BEFORE THE
Federal Communications Commission
WASHINGTON, D.C.
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 TIME WARNER COMMUNICATIONS HOLDINGS, INC.
Brian Conboy
Michael Jones
Thomas Jones
WILLKIE FARR & GALLAGHER
Three Lafayette Centre
1155 21st Street, N.W.
Washington, D.C. 20036
(202) 328-8000
ATTORNEYS FOR TIME WARNER
COMMUNICATIONS HOLDINGS, INC.
February 14, 1997
TABLE OF CONTENTS
Page
I.
INTRODUCTION AND SUMMARY...................................1
II.
THE MARKET-BASED APPROACH TO ACCESS CHARGE REFORM MUST
NOT HARM THE DEVELOPMENT OF LOCAL ACCESS COMPETITION
..............AND MUST ENSURE THAT ACCESS CUSTOMERS AND CONSUMERS
ARE BENEFITED..............................................3
A. The Availability Of Unbundled Elements Does Not
Flexibility................................................5
B. Granting ILECs Pricing Flexibility In The Absence
Remove The Incentive Necessary For ILEC Cooperation
In The Removal Of The Local Bottleneck.....................9
C. Modifying The Price Cap Rules For Switched Access
Promote The ILECs' Ability To Cross-Subsidize And
Engage In Strategic Pricing...............................10
D. USTA's Suggestion That The Commission's Treatment
Flexibility Prior To Assessing The Status Of
Competition Is Incorrect..................................12
E. The Commission Should Reject Forbearance Proposals
Services..................................................14
Provi
Of Su
Servi
Of AT
For S
III. AMERITECH'S LOOP PORT RECOVERY CHARGE IS AN UNREASONABLE
AND ANTICOMPETITIVE PROPOSAL..............................16
IV.
THE ILEC "MAKE-WHOLE" PROPOSALS FOR "HISTORIC COST"
RECOVERY ARE NOT SUSTAINABLE..............................17
A. The ILECs Are Not Owed Recovery Of Costs Of
B. The ILEC Depreciation Reserve Deficiency Is
C. Unidentified TIC Costs Must Be Allocated On A
D. The Commission Should Correct For Any
Regul
Suspe
Propo
Separations Reform........................................22
E. The Proposals Before The Commission Do Not
V.
Impli
THE COMMISSION SHOULD ALIGN COST RECOVERY WITH COST
CAUSATION.................................................24
A.
Tandem-Switched Transport Competition Will Not
To Where Costs Are Incurred..........................25
B. The Commission Should Increase The Cap For
Line Charges, Or, In The Alternative, Modify
The Carrier Common Line Charge To A Flat-Rate,
Per Line Charge...........................................27
VI.
Juris
THE COMMISSION SHOULD AVOID BURDENING NASCENT CLECS
WITH TERMINATING ACCESS REGULATION........................28
VII. CONCLUSION................................................31
-ii-
Devel
Resid
Reply Comments of Time Warner Communications Holdings, Inc.
February 14, 1997
BEFORE THE
Federal Communications Commission
WASHINGTON, D.C.
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 TIME WARNER COMMUNICATIONS HOLDINGS, INC.
Time Warner Communications Holdings, Inc., ("TWComm"), by its
attorneys, hereby submits its reply comments in response to the
Commission's Notice of Proposed Rulemaking in the above-captioned
proceeding.1
I.
INTRODUCTION AND SUMMARY
The comments filed in response to the Notice underscore the
critical importance of the Commission's decision in this proceeding.
Any action (or inaction) the Commission takes in this docket will
result in far-reaching consequences for the telecommunications
industry and for consumers.
1
TWComm is concerned that access charge
See Access Charge Reform, CC Docket Nos. 96-262, 94-1, 91-213,
96-263, Notice of Proposed Rulemaking, Third Report and Order,
and Notice of Inquiry, FCC 96-488 (released December 24, 1996)
("Notice").
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Reply Comments of Time Warner Communications Holdings, Inc.
February 14, 1997
reform is being considered primarily in light of its potential impact
upon ILECs.i
Undoubtedly, ILECs will experience the effects of the
Commission's reforms.
However, potential competitors, too, will
be impacted by the Commission's decision.
A failure by the
Commission to promote competition and to prevent anticompetitive
abuses would severely damage nascent competitive markets.
Ineffective or delayed competitive entry combined with greater
freedom for monopoly ILECs perversely would harm consumers under
the 1996 Act.
TWComm urges the Commission to consider this
possibility when weighing the options for access charge reform.
TWComm confines its Reply Comments to responding to issues
raised by other parties. Specifically:
A market-based approach to access charge reform must avoid harming
the development of competition and the interests of ILEC access
customers. The market approach proposed by the Notice and the
ILECs fails to protect adequately against anti-competitive ILEC
incentives. ILEC requests for pricing flexibility in the absence
of substantial competition must be rejected.
·Ameritech's Loop/Port Recovery Charge proposal would insulate ILECs
from competitive forces and would dampen the development of
competition in the local and access markets. The Commission
should dismiss the Ameritech proposal.
Neither law nor economic theory nor sound public policy mandates
the ILEC recovery of historic costs. The Commission should reject
ILEC proposals for regulatory structures designed to guarantee
historic cost recovery.
The Commission must remove costs associated with tandem-switched
transport from the TIC so that tandem-switched transport
competition can develop.
The Commission should avoid regulating CLEC terminating access in
the absence of evidence that CLECs have actually overpriced such
services.
II.
THE MARKET-BASED APPROACH TO ACCESS CHARGE REFORM MUST NOT HARM
THE DEVELOPMENT OF LOCAL ACCESS COMPETITION AND MUST ENSURE
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Reply Comments of Time Warner Communications Holdings, Inc.
