Reply Comments of WorldCom, Inc.  CC Docket Nos. 96-262 et al.  February 14, 1997
BEFORE THE
FEDERAL COMMUNICATIONS COMMISSION
WASHINGTON, D.C. 20554
In the Matter of
Access Charge Reform
Price Cap Performance Review for
Local Exchange Carriers
Transport Rate Structure and
Pricing
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CC Docket No. 96-262
CC Docket No. 94-1
CC Docket No. 91-213
REPLY COMMENTS OF WORLDCOM, INC.
WorldCom, Inc. (“WorldCom”) hereby submits its reply to the initial
comments of other parties on the Commission’s Notice of Proposed Rulemaking,
FCC 96-488 (released December 24, 1996) (“Notice”) in this proceeding.
INTRODUCTION
The comments in this proceeding generally fall into one of three
categories:
One camp consists of those parties that believe that local competition
is at best several years away, and not certain even then. These parties make a
strong showing that prescription is the only way to bring access rates to cost, and
thereby foster both cost-based interexchange services and full service competition
for the public.
The incumbent local exchange carriers (“incumbent LECs” or “ILECs”)
make up a second, completely different camp. They put forth astonishing claims
Reply Comments of WorldCom, Inc.  CC Docket Nos. 96-262 et al.  February 14, 1997
that local competition is already here, or on the near horizon. They ask for the sort
of pricing flexibility now that AT&T received only several years after divestiture,
when facilities-based interexchange competition was available to consumers
everywhere. At the same time, the ILECs argue for access revenue guarantees
that are the antithesis of competition.
WorldCom and certain other parties approach access reform from a
third perspective. We refuse to put on the rose-colored glasses offered up by the
ILECs. We know that local competition will take time to develop, and that the
ILEC access bottleneck will remain unavoidable until then. But at the same time,
we do not necessarily agree that broad rate prescriptions are needed now -- so
much as rate restructuring that more directly subjects access to future competitive
pressures. We are hopeful that the Commission will be able to implement the 1996
Act successfully. If so, we expect to use ILEC network elements to provide local
service. We will order them where we already own local network facilities, and
where we do not, to compete across the country.
As we discussed in our initial comments, the possibility, let alone
existence, of local competition is inextricably related to a market-based access
reform system. For example, originating access is not a competitive service per se;
it is an input that an interexchange carrier (“IXC”) can avoid purchasing only by
becoming the end user’s local service provider. Thus the rates consumers pay for
the total package of local and long distance service can fall as new providers capture
local customers and provide their own access rather than paying for ILEC access.
But that market process depends heavily upon full implementation of the 1996 Act,
so that carriers like WorldCom can enter the local market using ILEC network
elements without great difficulty.
WorldCom is sympathetic to those who have called for re-initialization
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Reply Comments of WorldCom, Inc.  CC Docket Nos. 96-262 et al.  February 14, 1997
of ILEC access rates at cost-based levels. We agree that this stricter approach
would be necessary if the promise of the 1996 Act is broken through ILEC
resistance or unexpected court action. As a result, we have recommended that the
Commission hold the possibility of broad access rate prescription in reserve.
Meanwhile, however, we have suggested more modest up-front
changes that we believe can create the fundamental conditions for the reduction of
access costs -- and do so quickly. Another copy of the summary to our initial
comments is provided here as Attachment A for the convenience of the Commission.
That summary sets out the specific rate structure changes that we have proposed.
Our recommendations reflect three core principles:
1.Restructure access rates now to more closely match the basis on which costs are
incurred;
2.Focus immediate rate prescriptions on those elements that are the least
susceptible to competition; and
3.Expose remaining access charges to competitive pressure as local competition
gradually rolls out.
We believe that these principles will best serve the public interest by driving access
rates toward cost, and thereby permitting lower long distance prices for all
customers. And these principles are also consistent with the broad development of
local competition itself.
As the Commission well knows, thousands of pages of comments have
been filed in this crucial docket. WorldCom is not in a position to respond to all of
the points made by other parties, and will not try to do so here. Instead, we begin
by suggesting a schedule that would prioritize the steps that the Commission
should take immediately, and defer less pressing issues to later orders. We
emphasize that we are not advocating delay for delay’s sake, and we have no
3
Reply Comments of WorldCom, Inc.  CC Docket Nos. 96-262 et al.  February 14, 1997
objection to earlier resolution of as many issues as possible. We offer this schedule,
however, out of an appreciation of the complexity of the immediate tasks before the
Commission here, in the universal service docket, and elsewhere. To the extent
that more time is required to complete all aspects of access reform, we suggest how
the docket might be subdivided.
Second, we respond to major arguments of the ILECs that we find
particularly inconsistent with the development of local competition (and thus access
reform). For example, the Commission should reject out of hand ILEC assertions
that they should continue to receive access revenue free from competitive pressures,
for example, through bulk billed charges based on a competitor’s revenues. Such
“non-competitive” rate elements are a barrier to both lower long distance rates and
new local competition. Similarly, the Commission should reject ILEC arguments
for premature pricing flexibility, especially flexibility to offer lower access rates only
to selected access customers, without reducing them generally. Given that the
access input makes up 40% of the cost of long distance service today, such
discrimination could have devastating effects for both existing interexchange and
nascent local competition.
Finally, WorldCom addresses selected access issues raised in ILEC
comments, including ILEC arguments regarding tandem-switched transport and
price caps. Again, it is not possible for us to respond to all of the comments in this
docket that affect us. We rely on the Commission to see through illogical or
self-serving positions and advance the public interest. We believe that the
principles for access reform mentioned above can guide the Commission to sound
decisions in all aspects of this critical proceeding.
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Reply Comments of WorldCom, Inc.  CC Docket Nos. 96-262 et al.  February 14, 1997
3.
I.
THE COMMISSION SHOULD CONSIDER A STAGED
APPROACH TO RESOLVING THE ISSUES IN THIS PROCEEDING.
WorldCom is well aware of the enormity of the task that the
Commission faces in trying to resolve the numerous difficult issues arising from this
proceeding. We suggest that, instead of trying to address all the issues at once in
the very near term, the Commission could “bring home” this proceeding in at least
three separate orders, staged over the next 12 months or so. Such an approach
would work well with the overall access reform plan proposed by WorldCom.
WorldCom’s proposal for staging access reform orders is presented graphically in a
table in the Summary of these comments.
We strongly support the Commission’s stated intent to adopt its first
access reform order at about the same time as the statutorily required universal
service order -- April to May, 1997. The changes adopted in this initial order could
be implemented through ILEC tariff changes by July 1, 1997. This order must
address the most egregious problems with the existing access rate structure, and
should resolve the most pressing issues to facilitate the development of local
competition. Correctly done, the Commission can improve the access rate structure
measurably; harmonize access with changes required for universal service reform;
and set the stage for local competition by enabling access customers to reduce their
access costs over time as they become local service providers themselves. ILECs
would not experience precipitous losses of revenue, but they would not receive any
revenue guarantees either.
Specifically, this order should:
(1)adopt the necessary rate structure changes to remove inefficiencies and to set the
stage for local competition -- primarily, by eliminating the per minute CCL
and TIC and establishing flat rate per-line charges for subscriber loops,
line-side local switch ports, and the TIC;
(2)make modest rate level prescriptions for a limited number of rate elements:
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Reply Comments of WorldCom, Inc.  CC Docket Nos. 96-262 et al.  February 14, 1997
terminating local switching (which is least likely to become subject to
competitive pressure), tandem switching (in response to the CompTel v. FCC
remand), and the TIC (at least the initial, analytically simplest steps, such as
targeting all universal service and price cap reductions to the TIC); and
(3)specify the pro-competitive steps that incumbent LECs need to demonstrate to
qualify for Phase I (“potential competition”) forms of pricing flexibility, and
define the types of flexibility available at this stage.
The first access reform order need not make other changes to the transport rate
structure or price levels (which, although far from perfect, represent a status quo
that is a tolerable base level for the development of local competition). 1/ Also, the
first order need not address the competitive triggers or the pricing flexibility
measures for steps beyond Phase I, since it is extremely unlikely that any ILEC will
be anywhere near meeting such triggers within the next year.
