ORDER NO. 97-071

ENTERED FEB 20 1997

This is an electronic copy.

BEFORE THE PUBLIC UTILITY COMMISSION

OF OREGON

UM 351

DISPOSITION: APPLICATIONS FOR RECONSIDERATION DENIED

On July 19, 1996, the Public Utility Commission (Commission) issued Order No. 96-188 in this docket, unbundling the telecommunications services offered by U S WEST Communications, Inc. (USWC) and GTE Northwest Incorporated (GTE) into building block elements and establishing cost-based prices for those elements.

On August 8, 1996, the Federal Communications Commission (FCC) issued Order 96-325 promulgating regulations to implement the interconnection and pricing provisions of §§251 and 252 of the Telecommunications Act of 1996. (the Act). The FCC rules are set forth in Title 47 of the Code of Federal Regulations, Part 51.

On September 3, 1996, the Commission issued Order No. 96-228, reopening this proceeding to receive comments from parties regarding changes necessary to comply with the FCC regulations. We also invited parties to file applications for reconsideration on other issues at the same time. Comments and/or applications for reconsideration were filed by USWC, GTE, AT&T Communications of the Pacific Northwest, Inc., (AT&T) and MCI Telecommunications Corporation (MCI), and several other parties.

On November 1, 1996, the Commission issued Order No. 96-283 in this proceeding. Order No. 96-283 adopts additional building blocks consistent with the minimum list of unbundled network elements approved in FCC Order 96-325, approves revised building block prices, and addresses arguments raised in the various applications for reconsideration of Order No. 96-188.

On December 31, 1996, USWC filed an application for reconsideration and clarification of Order No. 96-283. AT&T and MCI filed a joint application for reconsideration.

On January 14, 1997, AT&T and MCI filed responses to USWC’s application for reconsideration and clarification.

The Commission has reviewed the applications and enters the following findings and conclusions:

AT&T/MCI Joint Petition for Reconsideration/Clarification

I. AT&T/MCI challenge the Commission's decision in Order No. 96-283 to increase the monthly rate for basic network access channels (NACs) from $11.95 to $16.00. Petitioners allege that the Commission increased the NAC rate to remedy a perceived LEC revenue shortfall and, in so doing, violated §252(d) of the Act. Section 252(d)(1)(A) states that prices for unbundled network elements must be cost-based, but determined without reference to a rate of return or rate-based proceeding.

In support of their argument, AT&T/MCI point to the following language in Order No. 96-283 at 11:

The level of contribution included in the NAC price is designed to minimize the potential for LEC revenue erosion until the new building block costs and prices can be developed..

The statement relied on by AT&T/MCI is taken out of context. A proper reading of Order No. 96-283 discloses that the Commission’s decision to increase the basic NAC price was unrelated to USWC’s revenue requirement or rate of return.

The Commission’s rationale for increasing the NAC price is set forth on pp.10-11 of Order No. 96-283. As that discussion indicates, a principal reason for increasing the NAC price is that the revised cost methodology approved by the Commission in Order No. 96-284 (docket UM 773) is likely to produce a NAC cost that exceeds the NAC price approved in Order No. 96-188. Since the NAC is the most significant cost component in supplying telecommunications service, we determined that the contribution included in the NAC price should be increased from 5 percent to 40 percent over UM 351 cost levels. We concluded that such an increase would prevent USWC and GTE from selling NACs below cost and experiencing potentially injurious financial consequences.

Given our decision to adopt a new cost method in UM 773, it was not error to increase the NAC price to a level that covers cost and includes a reasonable contribution to common costs. Indeed, §252(d) of the Act mandates this result. Furthermore, the Commission did not violate the Act by acknowledging that the LECs may suffer revenue erosion if NACs are priced below cost. The Act states that the prices of unbundled elements must be "determined without reference to a rate of return or other rate-based proceeding." It does not require the Commission to disregard the financial consequences that may result from noncompensatory rates.

II. AT&T/MCI also argue that there is insufficient evidence in the UM 351 record to support an increase in the basic NAC price. While petitioners acknowledge that the Commission may take official notice of evidence presented in UM 773, they assert that the record in that case does not support a NAC price increase.

As noted above, our decision to increase the basic NAC price is based, in large part, on our decision to adopt revised cost methods in docket UM 773. The Commission takes official notice of the record in that proceeding pursuant to OAR 860-014-0050.

Contrary to the claims made by AT&T/MCI, the record in docket UM 773 discloses that the cost of the basic NAC may increase significantly as a result of the methodology approved in Order No. 96-284. According to testimony presented by Staff witness Jon Wolf, the statewide average NAC cost will likely "fall somewhere between" the $11.38 NAC cost developed in this case and the substantially greater NAC cost produced by USWC’s March 1996 study. Tr., 6/18/96, Vol. II, at 117, 129. While it is not possible to pinpoint the precise NAC cost that will be produced by the cost method adopted in Order No. 96-284, Mr. Wolf’s testimony indicates that it will likely exceed the $11.95 NAC price adopted by the Commission in Order No. 96-188.