February 14, 1997
THAT ACCESS CUSTOMERS AND CONSUMERS ARE BENEFITED.2
TWComm supports a market-based approach to access charge reform,
but not as initially proposed by the Commission,ii and not as proposed
by the ILEC interests filing comments in this proceeding.3
TWComm
believes that a market-based approach to access reform must condition
ILEC pricing flexibility upon the presence of substantial competition
in the provision of local access services; any approach that does
not appropriately condition ILEC access pricing flexibility will
squander the 1996 Act's promise of local telephone service
competition and will pose a significant threat of harm to ratepayers.4
The market-based approach proposed by the Commission, modified as
suggested by TWComm, will accomplish the objectives of the 1996 Act;
the approach proposed by USTA and other ILEC interests simply will
not.
With certain variations on the theme, ILEC commenters generally
propose that the Commission provide ILECs essentially unrestricted
2
3
4
This Section relates to Sections V.A and V.B of the Notice.
See, e.g., USTA Comments at 25-35.
See Appendix to TWComm Comments in which TWComm proposes a
definition of the proper criteria for measuring substantial
competition. TWComm recommends using the measurement criteria
applied to AT&T for streamlining and pricing flexibility
purposes, modified to account for the fundamental differences
between AT&T and the ILECs regarding market power and bottleneck
control. These criteria include an analysis of demand
elasticity, supply elasticity and market share, with market
share given the greatest weight. The LATA should serve as the
relevant geographic market (which should include both
intrastate and interstate services offered in that geographic
area) and, subject to certain limitations, the existing price
cap service categories could serve as the relevant product
markets. The Commission must also consider the relative
presence or absence of shared costs among products or geographic
areas when the ILEC provides both competitive and
non-competitive services in those categories.
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Reply Comments of Time Warner Communications Holdings, Inc.
February 14, 1997
pricing flexibility upon a showing that a given state has approved
an interconnection agreement complying with sections 251 and 252
of the Act, or that a given state has approved a Statement of Generally
Available Terms ("SGAT").5
ILEC commenters also propose that the
Commission revise the Part 69 price cap regulations applicable to
switched access services subject to Phase I regulation to consolidate
the baskets within which such services fall.
Such an approach will
severely undercut the goals of the 1996 Act for the following reasons:
The mere theoretical availability of unbundled elements does not
demonstrate that the ILEC's access service offerings are subject
to substantial competition;
If pricing flexibility is granted in the absence of substantial
competition, ILECs will have a reduced incentive to provide
the degree of cooperation necessary for the development of local
access competition;
Revising the Part 69 price cap regulations to consolidate the baskets
and service categories for switched access services will allow
ILECs to deter competitive entry through cross-subsidization
and strategic pricing; and
Contrary to ILEC assertions, Commission precedent does not support
granting pricing flexibility in the absence of substantial
competition.
Finally, ILEC requests for forbearance for Special Access and
Collocated Direct Trunked Transport should be rejected because
competition for such services is not sufficient to warrant
deregulation.
Where competition does not justify such relief on
a LATA-wide basis, forbearance will only enhance ILECs' ability to
shift costs to consumers of less competitive services.
A.
The Availability Of Unbundled Elements Does Not Provide A
Sufficient Basis For Granting Pricing Flexibility.6
5
6
See, e.g., Bell Atlantic and NYNEX Comments at 43; BellSouth
Comments at 30; Southwestern Bell Comments at 26.
This Subsection relates to Section V.B of the Notice.
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Reply Comments of Time Warner Communications Holdings, Inc.
February 14, 1997
ILEC commenters justify their bid for unrestrained pricing
flexibility in Phase I on the grounds that having an approved
interconnection agreement or SGAT for the provision of unbundled
elements ensures the removal of remaining entry barriers and will
constrain the ability of ILECs to raise access rates.iii
This
justification is without merit and the ILEC proposal should be
rejected.
First, the mere availability of unbundled elements does not
provide a sufficient basis for finding that an ILEC has effectively
removed entry barriers.
The fact that an interconnection agreement
has been reached with a CLEC and approved by a state PUC does not
indicate that the terms of the agreement will in fact be workable
and implemented, much less allow the development of robust
competition.
The availability of a SGAT provides even less basis
for concluding that entry barriers have been removed because the
SGAT cannot account for the particular needs of a specific market
entrant.
Moreover, because the methods by which an ILEC can inhibit the
entry of local access competitors are difficult to detect, only the
presence of substantial competition over time will indicate that
entry barriers have been removed.
Unless substantial competition
is present, the Commission should have no confidence that the terms
of interconnection are free of barriers to competition and market
growth.
As evidence of the removal of entry barriers, an
interconnection agreement or SGAT is a step in the right direction
and nothing more.
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Reply Comments of Time Warner Communications Holdings, Inc.
February 14, 1997
The availability of unbundled elements pursuant to
interconnection agreements and SGATs provides no evidence of
functional local access supply alternatives.
An assessment of
supply alternatives for local access must depend on an examination
of the status of actual competitive effects, not future hopes.
This
is particularly crucial now, when local access competition likely
will focus on a few limited services.
If accepted as proof of supply
alternatives, interconnection agreements or SGATs could be used to
support pricing flexibility for all access services, not merely those
subject to substantial competition.
Finally, the notion that an interconnection agreement or SGAT
provides a reasonable restraint on the ability of ILECs to raise
access rates is without merit.
Whether or not unbundled elements
will in fact prove to be a useful access alternative is, as yet,
untested.7
As a factual matter, under the Commission's rules,
unbundled elements may only be used to offer access services to local
telephone customers of the unbundled element purchaser.
Thus,
unbundled elements are only a reasonable substitute for access where
the IXC also offers local telephone services to end users using
unbundled elements.
