Implementation of the Local Competition Provisions in the Telecommunications Act of 1996; Interconnection between Local Exchange Carriers and Commercial Mobile Radio Service Providers; Implementation of Sections 3(n) and 332 of the Communications Act

Federal RegisterAug 29, 1996

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SUMMARY: The Report and Order released August 8, 1996 promulgates

national rules and regulations implementing the statutory requirements

of the Telecommunications Act of 1996 (the 1996 Act) intended to

encourage the development of competition in local exchange and exchange

access markets. The Report and Order adopts certain national rules that

are consistent with the terms and goals of the 1996 Act and adopts

minimum requirements which states may augment with their own

requirements that are consistent with the 1996 Act and the Commission's

rules thereunder. The Report and Order also incorporates and resolves

issues regarding interconnection between CMRS providers and LECs, which

initially were raised in a separate docket. The Report and Order

enables the states and the Commission to begin implementing the local

competition provisions of the 1996 Act.

EFFECTIVE DATE: September 30, 1996.

FOR FURTHER INFORMATION CONTACT: Lisa Gelb, Attorney, Common Carrier

Bureau, Policy and Program Planning Division, (202) 418-1580, or David

Sieradzki, Attorney, Common Carrier Bureau, Competitive Pricing

Division, (202) 418-1520. For additional information concerning the

information collections contained in this Report and Order contact

Dorothy Conway at 202-418-0217, or via the Internet at [email protected].

SUPPLEMENTARY INFORMATION: This is a summary of the Commission's Report

and Order adopted August 1, 1996, and released August 8, 1996. The full

text of this Report and Order is available for inspection and copying

during normal business hours in the FCC Reference Center (Room 239),

1919 M St., NW., Washington, DC. The complete text also may be obtained

through the World Wide Web, at http://www.fcc.gov/Bureaus/Common

Carrier/Orders/fcc96325.wp, or may be purchased from the Commission's

copy contractor, International Transcription Service, Inc., (202) 857-

3800, 2100 M St., NW., Suite 140, Washington, DC 20037. Pursuant to the

Telecommunications Act of 1996, the Commission released a Notice of

Proposed Rulemaking, Implementation of the Local Competition Provisions

of the Telecommunications Act of 1996, CC Docket No. 96-98 (61 FR 18311

(April 25, 1996)) to seek comment on rules to implement sections 251,

252 and 253 of the 1996 Act.

General

Section 251 of the 1996 Act imposes specific obligations on

telecommunications carriers designed to promote competition in local

exchange markets across the country. Section 251(a) imposes general

obligations on all telecommunications carriers. Section 251(b) imposes

on all LECs certain requirements, including the obligation to provide

resale, access to rights-of-way, and to establish reciprocal

compensation arrangements for transport and termination of traffic.

Section 251(c) requires incumbent LECs to make available to new

entrants interconnection and access to unbundled network elements, and

to offer LEC retail services for resale to telecommunications carriers

at wholesale rates. Access to unbundled elements and resale

opportunities are methods by which telecommunications carriers can

enter the local exchange market.

Interconnection

Section 251(c)(2) of the 1996 Act requires incumbent LECs to

provide interconnection to any requesting telecommunications carrier at

any technically feasible point. The interconnection must be at least

equal in quality to that provided by the incumbent LEC to itself or its

affiliates, and must be provided on rates, terms, and conditions that

are just, reasonable, and nondiscriminatory. The term

``interconnection'' under section 251(c)(2) refers only to the physical

linking of two networks for the mutual exchange of traffic. The

Commission identifies a minimum set of ``technically feasible'' points

of interconnection: (1) the line-side of a local switch; (2) the trunk-

side of a local switch; (3) the trunk interconnection points for a

tandem-switch; (4) central office cross-connect points; and (5) out-of-

band signaling transfer points. In addition, the points of access to

unbundled elements are also technically feasible points of

interconnection. The Commission states that telecommunications carriers

may request interconnection under section 251(c)(2) to provide

telephone exchange service or exchange access service, or both. If the

request is for such purposes, the incumbent LEC must provide

interconnection in accordance with section 251(c)(2) and the

Commission's rules thereunder to any telecommunications carrier,

including interexchange carriers and commercial mobile radio service

(CMRS) providers.

Access to Unbundled Elements

Section 251(c)(3) requires incumbent LECs to provide requesting

telecommunications carriers nondiscriminatory access to network

elements on an unbundled basis at any technically feasible point on

rates, terms, and conditions that are just, reasonable, and

nondiscriminatory. The Commission identifies a minimum set of network

elements that incumbent LECs must provide under this section. States

may require incumbent LECs to provide additional network elements on an

unbundled basis. The Commission identified the seven following network

elements: network interface devices, local loops, local and tandem

switches (including all software features provided by such switches),

interoffice transmission facilities, signalling and call-related

database facilities, operations support systems and information and

operator and directory assistance facilities. Incumbent LECs must

provide requesting carriers nondiscriminatory access to operations

support systems and information. The Order requires incumbent LECs to

provide access to network elements in a manner that allows requesting

carriers to combine such elements as they choose. Incumbent LECs may

not impose restrictions upon the use of network elements.

Methods of Obtaining Interconnection and Access to Unbundled

Elements

Section 251(c)(6) requires incumbent LECs to provide physical

collocation of equipment necessary for interconnection or access to

unbundled network elements at the incumbent LEC's premises, except that

the incumbent LEC may provide virtual collocation if it demonstrates to

the state commission that physical collocation is not practical for

technical reasons or because of space limitations. Incumbent LECs are

required to provide any technically feasible method of interconnection

or access requested by a telecommunications carrier, including

[[Page 45477]]

physical collocation, virtual collocation, and interconnection at meet

points. The Commission adopts, with certain modifications, the physical

and virtual collocation requirements it adopted earlier in the Expanded

Interconnection proceeding. The Commission also establishes rules

interpreting the requirements of section 251(c)(6).

