ORDER NO. 97-053

ENTERED FEB 18 1997

This is an electronic copy.

BEFORE THE PUBLIC UTILITY COMMISSION

OF OREGON

ARB 11

DISPOSITION: ARBITRATOR’S DECISION APPROVED AS AMENDED

On September 25, 1996, Sprint Communications Company L.P. (Sprint) filed a petition with the Public Utility Commission of Oregon (Commission) to arbitrate a contract for network interconnection with GTE Northwest, Inc., (GTE) 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 October 7, 1996, GTE filed a response. On December 19, 1996, Arbitrator Michael Grant held a hearing on this matter in Salem, Oregon.

On January 21, 1997, the Arbitrator issued a decision resolving the open issues in this docket. The decision is attached as Appendix A. On January 31, 1997, the parties filed comments with the Commission on the Arbitrator's decision.

Standards for Arbitration

This proceeding was 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 * * * any open issues and imposing conditions upon the parties to the agreement, a State commission shall—

ensure that such resolution and conditions meet the requirements of section 251, including the regulations prescribed by the Commission pursuant to section 251;

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

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

Commission Approval

Section 252(e)(1) requires that any interconnection agreement adopted by arbitration 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) 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.

Commission Conclusion

The Commission has reviewed the Arbitrator’s decision and the exceptions and comments under the applicable standards. Except as indicated, we conclude that the Arbitrator's decision comports with the requirements of the Act, the FCC rules where applicable, and relevant state law and regulations, and should be approved as amended. We also provide clarification or additional explanation on portions of the Arbitrator’s decision below.

Comments

Pricing Services for Resale: Issues 1-7

GTE challenges the Arbitrator’s conclusion that its avoided cost studies were unsuitable for establishing a wholesale discount rate for this proceeding. It contends that the Arbitrator erred in rejecting the studies because they included only those costs that "will be avoided," rather than all those that could "reasonably be avoided." We agree with the Arbitrator’s decision that wholesale rates should be calculated based on reasonable avoidable retail costs. We address this issue only because of GTE’s attempt to now modify its proposal by claiming that it "provided ample evidence that its studies reasonably identify and quantify costs which will (or reasonably could) be avoided." GTE Comments at 4 (Emphasis added). In this and other arbitration proceedings, GTE has strenuously argued for an "avoided cost" standard and submitted evidence to establish costs that "will be avoided." See, e.g., GTE Brief at 25. There is nothing to support GTE’s revisionist claim that its studies comply with the "reasonably avoidable" standard.

GTE also challenges the Arbitrator’s reliance on the FCC’s methodology to set a wholesale discount rate. GTE renews its argument that the Commission may not refer to or base a decision on the stayed FCC pricing rules. We disagree. As noted by the Arbitrator, the FCC rules represent a thorough, comprehensive analysis of issues related to interconnection and provide useful guidance for the resolution of the pricing issues in this proceeding. It was not error for the Arbitrator to agree with and adopt the FCC’s conclusions, including those regarding the avoidable costs in the particular USOA accounts.

Services Subject to Resale: Issues 11-14

GTE makes numerous challenges to the Arbitrator’s main conclusion that it must offer for resale, at the discount rate, all retail telecommunication services. GTE first contends that it should not be required to make below-cost priced services available for resale at a discount. We have addressed this issue in prior arbitration decisions and agree with the Arbitrator’s conclusion on this issue. See, e.g., Order No. 97-003 at Appendix A pg. 9.

GTE also claims that the Arbitrator erred concluding that future Advanced Intelligent Network (AIN) services must be made available for resale. We approve the Arbitrator’s decision with the understanding that the wholesale discount obligation applies to all future retail AIN services.

We also approve the Arbitrator’s decision to exclude short term promotional offerings from the wholesale rate obligation with the understanding that these promotions are not excluded from resale altogether. Promotions lasting 90 days or less must be made available for resale, but need not be offered at a wholesale discount off the promotional price.

