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
Usage of the Public Switched
Network by Information Service
and Internet Access Providers
)
)
)
CC Docket No. 96-262
)
)
)
)
)
)
)
CC Docket No. 94-1
CC Docket No. 91-213
CC Docket No. 96-263
)
REPLY COMMENTS OF THE ASSOCIATION
FOR LOCAL TELECOMMUNICATIONS SERVICES
Richard J. Metzger
Emily M. Williams
Association for Local
Telecommunications Services
1200 19th Street, N.W.
Suite 560
Washington, D.C. 20036
(202) 466-3046
February 14, 1997
- 2 -
SUMMARY
The current brawl between the interexchange carriers (“IXCs”) and the incumbent local
exchange carriers (“ILECs”) over the level and structure of ILEC access charges resembles a prize
fight in which the fighters have thrown so many blows they can no longer defend themselves. The
Commission should step in now to deliver a standing ten-count on each of these heavyweights, and
declare this bout a non-contest.
The ILECs certainly show signs of having taken too many punches to the head in their
proposed “market-based” plans for access charge deregulation. NYNEX and USTA, for example,
just fourteen months ago in an earlier phase of this proceeding proposed
market-based plans that would have linked the extent of facilities-based competition to
highly-targeted deregulation of specific ILEC access services (though not targeted accurately enough
in ALTS’s opinion). They defended those plans as paralleling the Commission’s streamlining of
regulation for AT&T based on the emergence of facilities-based regulation in long distance services
(see, e.g., USTA’s December 11, 1995, comments in this proceeding at 38). But the current
market-based plans of USTA and NYNEX throw theory and market facts out the window, and
propose to streamline ILEC access charges on a statewide basis upon the mere execution of an
interconnection agreement (see USTA’s Attachment 8).
-i-
The lack of theoretical foundation for the ILECs’ current approach is obvious. The mere
signing of an agreement certainly means nothing by itself, inasmuch as the CLEC might change its
business plans without ever putting competitive facilities in place. Indeed, even the successful
implementation of a single interconnection agreement would provide little proof of the existence of
effective access competition because, given the current stay of the Commission’s rules implementing
the “most favored nation” provisions of Section 252(i) of the Telecommunications Act of 1996,
there is no assurance that subsequent new entrants could ever avail themselves of its terms.
Finally -- and quite importantly -- NYNEX and USTA’s reliance on existing interconnection
process and procedures is fatally flawed because NYNEX and USTA are doing their best to destroy
that process at the Eighth Circuit. Both NYNEX and USTA are trying to deny new entrants any
legal right to unbundled elements such as OSS -- unbundled elements which USTA’s principal
affiants Schmalensee and Tayor expressly rely upon in endorsing USTA’s plan -- or any right to
purchase unbundled elements at TELRIC levels (compare NYNEX’s claim in its current comments
that the states are using TELRIC prices with NYNEX’s attack on TELRIC at the Eighth Circuit in
general, and in particular with the assertion of counsel for NYNEX and other large LECs at the
recent oral argument that states are not applying TELRIC).
The IXCs are also swinging from their heels and hitting nothing but air. AT&T is reduced
to arguing, for example, that the proposed prescriptive approach (which is old fashioned regulation
under a new label) is needed to deprive the ILECs of a “war chest” for anti-competitive projects
(AT&T comments at 13-17). But even a $2B or $4B annual reduction in access charges is still
dwarfed by the ILECs’ $90B in annual revenues for their regulated activities alone. However
regrettable it might be, access charge reductions will not dent these companies’ ability to fund any
anti-competitive activity they please.
- ii -
Nor does MCI come closer to landing a blow when it argues that access charges should be
flash cut to TELRIC levels upon RBOC entry into in-region long distance service (MCI comments
at 17). RBOCs have no credible ability to eliminate competition in long-distance markets by means
of inflated access charges. And even if they did, and were to succeed in destroying the current long
distance competitors, the facilities of those bankrupted companies would remain in place, thereby
fully constraining RBOC long-distance pricing.1 The IXCs have failed to show any reason why
their prescriptive approach need be adopted.
Indeed, the Commission adopted this particular economic analysis in defending its
decision to eliminate the ILECs’ lower Service Band Indices (“SBIs”) in the present Third
Order and Further NPRM (at ¶ 307).
1
- iii -
Once the IXCs and ILECs are counted out, only one approach to ILEC access charge
deregulation remains standing: the aggressive removal of all remaining market barriers to effective
access competition -- in particular, the prompt completion of the pending Expanded
Interconnection proceeding. This is what the fight is really about, and ALTS urges the Commission
to climb into the ring and do its part.
