IX. Treatment of ILEC Net Receipts and Distributions
Some carriers have committed to reduce on a dollar-for-dollar basis through direct reductions to
their tariffed rates any amounts received from the universal service funding mechanism. See
GTEN Reply Brief at p. 26. GTEN Stmt. 1.4 (Williams) pp. 4, 32.
We believe this appropriate and reiterate our earlier finding that to the extent rate rebalancing is
proposed, it should be done or coordinated to the extent possible within the context of the
universal service funding mechanism. We clearly have the authority pursuant to §1308(a) to
order rate rebalancing as a result of our findings in this proceeding. It is our intent to coordinate
the results of this proceeding with the intrastate access charge reform proceeding we initiate
today. However, we do not find the evidence in the record of this proceeding sufficient to
support the other forms of rebalancing put forth, particularly with respect to increases to
residential rates since the direction of any subsidies involving residential rates has not been
established.
As discussed in the immediately preceding section, we today initiate an investigation to examine
the costs and pricing levels of intrastate access charges. It is unlikely that the funding
mechanism established herein will be in place prior to the completion of our intrastate access
charge proceeding. Hence, we expect ILECs to coordinate any specific reductions found
necessary in the intrastate access charge proceeding with their filings under Chapter 30.
Those companies with positive net revenue impacts from the fund shall be given the following options:
1. Companies will be required to come under § 1308(a) with filings which propose rate reductions calculated to offset the aggregate of fund receipts which they are entitled to under the fund. Companies shall be required to file under § 1308(a) pursuant to a schedule to be determined by the Commission at a later date. Any rate reductions shall be supported by cost studies.
2. Companies shall also be permitted to file a proposed alternative or streamlined regulation and network modernization plan pursuant to Chapter 30 of the Public Utility Code, 66 Pa.C.S.A. §§ 3001, et seq.
3. We will also permit companies, as part of their filings, to propose the availability of Lifeline programs within their service areas as an offset to any receipts to be obtained under fund.
As to those companies, including Bell, which are subject to a Chapter 30 alternative regulation
plan, the issue arises as to how the net contributions for these companies should be treated. Bell
is the only ILEC affected by this issues at least at the present time, since Bell is the only ILEC
which has filed under Chapter 30 and which will be required to make net contributions to the
funding mechanism at this time.(27) Bell's
Chapter 30 Plan approved with modification by this
Commission on June 28, 1994, provides for exogenous pass-throughs of changes in costs
resulting from: 1) jurisdictional shifts where costs are transferred to or from the interstate
jurisdiction and where an equal and opposite exogenous adjustment was allowed by the FCC
under its price cap system, and 2) limited regulatory accounting changes not initiated by Bell. 82
Pa. P.U.C. 236.
We note in this regard the Joint Board's recommendation that companies subject to price cap regulation be eligible to receive universal service support at the Federal level. Joint Board Recommended Decision at para. 159. The Joint Board stated in this regard:
No persuasive rationale has been advanced to explain why the flexibility and the opportunity for increased earnings that companies obtain when they are subject to price caps [footnote omitted] should disqualify such companies from receiving universal service support as long as they otherwise meet the statutory criteria for eligibility. Rather, we agree with those commenters that argue that price cap regulation is an important tool to smooth the transition to competition and that its use should not foreclose price cap companies from receiving universal service support.
Id. at para. 159.
We concur with the Joint Board's recommendation with regard to eligibility for the Federal
funding mechanism. In addition, we will not restrict eligibility to the state funding mechanism if
a carrier is regulated under Chapter 30 and is subject to price-caps or another alternative form of
regulation.
The Joint Board, however, did not address the issue of whether payments into the fund should
qualify for exogenous treatment under the Federal price cap plan. We decline to make any
findings as to whether exogenous treatment would be appropriate at this time. Since the funding
mechanism will not be operational before the FCC issues its decision in May, 1997, we will
consider the findings of the FCC on price cap carrier eligibility for federal fund receipts and their
ultimate disposition with regard to the appropriate treatment of any net payments into the federal
fund.