A second access reform order could be adopted in the fall of 1997, with
a view toward ILEC implementation through tariff changes effective in January
1998. This order could conclude the Fourth Further NPRM in the price cap
performance review proceeding to lower overall rate levels based on the
pro-efficiency incentives created by the price cap system. It could also complete the
more analytically difficult steps needed to eliminate the TIC, preferably with a
transition period of no longer than one year. Finally, the second order could
resolve any remaining rate structure issues, and address any necessary issues on
reconsideration from the first order based on the emerging experience with
interconnection and local competition (and probable resolution of any potential legal
issues, such as the Eighth Circuit appeal of the Local Competition Order).
A third major access reform order could be adopted early in 1998.
This order could address the competitive pre-conditions available at Phases beyond
1/
For a more complete discussion of the baseline access structure and rate level
changes needed now, see WorldCom Comments at 27-72.
6
Reply Comments of WorldCom, Inc.  CC Docket Nos. 96-262 et al.  February 14, 1997
Phase I, and the forms of pricing flexibility available at those stages. (For
example, WorldCom has suggested the use of multiple phases, such as Phases II-A
and II-B for “emerging full-service competition” and “substantial full-service
competition.”) At the same time, the Commission could specify the “stick” of
prescriptive access rate reductions if the incumbent LECs do not at least meet the
conditions for emerging local competition by a date certain (e.g., January 1999).
Finally, the Commission could address the information service issues raised in the
Notice of Inquiry, which should be somewhat simpler to resolve if local competition
is succeeding in bringing access rates toward cost.
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Reply Comments of WorldCom, Inc.  CC Docket Nos. 96-262 et al.  February 14, 1997
(3)
II.
THE COMMISSION SHOULD RECOGNIZE THE INCUMBENT
LECS’ ATTEMPT TO “HAVE THEIR CAKE AND EAT IT TOO” FOR
WHAT IT IS
[Notice, Sections I, III.E, IV, V, and VII]
A.
The ILECs’ Simultaneous Arguments for Deregulation and Revenue
Guarantees are Mutually Contradictory
The Commission should not be taken in by the ILECs’ greedy attempt
to “have it all.” The ILECs argue, on the one hand, that local telecommunications
markets are so competitive today that the current regulatory system should be
substantially streamlined, and that regulation should be virtually eliminated once
the slightest indicia of developing competition can be demonstrated (e.g., when a
state approves a single interconnection agreement). 2/ On the other hand, the
ILECs claim that the Constitution, and possibly also their good corporate
citizenship, give them an absolute entitlement to an ironclad guarantee that they
will forever continue to reap all the revenues that they are currently receiving,
including dollars associated with the TIC, depreciation, and a laundry list of other
claimed costs. 3/
2/
See, e.g., USTA Comments at 27 and Attachment 8; Southwestern Bell
Comments at iii, 26.
3/
See, e.g., GTE Comments at 35-41; USTA Comments at 68-80; Bell
Atlantic/NYNEX Comments at 27-31, 36-38.
8
Reply Comments of WorldCom, Inc.  CC Docket Nos. 96-262 et al.  February 14, 1997
But the ILECs’ claims are inconsistent and self-contradictory. They
want to be treated as if the local marketplace is fully competitive -- which we
certainly hope it will be some day, but no part of it is today. But they also want to
be assured revenue neutrality, like thoroughly regulated rate-of-return monopoly
utilities, with the help of some surprisingly prescriptive regulatory proposals to
assign revenues to certain relatively non-competitive rate elements. The ILECs
can’t have it both ways. In an increasingly competitive marketplace, no company
can be guaranteed revenues. We realize that this is all new for the ILECs, but
they need to get used to it: no regulatory agency can lawfully ensure them revenue
recovery. They may or may not succeed in recovering all their investments in a
competitive marketplace; they may win big, or consistently faulty business
judgment could cause them to lose their shirts. The key to success will be
providing high-quality services to end users at reasonable rates, and retaining and
growing the customer base in a competitive manner -- not abusing the regulatory
process to try to obtain subsidies from competing carriers. 4/
4/
All of this assumes that the ILECs will not use their continuing bottleneck
control over unbundled network elements to obtain subsidies in other ways. For
purposes of projecting how local competition is likely to develop, WorldCom assumes
full ILEC compliance with Sections 251 and 252 and the Local Competition Order.
47 U.S.C. §§ 251 & 252; Implementation of the Local Competition Provisions of the
Telecommunications Act of 1996, CC Docket No. 96-98, First Report and Order,
11 FCC Rcd 15499 (1996) (“Local Competition Order”), recon., 11 FCC Rcd 13042
(1996), second recon., FCC 96-476 (released Dec. 13, 1996), pet. for review pending
sub nom. Iowa Utilities Board v. FCC, No. 96-3321 (8th Cir.).
9
Reply Comments of WorldCom, Inc.  CC Docket Nos. 96-262 et al.  February 14, 1997
At the same time, the ILECs seek an astounding degree of pricing
flexibility, with barely any check to ensure that competitors have opportunities to
enter local markets. The ILECs would have the Commission essentially deregulate
special access and dedicated transport now, and eliminate rate structure regulation
of other services, with no specific proof that competition for these services is
possible. 5/ And they suggest that a single state-approved interconnection
agreement or statement of generally available terms (“SGAT”) should lead to
substantial deregulation of most other access services. But no one can seriously
suggest that the mere paper existence of a single approved agreement or SGAT is
all it takes to make vibrant local competition a reality. The Commission’s proposed
thresholds for Phase I have it much more nearly right. The deregulation proposed
by the ILECs would facilitate a tremendous degree of anti-competitive conduct by
these monopolists -- including discrimination in favor of their interexchange
affiliates -- with no assurance that local competition is anywhere in sight.
5/
We address this argument in more detail below. See Section III.A.
10
Reply Comments of WorldCom, Inc.  CC Docket Nos. 96-262 et al.  February 14, 1997
The ILECs try to “have their cake and eat it too” in other ways as well.
They seek elimination of “sharing” from the price cap system, elimination of the
consumer productivity dividend, and reduction or elimination of the “X” factor (the
rate adjustment for increased productivity that forms the critical basis of the
productivity incentives in the price cap system). 6/ These changes would eliminate
the existing provisions that ensure that ILECs share with ratepayers a limited
amount of the benefits of productivity improvements in the event that profits are
high. Yet, in the same breath, the ILECs want prescriptive revenue guarantees
that would keep them whole even in the event that profits are low. No matter that
they can’t identify with particularity what costs are associated with up to half of the
TIC. 7/ Under the ILECs’ skewed theory, any revenues that they receive now
should keep flowing . . . because they are “the phone company.”
6/
See, e.g., BellSouth Comments at 25; Bell Atlantic/NYNEX Comments at
58-60.
7/
See,e.g., Southwestern Bell Comments at 9-10; see also USTA Comments,
Attachment 10 at 11, and Attachment 11. And, as we discuss below, the ILECs’
claims regarding the portion of the TIC that they do purport to quantify -- of which
a large part would be reassigned to tandem-switched transport -- are
extraordinarily weak. See infra Section III.C.
11
Reply Comments of WorldCom, Inc.  CC Docket Nos. 96-262 et al.  February 14, 1997
WorldCom has suggested a measured approach that would recognize
the state of the local marketplace for what it is -- only nascently competitive -- and
would set the stage for growing competition. Under this approach, access rates
would be restructured to shift revenues so as to maximize competitive pressure on
the ILECs. At the same time, the Commission would outline the steps by which
the ILECs gradually would be granted increasing pricing flexibility as the local
markets are truly opened to competition. We support a market-based approach,
and we fully recognize that the ILECs ultimately should be deregulated -- but
timing is everything. The Commission must not be taken in by the ILECs’
arguments for premature deregulation, which would squelch local competition
before it even gets off the ground, or for revenue guarantees, which would make it
impossible for entrants to compete against such revenues and would force them to
subsidize their biggest competitors.
B.