- iv -
TABLE OF CONTENTS
SUMMARY .................................................... i
I.THE NPRM’s SO-CALLED “MARKET-BASED APPROACH” SHOULD
BE REJECTED IF IT IS NOT SUBSTANTIALLY REVISED......... 1
A.The So-Called “Market-Based” Approach Marks
a Significant and Illogical Step Backwards
from Market-Based Plans Previously Offered
by the ILECs Themselves........................... 2
B.The ILECs’ Market-Based Approaches Are
Grounded on the False Assumption
that Access Competition Is
Geographically Homogenous......................... 9
C.Actual Market-Based Competition
(as Opposed to the NPRM’s Version)
Applies with Equal Effect to Terminating
and Originating Access............................ 10
D.There Is No Reason Why Facilities-Based
Competition Will Necessarily
Follow Resale-Based Competition................... 12
E. The NPRM’s Proposed “Market-Based”
Approach Suffers from
Numerous Specific Errors.......................... 12
II.NO FOUNDATION EXISTS FOR THE
PRESCRIPTIVE APPROACH ADVOCATED BY THE IXCs............ 15
A.The Fact that “A Minute-Is-A-Minute”
Does Not Mandate a Prescriptive Approach.......... 16
B.Reductions in ILEC Access Charges Would
Have No Appreciable Effect on the
ILECs’ Ability to Finance
Anti-Competitive Initiatives...................... 17
C.There Is No Logical Reason to
Reduce RBOC Access Charges Upon
Their Entry into In-Region
Long Distance..................................... 17
D.Miscellaneous Claims Raised in Defense of a Prescriptive Approach
by the IXCs Lack Merit...... 19
-v-
III.RATE STRUCTURE ISSUES.................................. 21
A. The Lack of Tandem Competition
Is the Result of Attempts to
Handicap Long Distance
Competition....................................... 21
B.In Adopting New Mechanisms for Recovering
NTS Costs that Remain After SLC
Revenues, the Commission Should Avoid
Bulk Billing Mechanisms, Nor
Should It Permit Deaveraging of
Any NTS Recovery, Including SLCs.................. 23
C.The Identifiable Cost Misallocations
in the TIC Should Be Corrected, and
the Remaining TIC Should Be
Eliminated Via Tandem Competition................. 23
D.Miscellaneous Structural Issues................... 24
IV.CONSTITUTIONAL TAKINGS ISSUES.......................... 26
CONCLUSION.................................................. 27
- vi -
Before the
FEDERAL COMMUNICATIONS COMMISSION
Washington, D.C. 20554
In the Matter of
)
Access Charge Reform
)
)
CC Docket No. 96-262
)
Price Cap Performance Review
For Local Exchange Carriers
)
CC Docket No. 94-1
)
Transport Rate Structure
and Pricing
)
)
Usage of the Public Switched
Network by Information Service
and Internet Access Providers
)
)
)
)
CC Docket No. 91-213
)
CC Docket No. 96-263
REPLY COMMENTS OF THE ASSOCIATION
FOR LOCAL TELECOMMUNICATIONS SERVICES
Pursuant to the Notice of Proposed Rulemaking, Third Report and Order, and Notice of
Inquiry released December 24, 1996, in the above dockets (“Access Charge Reform NPRM”), the
Association for Local Telecommunications Services ("ALTS") hereby replies to the initial comments
on the Commission’s proposed reform of its current regulation of interstate access charges.2
I.THE NPRM’s SO-CALLED “MARKET-BASED APPROACH” SHOULD
BE REJECTED IF IT IS NOT SUBSTANTIALLY REVISED.
Many of the parties filing initial comments in this proceeding
found immense defects in the Access Charge Reform NPRM’s so-called
ALTS is the national trade association of more than thirty
facilities-based providers of competitive access and local
telecommunications services.
2
-1-
“market-based” approach to access charge reform: “Giving ILECs
virtually unlimited pricing flexibility, as the
Commission has proposed for Phase One, would empower ILECs to lock
up favored access customers and advantage their own long distance
operations ... (Sprint at 41); “But, regarding the market-based
approach for access reform at this time, CPI feels compelled to point
out the emperor is not fully clothed” (CPI at 9; see also AT&T at
43; MCI at 35).
As shown below, not even the ILECs are able to muster
a passable rationale for the Access Charge Reform NPRM’s market-based
approach.
A.The So-Called “Market-Based” Approach Marks a Significant and
Illogical Step Backwards from Market-Based Plans Previously
Offered by the ILECs Themselves.
“Market-based” approaches to access charge deregulation are
nothing new.
In its December 11, 1995, comments in response to the
Second Price Cap FNPRM, NYNEX offered a detailed version of such
a plan (NYNEX Comments at 5-7):
“NYNEX proposes that the Commission create three regulatory
frameworks in Phase 1 of the Commission’s proposal, during which
the LEC’s rates would still be under the price cap rules.
Broadly speaking, Framework I-A would be the baseline condition,
where there is essentially no competitive presence or market
entry. Framework I-B would apply where barriers to entry had
been removed throughout most of the LEC’s operating area, and
where a competitor had taken advantage of this situation to
begin operating in the region. Framework I-C would apply when
the barriers to entry had been completely removed throughout
the LECs’ operating region, and when competition was present
throughout major segments of the LEC’s market.”
*
*
*
“In identifying whether competitors had developed a presence in a
market, the Commission would examine data showing presence in
-2-
ALTS - February 14, 1997 - ¶¶ 140-217
the area served by a LEC wire center. A competitive presence
within a wire center could be indicated by such factors as:
a competitor had collocated in the wire center; a competitor
had provided fiber facilities in office buildings within the
area served by the wire center; or a competitor had customers
in zip codes within the area served by the wire center.”
(Emphasis supplied.)
Under NYNEX’s proposal, significant deaveraging and ICB
authority would not occur even for special access services until
Phase I-C (id. at 7).
NYNEX defended its proposal as providing
incentives that would help insure ILEC compliance with
pro-competitive requirements (id. at 4): “By establishing a
regulatory model that is adaptive to the transition to actual
competition, the Commission would provide incentives for the LECs
to promote competition, and it would give potential competitors a
predictable environment in which to make their business plans”
(emphasis supplied).
Having adopted so statesmanlike a position (though one with
which ALTS differed in important respects), one might have expected
NYNEX’s current comments to again emphasize the importance of
providing pro-competitive “incentives” to ILECs while also giving
competitors “predictability.”
makes!