We expect that the FCC will address exogenous treatment for the larger LEC's since they have
not traditionally been required to contribute to the Federal funding mechanism. To the extent
their contributions exceed their distributions under the fund, the same issue is raised as to
whether the amount contributed qualifies for exogenous treatment under the existing federal
price cap plans.
We note that Bell did not comment one way or the other in the record of this proceeding as to
whether its payments into the state funding mechanism should qualify as an exogenous event
under its state Chapter 30 plan. Nor was this issue the subject of comment by other parties either
in the context of this proceeding.
X. Collection of USF Assessments
Several parties, including AT&T and GTEN, continue to advocate that an end user monthly surcharge be utilized to fund the state universal service funding mechanism. The Commission's Final-form regulations establishing the parameters of a USF funding mechanism provided no specific requirements on how contributions to the universal service fund should be recovered. In our Order accompanying the regulations we stated:
Overall, our preference is that the marketplace determine if and where net contribution can be recovered by a given carrier as long as recovery is consistent with the universal service goals articulated by the Commission.
We believe that further development of the record is appropriate with respect to this issue. Consequently, we will give parties the opportunity to develop the record relative to how contributions to the universal service fund can be recovered in Phase II of this proceeding. With regard to this issue, parties should submit comments within 45 days of the entry date of this Opinion and Order. The deadline for filing reply comments will be 75 days from the entry date of this Opinion and Order.
XI. Small LEC Waiver Process
PTA argues that the Commission should recognize that if a company is disadvantaged by the
generic, statewide methodology adopted in the BCM 2, an individual company should be
authorized to petition the Commission for modification.
While we fully expect the costing model to anticipate actual cost of service with some degree of
accuracy, there may be the rare case where actual costs prove much greater than the proxy costs.
Small LECs expect actual cost to prove much greater than the proxy costs. Small LECs may not
be able to withstand the economic impact of such a disparity. For this reason, we will grant a
waiver of our rules under very limited circumstances.
For a 3-year transition period, small LECs may petition this Commission for a waiver of the
rules. The Commission will grant such a waiver provided the petitioning LEC can show: (1) that
it has 50,000 or less access lines; (2) that it is an Eligible Telecommunications Provider; and (3)
that its embedded costs are significantly greater that the proxy costs and that the LEC would be
adversely affected and its ability to provide quality service compromised by the reduced amount
of funding it will receive.
Once again, we believe that this action is consistent with recent actions taken at the federal level.
Under the Joint Board's recommendation, small LECs are allowed to use embedded costs to
determine BUS costs for a 3-year transition period. While we will not be using embedded costs,
by permitting small LECs a waiver process, any potential adverse consequences identified by the
Joint Board in conjunction with the utilization of proxy costing for smaller LECs will be
mitigated.
XII. Transition Plan
In recognition of the fact that the evolution to a competitive marketplace is a transitional one,
implementation of the funding mechanism will be phased in over a four year period. In year one,
a fund equivalent of 25% of the monies for the universal service fund should be collected and
distributed. In years two, three and four, an additional incremental 25% in each year of the
monies for the universal service fund should be collected and distributed.
XIII. Reciprocal Compensation Rates
We instructed parties to address permanent interconnection rates in this proceeding in our October 4, 1995 Order in the MFS proceeding. We stated in relevant part:
Our action in this Opinion and Order adopts no predetermined solution or methodology to the question of the just and reasonable compensation for termination of local calls as between MFS and Bell. Instead, we reiterate our strong preference to provide the parties with an opportunity to resolve this issue through negotiation giving due consideration to the market realities facing each competitor. Neither Bell, nor MFS should, however, question the resolve of this Commission to fashion a result if the parties in question fail to take full advantage of this extraordinary opportunity.
We also direct MFS, Bell, the other applicants with petitions pending, and any other interested party to explore the interconnection costs and an appropriate mechanism for recovering such costs, on a permanent basis in the Universal Service Investigation. Each party should include in its analysis, an identification of all costs and subsidies currently existing in each LEC's access charges and a proposed resolution for restructuring rates in a manner which permits an appropriate reduction of such charges. The scope of this analysis should also include a review a review of the costs and subsidies for new local exchange carriers access charges.
