ORDER NO. 97-405

ENTERED OCT 16, 1997

This is an electronic copy.

BEFORE THE PUBLIC UTILITY COMMISSION

OF OREGON

UM 844

DISPOSITION: APPLICATION FOR RECONSIDERATION DENIED

On June 25, 1997, the Public Utility Commission of Oregon (Commission) issued Order No. 97-239 adopting building block rates based upon revised cost study results approved in Order No. 96-284.

On August 25, 1997, AT&T Communications of the Pacific Northwest, Inc., MCI Telecommunications Corporation, and MCIMetro Access Transmission Services, Inc., (Applicants) filed a joint application for reconsideration of Order No. 97-239. Applicants raise two arguments. First, they contend that the overall building block markup is too high. Second, they maintain that the network access channel (NAC) markup results in a price that effectively forecloses competitive entry in violation of §253 of the Telecommunications Act of 1996.

On September 12, 1997, GTE Northwest Incorporated (GTE) filed a response to the joint application. U S WEST Communications, Inc. (USWC), was granted an extension of time and filed its response on September 19, 1997. GTE and USWC maintain that the joint application does not state sufficient grounds to warrant reconsideration.

Oregon Administrative Rule 860-014-0095(3) states that the Commission may grant reconsideration if the applicant shows that there is:

(a) New evidence which is essential to the decision and which was unavailable and not reasonably discoverable prior to issuance of the order;

(b) A change in law or policy since the date the order was issued, relating to a matter essential to the decision;

(c) An error of law or fact in the order which is essential to the decision; or

Good cause for further examination of a matter essential to the decision.

The Commission agrees with GTE and USWC that the request for reconsideration of the overall building block markup authorized in Order No. 97-239 does not meet the requirements of OAR 860-014-0095(3). With respect to this issue, Applicants merely reassert arguments that have been previously considered and addressed. The allegation that the NAC markup creates a barrier to entry in violation of §253 of the Act falls within scope of the rule however. The Commission grants reconsideration to address this claim.

Applicants maintain that the NAC price approved in Order No. 97-239 violates the Act because it eliminates competitors from using unbundled elements to supply residential service. Applicants point to the following language in Order No. 97-239 to support their claim:

Although the current residential service rate (including the SLC) exceeds the cost of supplying that service on average, it does not meet the imputation test. In other words, the total price of the building blocks which comprise residential service is more than the existing tariff rate for that service. Such a result is permitted under ORS 759.050(5)(b), but may force new entrants to resort to resale as a means of marketing residential service, unless they are somehow able to self-supply or purchase the necessary building blocks at a lower cost. We expect this situation will resolve itself over time once deaveraging and universal service funding issues have been fully considered. Order No. 97-239 at 5, footnote 9.

As noted in Order No. 97-239, ORS 759.050(5)(b) imposes an imputation requirement, but allows the Commission to "establish rates for residential local service at any level necessary to achieve the Commission’s universal service objectives." Applicants contend that, "while [an exception to the imputation requirement for residential service] may be permitted by Oregon law, it is not consistent with the federal law." In other words, Applicants claim that the Act requires imputation to establish rates for unbundled elements. We disagree. This interpretation is also contrary to that made by the Federal Communications Commission (FCC) in its First Report and Order. In that decision, the FCC specifically declined to impose an imputation requirement, noting that such a mandate may not be necessary to achieve the procompetitive goals of the 1996 Act."

Even though the total price of the residential service building blocks exceeds the existing retail rate for that service, it is incorrect to allege that this will prevent competitive entrants from using unbundled elements to provide residential service. The $15.00 NAC price prescribed in Order No. 97-239 is a statewide averaged price. Evidence presented in recent Commission cases discloses that it costs significantly less than $15.00 to provision NACs in dense and urban areas. Since it is likely that new entrants will target dense and urban areas for their initial service offerings, it may be economical for these carriers to forego purchasing NACs from incumbent local exchange carriers (ILECs) and instead serve residential customers by self-provisioning or purchasing NACs from third party suppliers.

Furthermore, it is also possible that the total profit realized from the sale of residential service packages will still make it economical for competitive entrants to purchase unbundled ILEC NACs, despite the fact that residential service does not meet the imputation test. In addition to local service, many residential customers will also purchase toll and vertical services (e.g., call waiting, caller-ID, voice messaging) from the same carrier. Many of these services have historically been priced far above cost. We expect that telecommunications carriers interested in maximizing their market opportunities will look to the total profit margin generated by the entire range of services marketed to residential customers, not merely the profit or loss generated from the sale of local exchange service. The FCC reached a similar conclusion in deciding not to impose an imputation requirement.

Finally, the fact that new entrants may not currently be able to use ILEC NACs to serve every residential customer does not mean that a barrier to entry has been erected. The Act does not require that all of the steps necessary to produce a competitive telecommunications environment occur simultaneously. As explained in Order No. 97-239, this Commission is currently examining deaveraging issues and has made substantial progress in developing an intrastate universal service support mechanism. A decision on deaveraging should enable competitive providers to purchase unbundled ILEC NACs at rates based on deaveraged costs. As noted above, dense and urban NACs are likely to be available to carriers at prices well below the current averaged $15.00 NAC rate. In addition, residential customers served by more expensive NACs may qualify for universal service fund support. These subsidies will be available to telecommunications carriers on a competitively neutral basis and will reduce the cost to provide service to eligible customers.

The Commission concludes there is no basis for Applicants’ claim that the NAC prices established in Order No. 97-239 create a barrier to entry in violation of §253 of the Act. The joint application for reconsideration should be denied.

ORDER

IT IS ORDERED that the joint application for reconsideration filed by AT&T Communications of the Pacific Northwest, Inc., MCI Telecommunications Corporation, and MCIMetro Access Transmission Services, Inc., on August 25, 1997, is denied.

Made, entered, and effective ________________________.

A party may appeal this order to a court pursuant to ORS 756.580.