This is an electronic copy.

ISSUED January 15, 1997

BEFORE THE PUBLIC UTILITY COMMISSION

OF OREGON

ARB 10

Procedural History

On September 20, 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 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 October 8 and December 3, 1996, prehearing conferences were held in this case to establish a procedural schedule. A hearing was held on December 9, 1996, in Salem, Oregon before Samuel J. Petrillo, Administrative Law Judge. The following appearances were entered:

For Sprint: Richard Goldberg, San Mateo, CA, Appearing pro hac vice

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

On December 23, 1996, the parties filed post hearing briefs.

Statutory 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 under subsection (b) any open issues and imposing conditions upon the parties to the agreement, a State commission shall--

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

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

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

On August 8, 1996, the Federal Communications Commission (FCC) issued rules pursuant to 47 U.S.C. §§251 and 252. 47 C.F.R. § 51.100 et seq.

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

Issues Presented for Arbitration

The parties have presented the following five issues for arbitration:

Issue No. 1: Should the FCC’s interpretation of the Act allowing for "Most Favored Nation" (MFN) treatment of any carrier requesting the same individual terms and conditions of an approved agreement be applied in this case?

Telecommunications Act. Section 252(i) of the Act provides that "a local exchange carrier shall make available any interconnection, service, or network element provided under an agreement approved under this section to which it is a party to any other requesting telecommunications carrier upon the same terms and conditions as those provided in the agreement."

FCC Rules. The FCC has held that §252(i) of the Act permits a requesting carrier to pick and choose among individual provisions contained in publicly filed interconnection agreements. Thus, a carrier may obtain access to unbundled elements such as unbundled loops at the same rates, terms, and conditions as contained in any approved agreement. 47 C.F.R. §51.809; FCC Order at ¶¶1309-1323.

Party Positions. USWC argues that the FCC interpretation of §252(i) is incorrect, contrary to public policy, and undermines the negotiation and arbitration provisions of the Act. It emphasizes that 47 C.F.R. §51.809 has been stayed by the Eighth Circuit. Sprint, on the other hand, maintains that the FCC’s interpretation of §252(i) is necessary to ensure fair competition and to prevent discrimination.

Arbitrator’s Decision. In granting the stay of the FCC "pick and choose" provisions, the Eighth Circuit acknowledged that potential competitors will be inconvenienced by having to renegotiate the terms of their agreements with incumbent carriers if the FCC’s rules are subsequently upheld. Nevertheless, the Court found that "it would be easier for the parties to conform any variations in their agreements to the uniform requirements of the FCC’s rules if the rules were later upheld than it would be for the parties to rework agreements adopted under the FCC’s rules if the rules were later struck down." The Court further concluded that any harm that potential competitors may endure as a consequence of the stay is outweighed by the irreparable injury that the incumbent carriers would sustain in absence of a stay.

The FCC’s interpretation of §252(i) should not be incorporated in the Sprint/USWC interconnection agreement. If the FCC’s "pick and choose" rule is ultimately upheld, it will apply to the contract. In that event, Sprint will be able to renegotiate the terms of its agreement to include the rates, terms and conditions incorporated in other interconnection agreements executed by USWC.

Issue No. 2: When calls are forwarded to a competitive local exchange carrier (CLEC) through interim number portability (INP), how should access revenues and charges be applied?

Telecommunications Act. Section 251(b)(2) of the Act provides that incumbent local exchange carriers (ILECs) have the duty to provide number portability, to the extent feasible, in accordance with the requirements prescribed by the FCC. Section 251(e)(2) provides that the cost of establishing number portability "shall be borne by all telecommunications carriers on a competitively neutral basis as determined by the [FCC]."

FCC Rules. On July 2, 1996, the FCC released its First Report and Order on number portability. CC Docket No. 95-116, FCC Order 96-286. As part of that order, the FCC issued final rules that became effective August 26, 1996. 47 C.F.R. Title 52.

FCC Order 96-286 specifies how terminating access revenues should be shared in the context of interim number portability. The FCC determined that neither the forwarding carrier nor the terminating carrier provides all of the facilities and, therefore, terminating access charges should be assessed pursuant to meet point billing arrangements. With regard to "ported"calls, the FCC has ruled that the CLEC should receive the carrier common line (CCL) and local switching charges, and that transport charges should be shared between the ILEC and the CLEC. FCC Order 96-286 at ¶140.