Pricing Methodologies

The 1996 Act requires the states to set prices for interconnection

and unbundled elements that are cost-based, nondiscriminatory, and may

include a reasonable profit. To help the states accomplish this, the

Commission has concluded that the state commissions should set

arbitrated rates for interconnection and access to unbundled elements

pursuant a forward-looking economic cost pricing methodology. The

Commission has concluded that the prices that new entrants pay for

interconnection and unbundled elements should be based on the local

telephone companies Total Element Long-Run Incremental Cost (TELRIC) of

providing a particular network element, plus a reasonable share of

forward-looking joint and common costs. States will determine, among

other things, the appropriate risk-adjusted cost of capital and

depreciation rates. If states are unable to conduct a cost study and

apply an economic costing methodology within the statutory time frame

for arbitrating interconnection disputes, the Commission has

established default ceilings and ranges for the states to apply, on an

interim basis, to interconnection arrangements. The Commission

establishes a default range of 0.2-0.4 cents per minute for switching,

plus access charges as discussed below. For tandem switching, the

Commission establishes a default ceiling of 0.15 cents per minute. The

Order also will establish default ceilings for the other unbundled

network elements. These default provisions might provide an

administratively simpler approach for state establishment of prices,

for a limited interim period, and states, in the exercise of their

discretion, select the specific price within that range, or subject to

that ceiling.

Access Charges for Unbundled Switching

Nothing in the Commission's Order alters the collection of access

charges paid by an interexchange carrier under Part 69 of the

Commission's rules, when the incumbent LEC provides exchange access

service to an interexchange carrier, either directly or through service

resale. Because access charges are not included in the cost-based

prices for unbundled network elements, and because certain portions of

access charges currently support the provision of universal service,

until the access charge reform and universal service proceedings have

been completed, the Commission is continuing to provide for access

charge recovery with respect to use of an incumbent LEC's unbundled

switching element, for a defined period of time. This will minimize the

possibility that the incumbent LEC will be able to ``double recover,''

through access charges, the facility costs that new entrants have

already paid to purchase unbundled elements, while preserving the

status quo with respect to subsidy payments. Under this Order,

incumbent LECs will recover from interconnecting carriers the carrier

common line charge and a charge equal to 75% of the transport

interconnection charge for all interstate minutes traversing the

incumbent LECs local switches for which the interconnecting carriers

pay unbundled network element charges. This aspect of the Order expires

at the earliest of: 1) June 30, 1997; 2) issuance of final decisions by

the Commission in the universal service and access reform proceedings;

or 3) if the incumbent LEC is a Bell Operating Company (BOC), the date

on which that BOC is authorized under section 271 of the Act to provide

in-region interLATA service, for any given state.

Resale

The 1996 Act requires all incumbent LECs to offer for resale any

telecommunications service that the carrier provides at retail to

subscribers who are not telecommunications carriers. Resale will be an

important entry strategy both in the short term for many new entrants

as they build out their own facilities and for small businesses that

cannot afford to compete in the local exchange market by purchasing

unbundled elements or by building their own networks. The 1996 Act's

pricing standard for wholesale rates requires state commissions to

identify what marketing, billing, collection, and other costs will be

avoided or that are avoidable by incumbent LECs when they provide

services wholesale, and calculate the portion of the retail rates for

those services that is attributable to the avoided and avoidable costs.

To define clearly a wholesale service, the Commission has identified

certain avoided costs. The application of this definition is left to

the states. If a state elects not to implement the methodology, it may

elect, on an interim basis, a discount rate from within a default range

of discount rates established by the Commission. The Commission

establishes a default discount range of 17-25% off retail prices,

leaving the states to set the specific rate within that range, in the

exercise of their discretion.

Transport and Termination

The 1996 Act requires that charges for transport and termination of

traffic be cost-based. The Commission concludes that state commissions,

during arbitrations, should set symmetrical prices based on the local

telephone company's forward-looking costs. The state commissions would

also use the TELRIC methodology when establishing rates for transport

and termination. The Commission establishes a default range of 0.2-0.4

cents per minute for end office termination for states which have not

conducted a TELRIC cost study. The Commission finds significant

evidence in the record in support of the lower end of the ranges. In

addition, the Commission finds that additional reciprocal charges could

apply to termination through a tandem switch. The default ceiling for

tandem switching is 0.15 cents per minute, plus applicable charges for

transport from the tandem switch to the end office. Each state opting

for the default approach for a limited period of time, may select a

rate within that range.

Commercial Mobile Radio Service

In the Order, the Commission concludes that CMRS providers are

telecommunications carriers, and therefore are entitled to reciprocal

compensation arrangements under section 251(b)(5). The Commission also

concludes that under section 251(b)(5) a LEC may not charge a CMRS

provider, including a paging company, or any other carrier for

terminating LEC-originated traffic. The Commission also states that

CMRS providers (specifically cellular, broadband PCS, and covered

specialized mobile radio (SMR) providers) offer telephone exchange

services, and such providers therefore may request interconnection

under section 251(c)(2). The Commission determines that CMRS providers

should not be classified as LECs at this time. In this decision, the

Commission applied sections 251 and 252 to LEC-CMRS interconnection.

The Commission acknowledges that section 332 is also a basis for

jurisdiction over LEC-CMRS interconnection, but declined to define the

precise extent of that jurisdiction at this time.

[[Page 45478]]

Access to Rights of Way

The Commission also amends its rules to implement the pole

attachment provisions of the 1996 Act. Specifically, the Commission

establishes procedures for nondiscriminatory access by cable television

systems and telecommunications carriers to poles, ducts, conduits, and

rights-of-way owned by utilities or LECs. The Order includes several

specific rules as well as a number of more general guidelines designed

to facilitate the negotiation and mutual performance of fair, pro-

competitive access agreements without the need for regulatory

intervention. Additionally, an expedited dispute resolution is provided

when good faith negotiations fail, as are requirements concerning

modifications to poles, ducts, conduits, and rights-of-way and the

allocation of the costs of such modifications.