IXCs with no local telephone service ambitions
and IXCs pursuing a facilities-based or resale local telephone entry
strategy must undertake a new line of business or change their
business plan in order to arbitrage access charges using unbundled
elements.8
7
8
Moreover, IXCs using unbundled elements as a local
See Kwoka, John E., Jr., "Statement on LEC Price Cap Reform,"
at 16-17 (attached to MCI Comments) ("Kwoka").
It is, of course, by no means clear that the costs of entering
the local telephone market through unbundled elements will allow
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Reply Comments of Time Warner Communications Holdings, Inc.
February 14, 1997
telephone entry strategy cannot use such elements to internalize
access for all subscribers unless they win all of their existing
interexchange customers as local customers.
Further, as noted above, neither interconnection agreements
nor SGATs, in and of themselves, provide any evidence that all access
customers have reasonably available alternatives.
More
importantly, the availability of unbundled elements does not indicate
the types of access services which are or will be offered using those
elements; for the foreseeable future, some services and customers
will have competitive alternatives while others will not.
In these
circumstances, the "potential" for access competition embodied in
an interconnection agreement or SGAT is indeed a thin reed upon which
to grant ILEC pricing flexibility.
access arbitrageurs to undercut ILEC access charges. If
unbundled element prices prove to provide an irresistible price
advantage, that merely demonstrates the need for rate
restructuring and rebalancing, not the need for access charge
pricing flexibility. As demonstrated in TWComm's Comments,
existing ILEC price flexibility is sufficient to respond to
access rates based on unbundled element prices where unbundled
element prices recover the full TELRIC of the elements. See
TWComm Comments at 28.
-7-
Reply Comments of Time Warner Communications Holdings, Inc.
B.
February 14, 1997
Granting ILECs Pricing Flexibility In The Absence Of
Substantial, Facilities-Based Competition Will Remove The
Incentive Necessary For ILEC Cooperation In The Removal Of The
Local Bottleneck.9
ILEC commenters assert that Phase I pricing flexibilityiv
should be available on a statewide (study area) basis where unbundled
elements are available to competitors, whether through an approved
interconnection agreement or through an approved SGAT.
proposal should be rejected.
This
Granting ILECs unrestrained pricing
flexibility before their services are subject to substantial,
facilities-based competition will eliminate the incentive necessary
to ensure ILEC cooperation and thereby will allow ILECs to prevent
such competition from developing and maturing.
The Commission cannot simply allow competition in the provision
of local services, and it cannot simply require that ILECs cooperate
with this process.
Rather, the Commission must provide ILECs a
positive incentive to fully open the local access network to
competition.
This is because the ILECs possess nearly absolute
control over their core markets.
Most importantly, the ubiquity
of the public switched network and its strategic importance empower
the ILECs to control the success or failure of competitive entry.
As such, the standard for increased pricing flexibility must be
higher than the Section 271 standard for long distance entry.
Unlike
with the long distance market, the ILECs have virtually 100 percent
of the local exchange market and absolute control over the facilities
needed by potential competitors to interconnect with the ubiquitous
ILEC network.
9
This Subsection relates to Section V.B of the Notice.
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Reply Comments of Time Warner Communications Holdings, Inc.
February 14, 1997
Indeed, the ILECs can engage in violations of the Act that are
difficult to detect.
ILECs have historically proven adept at
cloaking discrimination in the provision of bottleneck services with
colorably legitimate business practices.
ILECs can obtain a
significant competitive advantage simply by withdrawing full
cooperation from their competitors.
Moreover, the Commission's
Chief Economist has stated that "[t]hese problems are hard to regulate
away, because the withdrawal of cooperation from rivals may be subtle,
shifting, and temporary, but yet have real and permanent effects.
. . ."10
For these reasons, it is crucial that ILECs be given every
incentive to provide full cooperation.
C.
Modifying The Price Cap Rules For Switched Access Services
Subject To Phase I Regulation Will Only Promote The ILECs'
Ability To Cross-Subsidize And Engage In Strategic Pricing.11
Several ILEC commenters urge the Commission to revise the price
cap rules for services subject to Phase I regulation.v
Typically,
these commenters propose that the Commission "simplify" the price
cap scheme to consolidate baskets and service categories.12
For
example, USTA favors consolidating the following service categories
into a single "Network Services" basket: Tandem Switching and
Transport, Local Switching, Database Services, and Common Line.13
10
11
12
13
Farrell, Joseph, "Creating Local Competition," 49 Federal
Communications Law Journal 201, 207 (1996).
This Subsection relates to Section V.B of the Notice.
See USTA Comments at 27-28, 50-54; BellSouth Comments at 31-32;
Bell Atlantic and NYNEX Comments at 45-46.
See USTA Comments at 50.
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Reply Comments of Time Warner Communications Holdings, Inc.
February 14, 1997
These proposals will serve only to facilitate the ILECs' ability
to subsidize services subject to competition with rates from less
competitive services, thereby frustrating the purpose of the price
cap system.
Indeed, the Commission has tried to guard against this
problem in the past by grouping services subject to similar levels
of competition in the same basket.14
Even this process is imperfect,
and ILECs currently possess the ability to cross-subsidize within
baskets, limited only by the upper pricing bands.
The ILEC price cap consolidation proposal is particularly
troubling when combined with Phase I pricing flexibility.
ILECs
will be able to strategically offer contract-based, volume or term
discounts for services subject to a competitive entry threat and
recover some or all of the revenue shortfall with rates for less
competitive services.15
Thus, consolidating services and baskets
will allow ILECs to impose static efficiency losses on consumers
paying higher rates and dynamic efficiency losses on all customers
by deterring competitive entry.
Thus, revising the Commission's
price cap rules would weaken an already imperfect protection against
cross-subsidization.
D.
