange carriers such as AT&T and MCI are currently required to distinguish the jurisdiction of toll/access minutes of use under the PIU reporting method. We are unaware that AT&T or MCI are abusing the current method. The Commission has not received any formal complaints on this subject from the LECs, nor are we aware of any PIU audits conducted by the LECs which would show this to be the case. We have no reason to believe that AT&T or MCI would risk possible sanctions by misreporting minutes of use where RSMs are collocated. We therefore agree with the Arbitrator's decision on this issue.

Issue 16--Subloop Unbundling. USWC argues that subloop unbundling should take place through the bona fide request (BFR) process. We agree with the Arbitrator that the BFR process will cause unnecessary delays in obtaining subloop elements. The procedure approved by the Arbitrator is adopted.

Issue 22--Dark Fiber. Notwithstanding USWC’s arguments to the contrary, we agree with the Arbitrator that dark fiber is a network element and must be offered to AT&T and MCI on an unbundled basis. See also, Order No. 96-188 at 40-41.

Issue 25--Platform. USWC alleges that the Arbitrator’s decision violates the Act because it allows AT&T and MCI to purchase all of the unbundled elements necessary to create a finished service, even if it produces a lower price than the wholesale rate available to AT&T and MCI under the resale provisions of the Act. The Commission agrees with Arbitrator. The Act does not place any restrictions on the purchase of unbundled elements. See also, Order No. 96-324, Appendix A at 7-8; Order No. 96-325, Appendix A at 12-13.

Issues 31, 32, 35, and 37--Wholesale Discount Rate. USWC claims that the Arbitrator erred by finding that the wholesale rate should be based on reasonably "avoidable" retail costs rather than the retail costs "actually avoided" by USWC. It further claims that the Arbitrator unreasonably relied on the FCC’s pricing rules in concluding that the MCI Avoided Cost Study should be adopted. We agree with the Arbitrator’s decision to calculate the wholesale rate based on reasonable avoidable retail costs. It was not error for the Arbitrator to agree with the FCC’s reasoning with regard to this issue. We also agree that the wholesale rate produced by the MCI Avoided Cost Study is consistent with the requirements of the Act.

Issue 33--Volume/Term Discounts. The Arbitrator found that a discount price may reflect savings due to operational efficiencies and/or avoided retail costs. He concluded that it is not possible to determine what combination of costs are avoided by an ILEC without analyzing the circumstances surrounding each discount offering. Under these circumstances, the Arbitrator found that the wholesale discount applicable to services already subject to volume or term discounts should equal the greater of 22 percent, or one half of the authorized wholesale rate plus 11 percent. USWC alleges that there is no basis in the record to support this conclusion, and recommends that the Commission apply a zero discount to these services.

We agree with the Arbitrator’s findings. Absent a detailed analysis of each discount offering, there is no way to ascertain precisely the retail costs that are avoided by the ILEC. The discount approved by the Arbitrator is a reasonable approach under the circumstances.

Issue 34--Residential Services for Resale. USWC claims that the Arbitrator erred by concluding that residential services should be subject to the 22 percent wholesale discount authorized in this proceeding. USWC argues that the discount for residential service should be zero. The Commission agrees with the Arbitrator’s decision on this issue.

Issue 39--Construction and Other Additional Charges. USWC contends that the Arbitrator’s decision does not acknowledge USWC’s right to recover "all the costs of implementing interconnection." The Arbitrator addresses the recovery of ILEC costs incurred to provide interconnection and access to unbundled elements at several places in his decision. See e.g., Appendix A, Issues 39, 46, 55, 62, 79, and 91. Except for the revision to page 25 of Appendix A noted below, we conclude that the Arbitrator’s decision is consistent with the Act and Commission policy regarding this issue.

The discussion of Issue 39 on page 25 of Appendix A of the Arbitrator’s decision notes that USWC is entitled to recover its construction costs where it must build new facilities that are not part of USWC’s planned construction schedule. The Commission concludes that this reference could generate disputes regarding the sufficiency of USWC’s planning and construction schedules. Accordingly, we find that the Arbitrator’s decision on this issue should be revised to read as follows:

As a general matter, the costs of providing a network element or service are included in the TELRIC-based price of that element or service. However, where an ILEC incurs additional costs to build or modify facilities for the benefit of a requesting carrier, and those costs are not included in existing rates, the ILEC is entitled to recover such additional costs. The ILEC has the burden of showing that any claimed additional costs are not already recovered through its existing rates.