Exemptions, Suspensions, and Modifications of Section 251 Requirements

for Rural and Small Telephone Companies

Section 251(f)(1) of the 1996 Act provides for exemption of the

requirements in section 251(c) for rural telephone companies (as

defined by the 1996 Act) under certain circumstances. Section 251(f)(2)

permits LECs with fewer than 2 percent of the nation's subscriber lines

to petition for suspension or modification of the requirements in

sections 251(b) or (c).

States are primarily responsible for interpreting the provisions of

section 251(f) through rulemaking and adjudicative proceedings, and are

responsible for determining whether a LEC in a particular instance is

entitled to exemption, suspension, or modification of section 251

requirements.

The Commission establishes a very limited set of rules interpreting

the requirements of section 251(f):

--LECs bear the burden of proving to the state commission that a

suspension or modification of the requirements of section 251(b) or (c)

is justified.

--Rural LECs bear the burden of proving that continued exemption of the

requirements of section 251(c) is justified, once a bona fide request

has been made by a carrier under to section 251.

--Only LECs that, at the holding company level, have fewer than 2

percent of the nation's subscriber lines are entitled to petition for

suspension or modification of requirements under section 251(f)(2).

Regulatory Flexibility Analysis

As required by the Regulatory Flexibility Act, the Report and Order

contains a Final Regulatory Flexibility Analysis which is set forth in

Appendix C to the Report and Order. A brief description of the analysis

follows.

Pursuant to Section 604 of the Regulatory Flexibility Act, the

Commission performed a comprehensive analysis of the Report and Order

with regard to small entities and small incumbent LECs. This analysis

includes: (1) a succinct statement of the need for, and objectives of,

the Commission's decisions in the Report and Order; (2) a summary of

the significant issues raised by the public comments in response to the

initial regulatory flexibility analysis, a summary of the Commission's

assessment of these issues, and a statement of any changes made in the

Report and Order as a result of the comments; (3) a description of and

an estimate of the number of small entities and small incumbent LECs to

which the Report and Order will apply; (4) a description of the

projected reporting, recordkeeping and other compliance requirements of

the Report and Order, including an estimate of the classes of small

entities and small incumbent LECs which will be subject to the

requirement and the type of professional skills necessary for

compliance with the requirement; (5) a description of the steps the

Commission has taken to minimize the significant economic impact on

small entities and small incumbent LECs consistent with the stated

objectives of applicable statutes, including a statement of the

factual, policy, and legal reasons for selecting the alternative

adopted in the Report and Order and why each one of the other

significant alternatives to each of the Commission's decisions which

affect the impact on small entities and small incumbent LECs was

rejected.

The rules adopted in this Report and Order are necessary to

implement the provisions of the Telecommunications Act of 1996.

Paperwork Reduction Act

Public reporting burden for the collection of information is

estimated as follows:

OMB Approval Number: 3060-0710.

Title: Policy and rules concernng the implementation of the local

competition provisions in the Telecommunications Act of 1996.

Form No.: N/A.

Type of Review: New collection.

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

Annual hour Total

No. of burden per annual

Information collection respondents response burden

(approx.) (hours) (hours)

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

Submission of information

necessary to reach agreement.... 51 500 25,500

Submission of agreements to the

state commission................ ........... ........... 835

New and modified............. 51 5

Class A carrier.............. 16 5

Other preexisting............ 500 1

Burden of proof regarding

interconnection and access

to unbundled network

elements.................... 100 250 25,000

Collocation...................... 100 250 25,000

Notification that state

commission has failed to act.... 30 1 30

Rural and small carriers......... 500 10 5,000

Pole attachment modifications:

private electric utilities and

telephone utilities............. 1,400 375 525,000

Maintenance practices

modifications: cable operators,

utilities and others............ 12,250 .5 6,125

Pole attachment access requests.. 2,500 1 2,500

Pole attachment denials of access 250 3 750

Dispute resolution process for

denials of access: using in-

house assistance................ 250 25 6,250

Dispute resolution process for

denials of access: using outside

legal counsel................... 250 4 1,000

Preparation of forward-looking

economic cost studies to

determine rates for

interconnection and unbundled

network elements during

arbitration proceedings......... 100 1,216 121,600

Preparation of a cost study on

avoidable costs to determine

resale discounts................ 200 480 96,000

Preparation of forward-looking

economic cost studies to

determine reciprocal rates for

transport and termination of

telecommunications traffic...... 100 1,216 121,600

[[Page 45479]]

Measurement of traffic for

purposes of determining whether

transport and termination

traffic flows are symmetrical... 550 700 385,000

Filing required for arbitration.. 200 2 400

Determination of rates for

interconnection, unbundled

network elements, and transport

and termination of

telecommunications traffic--

state commission review of

forward-looking economic cost

studies......................... 50 2,160 108,000

Determination of resale discount

percentage--state commission

review of avoided cost studies.. 50 640 32,000

Petition for incumbent LEC status 30 1 30

Use of proxies by state

commissions--articulating

written reasons for choice...... 50 120 6,000

Preparation of forward-looking

economic cost studies to

establish rates for transport

and termination for paging and

radiotelephone service,

narrowband personal

communications services, and

paging operation in the private

land mobile radio services...... 50 720 36,000

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

Total Annual Burden: 1,529,620 hours.

Respondents: Business or other for-profit.

Estimated costs per respondent: $0.

Needs and Uses: The Report and Order implements parts of section

251 of the Telecommunications Act requiring that: incumbent local

exchange carriers (LECs) offer interconnection, unbundled network

elements, transport and termination, and wholesale rates for retail

services to new entrants; incumbent LECs price such services at rates

that are cost-based and just and reasonable; and incumbent LECs provide

access to rights-of-way, as well as establish reciprocal compensation

arrangements for the transport and termination of telecommunications

traffic.

Synopsis of First Report and Order

I. Introduction, Overview, and Executive Summary

A. The Telecommunications Act of 1996--A New Direction

1. The Telecommunications Act of 1996, (Telecommunications Act of

1996, Public Law No. 104-104, 110 Stat. 56, to be codified at 47 U.S.C.