USTA's Suggestion That The Commission's Treatment Of AT&T
Supports The Application Of Pricing Flexibility Prior To
Assessing The Status Of Competition Is Incorrect.16
14
15
16
See Notice at ¶ 216.
This does not necessarily imply that rate increases would be
solely relied upon. Rather, ILECs could flow all productivity
gains into rate reductions for competitive services and areas,
while leaving consumers in non-competitive areas without the
benefit of overall cost reductions. By contrast, all new
entrant services are highly competitive. New entrants cannot
maintain monopoly rate levels on any of their services.
This Subsection relates to Section V.B and V.C of the Notice.
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Reply Comments of Time Warner Communications Holdings, Inc.
February 14, 1997
USTA argues that ILECs should be allowed to offer volume and
term discounts, provide service under contract tariffs and issue
individual responses to RFPs in Phase I based in part on the assertion
that "[t]he Commission adopted analogous regulatory reforms for AT&T
prior to any determination regarding the status of competition in
AT&T's markets."vi
While USTA offers no citation for this
proposition, an examination of the Commission's decision granting
AT&T the authority to offer service under contract-based tariffs17
and other applicable precedent does not comport with USTA's
assertion.
17
See Competition in the Interstate Interexchange Marketplace,
CC Docket No. 90-132, Report and Order, 6 FCC Rcd 5880 (1991).
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Reply Comments of Time Warner Communications Holdings, Inc.
February 14, 1997
Before granting AT&T contract tariff authority, the Commission
made a careful examination of AT&T's competitive situation.
First,
the Commission found that demand for business services was highly
elastic.18
Second, based on a review of analyses of traffic volumes
and supply capacity, the Commission concluded that supply
elasticities in the interstate interexchange market were high.19
Third, the Commission found that AT&T had never exceeded the price
cap ceiling for the relevant basket and had a market share in business
services of approximately fifty percent.20
The Commission noted
that, combined with the high demand and supply elasticities of the
market, a fifty percent market share was indicative of a highly
competitive market.21
As noted in TWComm's initial comments in this
proceeding, Commission precedent firmly establishes that some
showing of actual competition beyond mere entry is required before
the Commission will grant pricing flexibility.22
18 See id.
19 See id.
20 See id.
21 See id.
at
at
at
at
22 See TWComm
¶¶ 37, 40.
¶ 46.
¶¶ 49-50.
¶ 51.
Comments at 35, n.70.
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Reply Comments of Time Warner Communications Holdings, Inc.
February 14, 1997
Moreover, even if the Commission had not premised AT&T's
contract tariff authority on a showing of competition, such a result
would not support similar treatment of the ILECs.
This is because
the ILECs and post-divestiture AT&T simply are not similarly
situated.
facilities.
Most significantly, ILECs possess control of bottleneck
While the bottleneck is no longer legally protected,
it is likely to persist in many areas for the foreseeable future
and may persist indefinitely in many others.23
Thus, an analysis
of the ILECs' competitive situation is necessary and proper before
granting relief similar to that granted AT&T.
E.
The Commission Should Reject Forbearance Proposals For
Special Access And Direct Trunked Transport Services.24
USTA and Southwestern Bell request that the Commission forbear
from further regulation of Special Access and Collocated Direct
Trunked Transport ("DTT") based on the assertion that competition
exists for such services in certain high volume markets with high
access line density.vii
Characterizing competition for Special
Access as widespread, USTA seeks forbearance for all ILECs
(presumably in all markets) rather than proceeding under individual
petitions for forbearance.25
The Commission should decline this
request and continue to grant flexibility only where ILECs
individually demonstrate the presence of substantial competition.
23
24
25
See Kwoka at 17.
This Subsection relates to Section III.D and V.B of the Notice.
USTA Comments at 46.
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Reply Comments of Time Warner Communications Holdings, Inc.
February 14, 1997
Forbearance from regulation of Special Access and DTT should
not be adopted by the Commission.
First, competition for these
services is not sufficient to warrant deregulation.
At best, the
data cited by USTA may demonstrate that Special Access services are
competitive in certain geographic markets.
The Commission has
already granted appropriate pricing flexibility where ILECs have
demonstrated that such services are subject to competition.
On a
going forward basis, the Commission should grant regulatory relief
for Special Access and DTT where an ILEC demonstrates it is subject
to substantial competition for such services, as described in the
Appendix to TWComm's Comments.26
Relaxing regulation on a market-by-market basis will reduce
the ILECs' ability to use pricing flexibility as a means of deterring
competitive entry.
Such an approach also will limit the extent to
which ILECs can fund their responses to competition with Switched
Access revenues.
It is particularly important to safeguard against
such cross-subsidization because Special Access and DTT are usually
provisioned by ILECs using the same facilities as Switched Access.
The common use of infrastructure by services subject to differing
levels of competition provides a substantial opportunity for cost
shifting.
Forbearance would fail to provide any check on an ILEC's
incentive or ability to cross-subsidize and, for this reason, the
Commission should decline to adopt such proposals.
III. AMERITECH'S LOOP PORT RECOVERY CHARGE IS AN UNREASONABLE AND
ANTICOMPETITIVE PROPOSAL.27
26 See Appendix to TWComm Comments.
27
This Section relates to Section III and Section V of the Notice.
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Reply Comments of Time Warner Communications Holdings, Inc.
February 14, 1997
Ameritech has proposed that the Commission establish what it
refers to as the "loop/port recovery" or "LPR" charge.viii
This
charge would recover the costs allocated to the interstate rate base
of the ILECs' loops and associated switching ports that are not
recovered from the SLC.28
Ameritech proposes that this charge should
be transitioned from price caps to actual costs and should be
recovered from interstate carriers on a "competitively neutral
basis."29
As the Commission no doubt recognizes, this is a totally
unreasonable proposal.