The Commission Should Not Heed the ILECs’ Scare Tactics and Red
Herrings
12
Reply Comments of WorldCom, Inc.  CC Docket Nos. 96-262 et al.  February 14, 1997
The ILECs claim, both in their filings in this proceeding and in
advertisements in the general press, that high access charges are needed to assure
universal service support and to protect their incentives to continue investing in
and maintaining their world-class local networks. Both of these arguments are red
herrings, and should be paid little heed. Universal service support -- specifically,
support needed for consumers in high-cost areas and low-income consumers -- is
being addressed in a different proceeding, and will be supported through a truly
competitively neutral mechanism, into which all carriers will pay, and from which
all carriers providing local services will be eligible to draw. 8/ By contrast, none of
the mechanisms suggested by the ILECs in this proceeding, such as bulk billing,
would be “competitively neutral.” 9/ All would single out access customers (i.e.,
IXCs), and possibly also purchasers of unbundled network elements, to pay
burdensome and distortive subsidies to their prospective competitors, the ILECs.
Such subsidies would violate the express statutory requirement of Section 254 that
universal support be “equitable and non-discriminatory.” 10/ The 1996 Act thus
forbids the use of access charge revenues to support universal service.
8/
47 U.S.C. § 254; Federal-State Joint Board on Universal Service, CC Docket
No. 96-45, Recommended Decision, FCC 96J-3 (released Nov. 8, 1996).
9/
See, e.g., GTE Comments at 41-44 (proposing “bulk billing” a “regulatory
policy charge” to all carriers that purchase ILEC interstate access and unbundled
elements); BellSouth Comments at ii (proposing recovery of depreciation reserve
deficiency by “bulk billing” IXCs based on share of revenues over past three years -which effectively would exclude future RBOC interLATA affiliates); US West
Comments at 72-73 (proposing recovery of TIC from IXCs based on shares of
switched access minutes).
10/
47 U.S.C. § 254(b)(4) & 254(d).
13
Reply Comments of WorldCom, Inc.  CC Docket Nos. 96-262 et al.  February 14, 1997
Similarly, the argument that high access charges and revenue
guarantees are necessary to assure continued network investment is baseless. In
fact, the Commission has found in the past that the rate-of-return regulatory
system, which -- like the guarantees the ILECs now seek -- ensured that every
dollar invested would be matched by revenue dollars, created inefficient incentives
for investment. 11/ A much more powerful guarantor of local network investment
and ongoing quality improvements would be to promote competition for local
telecommunications services. If competition forces the ILECs to scramble for
customers and revenue, they will need to invest in their networks to remain
competitive. Yet the revenue guarantees that the ILECs seek would stifle the
development of local competition. 12/
11/
Indeed, the larger ILECs have embraced the notion of “pure” price cap
regulation, which would provide no guaranteed return on ILEC investment.
12/
See WorldCom Comments at 22-24, 59-72. Such revenue guarantees would
deter WorldCom and other competitors from constructing competing local network
facilities. Meanwhile, the ILECs will have their network element costs fully
reimbursed through the interconnection process.
14
Reply Comments of WorldCom, Inc.  CC Docket Nos. 96-262 et al.  February 14, 1997
Finally, the ILECs argue that the Commission is legally prohibited
from imposing local competition-related preconditions for increased pricing
flexibility in this proceeding. This is absolutely false. Even if the Eighth Circuit
ultimately concludes that the Commission overstepped its authority in adopting
pricing rules pursuant to Sections 251 and 252 (which it has not done to date; it has
only issued a stay pending the outcome of the litigation), this has no effect on the
Commission’s well-established authority under Sections 201-205 to adopt rules
regarding the pricing of interstate access services. The conditions that the
Commission proposed for Phase I pricing flexibility are well within the established
parameters of regulation under Sections 201-205. 13/ At minimum, premature
relaxation of ILEC price regulation would violate the public interest, and thus
would itself be inconsistent with these provisions of the Act.
13/
Cf. Expanded Interconnection with Local Telephone Company Facilities,
7 FCC Rcd 7369, 7454-7455¶¶ 179-80 (1992), recon., 8 FCC Rcd 127 (1992), second
recon., 8 FCC Rcd 7341 (1993), reversed on other grounds and remanded sub nom.
Bell Atlantic Tel. Cos. v. FCC, 24 F.3d 1441 (1994).
15
Reply Comments of WorldCom, Inc.  CC Docket Nos. 96-262 et al.  February 14, 1997
Indeed, while the Commission may not deprive a party of its
Constitutional rights, it may withhold a privilege -- pricing flexibility, to which the
ILECs have no legal entitlement -- unless the party voluntarily satisfies a related
condition that is proportional to that privilege, even if the Commission lacks
authority to require the party to satisfy the condition. 14/ The ILECs apparently
rely on the doctrine of “unconstitutional conditions,” under which “the government
may not require a person to give up a constitutional right . . . in exchange for a
discretionary benefit conferred by the government where the property sought has
little or no relationship to the benefit." 15/ But the Supreme Court has clearly held
that a condition is constitutional where, as here, (1) there exists an "essential
nexus" between the "legitimate state interest" and the condition, and (2) there is a
"rough proportionality" between the condition and the discretionary benefit. 16/
This constitutional standard clearly would be satisfied here, where the ILEC’s
satisfying the prerequisites to vibrant local competition is directly related to and
proportional to the pricing flexibility that would be granted to the ILEC in an
increasingly competitive local marketplace.
C.
A “Reasonable Opportunity” for Recovery Does Not Equate to An
Absolute Guarantee; and the ILECs Depreciation Claims Are Bogus.
14/
This is no different from saying, for example, that (outside the context of
taxation) the government cannot force me to pay it $10, but it can withhold the
privilege of visiting a national park unless I voluntarily pay $10.
15/
Dolan v. Tigard, 114 S.Ct. 2309, 2317 (1994). See USTA Comments,
Attachment 3, Affidavit of J. G. Sidak & D. F. Spulber at 99-101.
16/
Nollan v. California Coastal Comm'n, 483 U.S. 825, 834, 837 (1987); Dolan,
114 S.Ct. at 2317, 2319.
16
Reply Comments of WorldCom, Inc.  CC Docket Nos. 96-262 et al.  February 14, 1997
The Commission is required only to give the ILECs (and all other
common carriers) a “reasonable opportunity” to obtain a reasonable return on their
investments. 17/ But the Commission should ignore the ILECs’ pleas to transmute
that “reasonable opportunity” into a prescriptive guarantee. If, once local
competition develops, the ILECs lose some of their customers and cannot raise rates
on the remaining customers without losing more revenue -- that is the way
competition is supposed to work under the 1996 Act. Competition guarantees
nothing but the maximum opportunities for consumers and competitors alike.
The ILECs’ arguments regarding depreciation ignore this basic point.
They also seem to forget the intensity of their own successful campaign to replace
rate-of-return guarantees with price caps. There is no evidence in the record now
that would compel the Commission to reverse the reasonable decision it made in
1990, when adopting price cap regulation, not to guarantee price cap LECs recovery
of their depreciation expenses and to treat depreciation as an endogenous cost
under price caps (i.e., a cost that should not affect rate changes in the price cap
system). 18/ The Commission found that a guarantee of depreciation recovery
would run counter to the productivity and efficiency incentives of the price cap
system:
17/
FPC v. Hope Natural Gas Co., 320 U.S. 591 (1934); Duquesne Light Co. v.
Barasch, 488 U.S. 299 (1989).
18/
Policy and Rules Concerning Rates for Dominant Carriers, CC Docket
No. 87-313, Second Report and Order, 5 FCC Rcd 6786, 6809, ¶¶ 182-187 (1990),
aff’d in pertinent part on recon., 6 FCC Rcd 2637, 2672, ¶¶ 74-75 (1991), aff’d sub
nom. National Rural Telecom Ass’n v. FCC, 988 F.2d 174 (D.C. Cir. 1993).
17
Reply Comments of WorldCom, Inc.  CC Docket Nos. 96-262 et al.  February 14, 1997
[W]hile we determine the rate of depreciation, we do not decide for
carriers when to deploy new plant and when to retire the
old. We believe that such decisions are at the very heart
of a carrier’s business operation, and we do not seek to
disturb it. Accordingly, it is not this Commission, but the
carrier, through its decisions on when to deploy and retire
equipment, that primarily controls the rate at which
plant investment is translated into depreciation expense. .
. . [I]f we were to guarantee recovery of depreciation
expense for carriers, we would risk destroying the very
incentives that we wish to create with the price cap
program. 19/
Seven years later, the ILECs’ argument for guaranteed recovery of depreciation
expense is far weaker now than it was then.