Secs. 151 et seq. Hereinafter, all citations to the 1996 Act will be to

the 1996 Act as codified in the United States Code), fundamentally

changes telecommunications regulation. In the old regulatory regime

government encouraged monopolies. In the new regulatory regime, we and

the states remove the outdated barriers that protect monopolies from

competition and affirmatively promote efficient competition using tools

forged by Congress. Historically, regulation of this industry has been

premised on the belief that service could be provided at the lowest

cost to the maximum number of consumers through a regulated monopoly

network. State and federal regulators devoted their efforts over many

decades to regulating the prices and practices of these monopolies and

protecting them against competitive entry. The 1996 Act adopts

precisely the opposite approach. Rather than shielding telephone

companies from competition, the 1996 Act requires telephone companies

to open their networks to competition.

2. The 1996 Act also recasts the relationship between the FCC and

state commissions responsible for regulating telecommunications

services. Until now, we and our state counterparts generally have

regulated the jurisdictional segments of this industry assigned to each

of us by the Communications Act of 1934. The 1996 Act forges a new

partnership between state and federal regulators. This arrangement is

far better suited to the coming world of competition in which

historical regulatory distinctions are supplanted by competitive

forces. As this Order demonstrates, we have benefitted enormously from

the expertise and experience that the state commissioners and their

staffs have contributed to these discussions. We look forward to the

continuation of that cooperative working relationship in the coming

months as each of us carries out the role assigned by the 1996 Act.

3. Three principal goals established by the telephony provisions of

the 1996 Act are: (1) opening the local exchange and exchange access

markets to competitive entry; (2) promoting increased competition in

telecommunications markets that are already open to competition,

including the long distance services market; and (3) reforming our

system of universal service so that universal service is preserved and

advanced as the local exchange and exchange access markets move from

monopoly to competition. In this rulemaking and related proceedings, we

are taking the steps that will achieve the pro-competitive,

deregulatory goals of the 1996 Act. The Act directs us and our state

colleagues to remove not only statutory and regulatory impediments to

competition, but economic and operational impediments as well. We are

directed to remove these impediments to competition in all

telecommunications markets, while also preserving and advancing

universal service in a manner fully consistent with competition.

4. These three goals are integrally related. Indeed, the

relationship between fostering competition in local telecommunications

markets and promoting greater competition in the long distance market

is fundamental to the 1996 Act. Competition in local exchange and

exchange access markets is desirable, not only because of the social

and economic benefits competition will bring to consumers of local

services, but also because competition eventually will eliminate the

ability of an incumbent local exchange carrier to use its control of

bottleneck local facilities to impede free market competition. Under

section 251, incumbent local exchange carriers (LECs), including the

Bell Operating Companies (BOCs), are mandated to take several steps to

open their networks to competition, including providing

interconnection, offering access to unbundled elements of their

networks, and making their retail services available at wholesale rates

so that they can be resold. Under section 271, once the BOCs have taken

the necessary steps, they are allowed to offer long distance service in

areas where they provide local telephone service, if we find that entry

meets the specific statutory requirements and is consistent with the

public interest. Thus, under the 1996 Act, the opening of one of the

last monopoly bottleneck strongholds in telecommunications--the local

exchange and exchange access markets--to competition is intended to

pave the way for enhanced competition in all telecommunications

markets, by allowing all providers to enter all

[[Page 45480]]

markets. The opening of all telecommunications markets to all providers

will blur traditional industry distinctions and bring new packages of

services, lower prices and increased innovation to American consumers.

The world envisioned by the 1996 Act is one in which all providers will

have new competitive opportunities as well as new competitive

challenges.

5. The Act also recognizes, however, that universal service cannot

be maintained without reform of the current subsidy system. The current

universal service system is a patchwork quilt of implicit and explicit

subsidies. These subsidies are intended to promote telephone

subscribership, yet they do so at the expense of deterring or

distorting competition. Some policies that traditionally have been

justified on universal service considerations place competitors at a

disadvantage. Other universal service policies place the incumbent LECs

at a competitive disadvantage. For example, LECs are required to charge

interexchange carriers a Carrier Common Line charge for every minute of

interstate traffic that any of their customers send or receive. This

exposes LECs to competition from competitive access providers, which

are not subject to this cost burden. Hence, section 254 of the Act

requires the Commission, working with the states and consumer advocates

through a Federal/State Joint Board, to revamp the methods by which

universal service payments are collected and disbursed. Federal-State

Joint Board on Universal Service, CC Docket No. 96-45, Notice of

Proposed Rulemaking and Order Establishing Joint Board, FCC 96-93, 61

FR 10499 (March 14, 1996) (Universal Service NPRM). The present

universal service system is incompatible with the statutory mandate to

introduce efficient competition into local markets, because the current

system distorts competition in those markets. For example, without

universal service reform, facilities-based entrants would be forced to

compete against monopoly providers that enjoy not only the technical,

economic, and marketing advantages of incumbency, but also subsidies

that are provided only to the incumbents.

B. The Competition Trilogy: Section 251, Universal Service Reform and

Access Charge Reform

6. The rules that we adopt to implement the local competition

provisions of the 1996 Act represent only one part of a trilogy. In

this Report and Order, we adopt initial rules designed to accomplish

the first of the goals outlined above--opening the local exchange and

exchange access markets to competition. The steps we take today are the

initial measures that will enable the states and the Commission to

begin to implement sections 251 and 252. Given the dynamic nature of

telecommunications technology and markets, it will be necessary over

time to review proactively and adjust these rules to ensure both that

the statute's mandate of competition is effectuated and enforced, and

that regulatory burdens are lifted as soon as competition eliminates

the need for them. Efforts to review and revise these rules will be

guided by the experience of states in their initial implementation

efforts.

7. The second part of the trilogy is universal service reform. In

early November, the Federal/State Universal Service Joint Board,

including three members of this Commission, will make its

recommendations to the Commission. These recommendations will serve as

the cornerstone of universal service reform. The Commission will act on

the Joint Board's recommendations and adopt universal service rules not

later than May 8, 1997, and, we hope, even earlier. Our universal

service reform order, consistent with section 254, will rework the

subsidy system to guarantee affordable service to all Americans in an

era in which competition will be the driving force in

telecommunications. By reforming the collection and distribution of

universal service funds, the states and the Commission will also ensure

that the goals of affordable service and access to advanced services

are met by means that enhance, rather than distort, competition.