Testimony presented by AT&T and MCI also supports the conclusion that the cost method adopted in Order No. 96-284 will produce a higher NAC cost. AT&T witness Dr. Thomas Zepp and MCI witness Donald Laub both emphasized that assumptions embodied in the USWC/Staff stipulation relating to growth spare and placement of facilities would have a significant impact on the cost of the basic NAC. Tr., 6/19/96, at 23, 27, 29, 33, 38-40, 49-51; Tr., 6/18/96, Vol. I, 56-57, 59-60, 82-83.

The post hearing briefs submitted by AT&T and MCI in docket UM 773 also emphasize that the basic NAC cost will increase as a result of the cost method adopted in Order No. 96-284. AT&T stresses that the cost assumptions incorporated in the stipulation produce a "dramatic increase in the costs of . . . the basic NAC used to provide residential and business local exchange service." AT&T Opening Brief at 6-7. (Emphasis supplied). Elsewhere, in its brief, AT&T states:

Of course, no one knows what those costs would be if the Stipulation is approved, as Staff and USWC both admitted. However, Staff expects the costs of the NAC to be above the September numbers—which represented a 44% increase above the UM 351 costs. (Citations omitted) Id. at 19.

MCI makes similar claims regarding the effect of the revised cost assumptions adopted in Order No. 96-284. It states:

This has lead Dr. Zepp and Mr. Laub to predict that the Stipulation will produce inflated costs—particularly for NACs. (See generally, Tr. 6/18, pp. 49-62; Tr., 6/19, pp. 21-41.)

When pressed regarding what costs he believed would result from acceptance of the Stipulation, Mr. Wolf would only venture to guess that they would be something less than the April numbers—cold comfort given that those numbers represent an almost 85% increase over the costs which the UM 351 participants agreed were reasonable. (Tr. 6/18, p. 43.)

* * * * *

If Mr. Laub and Dr. Zepp are correct, costs for the NAC, and possibly, costs for all monopoly bottleneck services, will be significantly inflated if U S West is allowed to calculate its costs using the principles and assumptions contained in the Stipulation. MCI Opening Brief at 18-19.

In view of the foregoing, it is difficult to understand how AT&T and MCI can allege that there is no evidence to support the conclusion that the cost method adopted in Order No. 96-284 will increase the cost of the basic NAC. It is appropriate to take official notice of this evidence and to maintain the basic NAC price at the level approved in Order No. 96-283. As we have indicated, the $16.00 NAC price is an interim price and may be further adjusted as a result of our review of the costs produced by the methodology adopted in Order No. 96-284.

III. In Order No. 96-283 at 14, the Commission found that USWC should present proposals for geographic deaveraging and related implementation issues in the rate design phase of docket UT 125. We also stated that GTE should submit similar proposals in its next general rate filing.

AT&T/MCI seek clarification of the issues that will be considered in docket UT 125. They allege that the Commission may not direct USWC to file deaveraged rates for NACs or other unbundled elements without violating §252(d)(1)(A)(i) of the Act, which, as noted above, requires that prices for unbundled network elements be determined without reference to a rate-based or rate of return proceeding.

At present, the Commission contemplates that unbundled element costs based on the method adopted in Order No. 96-284 (docket UM 773) will be developed in

March 1997. Once those costs have been reviewed and approved, we will consider whether new unbundled element prices are warranted. In the event the Commission approves new prices for unbundled elements, they will supersede the prices established in Order No. 96-283, Appendix C. Such an order approving new unbundled element prices would likely be issued before May 1, 1997, when USWC is scheduled to file its proposed bundled service rates in the rate design phase of docket UT 125.

Because deaveraging is fundamentally a rate design issue, we do not agree with AT&T/MCI that deaveraging of unbundled element rates must be considered outside the rate design phase of docket UT 125. The Act requires that unbundled elements must be priced without reference to LEC revenue requirements or rate of return. As long as unbundled element rates are not designed to meet a specific LEC revenue requirement or rate of return, it is not error to consider network element deaveraging in a rate design proceeding. As noted in Order No. 96-188 at 79, deaveraged network element prices must cover cost and include a reasonable contribution to common costs. Any additional revenue necessary to enable the LEC to realize its overall revenue requirement must be obtained by marking up its bundled service offerings.

As a practical matter, the deaveraging of network elements will also result in the deaveraging of retail bundled service rates. Issues relating to how such charges will be structured, as well as concerns relating to coordination and timing, should be addressed concurrently. Reviewing these issues at the same time will minimize delays in implementing deaveraged rates and result in a more efficient allocation of scarce resources.