We would also direct that a Secretarial Letter issue apprising the parties to the Universal Service Investigation that proceeding should address appropriate mechanisms for recovering the costs pertaining to interconnection access pricing.
Parties were given until November 26, 1996 to independently arrive at a negotiated resolution
with Bell regarding an appropriate reciprocal compensation arrangement. The Commission
instructed that if parties were unable to arrive at an independently negotiated agreement, the
Commission would enter an Order disposing of the issue by December 26, 1995. Due to the
parties inability to reach agreement on this issue, the Commission, by Opinion and Order entered
December 13, 1995, established an escrow arrangement, with Bell and each of the co-carriers
required to make monthly payments of $3,250 into a fund until a permanent rate was established.
Finally, in our December 13, 1995 Order we also put parties on notice that we would be
examining "the obligations of all LECs (both incumbent and competitive LECs) to determine if
the interconnection rates charged by those carriers, assuming universal service and carrier of last
resort obligations, should be different, and by how much, than the rates charged by niche market
co-carriers." Id. at p. 7.
Since that time, the TA-96 was enacted into law. The Federal Act sets pricing standards for call
termination which this Commission must follow. Section 252(d)(2). The standard is based on
the additional costs associated with the transport and termination of calls on each interconnected
carrier's network. Section 252(d)(2)(A)(I).
A. Position of the Parties
The positions of the parties generally line up in four major persuasions: usage for local
interconnection (BA-PA, PTA and GTEN); flat rate (Sprint/United and TCG); TSLRIC (AT&T);
and bill and keep (MCI, OCA, MFS, ETC, and PCTA).
1. Usage Charges
Bell urges that the Commission adopt a "play or pay" system whereby Bell would charge its
currently approved intrastate switched access rates less the CCLC, because it has no cost basis.
Bell Brief at p. 7.
Bell states that only its proposed termination rate of switched access minus the CCLC meets the
reciprocal compensation standard of §§ 251(b)(5) and 252(d)(2)(A). Bell Reply Brief at p. 4.
Bell states that its termination rate proposal is consistent with the Federal Act and is separate
from the "play or pay" proposal (inclusion of universal service charges) discussed earlier in this
Order. Bell Reply Brief at p. 5. Bell states that "[i]f the Commission adopts Bell's termination
rate recommendation, all parties -- incumbent LECs and new competitors -- can charge a
termination rate equal to the switched access rate minus the CCLC." Id. at p. 5. Bell goes on to
argue that if the termination rate for local calls is priced differently than toll calls and is
significantly less that the switched access rate, new LECs will have every incentive to classify all
calls as local in order to pay the lower local termination rate.
GTEN witness Vogel also recommends the application of switched access rates for local interconnection, with some modification. Witness Vogel would eliminate the CCLC and limit the application of switched access rates to end office switching, transport, and information surcharge rate elements. GTEN Main Brief at 43 (citing GTEN Stmt. 6.0 (Vogel) pp. 15, 16). GTEN takes this position because "local interconnection is functionally no different from interexchange access." GTEN Main Brief at p. 43. GTEN agrees with Bell that unless priced in this fashion, it will create an economically inefficient pricing structure with an opportunity for arbitrage since a CLEC could characterize a call as "local" when the same call provisioned by an interexchange carrier, would be a toll call for which access charges would be paid. GTEN Reply Brief at p. 31.
Teleport states that BA-PA's "play or pay" proposal, under which carriers pay switched access rates minus a CCLC in addition to universal service support, bears no relationship to the costs of call termination. Tr. at 1626 (Gabel); Teleport Main Brief at p. 26. Teleport argues that BA-PA has not presented any evidence of the additional costs it would incur to terminate calls on its network. Teleport Main Brief at p. 25.
AT&T also vehemently attacks Bell's proposed "play or pay" on a myriad of grounds.