Universal service reform is vitally connected to the local competition

rules we adopt today.

8. The third part of the trilogy is access charge reform. It is

widely recognized that, because a competitive market drives prices to

cost, a system of charges which includes non-cost based components is

inherently unstable and unsustainable. It also well-recognized that

access charge reform is intensely interrelated with the local

competition rules of section 251 and the reform of universal service.

We will complete access reform before or concurrently with a final

order on universal service.

9. Only when all parts of the trilogy are complete will the task of

adjusting the regulatory framework to fully competitive markets be

finished. Only when our counterparts at the state level complete

implementing and supplementing these rules will the complete blueprint

for competition be in place. Completion of the trilogy, coupled with

the reduction in burdensome and inefficient regulation we have

undertaken pursuant to other provisions of the 1996 Act, will unleash

marketplace forces that will fuel economic growth. Until then,

incumbents and new entrants must undergo a transition process toward

fully competitive markets. We will, however, act quickly to complete

the three essential rulemakings. We intend to issue a notice of

proposed rulemaking in 1996 and to complete the access charge reform

proceeding concurrently with the statutory deadline established for the

section 254 rulemaking. This timetable will ensure that actions taken

by the Joint Board in November and this Commission by not later than

May 1997 in the universal service reform proceeding will be coordinated

with the access reform docket.

C. Economic Barriers

10. As we pointed out in our Notice of Proposed Rulemaking in this

docket, Implementation of the Local Competition Provisions of the

Telecommunications Act of 1996, CC Docket No. 96-98, Notice of Proposed

Rulemaking, FCC 96-182 (April 19, 1996), 61 FR 18311 (April 25, 1996)

(NPRM), the removal of statutory and regulatory barriers to entry into

the local exchange and exchange access markets, while a necessary

precondition to competition, is not sufficient to ensure that

competition will supplant monopolies. An incumbent LEC's existing

infrastructure enables it to serve new customers at a much lower

incremental cost than a facilities-based entrant that must install its

own switches, trunking and loops to serve its customers. Furthermore,

absent interconnection between the incumbent LEC and the entrant, the

customer of the entrant would be unable to complete calls to

subscribers served by the incumbent LEC's network. Because an incumbent

LEC currently serves virtually all subscribers in its local serving

area, an incumbent LEC has little economic incentive to assist new

entrants in their efforts to secure a greater share of that market. An

incumbent LEC also has the ability to act on its incentive to

discourage entry and robust competition by not interconnecting its

network with the new entrant's network or by insisting on

supracompetitive prices or other unreasonable conditions for

terminating calls from the entrant's customers to the incumbent LEC's

subscribers.

11. Congress addressed these problems in the 1996 Act by mandating

that the most significant economic impediments to efficient entry into

the monopolized local market must be

[[Page 45481]]

removed. The incumbent LECs have economies of density, connectivity,

and scale; traditionally, these have been viewed as creating a natural

monopoly. As we pointed out in our NPRM, the local competition

provisions of the Act require that these economies be shared with

entrants. We believe they should be shared in a way that permits the

incumbent LECs to maintain operating efficiency to further fair

competition, and to enable the entrants to share the economic benefits

of that efficiency in the form of cost-based prices. Congress also

recognized that the transition to competition presents special

considerations in markets served by smaller telephone companies,

especially in rural areas. We are mindful of these considerations, and

know that they will be taken into account by state commissions as well.

12. The Act contemplates three paths of entry into the local

market--the construction of new networks, the use of unbundled elements

of the incumbent's network, and resale. The 1996 Act requires us to

implement rules that eliminate statutory and regulatory barriers and

remove economic impediments to each. We anticipate that some new

entrants will follow multiple paths of entry as market conditions and

access to capital permit. Some may enter by relying at first entirely

on resale of the incumbent's services and then gradually deploying

their own facilities. This strategy was employed successfully by MCI

and Sprint in the interexchange market during the 1970's and 1980's.

Others may use a combination of entry strategies simultaneously--

whether in the same geographic market or in different ones. Some

competitors may use unbundled network elements in combination with

their own facilities to serve densely populated sections of an

incumbent LEC's service territory, while using resold services to reach

customers in less densely populated areas. Still other new entrants may

pursue a single entry strategy that does not vary by geographic region

or over time. Section 251 neither explicitly nor implicitly expresses a

preference for one particular entry strategy. Moreover, given the

likelihood that entrants will combine or alter entry strategies over

time, an attempt to indicate such a preference in our section 251 rules

may have unintended and undesirable results. Rather, our obligation in

this proceeding is to establish rules that will ensure that all pro-

competitive entry strategies may be explored. As to success or failure,

we look to the market, not to regulation, for the answer.

13. We note that an entrant, such as a cable company, that

constructs its own network will not necessarily need the services or

facilities of an incumbent LEC to enable its own subscribers to

communicate with each other. A firm adopting this entry strategy,

however, still will need an agreement with the incumbent LEC to enable

the entrant's customers to place calls to and receive calls from the

incumbent LEC's subscribers. Sections 251 (b)(5) and (c)(2) require

incumbent LECs to enter into such agreements on just, reasonable, and

nondiscriminatory terms and to transport and terminate traffic

originating on another carrier's network under reciprocal compensation

arrangements. In this item, we adopt rules for states to apply in

implementing these mandates of section 251 in their arbitration of

interconnection disputes, as well as their review of such arbitrated

arrangements, or a BOC's statement of generally available terms. We

believe that our rules will assist the states in carrying out their

responsibilities under the 1996 Act, thereby furthering the Act's goals

of fostering prompt, efficient, competitive entry.

14. We also note that many new entrants will not have fully

constructed their local networks when they begin to offer service.

