Transport Rate Structure and Pricing

FEDERAL COMMUNICATIONS COMMISSION

47 CFR Parts 61 and 69

[CC Docket No. 91-213; FCC 94-325]

Transport Rate Structure and Pricing

AGENCY: Federal Communications Commission.

ACTION: Final rule.

-----------------------------------------------------------------------

SUMMARY: The Commission affirmed the interim transport rate structure,

the method used to establish initial transport rates under the interim

rate structure, and the price cap rules adopted to regulate future

changes in transport rates. The Commission also clarified certain

implementation procedures with respect to the interim transport rate

structure and pricing rules. In doing so, the Commission resolved all

the remaining issues raised on reconsideration in this proceeding.

EFFECTIVE DATE: February 21, 1995.

[[Page 4108]] FOR FURTHER INFORMATION CONTACT:

Matthew J. Harthun, (202) 418-1590 or David L. Sieradzki, (202) 418-

1576, Policy and Program Planning Division, Common Carrier Bureau.

SUPPLEMENTARY INFORMATION: This is a synopsis of the Commission's Third

Memorandum Opinion and Order on Reconsideration in CC Docket No. 91-

213, adopted December 15, 1994, and released December 22, 1994. The

complete text of this Third Memorandum Opinion and Order on

Reconsideration is available for inspection and copying during normal

business hours in the FCC Reference Center, 1919 M Street, N.W., Room

239, Washington, D.C. 20554.

Synopsis of Memorandum Opinion and Order

A. The Interim Rate Structure

1. The interim rate structure is a significant improvement over the

``equal charge'' rate structure. We believe that the interim rate

structure is consistent with all three of our goals in this proceeding:

(1) Encouraging efficient use of transport facilities by allowing

pricing that reflects the way costs are incurred; (2) facilitating full

and fair interexchange competition; and (3) avoiding interference with

the development of interstate access competition. Having weighed the

costs associated with an interim approach--namely, the effect on tandem

competition and the delay in implementing a full cost-based rate

structure--against the benefits associated with its balancing of our

three public interest goals, we conclude that our cautious approach of

adopting an interim rate structure and seeking comment on a long-term

rate structure was a reasonable step towards a more cost-based

transport rate structure.

2. We decline to hold open this proceeding, as suggested in the

record. We conclude that we have had sufficient time to evaluate the

interim restructure. We conclude, however, that continued monitoring of

the effects of the interim transport rate structure would be in the

public interest, and we delegate authority to the Chief, Common Carrier

Bureau, to continue and refine the Bureau's transport monitoring

program. With our affirmation of the interim transport rate structure,

we retain our conclusions that: (1) non-Tier 1 local exchange carriers

(LECs) are exempt from implementing the interim transport rate

structure; (2) if such LECs provide entrance facilities, they must

provide them on a flat-rated basis; and (3) such LECs must offer flat-

rated direct-trunked transport upon receipt of a bona fide request.

B. Initial Benchmark Level and Permanent Rate Relationships

3. We affirm the benchmark used in setting the initial transport

rates and our use of price cap rules to govern subsequent changes in

the price cap LECs' transport rates.

4. Adjusting the Benchmark or Applying It to Subsequent Rate

Changes. We decline to revise the benchmark used to establish initial

transport rates or establish rigid rate relationships based on such a

benchmark. We conclude that the small and medium interexchange

carriers' (IXCs') suggested level of the benchmark lacks adequate cost

justification. We continue to believe that special access rates provide

a rational framework for establishing the initial transport rates.

5. Further, fixed rate relationships are not consistent with LEC

price cap regulation. We believe that requiring permanent rate

relationships between DS3, DS1, and tandem-switched transport rates

would interfere with the efficient functioning of the market, and could

retard long-distance price reductions, depress telecommunications

usage, and inhibit economic growth. We reject the related

recommendation to require the LECs to reset their tandem-switched

transport rates annually based on DS3 and DS1 direct-trunked transport

rates, weighted based on updated fiber/copper ratios. We continue to

believe that price cap rules, rather than required annual adjustments

guided by cost factors, are the most appropriate means, in an

increasingly competitive access market, to govern ongoing changes in

rates for LEC services, including tandem-switched transport.

6. We also decline to require the LECs to place uniform overhead

loadings on their transport rates as a means of constraining changes to

the price relationships between DS3 and DS1 rates. We conclude that

even if it were demonstrated that different transport services are

``like services,'' differences between the levels of overhead loadings

recovered in those rates would not necessarily constitute unreasonable

discrimination. (We note that allegations that specific rates of

individual carriers are discriminatory are not before us in this

proceeding.)