What a difference a tentative merger
In its current joint comments with Bell Atlantic, NYNEX now
asserts that (NYNEX-BA Comments at 44):
“This [original NYNEX] proposal was based on the assumption that
competition in the local telephone market would be primarily
facilities-based. Since it takes time for new entrants to
deploy facilities, the NYNEX proposal recognized two distinct
phases during the start of local competition. However, the
Commission’s decision to allow competitors to purchase
unbundled network elements from the incumbent LEC on the basis
of unsupported cost will allow new entrants to provide service
- 3 -
ALTS - February 14, 1997 - ¶¶
140-217
throughout the area served by the LEC without building their
own facilities and without being subject to the uneconomic Part
69 access charge structure.* This means that the conditions
for Phases I-B and I-C in the NYNEX plan will be met
simultaneously as soon as a LEC has a state approved agreement
in place.
___________
*Indeed, competitors using unbundled elements will be able to
purchase these elements at rates that are below LECs’ actual costs.
Although the pricing provisions of the Commission’s interconnection
order have been stayed, ’most of the states are using a
forward-looking methodology, similar if not identical to the FCC’s
choice of TELRIC.’ A. Kovacs and K. Burns.” (Emphasis supplied.)
This is a world-class flip-flop, and it deserves attention at
both the logical and factual levels.
First, NYNEX simply abandons
without explanation the emphatic statement it made just fourteen
months ago about the need to create incentives in order to encourage
ILECs to perform their pro-competitive duties.
Apparently NYNEX
now believes such concerns have become “inoperative.”
Second, NYNEX simply turns a blind eye to the fact that Phase
I-C under its former plan “would apply when the barriers to entry
had been completely removed throughout the LECs’ operating region,
and when competition was present throughout major segments of the
LEC’s market” (December 11, 1995, NYNEX Comments at 5; emphasis
supplied).
Quite obviously, the mere signing of an interconnection
agreement tells nothing about the presence of competition “throughout
major segments of the LEC’s market.”
Indeed, NYNEX’s current
comments admit that: “it takes time for new entrants to deploy
facilities,” so NYNEX’s new stance is tantamount to asserting that
competition via unbundled network elements will be both instantaneous
and entirely sufficient to provide effective competition in access
- 4 -
ALTS - February 14, 1997 - ¶¶
markets.
140-217
This radical lurch from reliance on gradual
facilities-based entry to immediate entry via unbundled network
elements is unsupported by any facts, or by the adoption of the
Telecommunications Act of 1996.
Third, NYNEX’s assertion that competitive local exchange
companies (“CLECs”) currently enjoy automatic access to network
elements at TELRIC costs is staggeringly disingenuous, as well as
factually inconsistent with representations made to the Eighth
Circuit just a few weeks ago.
It is disingenuous because NYNEX is
among the many ILECs seeking to have the TELRIC standard set aside
by the Eighth Circuit (see NYNEX Brief filed November 18, 1996, at
6-8: “ ... TELRIC methodology is contrary to the plain meaning of
the 1996 Act,” also adopting the “Large-LEC” brief).
It is factually
inconsistent because at the January 17th oral argument at the Eighth
Circuit counsel for the Large LECs (including NYNEX) was asked whether
there are states which do not apply TELRIC, and his answer was “Yes,
there are” (Transcript at 19, line 19).
NYNEX’s inability to sweep its own former plan under the rug
in favor of the Access Charge Reform NPRM’s “market-based approach”
thus amply demonstrates the latter is fundamentally flawed.
Indeed,
not even USTA endorses the NPRM’s proposal (USTA at 23; Affiants
Sidak and Spulber at 15): “Paradoxically, the Commission’s
market-based approach imposes more regulation and less reliance on
the market.”
But USTA’s unwillingness to adopt the NPRM’s “market-based”
- 5 -
ALTS - February 14, 1997 - ¶¶
140-217
proposal hardly means that USTA has chosen to stay with its own earlier
recommendation.
USTA’s market-based plan as proposed in its
December 11, 1995, comments provided that:
“Streamlined regulation should be available when the relevant market
is competitive as determined by supply responsiveness, demand
responsiveness and, in certain cases, the presence of a
certified, facilities based local exchange competitor. These
principles are virtually identical to those used by the
Commission to streamline regulation of AT&T and, ultimately,
to declare AT&T to be nondominant.” (USTA Comments of December
11, 1995, at 38; emphasis supplied; footnote omitted).
But USTA’s present plan totally abandons the “presence of a
certified, facilities based local exchange competitor” required for
the streamlining of AT&T.
Attachment 8 to USTA’s current comments
plainly shows that streamlining occurs for many access services upon
the mere execution of an interconnection agreement regardless of
whether there is any actual competition in place (USTA Attachment
8).
Thus, USTA and BA-NYNEX’s eagerness to abandon their original
proposed market-based plans -- plans which they portrayed as
paralleling the Commission’s streamlining of the regulation of AT&T
-- fully demonstrates the economic irrationality of the Access Charge
Reform NPRM’s so-called market-based proposal.