19/
Id., 5 FCC Rcd at 6809, ¶¶ 182-83.
18
Reply Comments of WorldCom, Inc.  CC Docket Nos. 96-262 et al.  February 14, 1997
The main thrust of the ILECs’ arguments seems to be that
Commission policies in the past imposed unreasonably slow depreciation schedules,
which made it impossible for them to recover their investments in a timely manner.
Even if one were to concede this basic point (and we do not), it must be qualified in
a number of ways. 20/ First, at the ILECs’ behest, the depreciation schedules for
much of their equipment were accelerated substantially over the past decade and a
half, and the ILECs were permitted to amortize and recover depreciation reserve
deficiencies. As a result, the alleged problem, which at most applies only to dollars
in the rate base before the inception of price cap regulation, was largely eliminated
by the time price cap regulation was initiated. Moreover, the depreciation process
has been substantially streamlined, giving the ILECs a far greater degree of control
over their own depreciation rates. And of course, as discussed above, since the
inception of price cap regulation, depreciation changes have had no effect on ILEC
rates. The price cap ILECs have absolutely no claim to revenue guarantees
relating to depreciation expenses since 1991.
20/
We are aware of no quantification on the record of this proceeding of the
amount of undepreciated amounts that were incurred before 1991 (when price caps
began) and that are claimed to be attributable to incorrect FCC depreciation
prescriptions based on what was known then about the rate at which equipment
became unusable or obsolescent. We speculate, however, that any such amount is
likely to be minuscule.
19
Reply Comments of WorldCom, Inc.  CC Docket Nos. 96-262 et al.  February 14, 1997
In addition, a significant part of the ILECs’ depreciation argument
seems to be grounded in a contention that technological changes reduced the
economic value of the ILECs’ investment (after the plant was purchased and
depreciation schedules were established), and that the Commission should enable
the ILECs to recover additional revenue to compensate them for this reduction in
economic value. But even thoroughly regulated utilities in a monopoly
environment have to live with the risk that the value of their investments may
decline. And the 1996 Act stipulates that the ILECs no longer exist in a monopoly
environment, in which the value of their investments are guaranteed, but instead
must take their chances with everybody else in the competitive market.
D.
The ILECs Must Fully Implement the Prerequisites for Local
Competition In Order to Earn Greater Pricing Flexibility.
WorldCom is optimistic that local competition can emerge in the
relatively near future -- but this will happen only if the Commission sets the stage
properly. The Commission can use access reform to accelerate the process of local
competition -- or, if it follows the ILECs’ advice, it can snuff out any possibility of
local competition by providing the ILECs with an unwholesome mix of revenue
neutrality and premature deregulation. It is vitally important for the Commission
to insist that the ILECs receive their pro-competitively structured pricing flexibility
only after the Phase I thresholds are met. This includes, in particular, reasonable
pricing of unbundled network elements and other interconnection offerings, and
working operational support systems (“OSS”) to facilitate the development of local
competition. As with AT&T in the long distance market, the Commission should
grant the ILECs streamlined regulation, and ultimately deregulation, only when a
vibrantly competitive local telecommunications marketplace develops.
20
Reply Comments of WorldCom, Inc.  CC Docket Nos. 96-262 et al.  February 14, 1997
III.
THE COMMISSION SHOULD REJECT INCUMBENT LEC REQUESTS
FOR ANTI-COMPETITIVE ACCESS RULES.
A.
Access Charges Must Not be Applied to Unbundled Network
Elements.
[Notice, Section II-B]
21
Reply Comments of WorldCom, Inc.  CC Docket Nos. 96-262 et al.  February 14, 1997
The Commission definitively concluded in the Local Competition Order
that incumbent LECs should not be allowed to impose interstate access charges on
unbundled network elements. 21/ This conclusion is not only compelled by the
clear language of the 1996 Act, 22/ it is critical to the development of local
competition. Unbundled network elements must be available to new entrants at
rates based on their forward-looking cost -- the same basis on which those facilities
are available to ILECs -- in order to facilitate competition. The addition of access
charges to forward-looking cost-based rates for unbundled elements would raise
those rate levels far above cost and make it impossible for new entrants to compete
on the same basis as the ILECs themselves. Moreover, a new entrant purchasing
unbundled elements is entitled to use those facilities to provide any local
telecommunications service, including access service. But a requirement to pay the
ILEC access charges on top of cost-based network element rates -- essentially an
uneconomic access “tax” -- would make it economically impossible for new entrants
to offer access services as part of their full-service local telecommunications
offerings.
21/
Local Competition Order, ¶¶ 362-64. The Order created only a limited
exception to this rule -- the interim application of certain access charges to of
unbundled local switching until the earlier of June 30, 1997, the issuance of final
orders in this and the universal service proceedings, or RBOC interLATA
authorization under Section 271. Id., ¶¶ 716-32. The Commission stated, “We can
conceive of no circumstances under which the requirement that certain entrants
pay the CCLC or a portion of the TIC on calls carried over unbundled network
elements would be extended further.” Id., ¶ 725.
22/
47 U.S.C. §§ 251(c)(3), 252(d)(1) (rates for unbundled elements must be just,
reasonable, nondiscriminatory, and cost-based).
22
Reply Comments of WorldCom, Inc.  CC Docket Nos. 96-262 et al.  February 14, 1997
Put another way, local competition means competition to provide local
services to end users over a local loop, and to provide vertical features to that end
user, and to provide origination for that end user’s outbound interexchange traffic,
and to provide terminating service to other carriers who need to deliver traffic to
the end user. Once a carrier has purchased unbundled network elements, it has
covered the ILEC’s cost. ILECs must not be allowed to impose an additional
“access surcharge” on their local rivals, any more than they may prohibit their
rivals from receiving any one of these various revenue streams from end users or
carriers.
Accordingly, the Commission should soundly reject the ILECs’ brazen
calls for applying access charges to unbundled element rates in certain
circumstances. For example, SWB’s proposal to add a SLC “surcharge” to the rates
for unbundled loops 23/ ignores the fact that the Commission’s rules on unbundled
element pricing already provide for recovery of the full cost of the unbundled loop.
BellSouth and Pacific Telesis are similarly wrong when they argue that access
charges should apply when entrants purchase unbundled elements and package
them together to offer local service. 24/ These proposals blatantly violate the
statutory cost-based pricing standard. Moreover, they would gut the essence of the
Commission’s policies in the Local Competition Order.
23/
24/
Southwestern Bell Comments at 13.
BellSouth Comments at 13; Pacific Telesis Comments at 11-12.
23
Reply Comments of WorldCom, Inc.  CC Docket Nos. 96-262 et al.  February 14, 1997
Indeed, if these ILEC arguments were accepted, then WorldCom would
join the ranks of those who call for an immediate prescription of cost-based access
rates. The entire foundation of a market-based approach to access reform rests on
the ability of new entrants, whether using their own facilities, unbundled ILEC
network elements, or a combination, to offer the same full array of local telephone
services, including access, as the ILECs. If we cannot offer access without paying a
surcharge, then the ILEC access bottleneck remains substantially unbroken,
carriers will not be able to avoid high ILEC access charges by becoming full-service
providers using unbundled network elements, and prescription becomes the only
path to lower access rates for carriers, and thus lower long distance rates for
consumers.
B.
Special Access Should Not Be Deregulated Prematurely.
[Notice, Sections III.D.2 and IV.B.1]
24
Reply Comments of WorldCom, Inc.  CC Docket Nos. 96-262 et al.  February 14, 1997
Several of the ILECs contend that special access should, in effect, be
deregulated now, together with high-capacity dedicated transport. 25/ These
requests are over-reaching, for several reasons. First, competition for special
access and transport services is much less advanced to date than the ILECs claim.
WorldCom, which is one of the two largest competitive access providers (“CAPs”) in
the country, has operational collocation in fewer than 175 of the nation’s tens of
thousands of central offices. For example, while BellSouth goes to great lengths to
assert how much competition has arrived in its region, 26/ WorldCom has
operational collocation in only 4 central offices in that region. Collocators are
active in only 42 of Bell Atlantic’s thousands of central offices. 27/ And without
expanded interconnection, opportunities for widespread competition to provide
special access and transport is seriously limited.
25/
See, e.g., USTA Comments at 42-46 and Attachment 8; Bell South Comments
at 22-24.