Pricing Unbundled Elements: Issues 8, 9 and 25

Use of UM 351 Rates: GTE alleges that the Arbitrator erred in using the UM 351 rates for unbundled network elements, because those rates are based on USWC costs. GTE has previously challenged the application of UM 351 rates in other proceedings. We will not repeat here what we stated in Order No. 96-283 at 8. However, we do address several new allegations made by GTE in support of its position.

First, GTE cites Order 93-1118 and portions of a Staff Public Meeting Report to support its claim that the USWC costs were to be used for the limited purpose of identifying "price floors for routine tariff filings." GTE Comments at 22. GTE is mistaken. When read as a whole, the report makes clear that USWC costs were to be used as the basis for the UM 351 cost study and that those costs would subsequently be used in Phase II to establish building block prices. The costs and prices would be used for all LECs unless the LEC performed a separate study using UM 351 principles to justify different costs and prices. See Order No. 93-1118, July 12, 1993 Staff Public Meeting Report at 3. GTE agreed to this procedure and actively participated throughout the entire costing and pricing process.

GTE next claims that the Commission discouraged it from filing its own cost studies because Staff resources would be stretched too thin. Again, GTE relies on the Staff report attached to Order No. 93-1118. GTE has taken Staff’s comments out of context. In the report, Staff recommended that the Commission adopt the policy of applying the USWC cost result to the other LECs unless they provide alternative estimates. While noting that the decision to focus on one utility’s costs enabled a timely, comprehensive review, Staff stated that GTE and other non-USWC LECs had agreed to this policy to avoid the expense of developing their own building block estimates. Furthermore, Staff reiterated that under this policy, other LECs, including GTE, have the option of performing their own studies.

Finally, GTE claims that the Commission was waffling on its commitment to cost based pricing because of its decision in Order 94-542 (suburban mileage charges). GTE’s reliance is misplaced. The last paragraph on page 4 of the order states that the Commission is uncertain what effect the suburban mileage issue has on the UM 351 proceeding. The reference to costs, however, does not mean that the Commission is unconcerned with pricing services based on cost generally. Rather, the reference was merely to emphasize that the company's rate of return depends on the overall relationship of total company costs to revenue.

Access Charges: GTE requests clarification that it be allowed to recover 100 percent of its access charges for both interstate and intrastate calls. We note simply that section 251(g) of the Act provides that each LEC shall provide access to interexchange carriers under the same restrictions and obligations (including receipt of compensation) previously imposed on such carriers prior to the Act’s passage, until such restrictions and obligations are expressly superseded by regulations prescribed by the FCC.

Transport and Termination: GTE contends that the arbitrator improperly rejected the parties’ agreement that "bill and keep" for interconnection be confined to traffic within plus or minus ten percentage points of balance. We agree that an issue settled through negotiation should be approved in an arbitration proceeding, provided that the agreement is consistent with the Act. Accordingly, we adopt the parties agreement to use bill and keep as an interim pricing methodology when traffic is roughly in balance. We do not accept GTE’s proposal to use its interstate access rates when traffic is more than 10 percent out of balance, however. Such rates are based on GTE’s embedded costs, not TELRIC. Accordingly, we conclude that the rates for transport and termination set forth in UM 351, Order No. 96-283, Appendix C, should apply when traffic becomes more than 10 percent out of balance. These rates shall remain in effect until revised prices are developed based on the UM 773 cost study assumptions.

Geographic Deaveraging: We approve the Arbitrator’s decision that GTE’s rates should not be geographically deaveraged at this time. In addition to the reasons cited by the Arbitrator, we add that Sprint has not provided sufficient information in this proceeding to require deaveraging as it proposes.

Contract Submission

GTE asks the Commission to clarify that it will have a fair opportunity to negotiate the final wording of the contract. It is concerned that the procedures adopted by the Arbitrator would allow only Sprint to prepare contract language for the Commission’s consideration.