If an ILEC demonstrates that it is entitled to recover additional costs to provide facilities on behalf of a requesting carrier, it may propose to recover those costs through nonrecurring charges. However, because large up-front charges tend to discourage competition, the Commission will attempt to spread cost recovery over a reasonable period of time and allocate such costs among all requesting carriers. This approach is consistent with that approved by the FCC in 47 C.F.R. §51.507(e). See also, Order No. 96-283 at 13-14, Order No. 96-325, Appendix A at 11; FCC Order at ¶¶682, 743-752.

Issues 41, 44--Electronic Interfaces. USWC disagrees with the electronic interfaces approved by the Arbitrator. The Commission agrees with the Arbitrator’s decision on these issues.

Issue 50--Interim Number Portability (INP). The Arbitrator concluded that INP costs should be recovered on a bill and keep basis. Bill and keep is one of four approaches recommended by the FCC for recovery of INP costs. FCC Order 96-285 at ¶140. USWC disagrees with the cost recovery rules adopted by the FCC and advocates that all costs of INP be borne by new entrants. The Commission agrees with the Arbitrator’s decision on this issue.

Issue 54--Modification of Facilities. Among other things, USWC claims that the Arbitrator erred by adopting AT&T contract language that has no basis in the record. USWC also alleges that the Arbitrator did not address cost responsibility for increased capacity.

USWC misinterprets the Arbitrator’s decision. The Arbitrator found that the AT&T contract should be amended to comply with ¶¶1161-1164 of the FCC Order, which details the responsibilities of utilities and telecommunications carriers regarding the modification of facilities. Cost responsibility is discussed at various places in the Arbitrator’s decision. See Issue 39, supra.

Issues 73-74--Quality Standards. USWC claims that the Arbitrator erred by adopting procedures for collecting data and evaluating service quality improvements. USWC asserts that these procedures will require it to provide AT&T and MCI with higher quality service than USWC provides to itself. USWC maintains that all costs associated with the conditions imposed by the Arbitrator should be borne by AT&T and MCI.

USWC’s argument is without merit. The procedures adopted by the Arbitrator provide a reasonable starting point for evaluating the service quality provided to competing telecommunications carriers. Otherwise, the Commission would be forced to rely only on USWC’s promise to supply competing carriers with the level of service quality that USWC provides to itself. As the Arbitrator emphasizes, however, there is no way to objectively determine what USWC’s service standards are unless procedures are in place to monitor and evaluate existing service quality. For that reason, the Arbitrator’s decision requires USWC to submit detailed specifications identifying its internal quality standards. Furthermore, our experience with USWC’s numerous service problems causes us to question the level of service quality currently received by USWC’s Oregon customers. If USWC’s current customers are not receiving satisfactory service, the company certainly has no incentive to provide higher quality service to its competitors.

Issues 75-76--Dispute Resolution/ "Loser Pays" Provisions. USWC claims that the Arbitrator has no authority to resolve these issues. As noted above, however, the parties submitted these issues to the Arbitrator for decision. All three parties included dispute resolution procedures in their contracts. USWC recommended adoption of its dispute resolution process and offered testimony at hearing in opposition to the AT&T/MCI position.

There is nothing in the Act that precludes the Arbitrator from considering these issues. USWC cannot submit issues for arbitration, then withdraw them from consideration because it does not like the result.

Issue 77--Pricing of Unbundled Elements. USWC claims that the prices adopted by the Arbitrator for unbundled elements are confiscatory and not based on substantial evidence. It recommends that the Commission adopt the prices produced by the USWC incremental cost study.

The Commission finds that the Arbitrator correctly concluded that (a) the prices for unbundled elements should be those approved by the Commission in docket UM 351, Order No. 96-283, and; (b) the UM 351 prices should remain in effect until new unbundled element prices are developed based on the revised cost methodology recently approved in docket UM 773, Order No. 96-284.