Party Positions. This issue involves the question of how access charges should be shared when USWC is required to forward interexchange telephone calls to CLEC customers who have elected to retain their previous local phone numbers. Under INP, calls delivered by interexchange carriers (IXCs) are transported from the IXC point of presence (POP) to a USWC tandem and then to an USWC end office where the call is switched. The USWC end office then performs a "look up" function to determine if the call must be forwarded to a CLEC customer. If so, remote call forwarding is used to route the call from the USWC end office to the CLEC switch for delivery by the CLEC to its customer. This may occur by transporting the call back through the USWC tandem or through direct trunking to the CLEC switch.

USWC maintains that the FCC’s treatment of access charges is incorrect and provides an unwarranted subsidy to CLECs. USWC believes that it should be permitted to retain the local switching and local transport charges USWC receives from IXCs for calls ported to CLECs. It argues that the charge paid by the CLEC for remote call forwarding does not cover the local switching or transport costs that USWC incurs with respect to a ported call, nor does it compensate USWC for any backhaul or additional tandem switching that may be required. As a compromise measure, USWC proposes to forward the CCL charge to Sprint.

Sprint agrees with the FCC decision regarding the allocation of access charges and observes that the Commission adopted this approach in the MFS/USWC arbitration proceeding. See Order No. 96-324, docket ARB 1. Sprint proposes a similar allocation of access charges here. If USWC's entrance facilities, service wire center and access tandem switching are involved in transporting the call to the meet point, USWC should receive access charges and share transport charges with Sprint. If Sprint provides transport from the meet point, local switching and a line to the end user, it should receive the local switching, residual interconnection charge, CCL charge, and share transport charges with USWC.

Arbitrator’s Decision. Sprint's position is adopted. Section 252(b)(2) obligates LECs to provide number portability in accordance with FCC requirements. The FCC's decision regarding the allocation of access charges in Order 96-286 recognizes that both the forwarding and terminating carriers provide facilities and functions in an INP situation. There is an insufficient basis in this record to conclude that the FCC’s determination in Order 96-286 is unreasonable or contrary to the Act. As a result, I do not agree with USWC that the FCC approach should be disregarded in favor of another method of sharing access revenues.

Issue No. 3: What restrictions on resale, if any, are permissible?

Telecommunications Act. Section 251(c)(4) provides that an ILEC must offer for resale at wholesale rates any telecommunications service that it provides at retail to subscribers who are not telecommunications carriers. Such resale offerings must be made without any unreasonable or discriminatory limitations, except that a State commission may, consistent with FCC regulations, prohibit a reseller that obtains at wholesale rates a telecommunications service that is available at retail only to a category of subscribers from offering such service to a different category of subscribers.

FCC Rules. The FCC has determined that resale restrictions are presumptively unreasonable except for restrictions prohibiting the resale of (a) residential service to nonresidential end users and; (b) lifeline service to ineligible customers. The FCC also concluded that promotional prices offered for a period of 90 days or less need not be offered at a wholesale discount to resellers, and that resale of grandfathered services may be limited to existing customers of those services. 47 C.F.R. §51.613(a); FCC Order at ¶¶950, 968.

In order to rebut the presumption against resale restrictions, an ILEC must prove to the State commission that the proposed class restriction is reasonable and nondiscriminatory. Any proposed restrictions on resale must be narrowly tailored. 47 C.F.R. §51.613(b); FCC Order at ¶¶939, 958-964.

Party Positions. USWC recommends that cross-class restrictions be imposed, limiting resale of a given service to the same class of customers eligible to purchase that service from USWC. For example, Sprint would not be permitted to resell business services such as Centrex to other classes of customers. USWC maintains that cross-class restrictions are necessary because of historic Commission rate design and pricing practices.

USWC argues that its switched access, toll and feature revenues will be jeopardized if Centrex arrangements are extended to residential customers in multi-unit or high-rise complexes. This is because Centrex resellers can avoid payment of USWC switched access/toll charges by purchasing special access lines from USWC’s common block to an IXC POP. USWC emphasizes that Centrex was designed primarily to meet the needs of large business customers whose usage enables them to take advantage of other alternatives.

USWC also maintains that resale of Centrex to residential customers will destroy the average pricing philosophy inherent in the residential price structure that has existed in Oregon for many years. USWC alleges:

If resellers are permitted to buy Centrex in bulk and sell it in the residential market, residential customers in the same area will pay different prices for residential service depending upon whether they happen to live in a high-rise, a campus environment or new subdivision that might be attractive to a reseller, as opposed to a more traditional neighborhood, and whether resellers are interested serving that location through resold Centrex.