And even if USTA
or NYNEX could provide any account for so radical a shift in their
positions (which they cannot), neither NYNEX nor USTA are entitled
here to rely on the existence of interconnection agreements with
access competitors making available unbundled network elements such
as OSS, and prices set at TELRIC levels, as a basis for their new
- 6 -
ALTS - February 14, 1997 - ¶¶
140-217
proposals because both USTA and NYNEX are currently fighting to stop
CLECs from gaining access to unbundled elements at TELRIC prices,
or from gaining access to OSS at all!3
There is no question that NYNEX and USTA’s “new” plans
rely on the availability of network elements such as OSS, and on
the availability of TELRIC prices. USTA’s affiants Schmalensee and
Taylor expressly endorse USTA’s plan based on the “fact” that:
“Competitors will be able to electronically bond with the ILEC’s
preordering, ordering, provisioning, maintenance and repair and
billing systems” (Schmalensee and Taylor Affidavit at 10).
Despite
identifying these items as critical to effective competition, nowhere
does USTA assert that CLECs are actually obtaining such support
currently from the ILECs.
USTA and the ILECs have every legal right to fight on endlessly
in an effort to stop CLECs from gaining access to the network elements
and the TELRIC pricing that are needed for effective competition.
What they cannot do, of course, is to seek deregulation here of
their access charges predicated on the lifting of certain entry
3
USTA joined the rest of the ILEC industry in fighting to deny CLECs any
access to unbundled network elements such as OSS in the Eighth Circuit (see USTA Brief
at n. 7, joining the Large LEC Brief, and the oral argument of Maureen Mahoney (transcript
at 42, line 11: “I’d like to emphasize at the outset that we do join in the arguments
of the large LECs and midsize LECs that are set forth in the briefs here ...”; Large LEC
Brief at 50: “OSS systems are not facilities or equipment used in the routing or transmission
of telephone calls any more than repair trucks are ... Requiring an incumbent to make
these systems available to competitors has nothing to do with unbundling the pieces of
the physical network that are actually used to deliver calls;” and at 32: “Each of the
individual pricing formulas developed by the FCC -- for interconnection and unbundled
elements, for services, and for the transport and termination of traffic -- violates the
plain terms of the 1996 Act”).
- 7 -
ALTS - February 14, 1997 - ¶¶
140-217
barriers identified by their own affiants at the very time USTA and
NYNEX are fighting to maintain those barriers.
B.The ILECs’ Market-Based Approaches Are Grounded on
the False Assumption that Access Competition Is
Geographically Homogenous.
The ILECs’ efforts to defend their own market-based approaches,
as well as the approach of the Access Charge Reform NPRM, employ
the simplistic assumption that access competition will emerge in
a uniform fashion on a statewide basis.
But -- aside from
contradicting the assumption of heterogenous competition reflected
in NYNEX and USTA’s earlier plans -- this assumption is flatly
contradicted in the current record.
For example, USTA asserts that:
“high capacity special access service are generally concentrated
in high volume, dense markets” (USTA at 43).
True, competition
exists to some extent in various high volume, dense markets.
But
the ILECs themselves acknowledge that outside the “high volume, dense
markets” referenced by USTA, the costs of special services can be
five times as much as in dense areas (Access Charge Reform NPRM at ¶ 107,
citing SWB’s Comments in CC Docket No. 91-213, filed February 1,
1993, at 39-45).
The fact that USTA’s demonstrations of
“competition” are all anecdotal, and based on narrow geographic
areas, plainly shows that its request for statewide deregulation
is unwarranted.
C.Actual Market-Based Competition (as Opposed to the
NPRM’s Version) Applies with Equal Effect to
Terminating and Originating Access.
A well-founded market-based approach (i.e., an approach more
- 8 -
ALTS - February 14, 1997 - ¶¶
140-217
resembling USTA and NYNEX’s proposals of fourteen months ago than
their current recommendations) can and will work for terminating
access as well as for originating access.
ALTS demonstrated in the
affidavit of Brenner and Woodbury attached to its initial comments
that the “multi-bottleneck” hypothesis being pushed by some IXCs
-- the claim that competition cannot possibly work for terminating
access even where competitive access facilities are available -is patently oxymoronic.
Sadly, IXCs which should know better are
now parroting this nonsense (see, e.g., CompTel at 14-16, 18; MCI
at 35).
For example, the affidavit of Baumol, Ordover, and Willig
attached to AT&T’s initial comments asserts that (at ¶ 37):
“In assessing the extent to which competition can constrain exchange
access rates, the Commission should also take into account the
fact that a customer’s choice of an access provider has an
element of ’externality’ associated with it. This is so because
a customer originating a call pays for terminating access, yet
cannot directly affect the choice of the terminating carrier
at the called party’s end. This is so because a customer
originating a call pays for terminating access, yet cannot
directly affect the choice of the terminating carrier at the
called party’s end.
As a result, the originating customer
has no direct way of inducing the receiving customer to select
an efficiently inexpensive terminating carrier.” (Emphasis
supplied.)
But it is unimportant whether an originating customer lacks
a “direct way of inducing” the selection of an inexpensive terminating
access provider (as these distinguished economists fully understand)
because the originating customer has a indirect sledgehammer
available.
businesses.
Current competitive access customers are almost all
Assume a “high-cost terminating CLEC” exists.
If IXCs
respond to such a high-cost terminating CLEC by surcharging calls
- 9 -
ALTS - February 14, 1997 - ¶¶
140-217
to that carrier, or else by refusing to place such calls in the first
place (and neither AT&T nor any other IXC disclaims its ability or
willingness to pursue such tactics), the business end user served
by such a high cost terminating CLEC would start losing business
calls and business customers, and very quickly would become very
unhappy with its competitive access provider.