We anticipate that GTE and Sprint will work in good faith to prepare contract language that is consistent with the terms of this decision. We believe that the procedures adopted by the Arbitrator would allow such cooperation. Nonetheless, to avoid delays in final contract submission, we adopt the following modified procedures:

Within 15 days from the date of this order, Sprint shall submit to GTE a contract incorporating terms that reflect the Commission's final decision in this proceeding. The contract shall bear the signature of a person authorized by Sprint to sign this contract.

Within 15 days of receipt of the contract from Sprint, GTE shall notify Sprint of any provisions of the revised contract that GTE believes are inconsistent with the terms of the final Commission decision.

If GTE does not contest Sprint’s language incorporating the terms of this decision, GTE shall return the contract to Sprint with the signature of a person authorized by GTE to sign the contract. GTE shall also file a copy of the contract with the Commission.

If Sprint and GTE are unable to resolve disputes over the language that embodies the decisions in this order, the parties may request the Commission to resolve the dispute on an expedited basis. The Commission will make the final determination and issue a binding contract.

ORDER

IT IS ORDERED that the Arbitrator's Decision in this case, attached to and made part of this order as Appendix A, is approved as modified in this order.

Made, entered, and effective ________________________. 

A party may request rehearing or reconsideration of this order pursuant to ORS 756.561. A request for rehearing or reconsideration must be filed with the Commission within 60 days of the date of service of this order. The request must comply with the requirements in OAR 860-014-0095. A copy of any such request must also be served on each party to the proceeding as provided by OAR 860-013-0070(2). A party may appeal this order to a court pursuant to applicable law.

BEFORE THE PUBLIC UTILITY COMMISSION

OF OREGON

ARB 11

INTRODUCTION

On September 25, 1996, Sprint Communications Company L.P. (Sprint) filed a petition with the Public Utility Commission of Oregon (Commission) to arbitrate a contract for network interconnection with GTE Northwest, Inc., (GTE) 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 October 21, 1996, GTE filed a response. After two prehearing conferences, an arbitration hearing was held on December 19, 1996, before Michael Grant, Arbitrator. The following appearances were entered:

For the petitioner, Sprint:

Carol Matchett, Attorney at Law

San Mateo, California

Appearing pro hac vice

For the respondent, GTE:

Richard E. Potter, Attorney at Law

Everett, Washington

Lewis F. Powell, III, Attorney at Law

Richmond, Virginia

Appearing pro hac vice

On January 6, 1996, the parties filed post-hearing briefs.

PRELIMINARY MATTERS

Arbitrator’s Authority

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 * * * any open issues and imposing conditions upon the parties to the agreement, a State commission shall—

ensure that such resolution and conditions meet the requirements of section 251, including the regulations prescribed by the Commission pursuant to section 251;

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.

FCC Pricing Rules

On August 8, 1996, the Federal Communications Commission (FCC) issued an order and rules on interconnection pursuant to 47 U.S.C. §§ 251 and 252. On October 15, 1996, the United States Court of Appeals for the Eighth Circuit stayed the operation of the portions of those rules that relate to pricing and the "pick and choose" provisions. On November 12, 1996, the United States Supreme Court issued a decision that declined to set aside the stay.

Because of the stay, GTE contends that the FCC’s pricing rules and related provisions should not be referred to or relied upon in the arbitration. I disagree. While not legally binding, I consider the FCC order to be a thorough, comprehensive analysis of issues related to interconnection. For that reason, the FCC order provides useful guidance for the resolution of the pricing issues in this proceeding. Accordingly, I refer to discussions in the FCC order and, where persuasive, adopt positions articulated by the FCC. I do not, however, consider the FCC conclusions to be dispositive.

Scope of Arbitration

At the time Sprint filed its Petition for Arbitration, more than 75 issues were in dispute between the parties. Since that time, the parties have reached agreements through negotiations on all but 18 issues. In this proceeding, the parties are not requesting that the Commission arbitrate a complete interconnection agreement between them. Rather, they are seeking resolution of the remaining disputed issues. The parties will subsequently file with the Commission a contract incorporating terms that reflect the Commission resolution of these issues.