Sprint has agreed to contract provisions which restrict the resale of residential services to business customers and lifeline services to eligible users. It objects, however, to USWC’s proposal to prohibit all other cross-class resale. Sprint contends that there is inadequate justification for restricting the resale of business services to residential customers. It further maintains that the potential loss of revenue is not a sufficient basis to restrict resale.

Arbitrator’s Decision. Sprint’s position on this issue is adopted. I agree with the FCC that restrictions on resale must be reasonable, nondiscriminatory and narrowly tailored. USWC’s proposal to prohibit all cross-class resale does not meet those requirements. The resale restrictions suggested by USWC would prohibit resale of any business service to residential customers, not merely Centrex. USWC has not provided evidence that would allow an assessment of the impact of such a restriction on competition and telecommunications customers generally.

USWC’s principal concern with Centrex resale appears to be the potential loss of switched access, toll and feature revenues. Potential revenue loss is not a sufficient justification for prohibiting cross-class resale. The nature of a competitive environment is that it entails a degree of uncertainty regarding the ability to attract and retain customers as competing firms vie to supply services that are more attractive to customers. Resale restrictions impede the emergence of effective competition by enabling the ILEC to retain its market dominance over local services. As the FCC explains:

[T]the ability of incumbent LECs to impose resale restrictions and conditions is likely to be evidence of market power and may reflect an attempt by incumbent LECs to preserve their market position. In a competitive market, an individual seller (an incumbent LEC) would not be able to impose significant restrictions and conditions on buyers because such buyers turn to other sellers. Recognizing that incumbent LECs possess market power, Congress prohibited unreasonable restrictions and conditions on resale. FCC Order at ¶939.

In addition, Centrex resale to residential customers will not necessarily result in significant deterioration of switched access, toll and feature revenues. If resellers target the residential market by providing Centrex service to multi-unit and high-rise complexes, there is no reason that USWC cannot respond by providing similar service. If USWC offers competitive prices and good customer service, it should not lose customers and experience substantial revenue erosion.

While USWC’s observations regarding the impact on historical pricing may be correct, the fact is that any price structure not based on cost--including averaged residential rates--cannot be sustained where effective competition exists. Competition will place pressure on existing price structures and will permanently change the manner in which telecommunications services are marketed to customers.

USWC shall make all retail telecommunications services offered to end user customers available for resale with the following restrictions:

Residential service may not be resold to any other class of customers.

Services for the disabled or others mandated by law may not be resold to any ineligible customers.

Promotional offerings of 90 days or less need not be offered at a discount.

Sprint may only resell grandfathered services to customers currently receiving the same grandfathered services from USWC.

Issue No. 4: Should Sprint be allowed to purchase unbundled elements and combine them in any manner requested?

Telecommunications Act. Section 251(c)(3) of the Act provides that incumbent LECs shall provide unbundled network elements in a manner that allows requesting carriers to combine such elements in order to provide telecommunications service.

FCC Rules. An incumbent LEC shall provide a requesting telecommunications carrier access to an unbundled network element, along with all of the unbundled network element’s features, functions, and capabilities, in a manner that allows the requesting telecommunications carrier to provide any telecommunications service that can be offered by means of that network element. 47 C.F.R. §51.307(c).

An incumbent LEC shall not impose limitations, restrictions, or requirements on requests for, or the use of, unbundled network elements that would impair the ability of a requesting telecommunications carrier to offer a telecommunications service in the manner the requesting telecommunications carrier intends. 47 C.F.R. §51.309(a); FCC Order at ¶¶292-297.

Party Positions. Sprint asserts that the Act and the FCC expressly authorize the combination of unbundled elements in any manner. USWC maintains that Sprint should not be permitted to recombine unbundled elements without using Sprint facilities, where the recombination does nothing more than rebundle all of the elements of a USWC finished service. USWC alleges 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 under the resale provisions of the Act. In the alternative, USWC requests establishment of a temporary residual unbundling charge to reconcile the unbundling and resale provisions of the Act.

Arbitrator’s Decision. Sprint's position is adopted. I agree with the FCC that the Act permits requesting carriers to combine unbundled elements in any manner that is technically feasible, provided such combination does not impair the ILEC’s network or undermine the ability of other carriers to interconnect or obtain access to unbundled elements.