The notion of AT&T as a helpless giant in the thrall of greedy
high cost terminating CLECs would be amusing if this myth were not
being trumpeted in an important NPRM.
how to manage this sort of issue.
AT&T is well familiar with
When several states attempted
to impose taxes on interstate calls in the belief that state-specific
taxes would flow back and be averaged into AT&T’s general expenses,
and thus its general rates, AT&T quickly disciplined these sovereign
entities by imposing off-setting surcharges on all calls subject
to such taxes.4
AT&T and the entire IXC industry have recourse to
similar effective tactics in the highly unlikely event that any CLEC
were foolish enough to attempt to charge unreasonable terminating
access charges.
D.There Is No Reason Why Facilities-Based
Competition Will Necessarily Follow
Resale-Based Competition.
AT&T contends that facilities-based competition will not be
adequate to discipline ILEC access rates, arguing that: “ ... like
[unbundled network element]-based local competition,
facilities-based local competition is in most markets virtually
4
See FCC Factsheet, “Taxes and Other Charges on Your Telephone Bill,” March 1996.
- 10 -
ALTS - February 14, 1997 - ¶¶
nonexistent today.
140-217
And it is widely accepted that significant
facilities-based competition is more likely to follow, than precede,
resale and UNE-based entry.
That is because facilities-based
competition entails significantly more risk than other forms of
entry, and that risk can be reduced only by first establishing
customer relationships through less capital-intensive strategies”
(AT&T comments at 46-47).
But there is no reason why facilities-based competition must
necessarily follow resale competition.
AT&T of all folks should
remember that it was private microwave systems and MCI’s
facilities-based entry into the Chicago-St. Louis corridor that
kicked off competition in the long-distance industry.
Effective
long-distance resale followed facilities-based competition in
long-distance, not the other way around (see Breyer, Regulation and
Its Reform, 301-309 (1982)).
While neither facilities-based or
resale-based competition may be progressing as fast as the new
entrants might prefer, there would currently appear to more
facilities-based than resale-based local competition, not less.
AT&T may quickly discover the reason.
The answer, of course, is that the delaying tactics of the ILECs
have a even greater impact on resale-based competition than on
facilities-based competition (see, e.g., CompTel’s discussion of
the unavailability of “network platform” at 8-9).
ILEC
intransigence is not quite so critical a problem for facilities-based
providers, because they do not rely on an ILEC to provide them with
- 11 -
ALTS - February 14, 1997 - ¶¶
140-217
everything, and thus have less vulnerability.
E. The NPRM’s Proposed “Market-Based” Approach Suffers
from Numerous Specific Errors.
Several parties identified specific aspects of the
Access Charge Reform NPRM’s market based approach
deserving of mention.
“Excessive” ILEC Access Rates Do Not Unnecessarily Encourage
the ILECs to Resist Competition - The IXCs contend that any market
approach is deficient compared to the prescriptive approach because
excessive ILEC access charges encourage the ILEC to resist access
competition in any fashion possible (MCI comments at 37). The IXCs
are correct as a general proposition that access rates above cost
do add incrementally to the ILECs’ incentive to frustrate Section
251-252 process.
However, given the immense profitability of the
local markets that are also threatened by access entry, a powerful
incentive for ILEC resistance already exists and could not be cured
even if access charges were reduced to zero.
The Proposed Phase I Relief Is Unjustified and Unnecessary Several commenting parties have noted serious defects in the
particulars of the Phase I relief set out in the Access Charge Reform
NPRM “market-based” plan.
MCI correctly notes, for example, that
it confers premature pricing flexibility (MCI at 45): “Premature
pricing flexibility would permit the incumbent LEC to reduce access
charges selectively in order to deter new entrants, while continuing
to charge above-cost access charges in areas and for services where
there are no competitive forces.”
- 12 -
ALTS - February 14, 1997 - ¶¶
140-217
Furthermore, Phase I flexibility would likely produce little
movement toward efficient access pricing given the existing ILEC
access pricing flexibility remains unexhausted (MCI comments at
48-52).
Accordingly, the sole effect of Phase I’s pricing
flexibility would be to foster anti-competitive ILEC pricing (MCI
comments at 56).
There Is No Current Justification for the Deaveraging of
Switched Access, or for Volume and Term Discounts - MCI correctly
remarks that deaveraging of ILEC switched access rates makes little
sense in the absence of interconnection agreements providing the
constituent elements of switched access at deaveraged rates (MCI
comments at 57).
While facilities-based competitive switched access
provides some competition, it is not nearly ubiquitous to justify
ILEC switched access deaveraging in the total absence of deaveraged
switched access unbundled network elements.
On a similar point, both Sprint and MCI observe correctly that
no cost evidence exists to justify volume and term discounts for
access (Sprint comments at 44-45; MCI comments at 58).
In the absence
of established cost distinctions, the Commission’s discretion to
circumscribe the anti-discrimination provisions of the 1934 Act have
limits even if this were good policy, which it is not.
Changes that Must Be Made to Phase I If It Is Adopted - While
Phase I is entirely unnecessary for all the reasons set forth above,
there are changes which manifestly must be made if it were to be
- 13 -
ALTS - February 14, 1997 - ¶¶
adopted.
140-217
At the very least, ICB and contract pricing should not
be made part of Phase I (Sprint comments at 44).
Furthermore, a new fresh look must be required in Phase I if
the NPRM’s market-based approach used (MCI Comments at 59).
Finally, even if Phase I adopted, Phase II should be postponed
indefinitely pending review of actual experience under Phase I
(Sprint comments at 47).