Sprint Proposal Concerning AT&T/GTE Arbitration

To ensure that all competitors enter the local exchange marketplace in competitive parity, Sprint requests that the same determinations made in the AT&T/GTE arbitration be applied in this proceeding for all but one of the disputed issues. Sprint contends that the decisions in various arbitrations with GTE should be consistent and not discriminatory among competitors. It explains that inconsistent terms and conditions for interconnection and wholesale services would result in unequal and unfair development of competition, contrary to the policy goals of the Act. GTE opposes Sprint’s proposal. GTE contends that all determinations must be made based on the evidence submitted by the parties in this proceeding. GTE argues that Sprint’s request, if granted, would deprive GTE’s right to due process.

I am not persuaded that the adoption here of the terms and conditions set forth in the AT&T/GTE arbitration would, as GTE claims, "contravene core principles of procedural due process." Many of the issues remaining in this proceeding involve policy matters, not questions of fact. Accordingly, GTE’s reliance on Goldberg v. Kelly, 397 U.S. 254 (1970), and other related cases is misplaced. Furthermore, GTE fails to acknowledge that it, obviously, was a party to the AT&T/GTE arbitration, and that it submitted identical cost studies and other information in that proceeding and had the opportunity to confront and cross-examine the witnesses.

Nonetheless, I decline to adopt Sprint’s proposal. I agree that consistent and uniform rates and terms for unbundled elements, pricing of wholesale service, and transport and termination of traffic would help ensure that no competitor is disadvantaged upon entry into the new market. I am reluctant, however, to simply apply the results of a prior proceeding to resolve the disputed issues here. First, I do not believe that Congress intended such a procedure. If it had, it could have simply established a procedure whereby the results of the first arbitration would be binding on all subsequent arbitrations. Such an action also would discourage comprehensive contract negotiations, a result inconsistent with the purposes of the Act.

In making this decision, however, I note that many of my decisions in this arbitration will undoubtedly be similar to those made in the AT&T/GTE arbitration. This is simply the result of applying prior Commission policy and decisions to similar issues.

ISSUES PRESENTED FOR ARBITRATION

PRICING SERVICES FOR RESALE

Issue 1: What is the proper methodology for determining the prices for GTE resold services?

Issue 2: Are advertising expenses in their entirety an avoided cost?

Issue 3: Are call completion costs (Operator Services) in their entirety an avoided cost?

Issue 4: Are number service costs (Directory Assistance) in their entirety an avoided cost?

Issue 5: Are some Product Management costs in their entirety an avoided cost?

Issue 6: What percentage of sales expenses is an avoided cost?

Issue 7: What percentage of uncollectable expenses is an avoided cost?

Under §251(c)(4)(A) of the Act, GTE must offer for resale, at wholesale rates, any telecommunications service that it offers at retail, and without any unreasonable or discriminatory limitations. The definition of "wholesale rates" is set forth in §252(d)(3), and requires GTE to discount the rate by any costs "avoided" by GTE as a result of providing the service to a reseller rather than to an end user customer.

GTE conducted extensive studies of its operations analyzing all of its work centers to determine which activities or functions in each work center will be avoided in a wholesale environment. Based on the results from those studies, GTE proposes an average discount rate of about seven percent. Sprint did not submit any studies as an alternative to those presented by GTE. It recommends that the Commission adopt a wholesale discount within the range recommended by the FCC, that is, between 17 and 25 percent.

After my review, I find GTE’s proposal unsuitable for purposes of establishing a wholesale discount rate for this proceeding. First, GTE’s studies include only those costs "that will be avoided," rather than all those "reasonably avoided." The Act should be read to anticipate the actions of a prudent competitor selling services at wholesale in a competitive market. To keep prices down, the competitor will cut its costs as deeply as possible to retain its customers. As the FCC stated:

We do not believe that Congress intended to allow incumbent LECs to sustain artificially high wholesale prices by declining to reduce their expenditures to the degree that certain costs are readily avoidable. We therefore interpret the 1996 Act as requiring states to make an objective assessment of what costs are reasonably avoidable when a LEC sells its services wholesale. We note that Colorado, Georgia, Illinois, New York, and Ohio commissions have all interpreted the 1996 Act in this manner. FCC Order ¶ 911.