As part of its UT 125 filing, USWC may propose deaveraged network element prices and deaveraged rates for its bundled retail services. Parties to UT 125 shall have the opportunity to submit evidence regarding USWC’s rate proposals and make their own recommendations regarding USWC’s proposed rate design and rate levels.

USWC Petition for Reconsideration/Clarification

I. USWC alleges that, without additional evidence in the record, there is an insufficient basis to support the additional building blocks mandated in Order No. 96-283. We disagree.

The additional building blocks authorized in Order No. 96-283 are network elements that incumbent LECs must make available to all telecommunications carriers pursuant to the rules adopted by the FCC to implement the unbundling requirements of the Act. See 47 C.F.R. §51.319. Contrary to USWC’s assertion, it is not error for the Commission to supplement its list of unbundled elements to include the minimum unbundling requirements mandated by the FCC. Indeed, as AT&T and MCI point out, failure to do so would be inconsistent with the Act. No additional record is required to mirror the minimum federal unbundling requirements.

The Commission also rejects USWC’s argument that there is insufficient evidence in the record to demonstrate that the building blocks authorized by the Commission are essential. As explained in Order No. 96-188 at 10-13, we do not agree that our authority to order unbundling derives from ORS 759.050 or is limited to essential functions provided within competitive zones.

II. USWC asks the Commission to clarify that the January 1, 1997 deadline for unbundling operational support systems (OSS) is limited to "Plain Old Telephone Service" (POTS), and that other timeframes for OSS access will be established in arbitration proceedings under the Act or negotiated by the parties. See Order No. 96-283 at 3.

The OSS unbundling requirement in Order No. 96-283 is intended to conform to 47 C.F.R. §51.319(f) of the FCC rules, which provides that all OSS functions (preordering, ordering, provisioning, maintenance and repair, and billing functions) must be unbundled no later than January 1, 1997.

To the extent USWC has not met the deadline set forth in 47 C.F.R. §51.319(f) for unbundling OSS functions, it shall submit a filing showing the OSS functions it has unbundled to date, together with a detailed schedule for meeting the remaining FCC requirements. The filing should be submitted no later than 20 days from the date of this order. USWC shall also submit any filings made with the FCC which address USWC’s failure to meet the federal timetable for unbundling OSS functions.

III. In its September, 1996 application for reconsideration of Order No. 96-188, USWC argued that it is not technically feasible to unbundle local office switching. The Commission rejected this argument in Order No. 96-283 at 4-5. In its current application for reconsideration, USWC states that confusion continues to exist regarding its capability to measure and bill local calls.

USWC states that its end offices are capable of recording originating minutes of use and are arranged to capture call information for all originating toll calls as well as local calls for customers subscribing to measured service. End office capability to measure terminating minutes of use, however, is currently limited to interexchange calls terminated at the end office via Feature Group D trunks.

USWC states that it has purchased a system which is capable of measuring originating and terminating minutes of use between USWC and CLEC switches, so long as the trunks carrying the calls use SS7 signaling. However, the system cannot measure calls within USWC end offices or between USWC end offices that are direct trunked using multifrequency signaling. USWC asserts that these limitations do not pose a problem where competitors purchase unbundled elements from USWC and route calls using their own switches. However, where a competitor purchases unbundled elements but does not supply its own switching, it is not possible to measure local traffic terminating at USWC end offices.

Because of these problems, USWC intends to propose a simplified measurement system for local switching as part of its building block compliance filing. The interim method would utilize the current end user billing system. USWC requests that the Commission clarify Order Nos. 96-188 and 96-283 to allow unbundled switching only when the interim measurement system is in place.

As we noted in Order No. 96-283, technical and operational issues relating to provisioning unbundled elements should be dealt with as part of the compliance filings made by the LECs. The selection of an appropriate measurement system for unbundled local office switching is part of the compliance process. The Commission anticipates that USWC will work with Staff and other interested parties to develop an interim measurement mechanism that will be in place by April 2, 1997, the date in which the UM 351 compliance tariffs are scheduled to take effect.

IV. Currently, ILECs assess a Common Carrier Line Charge (CCLC) on each interstate access minute of use purchased by telecommunications carriers. In Oregon, a similar charge is assessed on intrastate minutes of use. However, 47 C.F.R. §51.515 of the FCC rules provides that, after June 30, 1997, ILECs may not assess a CCLC on interstate minutes of use which traverse unbundled local switching elements purchased by telecommunications carriers. Subsection (c) of that rule also precludes States from assessing an intrastate CCLC on purchasers of unbundled elements after that date.

USWC claims that the scheduled elimination of the CCLC will substantially reduce its revenues. It requests that the Commission either examine the issue in this proceeding or open another docket to address an alternative means for USWC and other LECs to receive revenues now associated with the CCLC.