26/
BellSouth Comments at 22-24 and Attachment 1.
27/
Bell Atlantic Telephone Cos., Tariff F.C.C. No. 1, 9th Revised Pages
962-962.1 (effective Jan. 20, 1997).
25
Reply Comments of WorldCom, Inc.  CC Docket Nos. 96-262 et al.  February 14, 1997
Second, it is WorldCom’s understanding that, in more than half of the
states, the ILECs have not yet satisfied even the existing “quid pro quo” rule
regarding pricing flexibility for special access adopted almost five years ago. This
rule provides that an ILEC may implement geographic deaveraging of special
access in a state once at least one competitive carrier is using expanded
interconnection (i.e., collocation under the pre-existing FCC regime) in at least one
ILEC central office in that state. 28/ The Commission should, at the very least,
insist that its earlier quid pro quo is satisfied before granting additional pricing
flexibility. A similar set of quid pro quos exist for switched transport, which have
been met in even fewer states. For example, BellSouth has not met the existing
threshold for switched transport in a single state. Under these conditions, it would
be far too soon to grant additional forms of pricing flexibility or streamlined
regulation for switched transport.
Several of the ILECs make generalized allegations about the degree of
competition they face now for special access and high capacity dedicated transport
service. 29/ This may well be the case in certain limited specific areas, but the
Commission should not make general regulatory changes based on such meager,
anecdotal showings. Rather, the Commission should insist that ILECs make
specific, geographically targeted showings based on the Phase I and Phase II
pricing flexibility policies developed here.
28/
Cf. Expanded Interconnection with Local Telephone Company Facilities,
7 FCC Rcd 7369, 7454-7455¶¶ 179-80 (1992), recon., 8 FCC Rcd 127 (1992), second
recon., 8 FCC Rcd 7341 (1993), reversed on other grounds and remanded sub nom.
Bell Atlantic Tel. Cos. v. FCC, 24 F.3d 1441 (1994).
29/
See, e.g., Ameritech Comments at 33-35 and Attachment D.
26
Reply Comments of WorldCom, Inc.  CC Docket Nos. 96-262 et al.  February 14, 1997
In that regard, ILECs should not be allowed to remove any service
from price caps, nor should any other form of regulatory streamlining be granted,
until the competitive checklist has been satisfied. These forms of pricing flexibility
could be a powerful inducement for ILECs to cooperate in satisfying the
preconditions for local competition. It would be extremely unfortunate and a
missed chance to promote competition if the Commission were to give away this
“carrot” without a satisfactory quid pro quo. More important, unless Sections 251
and 252 are satisfied, and interconnection of competitive facilities takes place on a
wide scale, access customers will not have the competitive choice that would justify
relaxation of price regulation.
Finally, and in any event, what the ILECs are seeking in this area
goes far beyond the forms of pricing flexibility proposed for Phase I, and even
somewhat beyond that proposed for Phase II. The Commission should not grant
Phase II freedom until the preconditions are satisfied both for Phase I (i.e., the
competitive checklist) and for Phase II (i.e., some quantitative showing regarding
the emergence of actual competition).
C.
The Commission Should Not Revisit the Transport Rate Structure
and Pricing Rules -- But If It Does, It Must Treat Common and
Dedicated Transport Consistently.
[Notice, Sections III.D. and III.E.]
27
Reply Comments of WorldCom, Inc.  CC Docket Nos. 96-262 et al.  February 14, 1997
WorldCom, in our initial comments, maintained that -- with the
exception of the issues remanded by the Court of Appeals 30/ -- the Commission
should focus on the larger issues in this proceeding and should not get bogged down
in revisiting the rate structure and pricing issues decided in the Transport
proceeding. At this point, however, we must respond to the ILECs’ incorrect and
self-serving contentions that the unitary rate structure option for tandem-switched
transport should be eliminated, 31/ and that certain of the rate level decisions in
the Transport orders result in under-pricing of tandem-switched transport, with
residual dollars recovered through the TIC.
As an initial matter, we note that WorldCom is both a consumer of
transport services and a competitive provider of transport services. We therefore
have no interest in either unreasonably low or unreasonably high ILEC transport
rates. What we seek is a set of reasonably cost-based transport rate structures and
rate levels that avoid interfering with either local or long distance competition.
30/
Competitive Telecommunications Association v. FCC, 87 F.3d 522 (D.C. Cir.
1996) (“CompTel”).
31/
The so-called “unitary” rate structure option is the first of the two pricing
alternatives for tandem-switched transport described in ¶ 87 of the Notice. The
second alternative described in that paragraph is sometimes described as the
“partitioned” rate structure option.
28
Reply Comments of WorldCom, Inc.  CC Docket Nos. 96-262 et al.  February 14, 1997
It is somewhat surprising that the ILECs, with their supposed
affection for price caps and deregulation, would make the arguments that they do
for a highly regulatory overhaul of the rate structure and pricing of
tandem-switched transport. Done correctly, the ILECs’ approach would require
extensive cost studies and a complicated restructuring of both common and
dedicated transport. Although WorldCom believes that, with the important
exception of tandem switching, 32/ such cost studies are unnecessary, if the ILECs
are serious about such an enterprise, then WorldCom submits some guiding
principles.
1. Dedicated and common transport, which use identical network
facilities, would have to be treated consistently. The ILECs’ positions regarding
transport essentially amount to an argument that the Commission revisit the rate
structure and pricing decisions for tandem-switched transport alone. But it is
abundantly clear that today the same network facilities are used to provide
dedicated interoffice transport as well as tandem-switched transport. The basic
difference between the interoffice transmission facilities used for dedicated and
common transport is that, for the former, electronic circuit equipment permanently
reserves a set of time slots on a large, multiplexed transmission pipe for a given
IXC’s use, while for the latter, the identical time slots on the same transmission
pipe are set aside on an ad hoc basis when a particular call is set up. But both
types of interoffice transport typically are routed in the same way, over the same
transmission facilities, transiting a number of intermediate offices and/or hubs on
the way between the serving wire center (“SWC”) and the end office.
32/
See WorldCom Comments at 53-56.
29
Reply Comments of WorldCom, Inc.  CC Docket Nos. 96-262 et al.  February 14, 1997
Accordingly, WorldCom submits that it would be unreasonably
discriminatory for the Commission to make detailed changes to the rate structure or
pricing of tandem-switched transport and not make parallel changes with respect to
dedicated interoffice transport. If the ILECs want to re-open settled decisions
regarding tandem-switched transport, then it simply defies any notion of fairness or
reasoned decision-making not to engage in the same regulatory process with respect
to dedicated transport.
For example, the ILECs call for a detailed accounting of the actual
number of multiplexers used in the context of tandem-switched transport, and
similar minutiae. 33/ WorldCom is puzzled by this call for detailed, piece-part cost
accounting by the champions of price cap regulation and market-based deregulation
(which is supposed to move away from such detailed cost studies), and believes that
such an exercise would be counter-productive. Nonetheless, if the ILECs want to
start counting the multiplexers, hubs, and other network facilities used for
tandem-switched transport, then they must conduct a similar count of the
multiplexers, hubs, and so on used for dedicated transport. 34/ The same direct
costing methodologies must be used for all types of transport. 35/
33/
See, e.g., BellSouth Comments at 74.
34/
And to be fully consistent, this count should examine each transmission path
in the actual ILEC interoffice network, which approaches an efficient, cost-based
network much more closely than the non-existent network model that hypothesizes
“direct-trunked” transport provided over a straight-line transmission facility
directly linking the SWC and the end office.
35/
If, given the possible efficiencies and probable cost savings of ILEC
management of circuit facility assignments, a lower rate, reflecting these
efficiencies, is made available to access customers that choose to allow the ILEC to
control circuit facility assignments, then such an option should be available to users
of common transport as well as dedicated transport.