7. While we continue to believe that a certain level of pricing

flexibility is needed to enable the LECs to meet increasing competition

in the local access market, we also recognize that without sufficient

regulatory constraints the LECs could price their transport services

anti-competitively. We have addressed this concern through special

safeguards in the price cap system: placing DS3 flat-rated transport,

DS1 flat-rated transport, and tandem-switched transport in separate

service categories and subcategories, and retaining the +2% upper

pricing band for tandem-switched transport services. We continue to

believe that this approach best balances our concerns about potential

anti-competitive LEC pricing and the LECs' need for some pricing

flexibility in the face of increased competition, and thus, best

promotes our public interest goals. We note, however, that this

decision does not limit our discretion in addressing the separate

record developed in our pending LEC Price Cap Review proceeding (Price

Cap Performance Review for Local Exchange Carriers, Notice of Proposed

Rulemaking, 59 FR 12888 (March 18, 1994)).

8. Applying the Benchmark Separately to Different Transport

Segments. The method we used to create the benchmark was based on a

typical configuration of LEC transport offerings, using rates from

analogous special access offerings--one IXCs would likely use to

purchase transport services, and competitive access providers would

likely use to offer services that could be substituted for both

entrance facilities and interoffice facilities. We decline to require

the LECs to satisfy separate benchmark requirements for entrance

facilities and for direct-trunked transport.

9. Methodology for LECs with Rate Ratios Below the Benchmark. We

decline to revise the method by which those LECs with September 1992

special access rates below the 9.6 to 1 benchmark established initial

transport rates.

C. Price Cap Service Categories and Price Bands

1. Tandem Switching

10. We decline to place tandem switching and local switching into

the same price cap basket, whether that basket is the traffic sensitive

basket or a new ``switching'' basket. We note also that this decision

does not limit our discretion in addressing the separate record

developed in the LEC Price Cap Review proceeding. We see no reason to

treat tandem switching differently from tandem-switched transport

transmission elements, and we retain the tandem switch element in the

tandem-switched transport service category.

11. We also reject SW Bell's proposal to place the interconnection

charge into a separate ``public policy'' basket. Until [[Page 4109]] we

have completed our evaluation of what underlying costs are recovered in

the interconnection charge and how the interconnection charge revenues

should be reallocated or otherwise disposed of, we conclude that the

interconnection charge service category should be included in the

trunking basket.

12. Finally, we decline to price the tandem switching element

incrementally, or to eliminate that element. We conclude that such

measures would not be in the public interest.

2. Price Cap Service Categories and Pricing Bands

13. In our 1994 Second Transport Order (Transport Rate Structure

and Pricing, Second Report and Order, 59 FR 10300 (March 4, 1994)), we

specifically placed tandem-switched transport, DS1, and DS3 flat-rated

services into separate service categories and service subcategories in

order to prevent the LECs from offsetting lower rates for services

subject to more competition with higher rates for less competitive

services. We concluded in that order, and continue to believe, that

separate price cap service categories and pricing bands are sufficient

to protect against potential anti-competitive behavior. Accordingly, we

decline to eliminate the separate service categories and subcategories

that apply to transport services.

14. We also decline to put entrance facilities and interoffice

facilities into separate service categories. No sufficient reason

exists to place entrance facilities and interoffice facilities in

separate service categories and to restrict the LECs' pricing

flexibility between these services. We decline to eliminate the limited

upward pricing flexibility permitted for tandem-switched transport.

D. The Interconnection Charge

1. Mid-Course Adjustment to the Interconnection Charge

15. We clarify that the period to be used in calculating the amount

of any mid-course adjustment to the interconnection charge is from the

effective date of the initial transport tariffs (December 30, 1993)

through December 31, 1994. This calculation will define the amount that

will prospectively establish the appropriate level for the

interconnection charge. We further clarify that the mid-course

adjustment to the interconnection charge permits recoupment of under-

recovered interconnection charge revenues from December 30, 1993 to the

effective date of the tariff implementing the mid-course adjustment. We

intended that the interconnection charge yield only an initial rate

restructure that was revenue-neutral. We interpret ``initial'' to apply

to the first year after the implementation of the new rates. Subsequent

changes to the interconnection charge will be governed by the price cap

rules. LECs must file requests for mid-course adjustments to the

interconnection charge no later than March 31, 1995. We delegate

authority to the Chief, Common Carrier Bureau, to specify the format

and content of such filings.