Joint Managers' Statement, S. Conf. Rep. No. 104-230, 104th Cong., 2d

Sess. 113 (1996) (``Joint Explanatory Statement'') at 121. Although

they may provide some of their own facilities, these new entrants will

be unable to reach all of their customers without depending on the

incumbent's facilities. Hence, in addition to an arrangement for

terminating traffic on the incumbent LEC's network, entrants will

likely need agreements that enable them to obtain wholesale prices for

services they wish to sell at retail and to use at least some portions

of the incumbents' facilities, such as local loops and end office

switching facilities.

15. Congress recognized that, because of the incumbent LEC's

incentives and superior bargaining power, its negotiations with new

entrants over the terms of such agreements would be quite different

from typical commercial negotiations. As distinct from bilateral

commercial negotiation, the new entrant comes to the table with little

or nothing the incumbent LEC needs or wants. The statute addresses this

problem by creating an arbitration proceeding in which the new entrant

may assert certain rights, including that the incumbent's prices for

unbundled network elements must be ``just, reasonable and

nondiscriminatory.'' We adopt rules herein to implement these

requirements of section 251(c)(3).

D. Operational Barriers

16. The statute also directs us to remove the existing operational

barriers to entering the local market. Vigorous competition would be

impeded by technical disadvantages and other handicaps that prevent a

new entrant from offering services that consumers perceive to be equal

in quality to the offerings of incumbent LECs. Our recently-issued

number portability Report and Order addressed one of the most

significant operational barriers to competition by permitting customers

to retain their phone numbers when they change local carriers.

Telephone Number Portability, CC Docket No. 95-116, First Report and

Order and Further Notice of Proposed Rulemaking, FCC 96-286 (July 2,

1996) (61 FR 38605 (July 25, 1996)) (Number Portability Order).

Consistent with the 1996 Act, 47 U.S.C. Sec. 251(b)(2), we required

LECs to implement interim and long-term measures to ensure that

customers can change their local service providers without having to

change their phone number. Number portability promotes competition by

making it less expensive and less disruptive for a customer to switch

providers, thus freeing the customer to choose the local provider that

offers the best value.

17. Closely related to number portability is dialing parity, which

we address in a companion order. Dialing parity enables a customer of a

new entrant to dial others with the convenience an incumbent provides,

regardless of which carrier the customer has chosen as the local

service provider. The history of competition in the interexchange

market illustrates the critical importance of dialing parity to the

successful introduction of competition in telecommunications markets.

Equal access enabled customers of non-AT&T providers to enjoy the same

convenience of dialing ``1'' plus the called party's number that AT&T

customers had. Prior to equal access, subscribers to interexchange

carriers (IXCs) other than AT&T often were required to dial more than

20 digits to place an interstate long-distance call. Industry data show

that, after equal access was deployed throughout the country, the

number of customers using MCI and other long-distance carriers

increased significantly. Federal Communications Commission, Statistics

of Communications Common Carriers 1994-95, at 344, Table 8.8; Federal

Communications Commission, Report on Long Distance Market Share, Second

Quarter 1995, at 14, table 6 (Oct. 1995). Thus, we believe that equal

access had a substantial pro-competitive

[[Page 45482]]

impact. Dialing parity should have the same effect.

18. This Order addresses other operational barriers to competition,

such as access to rights of way, collocation, and the expeditious

provisioning of resale and unbundled elements to new entrants. The

elimination of these obstacles is essential if there is to be a fair

opportunity to compete in the local exchange and exchange access

markets. As an example, customers can voluntarily switch from one

interexchange carrier to another extremely rapidly, through automated

systems. This has been a boon to competition in the interexchange

market. We expect that moving customers from one local carrier to

another rapidly will be essential to fair local competition.

19. As competition in the local exchange market emerges,

operational issues may be among the most difficult for the parties to

resolve. Thus, we recognize that, along with the state commissions and

the courts, we will be called upon to enforce provisions of arbitrated

agreements and our rules relating to these operational barriers to

entry. Because of the critical importance of eliminating these barriers

to the accomplishment of the Act's pro-competitive objectives, we

intend to enforce our rules in a manner that is swift, sure, and

effective. To this end we will review, with the states, our enforcement

techniques during the fourth quarter of 1996.

20. We recognize that during the transition from monopoly to

competition it is vital that we and the states vigilantly and

vigorously enforce the rules that we adopt today and that will be

adopted in the future to open local markets to competition. If we fail

to meet that responsibility, the actions that we take today to

accomplish the 1996 Act's pro-competitive, deregulatory objectives may

prove to be ineffective.

E. Transition

21. We consider it vitally important to establish a ``pro-

competitive, deregulatory national policy framework'' for local

telephony competition, but we are acutely mindful of existing common

carrier arrangements, relationships, and expectations, particularly

those that affect incumbent LECs. In light of the timing issues

described above, we think it wise to provide some appropriate

transitions.

22. In this regard, this Order sets minimum, uniform, national

rules, but also relies heavily on states to apply these rules and to

exercise their own discretion in implementing a pro-competitive regime

in their local telephone markets. On those issues where the need to

create a factual record distinct to a state or to balance unique local

considerations is material, we ask the states to develop their own

rules that are consistent with general guidance contained herein. The

states will do so in rulemakings and in arbitrating interconnection

arrangements. On other issues, particularly those related to pricing,

we facilitate the ability of states to adopt immediate, temporary

decisions by permitting the states to set proxy prices within a defined

range or subject to a ceiling. We believe that some states will find

these alternatives useful in light of the strict deadlines of the law.

For example, section 252(b)(4)(C) requires a state commission to

complete the arbitration of issues that have been referred to it,

pursuant to section 252(b)(1), within nine months after the incumbent

local exchange carrier received the request for negotiation. Selection

of the actual prices within the range or subject to the ceiling will be

for the state commission to determine. Some states may use proxies

temporarily because they lack the resources necessary to review cost

studies in rulemakings or arbitrations. Other states may lack adequate

resources to complete such tasks before the expiration of the

arbitration deadline. However, we encourage all states to complete the

necessary work within the statutory deadline. Our expectation is that

the bulk of interconnection arrangements will be concluded through

arbitration or agreement, by the beginning of 1997. Not until then will

we be able to determine more precisely the impact of this Order on

promoting competition. Between now and then, we are eager to continue

our work with the states. In this period, as set forth earlier, we

should be able to take major steps toward implementing a new universal

service system and far-reaching reform of interstate access. These

reforms will reflect intensive dialogue between us and the states.