30
Reply Comments of WorldCom, Inc.  CC Docket Nos. 96-262 et al.  February 14, 1997
2. Decisions would have to be based on a current, forward-looking
view of the design of the interoffice network. WorldCom is insistent that the
Commission must stop approaching these issues based on the outdated triangular
or pyramidal model of the interoffice network represented by Figure 1 in the
Notice. 36/ As long ago as 1987, Peter W. Huber -- no enemy of the
ILECs -- argued that the ILEC transmission network (and the national
telecommunications network of networks more generally) was increasingly
“geodesic” rather than pyramidal in design. 37/ This trend has accelerated over
the past decade. The ring, rather than the pyramid, has become the basic unit of
transmission network design. All of the major ILECs have, over the past decade,
replaced virtually all of their copper interoffice transmission facilities with very
high capacity fiber optics, and synchronous optical network (“SONET”) rings are the
technology of choice on a forward-looking basis. Below, WorldCom submits an
alternative diagram that more accurately depicts the current and forward-looking
architecture of the ILECs’ interoffice transmission networks, as a conceptual model
that would more accurately guide Commission decision-making.
36/
Notice, Figure 1 (following ¶ 24).
37/
U.S. Department of Justice, Antitrust Division, The Geodesic Network:
1987 Report on Competition in the Telephone Industry 1.2 (prepared by Peter W.
Huber, consultant) (Jan. 1987).
31
Reply Comments of WorldCom, Inc.  CC Docket Nos. 96-262 et al.  February 14, 1997
There are several practical implications of this geodesic network
architecture. First, distance sensitivity plays at best a minor role in the cost of
interoffice transmission. Given that all interoffice transmission is routed around
large fiber rings, the actual distance between the originating and terminating
points of any given transmission point is growing less and less relevant to the
actual costs.
Second, in the geodesic interoffice transmission network, actual
transmission paths -- both for dedicated interoffice circuits and for common
transport -- do not follow straight-line paths between central offices. So-called
“direct-trunked” transport is a misnomer: dedicated transport (as well as special
access) is never “direct trunked” on a straight line between the SWC and the end
office. The distance-sensitive component of dedicated transport is rated on the
basis of mileage “as the crow flies” between the SWC and the end office, not because
transmission facilities actually follow such a path, but because the access customer
has no control over the specific geographic pattern the traffic takes en route
between the SWC and the end office, and does not care. 38/ The customer only
cares that the traffic reaches its destination. Since the ILEC has exclusive control
over the actual routing of the traffic, a rate based on the straight-line distance gives
it incentives to route the traffic in the most efficient manner possible. The same is
true for tandem-switched transport.
38/
In addition, it is difficult or impossible for ILECs to rate dedicated transport
based on the actual transmission path, which may be hard to trace and which may
change frequently, given the dynamic routing used in the ILECs’ high capacity
transmission rings.
32
Reply Comments of WorldCom, Inc.  CC Docket Nos. 96-262 et al.  February 14, 1997
Third, and most critically, transport routing is driven by overall ILEC
network design decisions based on the overall requirements for the transport of
both local and access traffic. It follows that the routing of access traffic is heavily
influenced by ILEC network deployment for these facilities shared by local uses.
Deployment decisions are not made to maximize the efficiency of serving only access
customers, let alone common transport customers. This is not a criticism.
WorldCom similarly designs its network to meet its overall traffic requirements,
rather than the needs of a specific category of customers. But we would lose
customers quickly if we tried to penalize particular customers for our network
routing decisions by charging based on the routing distances among our facilities,
rather than on an end-to-end basis.
For all these reasons, there is simply no basis to require
tandem-switched transport customers -- but not dedicated transport customers -- to
pay for transport based on the partitioned rate structure so beloved by the
ILECs 39/ (although the Commission should retain the hubbed version of
tandem-switched transport as an option for customers). Contrary to the ILECs’
contention, the partitioned rate structure is no more cost-based than the unitary
rate structure. It simply would result in unreasonable discrimination between
dedicated and common transport users. In the past WorldCom has primarily been
concerned that AT&T would be the beneficiary of such discrimination. In the
future that beneficiary could be the ILEC long distance operation.
39/
If, however, the Commission eliminates the unitary rate structure for
tandem-switched transport, then it should also modify the rate structure for
dedicated transport. To be consistent, all access customers would have to be priced
based on the distance of the actual routing of the transmission path. Such a rate
structure, while consistent, would hardly be rational for either dedicated or common
transport.
33
Reply Comments of WorldCom, Inc.  CC Docket Nos. 96-262 et al.  February 14, 1997
3. Forward-looking costing methodologies would have to be used.
The ILECs’ call for setting the prices of tandem switching based on fully allocated,
embedded costs is astounding. Not a single other access charge rate element is
priced on that basis, nor have they been since 1991, when price cap regulation was
initiated for most of the ILECs. The Commission has decided -- not just in the
recent Local Competition Order, but in the orders establishing price cap regulation
half a decade earlier -- that embedded cost pricing using a rate of return
methodology does not advance the public interest. And such an approach could
hardly be reconciled with the 1996 Act and the Local Competition Order’s pricing
methodology.
WorldCom has already demonstrated that, in response to the CompTel
remand, ILECs’ tandem switching rates should be re-initialized based on either a
forward-looking cost study, or using the proxy prices adopted in the Local
Competition Order. 40/ This correction should be relatively simple, thanks to the
cost studies in use to develop interconnection rates for the identical functionality
provided as an unbundled network element. At the same time, WorldCom has not
asked the Commission to re-open the (highly important) question of transport
transmission rate levels at this time. We hope that competitive pressure can cure
discrimination and excessive pricing in both common and dedicated transport rates
over time. 41/
40/
WorldCom Comments at 53-56.
41/
The ILECs, however, seek rate changes here that would permit them to raise
rates even further for less competitive tandem-switched transport. Such a change
would have a potentially devastating impact on interexchange competition, which is
why this issue was so hotly debated in the past.
34
Reply Comments of WorldCom, Inc.  CC Docket Nos. 96-262 et al.  February 14, 1997
The ILECs make various allegations regarding the “costs” of common
transport transmission recovered through the TIC. But if they are serious about
re-setting tandem-switched transport rates based on cost, then this cannot be
accomplished by simply shifting revenues from the TIC to the tandem-switched
transport rate. Instead, a forward-looking cost study would be required to
re-initialize the rates for both common and dedicated transport. Again, WorldCom
does not relish this “mother of all rate cases.” Except for the tandem switching
charge, where adjustment is required by the court, we would prefer to leave as a
given the Commission’s transport rate structure and pricing decisions to
date -- even those we disagree with -- and let local competition start driving rates
toward more reasonable levels in the future. But such a massive cost study and
rate case is inevitably implied by the prescriptive arguments the ILECs have made
regarding tandem-switched transport “costs” recovered through the TIC.
The Commission would have to apply to all access charges the same
forward-looking costing principles that it has adopted for interconnection elements.
First, the network configuration used should be forward-looking. Forward-looking
costs do not vary based on the existing technologies that historically were installed
in the ILEC network; they are determined based on the efficient technologies that
the ILEC is installing currently and in the (short term) future. Moreover, access
customers have no control over which technologies an ILEC uses to provide a given
service.
35
Reply Comments of WorldCom, Inc.  CC Docket Nos. 96-262 et al.  February 14, 1997
Furthermore, forward-looking cost studies should presume that ILECs
will deploy network facilities efficiently. For example, the actual fill factors on a
given transmission facility are irrelevant to forward-looking cost studies. The fill
factors that would represent efficient network deployment are far more relevant. 42/
Finally, forward-looking cost studies must examine, de novo, the
relationships between the costs of high capacity and lower capacity dedicated
transport facilities. WorldCom believes that, given the ring architecture of the
modern, geodesic, shared interoffice transmission network, the costs per circuit do
not vary (or vary only minimally) based on the transmission capacity reserved by
the access customer. What is critical is this: if, contrary to WorldCom’s
preferences, cost studies are undertaken to re-initialize transport rates, then those
studies must not assume, contrary to reality, that either DS1 or DS3 service is
provided using a hypothetical and inefficient “stand alone” circuit directly from the
SWC to the end office. Rather, those studies should examine the costs based on
efficient, forward-looking networks -- which coincide with the ILECs’ actual
ring-based interoffice networks. 43/
42/
Thus, even if the number of actual minutes traversing a given LEC’s common
transmission circuits is below 9000 minutes per month, the optimal number, using
an ideal network design, may well be far higher. Sprint Comments at 27.
Similarly, the actual number and location of access tandem switches, within the
existing network topology of central offices, is irrelevant to a forward-looking cost
study. What matters is the most efficient number and location of access tandem
switches. WorldCom Comments at 52-53; Local Competition Order, ¶¶ 685, 690.