16. The mid-course adjustment to the interconnection charge, should

any LEC choose to avail itself of the adjustment, does not constitute

retroactive ratemaking. The adjustment will affect only rates in effect

after the date of the adjustment. It will not retroactively change the

interconnection charge rates that customers already paid before the

adjustment date. Nor will the adjustment require recoupment of revenues

from customers or refunds to customers without suspension and an

accounting order pursuant to Section 204(a) of the Communications Act,

47 U.S.C. 204(a).

17. That the mid-course adjustment will take into account revenues

the LECs under-recovered before the date of the adjustment does not

convert the adjustment into retroactive ratemaking. All interested

parties were on notice prior to the effective date of the transport

tariffs that the interconnection charge was subject to adjustment and

that the purpose of that adjustment was to achieve more fully our

objective of revenue neutrality during the transition from the old to

the new rate structure. Therefore, any adjustment at a later date

merely constitutes the implementation of a prospectively established

obligation affecting the LECs and all access customers. The prior

notice that the interconnection charge would be subject to adjustment,

and the unique nature of the interconnection charge mid-course

adjustment in the context of the major, Commission-required transport

rate restructure, distinguish this case from cases in which a carrier

generally seeks to adjust its rates prospectively to recoup costs from

an earlier period. We do not address whether or not such cases would

constitute retroactive ratemaking.

2. Burden of Proof for the Mid-Course Adjustment

18. We decline to modify the burden of proof associated with the

mid-course adjustment. The LECs have the burden of demonstrating a

significant under-recovery of revenues that justifies an adjustment to

the interconnection charge. We affirm our determination that the LECs

must prove the extent to which they have not been able to reuse

facilities no longer needed after IXC reconfigurations.

19. We clarify, however, that the burden of proving that facilities

could not be reused does not apply to facilities that are reused as a

result of the transport restructure itself. For example, if a customer

reconfigures its LEC entrance facility from 25 DS1 circuits to a lower-

priced DS3 circuit running over the same physical facility, the

``reuse'' of that facility in providing DS3 service instead of DS1

service is not excluded from the computation of the interconnection

charge. In such a case, the interconnection charge may reasonably

include recovery of the difference between the price of the 25 DS1

circuits and the price of the DS3 circuit. The requirement that LECs

show that they have been unable to reuse facilities applies to

situations in which facilities are no longer used for interstate

switched transport, and the LECs have not been able to put the

facilities to any alternative uses. For example, if the customer

terminates its use of the 25 DS1 circuits because, due to the transport

restructure, it has decided to consolidate its points of presence, and

the LEC is unable to put the entrance facility to any alternative uses

in its network, then the LEC may reasonably include recovery of the

lost DS1 revenues in the interconnection charge.

20. We also affirm our determination that the LECs should have the

burden of proving that demand losses result from the transport rate

restructure rather than competition. While we intend that the transport

rate restructure be revenue-neutral to the LECs, competition in the

provision of switched transport is likely to result in revenue losses

to the LECs. The interconnection charge should not be used to shield

LECs from the risks of revenue loss associated with growing

competition.

3. Waiver of Non-Recurring Charges

21. We decline to modify the scope of the NRC waiver. As a general

matter, we conclude that to broaden the scope of the NRC waiver to

include network reconfigurations not related to the rate restructure

would be unfair to the LECs and beyond the scope of this proceeding.

Specifically, we conclude that six months was ample time for the

mandated waiver to be held open, especially since IXCs had more than

one year to plan any network reconfigurations before the new rate

structure became effective. We reject [[Page 4110]] CompTel's

recommendation that we require waiver of termination penalties in

contracts for entrance facilities because we conclude that such a

waiver would deny the LECs recovery of capital expenditures made

specifically for a particular IXC. We also decline to adopt AT&T's

proposal to require LECs to waive NRCs for all IXC consolidations

because it is moot and beyond the scope of this proceeding. Moreover,

we decline to restrict the NRC waiver to once per trunk, as USTA

suggests, because, in light of the limited time period for which the

waiver was available, we have no reason to believe that the significant

churn envisioned by USTA occurred.

22. Finally, we conclude that, in their mid-course adjustment of

the interconnection charge, the LECs are entitled, upon a proper

showing, to take into account NRCs waived pursuant to the Commission's

requirement. Therefore, if a LEC can demonstrate that, as a result of

the Commission-mandated waiver of NRCs, the transport restructure

yielded revenues significantly less than the amount it realized

previously, in part, because the number of NRCs charged during the year

fell short of the demand level used in calculating the initial

interconnection charge, the LEC may seek a mid-course adjustment on

this basis. We conclude that the Commission has statutory authority to

allow this type of recovery through the interconnection charge because

it is necessary to maintain revenue neutrality and because carrying out

such an adjustment does not constitute retroactive ratemaking.