USWC’s request is premature. The Eighth Circuit has stayed implementation of 47 C.F.R. §51.515 and other FCC pricing rules pending the appeal of those regulations. Until the appeals process has concluded, it is impossible to determine whether the FCC decision to eliminate the interstate CCLC and preempt the intrastate CCLC will be upheld. In addition, the FCC is also considering major changes to the current access charge structure in CC Docket 96-262. Under these circumstances, it would not be productive for the Commission to convene a proceeding to consider the CCLC at this time. We will continue to monitor events at the federal level and will take action as it becomes necessary.

V. USWC requests that the Commission reconsider its decision in Order No. 96-283 to reduce the prices for Continuous Redial, Priority Calling and Selective Call Forwarding (CR/PC/SCF) from the rate levels approved in Order No. 96-188. USWC states that the cost decrease for these services mentioned in Order No. 96-283 at 12 is based on assumed demand levels necessary to comply with the Table 3 price matrix instructions specified by the Commission, rather than actual demand. USWC argues that demands and resulting cost variations that do not reflect actual market conditions should not be used.

For purposes of calculating volume insensitive costs, CR/PC/SCF are grouped with certain Calling Name and Number Delivery (CNND) services (e.g., Caller ID services). Although USWC’s Table 3 results did not show a significant demand shift for CR/PC/SCF, the demand for CNND services increased substantially. As a result, the volume insensitive cost for combined group of services declined markedly. This lower volume insensitive cost was the basis for the CR/PC/SCF price decrease ordered in Order No. 96-283.

The Commission is unable to find that the demand increase in CNND services--and the resulting decrease in group volume insensitive cost--was caused by the assumptions underlying Table 3. USWC’s Table 3 filing shows that the CNND demand change was calculated differently from the approach used for other unbundled elements. This suggests that the increase was not related to Table 3 assumptions, but rather to other reasons, such as a projected increase in the demand for Caller ID services. Given that these services are relatively new, it is not unreasonable to conclude that demand may increase to the level specified by USWC in Table 3.

Based on the information presented, we find that the CR/PC/SCF rates authorized in Order No. 96-283 should remain in effect. However, all of the unbundled element rates specified in Order No. 96-283 are interim in nature, pending approval of revised costs and prices based on the methodology adopted in Order No. 96-284 (docket UM 773). As part of the costing process, USWC will have the opportunity to demonstrate the appropriate cost of CR/PC/SCF.

VI. USWC argues that telecommunications carriers should not be permitted to purchase all of the unbundled elements of a USWC finished service and recombine these elements into a retail service offering. USWC argues that this type of unbundling is a "sham" that will be used by requesting carriers when the total price of the unbundled elements necessary to create a finished service is less than the wholesale price otherwise available to carriers under the resale provisions of the Act. USWC maintains that the FCC Order allowing "sham unbundling" conflicts with the Act and creates an arbitrage opportunity that will drastically reduce LEC revenues.

Because Order No. 96-188 did not resolve issues relating to resale of LEC services at wholesale rates, the Commission did not address the "sham unbundling" concerns raised by USWC. In subsequent orders, however, we have agreed with the FCC that the Act does not restrict how unbundled network elements may be combined by purchasing carriers. See e.g., Order Nos. 96-324, 96-325, 97-003.

The "sham unbundling" issue is before the Eighth Circuit on appeal. It is significant that the Court did not stay those portions of the FCC rules which permit carriers to purchase all of the unbundled elements necessary to comprise a finished service. Given the language of the Act, and absent a decision by the Court precluding "sham unbundling," the Commission finds no basis to place restrictions on the purchase of unbundled elements by telecommunications carriers.

VII. USWC asks the Commission to clarify the statement on page 17 of Order No. 96-283 regarding the retail rates charged by Commercial Mobile Radio Service (CMRS) providers. In response to USWC’s request, the Commission notes that it does not regulate the retail rates charged by CMRS providers to end user customers.

ORDER

IT IS ORDERED that:

1. The applications for reconsideration filed by U S WEST Communications, Inc, AT&T Communications of the Pacific Northwest, Inc., and MCI Telecommunications Corporation, are denied.

2. To the extent USWC has not met the January 1, 1997 deadline set forth in 47 C.F.R. §51.319(f) for unbundling OSS functions, it shall submit a filing showing those OSS functions it has unbundled to date, together with a detailed schedule for meeting the remaining FCC requirements. The filing should be submitted no later than 20 days from the date of this order. USWC shall also submit any filings made with the FCC which address USWC’s failure to meet the federal timetable for unbundling OSS functions.

Made, entered, and effective ________________________.

A party may appeal this order pursuant to ORS 756.580.