43/
Similarly, we do not object to cost-based rate elements for SONET-based
services based on dedicated transport capacities higher than DS3. But critically,
users of lower capacity transport should share the efficiencies, given that the
services they purchase are provided over the same SONET-based networks. And
before an ILEC makes the requisite competitive showing, the Commission must not
relax its existing requirement, adopted in the context of switched transport
expanded interconnection, that a specified threshold amount of collocation must be
36
Reply Comments of WorldCom, Inc.  CC Docket Nos. 96-262 et al.  February 14, 1997
4. There is no justification for loading different amounts of overheads
or common costs on different transport services. The CompTel court reversed and
remanded the Transport decision regarding tandem switching in large part because
it could discern no rational basis for the different allocation of overhead loadings to
different transport services. No such rational basis exists. 44/ Whether the cost
studies utilize the price cap new services test methodology (which establishes rates
based on forward looking “direct costs” plus “a reasonable share of overhead
loadings”) or a TSLRIC or TELRIC methodology (which establishes rates based on
forward looking “long run incremental costs” plus “a reasonable share of joint and
common costs”) 45/ -- and we believe that the difference between these
forward-looking methodologies, done correctly, may be somewhat less than meets
the eye -- it is critical that an identical proportion of “overhead loadings” or “joint
and common costs” be added to the direct cost base for all transport services. In
light of the CompTel remand, the Commission simply has no other option.
(..???????????)
in use before an ILEC may offer discounted offerings for capacity volumes greater
than DS3, and that such discounted offerings must be cost-justified. CITE.
44/
A differential based on the greater degree of competition for high capacity
dedicated transport certainly would not satisfy a standard of reasoned
decisionmaking. Local Exchange Carriers’ Rates, Terms, and Conditions for
Expanded Interconnection Through Virtual Collocation for Special Access and
Switched Transport, CC Docket No. 94-97, Phase I, 10 FCC Rcd 6375 (1995) (inter
alia, rejecting ILECs’ argument that market conditions justified differential
overhead loadings). The point of cost-based ratemaking is to protect consumers
and to prevent discrimination. A “market-based” rationale for differential loadings
of overheads or common cost would basically be equivalent to pricing based on the
ILECs’ market power, rather than based on costs.
45/
Compare 47 C.F.R. § 61.49(g), (h), and (i) with 47 C.F.R. §§ 51.503, 51.505,
and 51.511.
37
Reply Comments of WorldCom, Inc.  CC Docket Nos. 96-262 et al.  February 14, 1997
5. Rates for usage-sensitive elements would have to take into account
peak usage. The Commission has correctly concluded that the costs of shared
facilities vary primarily based on usage during peak periods, rather than total
usage. 46/ With most network facilities, it is difficult to measure peak period
usage, since peaks occur at different times in different parts of the network, and
frequently shift. But with tandem-switched transport, this problem is less difficult:
peak demands are imposed by IXCs that depend primarily on dedicated transport,
but that use tandem-switched transport for overflow during peak periods. This
overflow usage practically defines the peaks for tandem-switched transport usage.
To be cost-based, a much higher proportion of the costs of both tandem switching
and common transport facilities would have to be recovered from overflow charges,
rather than from the charges imposed on regular “base load” users of
tandem-switched transport.
6. Rates based on forward-looking costs will not be revenue neutral to
the ILECs, and should not provide for ILEC recovery of residual costs. We will not
reiterate our arguments on this central point here. But the point is just as
applicable in the specific context of a cost-based re-initialization of transport rates
as it is more generally.
In conclusion, WorldCom reiterates its position that the Commission
need not re-open any of the non-remanded issues decided in the Transport
proceeding. But if the Commission accedes to the ILECs’ calls to do so, then it
must decide those issues in a rational manner, consistent with its recent decisions
regarding how rates should be derived based on forward-looking costs, as described
above.
46/
Local Competition Order, ¶ 755.
38
Reply Comments of WorldCom, Inc.  CC Docket Nos. 96-262 et al.  February 14, 1997
D.
ILECs Should Not Be Allowed to Double Recover Their Shared SS7
Costs While Reaping the Benefits of Free IXC SS7 Services.
[Notice, Section III.F.]
In WorldCom’s initial comments, we argued that the ILECs should not
be permitted to charge interconnecting IXCs for the use of their common channel
signalling system 7 (“SS7”) networks. 47/ Certain aspects of our proposal need to
be clarified. First, we do not mean that there should be no charge for SS7-related
facilities that are dedicated to the use of particular IXCs. WorldCom has no
objection to reasonably cost-based rates for dedicated network access lines
(“DNALs”) provided to access customers in the context of SS7 networks -- for which
ILECs are already charging IXCs. 48/ Rather, our argument goes to new charges
to IXCs for the shared costs of SS7 networks. Second, WorldCom has no objection
to cost-based rates for ILECs’ offering of SS7 (both dedicated and shared
components) as an unbundled network element. Carriers purchasing unbundled
elements from the ILECs may well need to use the ILECs’ SS7 networks to provide
their own services, and should be able to purchase the use of such networks as an
unbundled element. 49/
Instead, WorldCom’s contention is that when telecommunications
carriers with their own separate network facilities, including SS7 networks,
interconnect with one another, those carriers should not charge one another for the
use of those SS7 networks, which have shared costs. The same principle should
apply whether the carriers are two interconnected facilities-based LECs operating
in the same service area, or an IXC interconnecting with a LEC.
47/
48/
49/
WorldCom Comments at 56-59.
47 C.F.R. § 69.125.
47 C.F.R. §§ 51.319(e), 51.509(f).
39
Reply Comments of WorldCom, Inc.  CC Docket Nos. 96-262 et al.  February 14, 1997
The total shared costs of SS7 networks are relatively low. 50/
Moreover, the administrative and transaction costs of implementing a billing
arrangement for the shared costs of SS7 are significant:
several ILECs in this
proceeding, in effect, conceded that the high costs of the measurement and billing
facilities necessary to implement the SS7 rate structure adopted by Ameritech and
proposed in the Notice would not be justified by the benefits of that rate
structure. 51/ And the traffic flows between ILECs and almost all IXCs are
roughly balanced (i.e., the amount of originating and terminating traffic is roughly
equal). These are precisely the circumstances under which the Commission has
found that a “bill-and-keep” arrangement -- “compensation ‘in-kind’ in the form of
access to the other carrier’s network” -- could advance the public interest. 52/
Moreover, a mandated “bill-and-keep” arrangement makes particular
sense where, as here, each of the interconnected carriers is able to, and does,
recover the relevant costs from its own end users. In particular, ILECs can, and
do, recover the costs of their SS7 networks (and much, much more) from their end
users through charges for SS7-based vertical services. In turn, IXCs have
(somewhat more limited) opportunities to earn revenues from service offerings that
use their SS7 networks. In these circumstances, neither ILECs nor IXCs should be
allowed to impose charges on one another for the use of shared SS7 network
facilities. Such charges would amount to double recovery.
50/
See USTA Comments, Attachment 11 (total industry costs of SS7 included in
TIC estimated at $58.7million).
51/
See, e.g., Bell Atlantic/NYNEX Comments at 40 and n. 95.
52/
See Local Competition Order, ¶¶ 1112-13, 1116; cf. 47 U.S.C.
§ 252(d)(2)(B)(i). In particular, there is no risk, in this context, that cost-free
termination would distort carriers’ incentives and encourage them to seek
customers that primarily originate traffic. Local Competition Order, ¶ 1112.
Termination in the context of ILEC-IXC interconnection would not be free; under
WorldCom’s proposal, only the SS7 component would be free of charge.
40
Reply Comments of WorldCom, Inc.  CC Docket Nos. 96-262 et al.  February 14, 1997
E.
WorldCom Would Not Object to A Pro-Competitive Restructure of
the Price Cap Baskets and Service Categories.
[Notice, Section V.C.2]
Several of the ILECs propose major modifications to the existing
structure of price cap baskets and service categories. In particular, several of them
propose replacing the current four baskets and approximately two dozen service
categories and subcategories with one or two baskets and a handful of service
categories. 53/ WorldCom has long been concerned that the price cap system does
not contain adequate controls on potential unreasonable discrimination by the
ILECs. 54/ This remains a serious problem, particularly while local competition is
still developing. That said, we would not object in principle to a simplification of
the existing price cap structure, particularly some of the duplicative, nested
baskets, service categories, and subcategories, once the requisite competitive
showing is made.