E. Miscellaneous

1. Pricing Flexibility

23. We reaffirm that the LECs may offer term and volume discounts

for switched transport services and may implement density zone pricing

of switched transport, as set forth in the Switched Transport Expanded

Interconnection Order (Expanded Interconnection with Local Telephone

Company Facilities, Second Report and Order and Third Notice of

Proposed Rulemaking, 58 FR 48756 (September 17, 1993)), and as

reaffirmed and slightly modified by the Expanded Interconnection Remand

Order, (Expanded Interconnection with Local Telephone Company

Facilities, Memorandum Opinion and Order, 59 FR 38922 (August 1,

1994)). We decided these issues in the expanded interconnection

proceeding, based on a separate and complete record. The present

record, however, does not refute the need for this additional pricing

flexibility in an increasingly competitive access market.

24. With respect to volume and term discounts, we clarify that the

rules we adopted in the expanded interconnection proceeding regarding

discounted transport offerings (47 U.S.C. 69.110(f)-(h), 69.111(i)-(k),

and 69.112(f)-(h)) contemplate only volume discounts (reduced per-unit

prices for a particular number of units of service) and term discounts

(reduced per-unit prices for a specified service for a particular

period of time). These rules do not provide for percentage or growth

discounts--reduced per-unit prices for customers that commit to

purchase a certain percentage of their past usage from a LEC, or

reduced prices based on growth in traffic placed over a LEC's network.

With respect to density zone pricing, we reaffirm our requirement that

the price subindexes (i.e., the upper and lower pricing bands--not the

rate levels) be the same in each zone when a LEC introduces density

zone pricing in a study area.

2. Intermediate Hubbing and Tandem-Switched Transport

25. We decline to adopt Sprint's proposal to modify the definition

of ``tandem-switched transport'' to include service between any

customer-designated telephone company office and an end office, thus

permitting IXCs to purchase (1) dedicated facilities to an intermediate

hub that is not collocated at the serving wire center or at the tandem

office; and (2) tandem-switched transport from that intermediate hub to

an end office, rated based on the distance between the hub and the end

offices without regard for the actual location of the intervening

tandem office. We have already adopted rules that enable tandem-

switched transport users to obtain efficiencies through intermediate

hubbing. Sprint's proposal would substantially change the transport

rate structure, and would lead to the pricing of more services in a

manner that does not reflect the way facilities are deployed. Given our

doubts about the efficiency benefits of Sprint's request and the fact

that the existing rules already provide reasonable opportunities for

tandem-switched transport users to compete with direct-trunked

transport users, we decline to amend our prior decisions.

3. Meet Point Billing

26. We conclude that specific methods for assessing, and avoiding

double billing for, the tandem charge and the interconnection charge

under meet point billing arrangements are better left to the individual

parties involved, given the wide variety and diversity of such

arrangements. If such issues cannot be settled among the parties, we

can address them in the future in the tariff process or pursuant to

specific complaints filed with the Commission.

4. Prohibition on Ratcheting

27. We continue to believe that ratcheting by interconnectors

benefits access customers and competition, and therefore, decline to

modify our rules with respect to ratcheting.

Ordering Clauses

28. Accordingly, it is ordered, pursuant to Sections 1, 4(i) and

(j), 201-205, 218, 220, 403, and 405 of the Communications Act of 1934,

as amended, 47 U.S.C. 151, 154(i) and (j), 201-205, 218, 220, 403, and

405, that the petitions for reconsideration and clarification

concerning the rate structure and pricing of local transport are

denied, except to the extent indicated herein.

29. It is further ordered that the decisions and policies adopted

herein shall be effective thirty days after the date of publication in

the Federal Register.

30. It is further ordered that WilTel's Motion for Acceptance of

Late-Filed Opposition to Petition for Reconsideration is granted.

31. It is further ordered that authority is delegated to the Chief,

Common Carrier Bureau, as set forth herein.

List of Subjects in 47 CFR Part 61 and 69

Communications common carriers, Reporting and recordkeeping

requirements, Telephone.

Federal Communications Commission.

William F. Caton,

Acting Secretary.

[FR Doc. 95-1358 Filed 1-19-95; 8:45 am]

BILLING CODE 6712-01-M