GTE also chose to submit a wholesale discount proposal that included an adjustment to compensate GTE for opportunity costs. In theory, this adjustment is designed to compensate GTE for revenues from complimentary services such as intraLATA toll that it may lose because the customer has gone to a competitor. In effect, the modification produces results that are anti-competitive and counterintuitive. The most obvious example is GTE's proposed wholesale rate for basic business service. As a result of the opportunity cost factor, GTE's wholesale rate is greater than the retail rate for the service. There is no basis in the Act for such a result.

Because neither party has submitted an acceptable avoided cost study in this proceeding, I refer to the FCC’s findings and conclude that the discount rate for GTE’s wholesale services should be 18.81 percent. This figure is based on the results of a modified MCI cost study used by the FCC to determine appropriate rates for the regional Bell operating companies and GTE. See FCC Order ¶ 930. The FCC concluded that the MCI study, with some modifications, established discount rates that reasonably approximated the amount of avoided costs that should be subtracted from the retail rate. I find the FCC’s conclusions persuasive and adopt them. If the parties prefer disaggregated wholesale discounts with specific rates for particular types or categories of services, they may negotiate such rates based on this average wholesale discount rate.

I further conclude that GTE should offer volume and term discounted services at a wholesale rate of 9.405 percent. This is one-half the rate for fully-priced retail services. Notwithstanding GTE's assertions, there are avoided costs for services sold at volume and term discounts. While the amounts may be small and, in some cases may be zero, there remains marketing and other costs that GTE must incur to offer the volume and term discounted services. The issue is not whether there are avoided costs, but rather the amount of those costs.

These discount rates should be interim, pending Commission determination of the appropriate discount rate. See Order No. 96-283 at 14.

SERVICES SUBJECT TO RESALE

Issue 11: What GTE services should be required to be made available for resale at wholesale rates?

Issue 12: Is GTE required to offer for resale at wholesale rates services to the disabled, including special features of that service such as free directory assistance service calls, if that service is provided by GTE?

Issue 13: What resale restrictions should be permitted, if any?

Issue 14: Should each and every retail rate have a corresponding wholesale rate?

Under these related issues, GTE seeks to exclude numerous retail services from the resale obligation. First, GTE contends that it should not be required to provide many services for resale at all, let alone at wholesale rates. These include services that GTE allegedly sells below cost, promotional service offerings, pay telephone services, future Advanced Intelligent Network (AIN) services, and public subsidy services. GTE then identifies several services that it is willing to offer for resale, but does not believe it should do so at a wholesale discount. These include operator services, directory assistance, non-recurring charges, individual based contracts, and other services that are already offered at wholesale rates.

The Act makes no provision for GTE’s proposed exclusions. The Act expressly provides that an incumbent local exchange carrier (ILEC) must "offer for resale at wholesale rates any telecommunications service that the carrier provides at retail to subscribers who are not telecommunications carriers." 47 U.S.C. § 251(c)(4)(A) (Emphasis added). Furthermore, there can be no prohibition on the resale of these services, with the exception that a state commission may prohibit a competitor from purchasing wholesale services available only to one category of customers and reselling the services to another category of customers. 47 U.S.C. § 251(c)(4)(B).

I note that the FCC specifically concluded that below-cost services are subject to the wholesale rate obligation under the Act. The FCC reasoned:

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. FCC Order ¶956.

I am persuaded by the FCC’s reasoning and adopt it. All of these services must be sold at wholesale rates. If GTE believes that it will be disadvantaged by the wholesale resale duty because the retail rate is too low, its remedy is to request the Commission to raise the retail rate.

I also adopt the FCC’s conclusion with regard to promotional discounts. GTE claims that a total exclusion of these offerings is necessary to enable the company to distinguish its offerings from those of its competitors. However, the FCC proposed, and Sprint agrees, that promotional discounts of 90 days or less do not have to be offered at resale. FCC Order ¶ 950. 47 C.F.R. § 51.613(2). This limitation will adequately allow GTE to distinguish its services, but will prevent GTE from offering perpetually discounted, nonstandard promotions.