23. Similarly, as states implement the rules that we adopt in this

order as well as their own decisions, they may find it useful to

consult with us, either formally or informally, regarding particular

aspects of these rules. We encourage and invite such inquiries because

we believe that such consultations are likely to provide greater

certainty to the states as they apply our rules to specific arbitration

issues and possibly to reduce the burden of expensive judicial

proceedings on states. A variety of formal and informal procedures

exist under our rules for such consultations, and we may find it

helpful to fashion others as we gain additional experience under the

1996 Act.

F. Executive Summary

1. Scope of Authority of the FCC and State Commissions

24. The Commission concludes that sections 251 and 252 address both

interstate and intrastate aspects of interconnection, resale services,

and access to unbundled elements. The 1996 Act moves beyond the

distinction between interstate and intrastate matters that was

established in the 1934 Act, and instead expands the applicability of

national rules to historically intrastate issues, and state rules to

historically interstate issues. In the Report and Order, the Commission

concludes that the states and the FCC can craft a partnership that is

built on mutual commitment to local telephone competition throughout

the country, and that under this partnership, the FCC establishes

uniform national rules for some issues, the states, and in some

instances the FCC, administer these rules, and the states adopt

additional rules that are critical to promoting local telephone

competition. The rules that the FCC establishes in this Report and

Order are minimum requirements upon which the states may build. The

Commission also intends to review and amend the rules it adopts in this

Report and Order to take into account competitive developments, states'

experiences, and technological changes.

2. Duty to Negotiate in Good Faith

25. In the Report and Order, the Commission establishes some

national rules regarding the duty to negotiate in good faith, but

concludes that it would be futile to try to determine in advance every

possible action that might be inconsistent with the duty to negotiate

in good faith. The Commission also concludes that, in many instances,

whether a party has negotiated in good faith will need to be decided on

a case-by-case basis, in light of the particular circumstances. The

Commission notes that the arbitration process set forth in section 252

provides one remedy for failing to negotiate in good faith. The

Commission also concludes that agreements that were negotiated before

the 1996 Act was enacted, including agreements between neighboring

LECs, must be filed for review by the state commission pursuant to

section 252(a).

[[Page 45483]]

If the state commission approves such agreements, the terms of those

agreements must be made available to requesting telecommunications

carriers in accordance with section 252(i).

3. Interconnection

26. Section 251(c)(2) requires incumbent LECs to provide

interconnection to any requesting telecommunications carrier at any

technically feasible point. The interconnection must be at least equal

in quality to that provided by the incumbent LEC to itself or its

affiliates, and must be provided on rates, terms, and conditions that

are just, reasonable, and nondiscriminatory. The Commission concludes

that the term ``interconnection'' under section 251(c)(2) refers only

to the physical linking of two networks for the mutual exchange of

traffic. The Commission identifies a minimum set of five ``technically

feasible'' points at which incumbent LECs must provide interconnection:

(1) the line side of a local switch (for example, at the main

distribution frame); (2) the trunk side of a local switch; (3) the

trunk interconnection points for a tandem switch; (4) central office

cross-connect points; and (5) out-of-band signalling facilities, such

as signalling transfer points, necessary to exchange traffic and access

call-related databases. In addition, the points of access to unbundled

elements (discussed below) are also technically feasible points of

interconnection. The Commission finds that telecommunications carriers

may request interconnection under section 251(c)(2) to provide

telephone exchange or exchange access service, or both. If the request

is for such purpose, the incumbent LEC must provide interconnection in

accordance with section 251(c)(2) and the Commission's rules thereunder

to any telecommunications carrier, including interexchange carriers and

commercial mobile radio service (CMRS) providers.

4. Access to Unbundled Elements

27. Section 251(c)(3) requires incumbent LECs to provide requesting

telecommunications carriers nondiscriminatory access to network

elements on an unbundled basis at any technically feasible point on

rates, terms, and conditions that are just, reasonable, and

nondiscriminatory. In the Report and Order, the Commission identifies a

minimum set of network elements that incumbent LECs must provide under

this section. States may require incumbent LECs to provide additional

network elements on an unbundled basis. The minimum set of network

elements the Commission identifies are: local loops, local and tandem

switches (including all vertical switching features provided by such

switches), interoffice transmission facilities, network interface

devices, signalling and call-related database facilities, operations

support systems and information, and operator and directory assistance

facilities. The Commission concludes that incumbent LECs must provide

nondiscriminatory access to operations support systems and information

by January 1, 1997. The Commission concludes that access to such

operations support systems is critical to affording new entrants a

meaningful opportunity to compete with incumbent LECs. The Commission

also concludes that incumbent LECs are required to provide access to

network elements in a manner that allows requesting carriers to combine

such elements as they choose, and that incumbent LECs may not impose

restrictions upon the uses to which requesting carriers put such

network elements.

5. Methods of Obtaining Interconnection and Access to Unbundled

Elements

28. Section 251(c)(6) requires incumbent LECs to provide physical

collocation of equipment necessary for interconnection or access to

unbundled network elements at the incumbent LEC's premises, except that

the incumbent LEC may provide virtual collocation if it demonstrates to

the state commission that physical collocation is not practical for

technical reasons or because of space limitations. The Commission

concludes that incumbent LECs are required to provide for any

technically feasible method of interconnection or access requested by a

telecommunications carrier, including physical collocation, virtual

collocation, and interconnection at meet points. The Commission adopts,

with certain modifications, some of the physical and virtual

collocation requirements it adopted earlier in the Expanded

Interconnection proceeding. The Commission also establishes rules

interpreting the requirements of section 251(c)(6).