The Arbitrator’s decision recognizes that the unbundled element prices adopted in docket UM 351 are the product of a comprehensive examination of incremental cost pricing and unbundling conducted by the Commission. In contrast, the input assumptions underlying the USWC cost study presented for purposes of this arbitration proceeding have not been tested for reasonableness. As AT&T and MCI point out, the manner in which the USWC cost study has been developed makes it extremely difficult to evaluate USWC’s methodology or to determine that it is, in fact, a properly constructed incremental cost analysis. Our review also raises a number of questions regarding critical assumptions incorporated in the USWC cost study. We also question the inordinately high loop cost results produced by the USWC methodology.

Given the degree of uncertainty and potential adverse consequences, we agree with the Arbitrator that the prices produced by the USWC cost study should not be implemented for purposes of this interconnection agreement. We further agree that the only reasonable prices available are those developed by the Commission in docket UM 351.

In the case of network elements for which prices have not been developed, the Arbitrator found that the prices proposed by AT&T should be implemented until the Commission develops new prices based on the revised cost methodology approved in Order No. 96-284. USWC argues that AT&T’s proposed prices are too low and will put USWC at a competitive disadvantage. It proposes that the interim AT&T prices be trued-up once the Commission implements new unbundled element rates using the revised cost methodology approved in Order No. 96-284.

The Commission concludes the Arbitrator’s decision should be amended to require that AT&T prices shall be implemented subject to true-up in the case of network elements that were not priced in UM 351. The true-up shall take place once the Commission approves unbundled element prices using the revised cost method approved in Order No. 96-284, or such later time as the Commission determines. This approach will ensure that no party is disadvantaged while new network element prices are developed.

In addition, there may be unbundled elements for which there are neither UM 351 prices nor prices proposed by AT&T. In that event, USWC shall propose prices which shall apply on an interim basis subject to the same true-up requirements that apply to the interim AT&T prices.

Issues 85-93--Reciprocal Compensation. USWC claims that the Arbitrator erred by concluding that AT&T and MCI switches are tandem switches covering a geographical area comparable to USWC tandem switches. USWC maintains that this decision will result in a "non-reciprocal, unsymmetrical compensation scheme" that is unrelated to cost.

USWC is incorrect. The Arbitrator’s decision adopts bill and keep arrangements for the transport and termination of local and EAS traffic consistent with the Commission’s findings in Order No. 96-021 (dockets CP 1, CP 14, and CP 15). Contrary to USWC’s claim, the Arbitrator’s decision does not state that the AT&T/MCI switches are tandem switches comparable to those used by USWC. Indeed, there is no need to make this finding if bill and keep arrangements are in place. Under bill and keep, each carrier pays its own cost of transporting and terminating local and EAS traffic. Bill and keep does not take into account differences in network architecture and thus does not distinguish between local and tandem switch functionality for purposes of provisioning local and EAS traffic.

Joint Comments of AT&T and MCI

Issue 26--Customized Routing. AT&T and MCI state that page 16, Appendix A of the Arbitrator’s decision contains a typographical error. The Arbitrator has sent a letter to the parties and the Commission confirming the error. The Arbitrator indicates that the decision should read: "The parties agree in principle. AT&T contract language is adopted." The Commission adopts this modification.

Issue 27--Services To Be Made Available. AT&T and MCI state that page 17, Appendix A of the Arbitrator’s decision contains an unintended error. The Arbitrator has sent a letter to the parties and the Commission confirming that the words "enhanced services and" should not have been included in the decision and should be deleted. The Commission adopts this modification.

Issue 33--Volume/Term Discounts. AT&T and MCI challenge the Arbitrator’s decision regarding the wholesale discount for services already subject to term or volume discounts. This issue is discussed above.

Issue 39--Construction and Additional Charges. AT&T and MCI request modification of the Arbitrator’s decision relating to the recovery of construction costs. This issue is discussed above.

Issue 52--Reciprocal Access to Poles, Ducts, Conduits, Rights-of-Way. The Arbitrator concluded that the parties should provide reciprocal access to poles, ducts, conduits, and rights-of-way. This decision is contrary to the position taken by the FCC. FCC Order at ¶1231. AT&T/MCI maintain that the Arbitrator’s decision violates §252(e)(2)(B) of the Act, which requires State commissions to comply with regulations prescribed by the FCC.