I am also not persuaded by GTE’s argument that pay phone services, such as public access lines (PAL) and customer owned coin operated telephone (COCOT), are not subject to the Act’s wholesale discount provisions because they are not offered to end users as retail service offering. Contrary to its assertion, public pay phone providers who purchase public pay phone lines are subscribers who purchase the service at retail rate. Furthermore, the fact that semi-public pay phones are deregulated does not exclude them from the definition of telecommunications services under the Act. These are all retail services that must be sold on a wholesale basis.

Accordingly, I adopt Sprint’s position that GTE must offer for resale, at the discount rate, all retail telecommunication services, including below-cost priced services, promotional service offerings (more than 90 days), pay telephone services, future AIN services, public subsidy services, nonrecurring charge activities, operator services and directory assistance services, and other services already offered at resale. GTE must also offer wholesale rates for grandfathered services to Sprint for the purpose of serving customers who currently receive the grandfathered service from GTE. Sprint, however, may not resell residential service to any other class of customers. Similarly, services for the disabled or others mandated by law may not be resold to any ineligible customers.

PRICING UNBUNDLED ELEMENTS

Issue 8: What input and loading assumptions should be used in establishing the cost of interconnection and unbundled network elements, and what prices should be the resulting prices?

Section 252(d)(1) of the Act requires that interconnection and network element rates be based on cost, without reference to a rate-of-return, and may include a reasonable profit. Both Sprint and GTE interpret that provision to require prices based on Total Element Long Run Incremental Costs (TELRIC) of the unbundled loop with a reasonable share of forward-looking costs. GTE further contends that prices must be based on GTE costs, and have submitted a "market efficient component pricing" study to support its recommended prices.

I am unable to conclude that GTE’s cost study will produce reasonable, cost based rates. I first note that GTE’s cost study is voluminous and has not been reviewed or audited by the Commission or its professional staff. Given the limited time available in this arbitration, I have not had the opportunity to carefully review the study myself and make judgments as to the reliability or reasonableness of the underlying assumptions.

GTE’s methodology also appears unsuitable for setting prices for unbundled elements. Its so-called market determined efficient component pricing rule (M-ECPR) is a revision of its earlier ECPR methodology. Under the earlier approach, GTE proposed that the price of an unbundled element be equal to the incremental cost of the element, plus the opportunity cost of the resold element. The opportunity cost is the revenue that an incumbent loses when the new entrant provides the service instead of the incumbent. The FCC rejected the ECPR methodology, because the retail prices used to calculate opportunity costs are based on revenues, not costs. It concluded that the "application of ECPR would result in input prices that would be either higher or lower than those which would be generated in a competitive market and would not lead to efficient retail pricing." FCC Order ¶ 709.

GTE contends that its new M-ECPR addresses the FCC’s concerns by capping prices for each unbundled element at the price of its market alternative. However, the methodology still sets prices based on lost revenues, not costs. Furthermore, there are no market alternatives for some building blocks. For example, GTE proposes to use "internal benchmarks" as a cap for certain kinds of loops. Internal benchmarks are not market determined prices. In addition, GTE's cap merely limits the price of the monopoly network element. It does nothing to bring the price of the service down to the actual forward-looking cost of providing the service.

After my review, I find that the prices for interconnection and network elements in this arbitration should be based on the prices established in docket UM 351, Order No. 96-283. Those prices are based on TELRIC methodology and include a reasonable contribution to forward-looking common costs. Furthermore, unlike GTE’s prices, the models, assumptions, and underlying cost data used to determine the UM 351 prices are readily available and have already been evaluated in a formal, open investigation, one in which GTE actively participated.

In reaching this decision, I am not persuaded by GTE’s argument that the UM 351 prices may not be used in this proceeding because the prices are based on USWC's costs, not GTE's costs. GTE's argument carries little weight given the company’s lack of diligence in submitting cost studies for Commission approval at any time during the extensive UM 351 proceedings and its acquiescence to the approach the Commission followed. See Order No. 96-283 at 9.