II.NO FOUNDATION EXISTS FOR THE
PRESCRIPTIVE APPROACH ADVOCATED BY THE IXCs.
ALTS demonstrated in its initial comments that the Access Charge
Reform NPRM’s “prescriptive” approach was nothing more than
old-fashioned regulation dressed up in a new set of clothes.
ALTS
pointed out that it was precisely the inadequacies of regulation
in general -- and tactics like the “prescriptive” approach in
particular -- that had led Congress to rely on market forces in the
Telecommunications Act of 1996.
Given this fundamental reliance
on competition, and the incompleteness of many factors needed to
inject effective competition into access markets (such as the
currently incomplete Expanded Interconnection proceeding), it makes
little sense for the Commission now to be switching policy horses
mid-stream.
Indeed, as the Illinois Commerce Commission eloquently
states (ICC Comments at 24):
“The prescriptive approach would launch regulation on a slippery
slope of administratively burdensome micromanagement. The FCC
contemplates that each State commission may be required to both
evaluate TSLRIC studies and perform traditional embedded-cost
rate cases for each price cap incumbent LEC. The national
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ALTS - February 14, 1997 - ¶¶ 218-240
resources required for such an undertaking would be staggering.
Further, it is not clear that, even with all that effort,
regulators would arrive at better prices than would be obtained
in a market-based approach.”
As shown below, none of the initial comments succeed in showing
why the Commission should abandon sound competitive approaches to
deregulation (and these approaches do not include the NPRM’s
“market-based” proposal) in favor of a return to regulation.
A.The Fact that “A Minute-Is-A-Minute” Does Not
Mandate a Prescriptive Approach.
Several parties remark that the similarity of transport and
termination to terminating access somehow mandates a prescriptive
approach (see, e.g., AT&T at 12).
ALTS does not deny that transport
and termination resembles terminating access, but this by itself
does not require a prescriptive approach.
ILEC access rates will
indeed move closer to transport and termination levels with the
emergence of competition, so that minutes of ILEC terminating access
will eventually move to the level of transport and termination for
non-long distance traffic.
Nowhere do the IXCs contend that
disparities between transport and termination and terminating can
be eroded immediately, or even over the near term by any form of
arbitrage.
If there were any basis to the theory that the resemblance
between transport and termination and terminating access should
somehow drive Part 69 pricing, CompTel’s claim that the cost of
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ALTS - February 14, 1997 - ¶¶ 218-240
transport and termination is zero (CompTel at 19) would bear closer
examination.
The Commission has already rejected this particular
claim in its Local Competition Order by declining to mandate “bill
and keep” based on its belief that such costs do exist.
B.Reductions in ILEC Access Charges Would Have No
Appreciable Effect on the ILECs’ Ability to
Finance Anti-Competitive Initiatives.
Contrary to the assertion of several parties (see, e.g., AT&T
at 13-17; MCI at 13, 19), lowering ILEC cash flows through reductions
in ILEC access charges will have no meaningful affect on the ILECs’
ability to fund “bad deeds.”5
The “war chest” much feared by AT&T
(at 17) already exists because the ILECs have ample ability to raise
whatever funds they are likely to need, based on their AAA debt ratings
and their unquestioned ability to finance huge acquisitions.
However regrettable it may be that monopolists are well positioned
to finance anti-competitive activities, reductions in ILEC access
rates would not have any appreciable effect on that ability.
C.There Is No Logical Reason to Reduce RBOC Access Charges Upon
Their Entry into In-Region Long Distance.
The IXCs insist in their initial comments that RBOCs must be
made to flash cut their access charges to TELRIC levels upon their
5
Total Class A Incumbent LEC Revenues are $90.9B per year as of year end 1995 (Access
Charge Reform NPRM at Table 1.
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ALTS - February 14, 1997 - ¶¶ 218-240
entry into in-region long distance service (see MCI comments at 17).
But the level of Part 69 access charges has no logical connection
to RBOC entry into in-region long distance once the IXCs have full
access to forward-looking unbundled elements for origination and
termination of long distance traffic (see Sprint at 33: “Local entry
through the purchase of unbundled network elements and facilities
both will put economic pressure on ILECs, particularly as long as
non-cost based access charges continue to exist”; see also
Non-Accounting Safeguards of Section 271 and 272, ¶ 258).
Once the IXCs can obtain unbundled elements at forward-looking
costs for the purpose of originating and terminating long-distance
traffic, they cannot be disadvantaged in the long-distance markets
vis-a-vis the RBOCs (see AT&T at 16: “ ... [unbundled network
element]-based competitors can avoid excess access charges”).
Indeed, the checklist compliance required by Section 271 will
help accelerate effective access competition in states where the
RBOCs win approval, though it will not be adequate to insure such
competition by itself.
It would be totally counter-productive to
undercut access competition by flash cut reductions in ILEC access
rates in the very states where access competition would have the
most promise.
It would be particularly egregious to make such a
reduction out of a misplaced fear about the effect of such rates
on long-distance competition.
Robust, multiple facilities-based
long-distance networks are already in place, and these facilities
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ALTS - February 14, 1997 - ¶¶ 218-240
could not be torn out of the ground by RBOC entry even in the remote
event an RBOC were to succeed -- quite irrationally -- in driving
each of them into bankruptcy.
They would continue to be operated
by trustees in bankruptcy, and thus continue to provide long-distance
competition.