Although the Arbitrator’s decision differs from the position taken by the FCC, the Commission is persuaded that §251(b)(4) of the Act mandates reciprocal access for all LECs, not merely incumbent LECs. Although §224(f)(2) contains a limited exception to access requirements, it applies only to electric utilities. See also, H.R. Rep. No. 458, 104^th Cong., 2d Sess., reprinted in 142 Cong. Rec. 1108 (daily ed. January 31, 1996) (Joint Explanatory Statement of the Committee of Conference at 8).

Issue 73--Quality Standards. The Arbitrator did not adopt the quality standards recommended by AT&T, but acknowledged that development of standards is necessary. As discussed above, the Arbitrator’s decision requires USWC "to prepare detailed specifications showing all of its existing service quality and performance standards," in order to provide a benchmark for facilitating resolution of service quality issues.

AT&T argues that its proposed standards should be adopted. However, to the extent the Commission agrees with the Arbitrator on this issue, AT&T/MCI recommend that the Arbitrator’s decision be amended to include the following statement:

A paragraph will be inserted in Attachment 11 requiring USWC to provide current written objective measures of quality for 1) billing; 2) operator assistance; 3) preorder, order, provisioning, and maintenance/repair; 4) network quality and; 5) provisioning of interconnection and unbundled elements, within 30 days of the effective date of the agreement.

The amendment proposed by AT&T/MCI is consistent with the steps taken by the Arbitrator to ensure that USWC adequately specifies its service quality standards. Detailed measures of service quality are necessary to ensure that USWC complies the requirement in the Act which mandates that ILECs provide competing carriers with the same level of service quality that the ILEC provides to itself. Attachment 11 of the contract shall be amended as proposed by AT&T/MCI.

The Arbitrator’s decision also notes that the Commission has opened docket AR 316 to consider service quality rules applicable to telecommunications utilities. AT&T/MCI emphasize that issues relating to the service quality provided to telecommunications carriers has been deferred. They urge the Commission to open a docket as soon as possible to consider such issues.

On December 20, 1996, the Commission issued Order No. 96-332 in docket AR 316, adopting service quality standards for basic services supplied by telecommunications utilities. Phase II of that docket will address performance standards for services by ILECs to CLECs, and may also encompass service quality for all competitive providers of telecommunications services. The Phase II investigation will commence in early 1997.

Issue 77--Pricing of Unbundled Elements. The Arbitrator’s decision adopts the prices established in Order No. 96-283 for unbundled network elements. AT&T/MCI contend that the network access channel (NAC) price adopted in Order No. 96-283 is erroneous, not based on substantial evidence, and inconsistent with the pricing standards in §252(d)(1) of the Act. On December 31, 1996, AT&T and MCI filed a joint application for reconsideration of Order No. 96-283. On the same day, USWC also filed for reconsideration of Order No. 96-283.

AT&T and MCI recommend that the Arbitrator’s decision be amended to clarify that, if the NAC price is revised by the Commission on reconsideration or on appeal, the revised price shall be incorporated in the interconnection contract. The Commission finds that the Arbitrator’s decision should be amended to provide that any price or contract provision modified as a result of Commission reconsideration or appeal shall be incorporated in the interconnection contract.

Issues 90 and 93--Transport and Termination Charges. The Arbitrator’s decision adopts interim bill and keep arrangements for the transport and termination of local and EAS traffic consistent the Commission’s findings in Order No. 96-021. AT&T/MCI agree with the Arbitrator regarding these issues, but maintain that the Arbitrator’s decision contains language that may cause confusion and should be deleted. Specifically, AT&T/MCI ask the Commission to delete that portion of the Arbitrator’s decision which states that transport, tandem switching and end office switching is unbundled and priced pursuant to Commission Order No. 96-283. See Appendix A, Issue 90, page 59, second paragraph; Appendix A, Issue 93, page 60, second paragraph.

The Arbitrator has notified the Commission and the parties that the language identified by AT&T and MCI was inadvertently included in the discussion of these issues and should be deleted. The Commission adopts these modifications.

ORDER

IT IS ORDERED that the Arbitrator’s decision in this case, attached to this order, is adopted as amended herein.

Made, entered, and effective ________________________.