Undoubtedly, this issue will be litigated before the Eighth Circuit, and perhaps even before the United States Supreme Court. Until a contrary decision is reached, however, there is no basis to impose the restrictions proposed by USWC.

Issue No. 5: Does the Act provide for performance measures and penalties, and if so, what specific performance measures must USWC provide to Sprint, and what penalties (if any) should apply for nonconformance?

Telecommunications Act. Section 251(c)(2) of the Act requires that ILECs provide services to CLECs that are at least equal in quality to those provided by the ILEC to itself .

FCC Rules. 47 C.F.R. §51.311(c) provides that, to the extent technically feasible, the CLEC may request services from the ILEC that are superior in quality to the services the ILEC provides to itself.

Party Positions. Sprint proposes that the parties mutually develop statistical process measurements. These measurements will be monitored to ensure that a specific level of service quality is maintained. Sprint recommends adoption of the specific performance standards, measures and remedies agreed to by AT&T and Pacific Bell. These requirements are set forth in Attachment 17 of Sprint’s posthearing brief.

Sprint also recommends that USWC provide detailed specifications showing all of USWC’s existing service quality and performance standards as prescribed in Commission Order No. 97-003. In addition, Sprint seeks the right to request performance measurements and quality levels that differ from those USWC provides to itself.

USWC proposes to provide twelve of the 21 service quality measurements recommended by Sprint during negotiations in this matter. USWC agrees to jointly develop performance standards, to periodically review measured performance against the standards, to implement service improvement plans as required, and to forward unresolved service issues to higher management for resolution. USWC also agrees with Sprint that the parties should seek Commission resolution of any issues that cannot be solved through negotiation.

USWC further agrees that the interconnection agreement should include terms and conditions designed to ensure that Sprint receives the same level of service quality provided to other CLECs and USWC’s own customers. It will provide Sprint with monthly reports that compare the level of service Sprint is receiving with the service USWC customers receive. USWC will also provide an aggregated report showing the service provided to all other CLECs for eleven service quality measures.

USWC states that the only difference between its proposal and Sprint’s proposal relates to the number of service quality measures that will be provided. USWC states that the additional measures proposed by Sprint are not currently provided by USWC for itself, and will be costly, if not impossible, to develop. USWC recommends that Sprint be required to use the bona fide request (BFR) process for any disputed measures. Sprint should also be required to pay any additional cost USWC incurs to develop such measures.

Arbitrator’s Decision. USWC and Sprint agree to jointly develop quality improvement processes that include performance measurements and monitoring to ensure that specific service levels are maintained. This requirement should be incorporated in the interconnection agreement.

Sprint’s recommendation that USWC provide detailed specifications showing all of its existing service quality and performance standards is also adopted. Objective quality measures are necessary to evaluate service levels provided to CLECs and to provide a benchmark that CLECs can rely on in providing service to their customers. The approach approved by the Commission in Order No. 97-003 is adopted. This requires USWC to provide current written measures of quality for (a) billing; (b) operator assistance; (c) preorder, order, provisioning and maintenance/repair; (d) network quality; and (e) provisioning of interconnection and unbundled elements, within 30 days of the effective date of this agreement.

The service performance measures and liquidated damage remedies set forth in Attachment 17 of Sprint’s posthearing brief are not adopted. USWC did not have an opportunity to comment on these proposals and there is no basis upon which to judge the reasonableness of the detailed standards that Sprint has proposed.

USWC agrees to adopt twelve of the 21 performance measures requested by Sprint. These performance measures should be included in the interconnection agreement. The parties should continue to negotiate regarding the nine remaining service measurements. Service quality issues that cannot be resolved informally should be brought to the Commission for resolution rather than under the BFR process. I agree with Sprint that the BFR process may lead to unnecessary delay.

As a final matter, the interconnection agreement should include a provision which enables Sprint to request service quality levels that differ from those that USWC provides to its own customers. If Sprint requests a higher level of service, it must pay any additional costs associated with providing superior service quality.

Arbitrator’s Decision

1. Within 30 days of the Commission’s final order in this matter, Sprint shall submit to USWC an executed contract incorporating the Commission’s final decision in this proceeding. USWC shall execute the contract within five days of receipt and deliver copies to the Commission. The fully executed contract shall be effective immediately.

Dated this 15^th day of January, 1997 in Salem, Oregon.

________________________

Samuel J. Petrillo

Arbitrator