53/
See, e.g., USTA Comments at 50-55; Southwestern Bell Comments at 32-34.
54/
In particular, the Commission must recognize that price caps cannot control
the discrimination that would result from ILEC offerings with prices specific to
individual customers, or inherent customer-specific pricing through volume
discounts for which only one access customer can qualify. For a more detailed
discussion of the limitations of price caps in the access context, see LDDS
WorldCom’s Comments in CC Docket No. 94-1, Price Cap Performance Review for
Local Exchange Carriers (filed Dec. 11, 1995). See also Response to LDDS
Communication, Inc. to January 18, 1995 USTA Ex Parte Filing in Docket No. 94-1
(filed Feb. 8, 1995).
41
Reply Comments of WorldCom, Inc.  CC Docket Nos. 96-262 et al.  February 14, 1997
The ILEC proposals, however, go way too far. The current price cap
structure contains certain absolutely critical protections that must be retained.
First, the division of trunking services (special access and transport) into separate
DS3, DS1, voice grade, and tandem-switched service categories is the only
protection left against the possibility of anti-competitive shifts of revenues between
these services. The Commission found in the original LEC price cap order, and
reconfirmed several times in the Transport proceeding, that separate price cap
treatment was necessary “in order to prevent the LECs from offsetting lower rates
for services subject to more competition with higher rates for less competitive
services.” 55/ For the same reasons, if the Commission adopts WorldCom’s
proposal to re-initialize terminating local switching usage rates based on
forward-looking cost and to recover the remaining revenues through originating
local switching usage rates, these two rates should be placed in separate service
categories.
Second, significantly more competitive services, such as interexchange
service and common carrier video dialtone-type offerings, must be regulated
separately from access services that are part of the ILECs’ basic local exchange
monopoly. Including all these services in the same price cap basket, as proposed by
USTA and others, would enable incumbent LECs to reduce prices for interexchange
and video offerings -- possibly below cost (given the removal of service category)
lower bands -- and offset this with higher rates for access services. This would
result in the most anti-competitive of cross-subsidies. The regulation of ILECs’
interexchange and video offerings must be kept separate from the price cap
regulation of access services.
55/
Transport Rate Structure and Pricing, Third Memorandum Opinion & Order
on Reconsideration, 10 FCC Rcd 3030, 3068, ¶ 76 (1994).
42
Reply Comments of WorldCom, Inc.  CC Docket Nos. 96-262 et al.  February 14, 1997
Third, simplification of the price cap system is a desirable regulatory
change from the ILECs’ point of view, and should be used as a “carrot” rather than
squandered. As with other forms of pricing flexibility the Commission should defer
any such changes until ILECs have demonstrated progress toward competition,
either based on the Phase I competitive checklist or the thresholds for Phase II (or
an intermediate phase).
That said, at the appropriate point in time for each ILEC, WorldCom
would not object to the creation of a single price cap basket for that ILEC’s “network
services,” with the following nine separate service categories:
(4)flat rate charges to users or carriers (including the SLC, any flat rate charge to
carriers recovering subscriber loop costs, and the charge for line-side
local switch ports);
(5)originating local switching usage charges;
(6)terminating local switching usage charges;
(7)data base and information;
(8)tandem-switched transport (transmission and switching);
(9)voice grade special access and dedicated transport;
(10)DS1 special access and dedicated transport;
(11)DS3 and above special access and dedicated transport; and
(12)the TIC, pending elimination of that element.
43
Reply Comments of WorldCom, Inc.  CC Docket Nos. 96-262 et al.  February 14, 1997
The Commission should not increase the upper bands from the current levels to
USTA’s proposed 10 percent for most of these service categories, which would
greatly expand the ILECs’ ability to raise rate levels for particular service
categories (offset by reductions in other categories), without a substantial showing
that competition has advanced to the extent that such rate increases are unlikely.
Nor should the existing zone density pricing subcategories be replaced with a
broader form of geographic deaveraging without a fairly substantial competitive
showing. Broader geographic deaveraging authority (beyond the existing density
pricing zone system) would give the ILECs substantially more pricing freedom than
they now have, and would therefore be a valuable “carrot” to help induce greater
ILEC cooperation with local competition prerequisites.
(9)
CONCLUSION
As the Commission moves forward to reform its access rules, it must do
all that it can to promote the local competition that provides the only means to
bring market pressures to current access rates. At the same time, the Commission
should deny the ILECs any premature pricing flexibility that would give them a
“hunting license” to block incipient competition wherever it might occur. And the
Commission should preserve the ability to mandate broader access rate prescription
at a later date if the promise of the 1996 Act is never met. Until and unless today’s
44
Reply Comments of WorldCom, Inc.  CC Docket Nos. 96-262 et al.  February 14, 1997
access customers have a reasonable opportunity to supply their own access, they
will remain captive to the ILECs, and the ILEC access bottleneck will continue
unabated.
Respectfully submitted,
WORLDCOM, INC.
Catherine R. Sloan
David Porter
Richard L. Fruchterman, III
Richard S. Whitt
WORLDCOM, INC.
1120 Connecticut Avenue, NW
Washington, DC 20036-3902
(202) 776-1550
Richard J. Heitmann
WORLDCOM, INC.
515 East Amite
Jackson, MS 39201-2702
(601) 360-8970
Alex J. Harris
33 Whitehill Street
15th Floor
New York, NY 10004
(212) 843-3051
February 14, 1997
45
By:
Peter A. Rohrbach
David L. Sieradzki
HOGAN & HARTSON L.L.P.
555 13th Street, NW
Washington, D.C. 20004-1109
(202) 637-5600
Reply Comments of WorldCom, Inc.  CC Docket Nos. 96-262 et al.  February 14, 1997
TABLE OF CONTENTS
Page
SUMMARY....................................................................................................... i
INTRODUCTION ............................................................................................ 1
I.
THE COMMISSION SHOULD CONSIDER A STAGED APPROACH TO
RESOLVING THE ISSUES IN THIS PROCEEDING. ............................ 5
II. THE COMMISSION SHOULD RECOGNIZE THE INCUMBENT LECS’ ATTEMPT
TO “HAVE THEIR CAKE AND EAT IT TOO” FOR WHAT IT IS [Notice, Sections I, III.E,
IV, V, and VII] ................................................................................................ 8
A. The ILECs’ Simultaneous Arguments for Deregulation and Revenue
Guarantees are Mutually Contradictory .................................................. 8
B. The Commission Should Not Heed the ILECs’ Scare Tactics and Red Herrings
12
C. A “Reasonable Opportunity” for Recovery Does Not Equate to An Absolute
Guarantee; and the ILECs Depreciation Claims Are Bogus. .................. 16
D. The ILECs Must Fully Implement the Prerequisites for Local Competition In
Order to Earn Greater Pricing Flexibility. .............................................. 19
III. THE COMMISSION SHOULD REJECT INCUMBENT LEC REQUESTS FOR
ANTI-COMPETITIVE ACCESS RULES.................................................. 20
A. Access Charges Must Not be Applied to Unbundled Network Elements.[Notice,
Section II-B] .................................................................................................. 20
B. Special Access Should Not Be Deregulated Prematurely.[Notice, Sections III.D.2
and IV.B.1] .................................................................................................... 23
C. The Commission Should Not Revisit the Transport Rate Structure and Pricing
Rules -- But If It Does, It Must Treat Common and Dedicated Transport
Consistently.[Notice, Sections III.D. and III.E.] ............................................... 26
D. ILECs Should Not Be Allowed to Double Recover Their Shared SS7 Costs
While Reaping the Benefits of Free IXC SS7 Services.[Notice, Section III.F.]39
E. WorldCom Would Not Object to A Pro-Competitive Restructure of the Price
Cap Baskets and Service Categories.[Notice, Section V.C.2] ........................ 41
iv
Reply Comments of WorldCom, Inc.  CC Docket Nos. 96-262 et al.  February 14, 1997
CONCLUSION ................................................................................................ 45
ATTACHMENT A
v