Elsewhere in the Access Charge Reform NPRM, the
Commission uses precisely this analysis to justify its decision to
eliminate the lower SBIs for the ILECs (at ¶ 305, citing Matsushita
Electric Industrial Co. v. Zenith Radio Corp., 475 U.S. 574 (1986)).
Quite obviously, this analytic “sauce” applies equally to the IXCs.
D.Miscellaneous Claims Raised in Defense of a Prescriptive
Approach by the IXCs Lack Merit.
Various assertions are made by the IXCs in defense of a
prescriptive approach.
However, none of these contentions are
persuasive.
Stand-Alone IXCs -- CompTel argues that unbundled network
elements fail to provide competition to ILEC access charges for
“stand-alone” IXCs -- i.e., those without local operations (CompTel
at 5-6).
But this makes no sense.
Once integrated IXCs have access
to unbundled network elements for origination and termination, there
is no question that they would no longer be dependent on the underlying
ILEC for access (see Sprint at 33).
And since multiple integrated
IXCs would be gaining access in this manner, there would be
competition among them to supply cheap access to “stand alone” IXCs.
Indeed, the IXCs would be hard pressed to argue now that the resale
of unbundled network elements would fail to provide adequate
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ALTS - February 14, 1997 - ¶¶ 218-240
competition given their general contentions about the efficacy of
resale in comparison to facilities-based competition.
“Inefficient CLEC Entry” -- MCI’s concern about “inefficient
entry in the access market” absent a prescriptive approach is also
profoundly puzzling.
Assuming for the sake of argument that Part
69 has the ability to lure competitive companies into “inefficient
entry” (an assumption which ALTS vehemently disputes), how could
prevention of that entry ever benefit an access consumer?
No doubt
some gas station owners could come to regret having moved to a street
corner across from a gas station that already exists.
But no motorist
has even regretted such an event, or has been hurt by any resulting
price competition.
It may well be that the investors in a competitive entity, or
in the ILEC it chooses to compete with, might well be harmed as a
result of an imprudent decision to enter a market.
But the Commission
does not exist to shelter investors from the consequences of
highly-specific investment decisions.
While the Commission needs
to provide predictability and fair competition in order to assure
adequate investor confidence, its ultimate concern must be consumer
welfare, and it is manifest that consumers always benefit from
competitive entry, no matter how imprudent any particular entry
decision proves to be.
Beyond MCI’s confusion of investor welfare with consumer
welfare, it is also mistaken in its belief that inflated Part 69
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ALTS - February 14, 1997 - ¶¶ 218-240
rates could somehow “lure” competitors into “inefficient” entry.
There is no theoretical basis for such a belief.
Robert Lucas won
the Nobel Prize in Economics two years ago for his work demonstrating
that the economic consequences of public policy cannot be kept
“secret” from rational private parties which possess adequate
incentives to discover the truth.
While Lucas’ work was directed
at the Keynesian theory of economic macromanagement through
governmental fiscal policy, it is just as true concerning the
Commission’s regulation of access rates.
The Commission could not
have successfully concealed the fact that access charges will
eventually be deregulated, and thereby dupe some competitive
providers to engage in “inefficient entry” based on the assumption
that regulated rate levels would continue indefinitely.
RBOC Resistance to Proper Provisioning of Unbundled Network
Elements Is Best Handled Through Strict Section 271 Enforcement,
Not Access Charge Reductions - The proper approach to RBOCs’ failure
to provision certain network elements (see CompTel at 6-11) is to
enforce the Section 271 checklist strictly, not to adopt the
prescriptive approach.6
III.RATE STRUCTURE ISSUES
A. The Lack of Tandem Competition Is the Result of Attempts
to Handicap Long Distance Competition.
CompTel complains in its initial comments about the absence
6
Furthermore, no geographic averaging should be allowed if prescriptive approach
is adopted except to extent paralleled by interconnection deaveraging (AT&T at n. 45).
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ALTS - February 14, 1997 - ¶¶ 55-139
of tandem competition (CompTel comments at 15-16).
be all too clear.
The reason should
As the Access Charge Reform NPRM openly admits
(at ¶ 102): “We took this action [creation of the TIC] because of
our uncertainty about the specific sources of the costs that were
in the tandem switching revenue requirement and because of our concern
of possible adverse impacts on small and medium IXCs as the new rate
structure was introduced;” (emphasis supplied).
The Commission’s
effort to “strike a balance” among IXCs of different sizes has created
underpriced ILEC tandem facilities, thereby increasing the barriers
to tandem competition.
Nor is CompTel correct about the extinction of “dedicated”
versus “common” transportation (CompTel comments at 25-26; see also
Sprint comments at 24-25).
While modern network architectures may
indeed be narrowing cost difference between common and dedicated
transport, they have hardly eliminated the distinction.
And where
cost-based rate distinctions do exist, price differences based on
those distinctions are not necessarily discriminatory (see Sprint
comments at 20; contra CompTel comments at 26-27;).
Nor is Sprint correct that ILEC rate structures for tandem
transport should be based on airline miles rather than actual mileage.
Assuming, rather than demanding maximum efficiency of the ILEC
networks would create a tremendous barrier to entry.
Circuity of
ILEC interoffice network reflects real network efficiencies -- or
inefficiencies -- and thus underlying cost structures.
Actual
mileage should be reflected in the ILECs’ rate structure so as to
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ALTS - February 14, 1997 - ¶¶ 55-139
permit meaningful competition by CLECs.
B.In Adopting New Mechanisms for Recovering NTS Costs that
Remain After SLC Revenues, the Commission Should Avoid
Bulk Billing Mechanisms, Nor Should It Permit Deaveraging
of Any NTS Recovery, Including SLCs.