Indeed, the notion that a tax should be imposed on interstate
carriers (including those not utilizing ILEC exchange access) to
pay for ILEC interstate loop costs not covered by the SLC is nothing
short of astonishing.
On a general level, the LPR would effectively
ensure the survival of the local loop bottleneck by eliminating
opportunities for low cost new entrants to compete in the provision
of local loops.
More specifically, the LPR is essentially a
universal service mechanism for the ILECs only, and therefore
violates Section 214(e).30
Finally, the proposal to transition the
LPR out of price caps so that the ILECs can recover actual loop and
loop port costs also revives in full force the inefficiencies of
rate of return regulation just at the time when Ameritech and other
BOCs are attempting to enter the long distance business (and other
price cap LECs are already in the long distance business) and other
competitive businesses.
28
29
30
See id.
Id.
See 47 U.S.C. § 214(e)(any eligible common carrier
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Reply Comments of Time Warner Communications Holdings, Inc.
IV.
February 14, 1997
THE ILEC "MAKE-WHOLE" PROPOSALS FOR "HISTORIC COST"
RECOVERY ARE NOT SUSTAINABLE.31
TWComm has reservations about the purported existence and size
of unrecovered historic costs in ILEC networks.
Nonetheless, a
definitive resolution of this issue is unnecessary.
Even assuming
that unrecovered ILEC historic costs remain, neither law nor policy
compels the imposition of costs upon ratepayers and competitors to
recover them.
USTA and the ILECs identify four areas in which historic costs
allegedly have not been recovered:
(1) the costs of regulation;
(2) under-depreciation of plant; (3) the TIC component costs; and
(4) costs overallocated to the interstate jurisdiction by the
Commission's separations rules.ix
As explained below, the ILECs
exaggerate the levels of unrecovered historic costs.
Moreover, they
attempt to broaden the legal standard for regulatory confiscation
as a way to persuade the Commission to mandate recovery.
"shall . . . receive universal service support")(emphasis added).
31
This Section relates to Section VII.B of the Notice.
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Reply Comments of Time Warner Communications Holdings, Inc.
February 14, 1997
Economics attaches no inherent value to historic cost recovery
in a non-regulated environment:
inefficient.
it is neither efficient nor
In this sense, the decision of a firm to recover its
historic costs or to write them off its books is best left to the
judgment of the individual firm.
An economic value does attach,
however, when historic cost recovery becomes a mandatory regulatory
feature.
To the extent that historic costs would not be recovered
in a competitive market, the mandatory recovery of historic costs
skews competition and requires ratepayers to pay more to allow an
incumbent firm's historic cost recovery.
Whether these consequences
merit the cost recovery feature is a matter of regulatory policy;
neither law nor economic theory mandate recovery.32
A.
The ILECs Are Not Owed Recovery Of Costs Of
Regulation.33
32
It is self-evident that those historic costs resulting from
ILEC inefficiency have no place in a discussion of regulatory
recovery mechanisms. The recovery of inefficient ILEC
expenditures is wholly the responsibility of ILEC shareholders.
See, e.g., American Tel. and Tel. Co., Docket No. 19129, (Phase
II), Phase II Final Decision and Order, 64 FCC2d 1, 49 at ¶ 118
(1977)("[E]xcessive investment is properly the responsibility
and burden of the investor."); see also, 47 C.F.R. § 65.800
(indicating that the rate base shall include plant investments
"used and useful in the efficient provision of interstate
telecommunications services")(emphasis added).
33 This Subsection relates to Section VII.B of the Notice.
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Reply Comments of Time Warner Communications Holdings, Inc.
February 14, 1997
The ILEC position considers the historic costs of regulation
but fails to consider its attending enrichments.
The Sidak and
Spulber Affidavit attached to the USTA Comments discusses at length
the "regulatory contract" and the "substantial capital expenditures"
ILECs were required to incur as part of their obligation to serve.x
Yet, it tells only half the story.
The analysis neglects to
recognize the profits, for both regulated and non-regulated services,
earned as a result of these "substantial capital expenditures."
Many ILEC vertical service offerings, the profitability of which
have been heralded by the financial press,34 are dependent upon the
results of these capital expenditures.
Combined with the "fair"
rates of return allowed the ILECs for regulated use of the network
(not to mention their substantial market shares), these profits
represent historical financial advantages, not disadvantages, from
the "regulatory contract."35
Ratepayers need not be compelled to
contribute any further to this false public debt.36
34
35
36
See Gautum Naik, "Telecommunications: Baby Bells Profit by
Tapping Phone Paranoia," Wall St. J., Sept. 3, 1996 at B1
(indicating that "the Bells and GTE Corp. rake in more than
$4 billion a year on these new [vertical] services, and the
take is growing" and that "the profit margins of 70% or more
far exceed the less-than-10% profit that regional carriers
typically get on basic phone service"); see also, Leslie
Cauley, "Four Baby Bells Report Healthy Results," Wall St. J.,
Oct. 18, 1996 at B3 ("Four Baby Bells reported healthy profits
for the third quarter, buoyed by strong consumer demand for
second phone lines, enhanced services such as "Caller ID" and
cellular fare")(emphasis added).
Moreover, if AT&T offers any example of post-monopoly
expectations, the historical ILEC advantages will increase as
a result of the market paradigm shift generated by the 1996
Act (insofar as ILECs abandon the erroneous notion that they
are guaranteed specific rates of return on their operations).
Moreover, the conversion to price cap regulation in recent years
was an implementation of ILEC requests to separate costs from
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Reply Comments of Time Warner Communications Holdings, Inc.
B.
February 14, 1997
The ILEC Depreciation Reserve Deficiency Is Suspect.37
It is highly unlikely that ILECs retain legitimate interstate
depreciation reserve deficiencies.