Accordingly, I conclude that on an interim basis, pending determination of permanent rates by the Commission, the prices for unbundled elements in Order No. 96-283, Appendix C, are adopted for this arbitration.

Issue 9: What rates are appropriate for transport and termination of local traffic?

GTE contends that its interstate access rate is the appropriate rate for transport and termination of local traffic. Sprint argues that bill and keep should be used as the interim pricing methodology, with TELRIC-based prices to be used when the exchange of traffic becomes more than ten percent out of balance.

The Act provides for the use of bill and keep as a just and reasonable means to recover the cost of terminating and transporting traffic between ILEC and competitive local exchange carrier (CLEC) networks. The FCC has determined that bill and keep may be employed if the amount of local traffic from one network to the other is roughly balanced with the amount of local telecommunications traffic flowing in the opposite direction, and is expected to remain so. 47 C.F.R. § 51.713(b). The FCC further stated that a State commission may presume rough balance, unless a party rebuts the presumption. 47 C.F.R. § 51.713(c).

In this state, the Commission has already found that traffic exchanged between a CLEC and an ILEC is likely to be within a few percentage points of equilibrium. See Order No. 96-021 at 55. Accordingly, I adopt the use of bill and keep on an interim basis for transport and termination of local and extended area service traffic. A permanent solution should await the results of the industry work group’s efforts undertaken pursuant to Order No. 96-021. If the Commission eliminates bill and keep as a result of those efforts, the rates for transport and termination set forth in UM 351, Order No. 96-283, Appendix C, should apply on an interim basis.

Sprint’s proposal to apply TELRIC-based prices when traffic is ten percent or more out of balance is not adopted. The Commission has previously identified the technical inability to measure traffic transiting a carrier’s facilities, and Sprint has offered no solution to address that problem. Even if the parties were able to estimate traffic flow from traffic studies, I believe that it is more prudent to await the recommendations of the industry work group for a more permanent intercompany compensation mechanism.

OPERATIONAL SUPPORT SYSTEMS

Issue 18: What authorization is required for the provision of customer account information to Sprint?

Sprint contends that GTE should be required to provide customer proprietary information (CPNI) to Sprint without a written request by GTE’s customer. Sprint argues that GTE’s proposed requirement for a signed customer letter prior to the release of information will create unnecessary delays and therefore constitutes a barrier to entry.

Section 222(c)(2) of the Act provides that a telecommunications carrier may disclose CPNI "upon affirmative written request by the customer, to any person designated by the customer." Section 222(d)(2) provides a limited exemption for the disclosure of CPNI to initiate, render, bill, and collect for telecommunications services. That section, however, appears to allow GTE to disclose CPNI for the purpose of GTE providing service to a customer, and not for the purpose of some other carrier providing service to a former GTE customer.

The FCC has opened a rulemaking proceeding to determine how CPNI should be protected when a customer changes local service providers. See FCC Docket No. 96-115. Until the FCC issues a final order in that docket, I believe that it is prudent to adopt procedures that strictly protect the interests of customer privacy. Accordingly, I adopt GTE’s position that, for the time being, Sprint must provide a written letter of authorization before GTE gives Sprint access to customer record information in the GTE data base.

Issue 19: Should Sprint be permitted to request a combination of network elements which would enable it to replicate any services GTE offers for resale?

GTE contends that Sprint should not be allowed to duplicate GTE resale services by combining unbundled network elements. According to GTE, such recombination would be inconsistent with the Act, would disadvantage GTE for Sprint’s benefit, and would deprive GTE of revenues and contributions to which it is entitled. I disagree.

New entrants should be able to purchase unbundled elements, individually or in common, regardless of whether they provide their own facilities or purchase elements in such a way that they would comprise a service comparable to resold services under 47 U.S.C. § 251(c)(4). This conclusion is consistent with the Act, FCC rules, and this Commission’s prior holdings. See 47 U.S.C. § 251(c)(3), FCC Order ¶¶ 293-296, 47 C.F.R. §§ 51.309(a) and 51.315(c), and Order No. 96-188 at 93. There is no provision in the Act or the FCC's order for imposing limitations on the sale of unbundled elements.