ALTS noted in its initial comments that bulk billing mechanism
should be avoided by the Commission as a means of recovering any
interstate NTS revenue requirement that remains after all SLC
revenues are recovered.
This reduces the incentive for an IXC to
switch to a competitive access provider.
Sprint agrees with ALTS
on this point (Sprint comments at 14; see also MCI comments at 77).
At a more general level, ALTS would have thought it obvious
that ILEC NTS cost recovery would be the very last ILEC access element
to be deaveraged, given that these costs reflect the paradigmatic
bottleneck, the local loop, and thereby pose a tremendous opportunity
for anti-competitive price discrimination.
Unfortunately, some
ILECs are now attempting to float this idea (see USTA comments at
52, n.86). ILECs must not be allowed to deaverage NTS cost recovery
until effective competition is virtually ubiquitous (MCI comments
at 77-78; contra Sprint comments at 17, 42-43).
C.The Identifiable Cost Misallocations in
the TIC Should Be Corrected, and the
Remaining TIC Should Be Eliminated Via
Tandem Competition.
Sprint proposes in its initial comments that the TIC should
be reduced by applying the productivity factor against it
solely(Sprint comments at 8, 29-30).
But this proposal would
undercut the fundamental rationale for the “just and reasonable”
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ALTS - February 14, 1997 - ¶¶ 55-139
status of all price cap rates -- the widespread application of the
productivity adjustment.
such an approach.
Nor is there any sound policy basis for
As ALTS pointed out in its initial comments,
identifiable cost misallocations in the TIC should first be cured,
and then the remainder should be reduced via competition in the tandem
market.
D.Miscellaneous Structural Issues
Peak/Off-Peak Pricing - The many initial comments filed in
opposition to peak/off-peak pricing point out that this concept
should be rejected for same reasons as it was rejected in the Local
Competition proceeding (CompTel comments at 27-28; MCI comments at
83; Sprint comments at 19-20).
Given the remarkable changes and
volatility in traffic created by the expansion of the Internet, it
would be almost impossible to attempt to implement peak/off-peak
ILEC access pricing at the present time.
New Services Must Remain In Price Caps - USTA asserts in its
initial comments that new services need to be removed from price
caps(USTA comments at 49-50).
According to USTA (id. at 49):
“Introduction of new services is in the public interest.
Congress
clearly stated that telecommunications policy should encourage the
provision of new technologies and services and that any person or
party opposing a new technology or service must bear the burden of
demonstrating that the technology or service is not in the public
interest.”
ALTS is perfectly happy to bear a heavy burden if it were to
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ALTS - February 14, 1997 - ¶¶ 55-139
oppose introduction of a genuinely new technology.
What ALTS
vehemently opposes is the ILECs’ constant efforts to glue tailfins
on some existing service, and attempt to pull it out of price cap
regulation on the grounds it is somehow “new.”
No one wishes to
oppose genuine innovation, but the telecommunications industry has
too many incremental technological changes going on
to permit an
accurate and predictable application of such a freedom now.
If the Commission believes that USTA’s claims have any merit,
it should commence a separate NPRM on this issue, and require the
ILECs to formulate appropriate and understandable definitions that
cannot be gamed.
SONET, AIN, and Signaling - AT&T is correct that the Commission
should adopt cost-causative rate structures for SONET and AIN (AT&T
comments at 62-63).
These technologies are sufficiently mature to
permit identification of cost structures in the ILECs, and
replication of those structures in Part 69 rates.
Concerning signaling, Sprint is correct that an ILEC’s passage
of optional signaling parameters should never be chargeable (Sprint
comments at 31).
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ALTS - February 14, 1997 - ¶¶ 247-270
IV.CONSTITUTIONAL TAKINGS ISSUES
MCI correctly points out in its initial comments that any
constitutional “takings” under the Fifth Amendment effected by the
Telecommunications Act of 1996 Act can only be assessed as a whole
(MCI comments at 30).
The ILECs are not entitled to wail and moan
about revenue losses they might incur in their access markets without
also figuring in the revenues they will gain through the new services
permitted by the 1996 Act, and the decision of the 1996 Act not to
reauction the immensely valuable cellular spectrum that had been
doled out to the ILECs as “wireline” cellular carriers for free.
In short, Fifth Amendment claims by regulated entities requires that
they include the wheat with the chaff.
As AT&T notes, most of the ILEC underrecovery claims here are
entirely unsubstantiated (AT&T comments at 29-42; contra USTA
comments at 68-80).
However, as ALTS remarked in its initial
comment, ILECs which comprehensively document the effect of the 1996
Act upon their overall revenues should be permitted to charge end
users for those amounts if they supply the underlying data, and
clearly identify the charges to the end users (contra AT&T comments
at 29-42).
This mechanism would insure that the ILECs could not
mount a facial constitutional challenge to the present proceeding.
CONCLUSION
For the foregoing reasons, ALTS requests that the Commission reform the current ILEC
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ALTS - February 14, 1997 - ¶¶ 247-270
access charge regime consistent with the pro-competitive intent of Congress reflected throughout
the 1996 Act as detailed in ALTS’s initial and reply comments.
Respectfully submitted,
By:
________________________
Richard J. Metzger
Emily M. Williams
Association for Local
Telecommunications Services
1200 19th Street, N.W.
Suite 560
Washington, D.C. 20036
(202) 466-3046
February 14, 1997
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