Richard Lee's analysis
demonstrates that ILECs may have a depreciation surplus rather than
a depreciation deficiency.xi
The analysis demonstrates that the
replacement cost of outside plant accounts is greater than the current
net book value of such plant (although the opposite may be true for
ILEC switches).38
Because ILEC investment in outside plant is double
that of its investment in switches, an ILEC's total plant replacement
costs should be greater than its current net book value of the plant.39
As the analysis states, "[t]his would indicate a depreciation
reserve surplus, not deficiency. . . ."40
Moreover, market values
of the RHCs are greater than their book values, indicating the absence
of a significant depreciation reserve.41
To understate the issue,
the ILECs exaggerate the levels, if not the existence, of their
interstate depreciation reserve deficiencies.
C.
Unidentified TIC Costs Must Be Allocated On A
Proportionate Basis.42
37
38
39
40
41
42
rate levels to encourage efficiency. Their requests in this
proceeding to reverse course and base rate levels upon
underlying costs is inconsistent and would reinstitute the
recovery methods (and attending inefficient incentives) of
rate-of-return regulation.
This Subsection relates to Section VII.B. of the Notice.
See id. at 12.
See id.
Id.
See id.
This Subsection relates to Section III.E and Section VII.B of
the Notice.
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Reply Comments of Time Warner Communications Holdings, Inc.
February 14, 1997
The Commission need not and should not abandon its preference
for cost-based pricing when dismantling the Transport
Interconnection Charge.
The ILEC comments identify many of the cost
components of the TIC.xii
Where identifiable, TIC components should
be assigned to the appropriate cost-causative interstate switched
access elements.
Those remaining TIC components which ILECs claim
result from overallocation of costs to the interstate jurisdiction
should be addressed through the Commission's upcoming separations
reform proceeding.
Any remaining costs not identified should be
phased out over a three- to five-year period.
Under no circumstances should ILECs be permitted to recover
residual TIC components from the universal service fund.
As TWComm
indicated in its comments, to the extent that rates fail to recover
the forward-looking costs of loop provisioning, the Joint Board's
Recommended Decision allows for the proxy model to assess the
appropriate reimbursement.43
TIC cost recovery from universal
service would allow an unreasonable double recovery of costs.
43
Federal-State Joint Board on Universal Service, CC Docket No.
96-45, Recommended Decision, FCC 96J-3 at ¶ 270 (released Nov.
8, 1996)("We find that forward-looking economic costs should
be used to determine the cost of providing universal service.").
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Reply Comments of Time Warner Communications Holdings, Inc.
February 14, 1997
Finally, the Commission must dismiss the unreasonable ILEC
suggestion that a separate recovery mechanism, such as bulk billing,
be established to preserve ILEC revenue requirements previously
recovered through the TIC.44
Competition allows the generation of
revenues; it does not require it.
from this paradigm.
The ILECs are no longer exempt
Accordingly, the Commission should dismiss ILEC
revenue requirement recovery proposals, which would reinstate the
largely discredited rate base, rate-of-return regulatory structure
and its attending harmful incentives.
D.
The Commission Should Correct For Any Jurisdictional
Cost Misallocation Through Separations Reform.45
With respect to the ILECs' stated need for separations reform,
TWComm agrees:
critical.xiii
reform of the jurisdictional separations regime is
However, as a practical matter, access charge reform
does not comprehend an immediate need for separations reform.
No
flash-cut dislocation of ILEC revenue streams will occur upon release
of the Commission's order in this docket.46
Rather, under TWComm's
proposal, the development of downward pressure on interstate access
prices will occur gradually.
The Commission has ample time to engage
in a considered approach to jurisdictional separations reform.
E.
The Proposals Before The Commission Do Not Implicate
Regulatory Confiscation.47
44
45
46
47
See, e.g., Southwestern Bell Telephone Company Comments at 9
(advocating the implementation of a new "Public Policy" charge
to recover, among other items, costs embedded in the TIC).
This Subsection relates to Section VII.B of the Notice.
Only transport elements are subject to any competitive pressures
currently. Any such pressure on remaining access revenue will
result from competition for local exchange dialtone services,
which will occur gradually over time.
This Subsection relates to Section VII.B. of the Notice.
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Reply Comments of Time Warner Communications Holdings, Inc.
February 14, 1997
TWComm's proposals herein are not confiscatory.
They permit
ILECs the opportunity to recover historic costs but, as in any
competitive market, they do not guarantee the ability to do so.
The ILECs will not find themselves unable to attract capital for
future investments, as evidenced by the reports of Merrill Lynch
and other Wall Street analysts.xiv
To the contrary, Wall Street
seems bullish on ILECs, despite full anticipation of the potential
effects of access charge reform.48
Hence, TWComm's proposal does
not constitute confiscation, as judicially defined.49
The ILECs, on the other hand, advocate broadening the standard
for confiscation.
They contend that unless a regulated carrier is
guaranteed perpetually the recovery of a profitable return on all
ventures (past, present, and future), a taking has occurred.50
Ratepayers should not be financially burdened, nor should the
development of competitive markets be impaired, to realize this
unreasonable proposition.
The proposals before the Commission do
not threaten confiscation, as discussed at length in TWComm's initial
comments,51 and ILEC assertions to the contrary are baseless.
48
49
50
See MCI Comments at 3 (stating that "financial analysts are
anticipating access charge reductions" and citing to Wall Street
analyses of anticipated BOC earnings in light of access charge
reform).
See, e.g., FPC v. Hope Natural Gas Co., 320 U.S. 591, 605
(1944)(rate regulation provides adequate compensation if it
"enable[s] [a] company to operate successfully, to maintain
its financial integrity, to attract capital, and to compensate
its investors for the risk assumed."); see also, Duquesne Light
Co. v. Barasch, 488 U.S. 299, 310 (1989)(holding that a taking
had not occurred because the state law did not jeopardize the
ability of the regulated firms to attract capital and compensate
investors).