6. Pricing Methodologies

29. The 1996 Act requires the states to set prices for

interconnection and unbundled elements that are cost-based,

nondiscriminatory, and may include a reasonable profit. To help the

states accomplish this, the Commission concludes that the state

commissions should set arbitrated rates for interconnection and access

to unbundled elements pursuant a forward-looking economic cost pricing

methodology. The Commission concludes that the prices that new entrants

pay for interconnection and unbundled elements should be based on the

local telephone companies Total Element Long-Run Incremental Cost

(TELRIC) of providing a particular network element, plus a reasonable

share of forward-looking joint and common costs. States will determine,

among other things, the appropriate risk-adjusted cost of capital and

depreciation rates. For states that are unable to conduct a cost study

and apply an economic costing methodology within the statutory time

frame for arbitrating interconnection disputes, the Commission

establishes default ceilings and ranges for the states to apply, on an

interim basis, to interconnection arrangements. The Commission

establishes a default range of 0.2-0.4 cents per minute for switching,

plus access charges as discussed below. For tandem switching, the

Commission establishes a default ceiling of 0.15 cents per minute. The

Order also establishes default ceilings for the other unbundled network

elements.

7. Access Charges for Unbundled Switching

30. Nothing in this Report and Order alters the collection of

access charges paid by an interexchange carrier under Part 69 of the

Commission's rules, when the incumbent LEC provides exchange access

service to an interexchange carrier, either directly or through service

resale. Because access charges are not included in the cost-based

prices for unbundled network elements, and because certain portions of

access charges currently support the provision of universal service,

until the access charge reform and universal service proceedings have

been completed, the Commission continues to provide for access charge

recovery with respect to use of an incumbent LEC's unbundled switching

element, for a defined period of time. This will minimize the

possibility that the incumbent LEC will be able to ``double recover,''

through access charges, the facility costs that new entrants have

already paid to purchase unbundled elements, while preserving the

status quo with respect to subsidy payments. Incumbent LECs will

recover from interconnecting carriers the carrier common line charge

and a charge equal to 75% of the transport interconnection charge for

all interstate minutes traversing the incumbent LECs local switches for

which the interconnecting carriers pay unbundled network element

charges. This aspect of the Order expires at the earliest of: (1)

[[Page 45484]]

June 30, 1997; (2) issuance of final decisions by the Commission in the

universal service and access reform proceedings; or (3) if the

incumbent LEC is a Bell Operating Company (BOC), the date on which that

BOC is authorized under section 271 of the Act to provide in-region

interLATA service, for any given state.

8. Resale

31. The 1996 Act requires all incumbent LECs to offer for resale

any telecommunications service that the carrier provides at retail to

subscribers who are not telecommunications carriers. Resale will be an

important entry strategy both in the short term for many new entrants

as they build out their own facilities and for small businesses that

cannot afford to compete in the local exchange market by purchasing

unbundled elements or by building their own networks. State commissions

must identify marketing, billing, collection, and other costs that will

be avoided or that are avoidable by incumbent LECs when they provide

services wholesale, and calculate the portion of the retail rates for

those services that is attributable to the avoided and avoidable costs.

The Commission identifies certain avoided costs, and the application of

this definition is left to the states. If a state elects not to

implement the methodology, it may elect, on an interim basis, a

discount rate from within a default range of discount rates established

by the Commission. The Commission establishes a default discount range

of 17-25% off retail prices, leaving the states to set the specific

rate within that range, in the exercise of their discretion.

9. Requesting Telecommunications Carriers

32. The Commission concludes that, to the extent that a carrier is

engaged in providing for a fee local, interexchange, or international

basic services directly to the public or to such classes of users as to

be effectively available directly to the public, the carrier is a

``telecommunications carrier,'' and is thus subject to the requirements

of section 251(a) and the benefits of section 251(c). The Commission

concludes that CMRS providers are telecommunications carriers, and that

private mobile radio service (PMRS) providers generally are not

telecommunications carriers, except to the extent that a PMRS provider

uses excess capacity to provide local, interexchange, or international

services for a fee directly to the public. The Commission also

concludes that, if a company provides both telecommunications services

and information services, it must be classified as a telecommunications

carrier.

10. Commercial Mobile Radio Service

33. The Commission concludes that LECs are obligated, pursuant to

section 251(b)(5) and the corresponding pricing standards of section

252(d)(2) to enter into reciprocal compensation arrangements with CMRS

providers, including paging providers, for the transport and

termination of traffic on each other's networks. The Commission

concludes that many CMRS providers (specifically cellular, broadband

PCS and covered specialized mobile radio (SMR) providers) offer

telephone exchange service and exchange access, and that incumbent LECs

therefore must make interconnection available to these CMRS providers

in conformity with sections 251(c) and 252. The Commission concludes

that CMRS providers should not be classified as LECs at this time. The

Commission also concludes that it may apply section 251 and 252 to LEC-

CMRS interconnection. By opting to proceed under sections 251 and 252,

the Commission is not finding that section 332 jurisdiction over

interconnection has been repealed by implication, and the Commission

acknowledges that section 332, in tandem with section 201, is a basis

for jurisdiction over LEC-CMRS interconnection.

11. Transport and Termination

34. The 1996 Act requires that charges for transport and

termination of traffic be cost-based. The Commission concludes that

state commissions, during arbitrations, should set symmetrical prices

based on the local telephone company's forward-looking costs. The state

commissions would also use the TELRIC methodology when establishing

rates for transport and termination. The Commission establishes a

default range of 0.2-0.4 cents per minute for end office termination

for states which have not conducted a TELRIC cost study. The Commission

finds significant evidence in the record in support of the lower end of

the ranges. In addition, the Commission finds that additional

reciprocal charges could apply to termination through a tandem switch.

The default ceiling for tandem switching is 0.15 cents per minute, plus

applicable charges for transport from the tandem switch to the end

office. Each state opting for the default approach for a limited period

of time, may select a rate within that range.

12. Access to Rights of Way

35. The Commission amends its rules to implement the pole