Accordingly, I adopt Sprint’s position that GTE must provide combinations of unbundled elements without restriction, provided those combinations are technically feasible and will not undermine the ability of other carriers to access unbundled elements or interconnect with the ILEC.

Issue 24: Should the agreement provide for a Most Favored Nations "Pick and Choose" clause?

Sprint seeks the inclusion of a most favored nations clause in its interconnection agreement with GTE. That provision would allow Sprint to incorporate into its contract any rate, term, or condition from another interconnection agreement between the LEC and other carriers.

The Eighth Circuit Court of Appeals stayed the effect of the same type of "pick and choose" provision contained in the FCC's order. In doing so, the Court recognized that the inclusion of such a term would undermine the congressional preference for negotiated and arbitrated agreements, because an agreement would never be finally binding. I find the Court’s reasoning persuasive.

Accordingly, I adopt GTE’s position that the interconnection agreement should not include a most favored nations clause. In the event that the FCC’s "pick and choose" clause is ultimately upheld, the contract should revised to allow Sprint the ability to renegotiate the terms of its agreement to include the rates, terms, and conditions set forth in other interconnection agreements executed by GTE.

Issue 25: Should GTE geographically deaverage its elements?

Sprint contends that GTE should immediately geographically deaverage its rates. Sprint argues that geographic deaveraging should occur now, rather than after a lengthy rate rebalancing proceeding, because competition is occurring now.

Although the cost of providing unbundled loops varies with length and density, this Commission has traditionally used geographic averaging of rates to ensure the availability of telephone service in high cost rural areas. As we enter a more competitive environment, geographic deaveraging is an appropriate mechanism to match the cost to provide unbundled elements with the price for those elements. However, requiring GTE to deaverage unbundled elements before its retail rates are deaveraged places the utility at a competitive disadvantage. Sprint should not be able to purchase loops in dense urban areas at a price that only reflects the cost of serving low-cost customers, while GTE is required to provide basic service at a rate that covers the cost of serving both high- and low-cost customers.

Deaveraged prices are appropriate only when all competitors can price retail services based on the underlying costs. Accordingly, I adopt GTE’s position that the rates set in this arbitration be on an averaged, geographic basis.

Issue 29: Should GTE be liable for network fraud caused by GTE’s negligence?

Sprint contends that GTE controls its network and should be responsible for the integrity of the network and for any fraud that results from the unauthorized access to the GTE network. GTE responds that Sprint’s proposal would expose GTE to unlimited consequential damages, and notes that the risk associated with these costs has not been factored into GTE's rates. It seeks adoption of standard, tariff-based provisions that limit its liability to the charges associated with time out of service.

From a review of the initial Term Sheet Matrix, it appears that Sprint is primarily concerned with its liability to a toll carrier. As GTE points out, however, a local exchange carrier is generally not liable to a toll carrier for fraudulent calls billed to an end-user. At hearing, Sprint’s witness could not identify any other concerns addressed by its proposal.

After my review, I find that the record fails to provide a sufficient basis to support the adoption of Sprint’s proposal. Accordingly, I adopt GTE’s position that standard, tariff-based provisions be used to limit GTE’s liability.

ARBITRATOR’S ORDER

IT IS ORDERED THAT:

Within 30 days of the Commission’s final order in this matter, Sprint shall submit to GTE a contract incorporating terms that reflect the Commission's final decision in this proceeding. The contract shall bear the signature of a person authorized by Sprint to sign this contract.

Within 5 days of receipt of the contract from Sprint, GTE shall properly execute the contract and deliver a copy to Sprint. GTE shall also file a copy of the contract with the Commission.

The contract is effective immediately upon delivery of the signed agreement to GTE.

Dated this 21st day of January, 1997, in Salem, Oregon.

________________________________

Michael Grant

Arbitrator