See, e.g., PacTel at 44-46; Bell Atlantic and NYNEX Comments
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Reply Comments of Time Warner Communications Holdings, Inc.
V.
February 14, 1997
THE COMMISSION SHOULD ALIGN COST RECOVERY WITH COST
CAUSATION.52
The Commission's interstate access rate structure impedes the
development of exchange access competition insofar as, in many cases,
it does not permit recovery of costs from cost causers.
The rate
structure skews the price signals guiding new entrant investment
decisions.
The Commission should align cost recovery with cost
causation.
Restructuring would permit the development of
competition which would improve the dynamic efficiencies of the
market and ultimately result in reduced prices for end users.
A.
Tandem-Switched Transport Competition Will Not Develop
Until The Commission Moves Cost Recovery To Where Costs
Are Incurred.xv
In its comments, the Competitive Telecommunications Association
("CompTel") notes the absence of competition in the provision of
tandem-switched transport and that such competition is unlikely to
develop in the foreseeable future.53
Its proposed solution to this
situation is the imposition of prescriptive regulatory action.54
CompTel correctly identifies current market conditions for
tandem-switched transport but misapprehends the cause of the
condition and, therefore, suggests an inappropriate solution.
51
52
53
54
at 16-19.
See TWComm Comments at 46-47.
This Section relates to Section III of the Notice.
See CompTel Comments at 15 ("[N]o carrier provides competitive
tandem switching or tandem-switched transport, and effective
competition is not likely to develop in this market segment
in the foreseeable future.").
See id.
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Reply Comments of Time Warner Communications Holdings, Inc.
February 14, 1997
TWComm agrees that tandem-switched transport is not provided
competitively.
The reason for the current absence of competition
lies in the fact that a portion of tandem-switched transport costs
are recovered through the TIC.55
Under the interim local transport
structure, purchasers of dedicated transport and CAP transport
essentially subsidize prices for purchasers of tandem-switched
transport through TIC payments assessed in conjunction with end
office switching.56
The below-cost tandem-switched transport
pricing by ILECs, made possible by the TIC, precludes efficient entry
into that market.
The solution does not necessitate prescriptive regulatory
reform.
Rather, the Commission must move access charges in a
cost-causative direction.
Dismantling the TIC and eliminating its
subsidy will go far to correct the non-competitive tandem-switched
transport market.
In doing so, the Commission must ensure that costs
for tandem-switched transport are recovered from purchasers of
tandem-switched transport.57
Removal of these costs from the TIC
will allow CAPs to serve economically the smaller IXCs relying upon
tandem-switched transport for access.
55
56
57
See USTA Comments at Attachment 10 and Attachment 11
(identifying over $1 billion in costs that can be reallocated
to tandem-switched transport).
See First Report and Order at 7019, ¶ 25 ("In order to ease
the impact of a rate structure change on small IXCs, . . . we
prescribe that the tandem element initially recover only twenty
percent of the current tandem revenue requirement, with the
remainder of the revenue requirement recovered through the
interconnection charge").
As discussed in TWComm's Comments, to the extent costs are
incurred to provide tandem overflow traffic to IXCs primarily
utilizing direct-trunked transport, such costs should be
recovered from those IXCs through local transport rate elements,
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Reply Comments of Time Warner Communications Holdings, Inc.
B.
February 14, 1997
The Commission Should Increase The Cap For Residential
And Single-Line Business Subscriber Line Charges, Or,
In The Alternative, Modify The Carrier Common Line
Charge To A Flat-Rate, Per Line Charge.58
TWComm has long advocated an increase in the cap for the
residential subscriber line charge ("SLC") as a necessary step toward
a more economically rational access charge structure.xvi
Due to
universal service mandates, the current state and federal rate
structures maintain artificially low residential rates against which
new facilities-based entrants must compete.
Recovery of non-traffic
sensitive costs through traffic sensitive rates causes market
distortions which create significant entry barriers for a business
contemplating the placement of substantial investment in alternative
telephony infrastructure in the face of artificially constrained
operating margins.
Since the recovery of NTS costs on a TS basis
shifts cost recovery from residential lines to high-volume, long
distance users (i.e., primarily business customers), competitors
are given the incentive to base initial entry strategies on the
business market.
This only serves to delay competitive entry into
the residential market and its corresponding benefits to consumers.
The problem is only compounded when ILEC services are made available
for resale at the steep discounts reflected in the Commission's Local
Competition Order59 and in state arbitration decisions.
not end office rate elements.
58 This Subsection relates to Section III.B of the Notice.
59
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"), review pending, sub nom., Iowa Util. Bd., et. al. v.
F.C.C., No. 96-3321 (8th Cir. 1996).
-25-
Reply Comments of Time Warner Communications Holdings, Inc.
February 14, 1997
To provide new entrants with the proper economic signals for
entry into the residential service market, rebalancing rates for
residential service toward cost is essential.
In the context of
the Commission's access charge reform proceeding, the most direct
vehicle to shift recovery to residential services is the SLC.
Unfortunately, despite ample evidence that SLC increases have no
impact on universal service objectives, this solution does not appear
to be acceptable at this time.
As TWComm recommended in its Comments,
and as supported by other parties,60 the next best alternative would
be a flat, per-line recovery of current CCLC revenue from IXCs.
While the charges would continue to be billed to IXCs, it would shift
cost recovery away from high-volume business to the individual line
where the cost is incurred.
VI. THE COMMISSION SHOULD AVOID BURDENING NASCENT CLECS WITH
TERMINATING ACCESS REGULATION.61
60 See, e.g., USTA Comments at 55; BellSouth Comments at 68.
61
As
a policy matter, restructuring the CCL charge to align rates
more closely to the manner in which the underlying costs are
incurred should be non-optional.
This Section relates to Section VIII.A of the Notice.
-26-
Reply Comments of Time Warner Communications Holdings, Inc.
February 14, 1997
CLECs are confronted with enormous entry barriers.
The 1996
Act and the Commission's Local Competition Order were designed to
reduce the entry barriers imposed by the ILECs.
The appeal of the
Commission's Local Competition Order foreshadows the continued
strong resistance of the ILECs to the reduction of local entry
barriers.xvii
Despite legislation and Commission orders to reduce
entry barriers, their vestiges will continue for some time.
In the
short term, CLECs will continue to face anticompetitive challenges
to local exchange market entry.
In addition to the anticompetitive barriers to entry, CLECs
also face the natural financial hurdles of constructing networks
and attracting customers.
Significant CLEC resources will be
devoted to this construction, expenditures which ILECs will not be
required to make.
In short, CLECs must devote their resources to confronting the
many challenges of local market entry.
The Commission should not
add to these burdens the regulation of CLEC terminating access.
TWComm understands the Commission's concerns that CLECs will
overcharge IXCs for terminating access and concedes that this remains
a theoretical possibility.
However, because no evidence suggests
that CLECs will, in fact, engage in this pricing strategy, regulation
is premature at this time.
Not only is regulation unnecessary, it
could be detrimental to the development of both local and access
competition in light of the many challenges already confronting
CLECs.
-27-
Reply Comments of Time Warner Communications Holdings, Inc.
February 14, 1997
Several commenters have suggested that CLECs be subject to
terminating access regulation only if their termination charges
exceed those of the ILEC with whom they compete.62
Once again, TWComm
strongly counsels the Commission to avoid placing regulatory burdens
on new entrants.
The ILEC-baseline approach described above would
be appropriate only after actual CLEC terminating access abuses are
demonstrated.
TWComm suggests that this approach be considered only
as a potential future approach and one which is utilized only in
the event that unreasonably high CLEC terminating access is shown
to be a problem.
TWComm remains cautious in its acceptance of this
approach due to the burdens it could place on CLECs with legitimately
higher cost structures.
Nevertheless, this option seems to present
a reasonable compromise that satisfactorily addresses the concerns
of the Commission and CLECs alike.
62 See, e.g., Ameritech Comments at 52.
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Reply Comments of Time Warner Communications Holdings, Inc.
February 14, 1997
VII. CONCLUSION
TWComm urges the Commission to adopt revised rules for
interstate access in accordance with these reply comments and its
initial comments.
Respectfully submitted,
_________________________
Brian Conboy
Michael Jones
Thomas Jones
WILLKIE FARR & GALLAGHER
Three Lafayette Centre
1155 21st Street, N.W.
Washington, D.C. 20036
(202) 328-8000
ATTORNEYS FOR TIME WARNER
COMMUNICATIONS HOLDINGS, INC.
February 14, 1997
The Commission should note the disastrous consequences that can attach to
attempts to ignore market realities in order to retain revenue neutrality for ILECs.
See Transport Rate Structure and Pricing, CC Docket No. 91-213, Report and Order
and Further Notice of Proposed Rulemaking, 7 FCC Rcd 7006, 7023 at ¶ 34 (1992)("First
Report and Order")("the interconnection charge would be priced residually as an
initial matter so as to make transport charges as a whole under the new rate structure
revenue neutral")(emphasis added). The TIC resulted from these efforts and the
Commission's action was deemed arbitrary and capricious by the D.C. Circuit.
Competitive Telecommunications Ass'n v. F.C.C., 87 F.3d 522, 532 (D.C. Cir. 1996).
ii.
See Notice at ¶¶ 162-164.
iii.
See USTA Comments at 27.
iv.
ILEC commenters suggest that Phase I pricing flexibility include the ability
to deaverage switched access services by geographic area and class of customer,
to offer volume and term discounts, to provide services based on contract rates,
and to respond to Requests For Proposals ("RFPs"). See USTA Comments at 28.
v.
See USTA Comments at 27-28; BellSouth Comments at 31-32; Bell Atlantic and
NYNEX Comments at 45-46.
i.
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Reply Comments of Time Warner Communications Holdings, Inc.
vi.
February 14, 1997
USTA Comments at 49.
USTA Comments at 42-46; Southwestern Bell Comments at 19.
viii.
See Ameritech Comments, Attachment A at 7.
ix.
See, e.g., USTA Comments at 68-79; PacTel Comments at 44-50; Southwestern Bell
Comments at 40-52; Bell Atlantic and NYNEX Comments at 16-31.
x.
See generally, Affidavit of J. Gregory Sidak and Daniel F. Spulber, Attachment
3 to USTA Comments, at 33-62.
xi.
Richard B. Lee, "Analysis of Local Exchange Carrier Depreciation Reserve
Levels," Appendix C to AT&T Comments ("Lee Analysis").
xii.
See PacTel Comments at 71-72; BellSouth Comments at 75-78; USTA Comments at
59.
xiii.
The Commission indicated its intent to initiate a proceeding to reform its
jurisdictional separations rules. See Notice at ¶ 6.
xiv.
See MCI Comments at 3-5 (noting financial analysts' positive outlook on future
BOC profits).
xv.
This Subsection relates to Section III.D and Section III.E of the Notice.
xvi.
Funding Universal Service: Maximizing Penetration and Efficiency in a
Competitive Local Service Environment, CC Docket No. 96-45, Comments of Time Warner
Communications Holdings, Inc. (filed April 12, 1996); Further Comments of Time Warner
Communications Holdings, Inc. (filed Aug. 2, 1996).
xvii.
See also, CompTel Comments at 10 ("GTE has appealed every final arbitration
award issued by a state regulatory commission to date").
vii.
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