AT&T
argues that pricing call termination at the "excessively high rate of today's switched access
charges would impose an almost insurmountable impediment to the development of local
exchange competition, thus preventing new entrants from bringing competitive pressure to bear
on the incumbents." AT&T Main Brief at p. 57. AT&T also argues that Bell's effort to price call
termination at the level of carrier access charges highlights the fact that as practically identical
functionalities, both services should be priced identically at TSLRIC. AT&T Main Brief at pps.
58-59. Bell counters that the pricing standards of Section 252(d)(2) do not apply to intrastate
switched access charges. Bell Reply Brief at p. 13.
OCA witness Johnson also states that "it would not be appropriate to levy the same per-minute
access charges for toll and local calls, because this would fail to acknowledge the great
differences in perceived value, and market demand, that distinguish toll usage from local usage."
OCA witness Johnson testified that "if an incumbent LEC is allowed to charge a smaller local
exchange competitor as much per minute to complete a call that originated down the block as it
charges AT&T to complete a call that originated in California, the LEC would be completely
ignoring the underlying differences in value, as well as the associated differences in revenues per
minute (and resulting differences in their respective ability to pay). ...[O]ne would expect to see
higher prices per minute for originating or terminating toll calls than for originating or
terminating local calls because the former service is inherently more valuable than the latter
service." OCA Stmt 1.0 (Johnson) p. 11.
2. Flat-Rate Charges
Sprint/United argues that the most appropriate method of compensation between LECs and
CLECs for local interconnection arrangements is through flat-rated capacity-based DS-1 port
charges contained in LECs' intrastate access tariffs. Sprint/United Main Brief at p. 46. The
mutual compensation for such local call termination should be set at a level that encourages the
development of competition and interconnection, while at the same time covering associated
costs. Prices should be based upon TSLRIC plus a reasonable contribution to shared and
common costs. Sprint/United Stmt. 1.2 (Jamison) pp. 11-12, 14. This process should be
accomplished through universal subsidy reform and rate rebalancing. Sprint/United Main Brief
at p. 46. Sprint also argues that most companies do not have the expensive software and systems
in place to measure and bill based on usage. Sprint/United Stmt. 1.2 (Jamison) p. 13.
Sprint/United Reply Brief at p. 10. By using a flat-rated, capacity-based DS-1 port charge, as
contained in the intrastate access tariff, and applying an assumed number of minutes per
connection, all parties' concerns are accommodated according to Sprint/United. Sprint/United
Reply Brief at p. 10.
Teleport also urges the adoption of flat-rate charges for local call termination. It states that it was
the only party to submit evidence regarding the additional costs of call termination and its
monthly cost for adding an additional switch port facility required to terminate traffic. TCG
Stmt. 1.0 (Kouroupas) at 18. TCG's monthly rate for a DS1 switch port represents the additional
cost to TCG to add the facilities required to terminate an increased level of traffic on its network.
TCG Main Brief at p. 28 TCG witness Kouroupas explained that the switch port figure is based
upon the level of buying power it has with the equipment vendors which supply TCG with
switch port facilities. He testified that because of Bell's economies of scale, it possess
significantly more purchasing power than smaller carriers and may be able to obtain such
facilities at a lower price. The CLECs' costs of call termination are higher than the incumbent
LECs because of the discounts and scale advantages the incumbents have. Tr. at 1627-28. TCG
argues that in order to encourage efficiency and reciprocity, the interconnection rate should be
symmetrical. Tr. at 816-17 (Ball); Teleport Main Brief at p. 28.
Charging flat-rated calls at switched access per minute rates, according to TCG witness
Kouroupas, result in imposing "play or pay" rates on CLECs which would force them to recover
the increased interconnection costs in their retail rates, making it impossible to offer competitive
prices to their customers. TCG Stmt. 2.0 (Gabel) at 13; Teleport Main Brief at p. 36. Witness
Kouroupas further testified that the price squeeze results from Bell's requiring CLECs to pay
usage-sensitive switched access rates to terminate flat-rated calls. The retail pricing structure
would not match the interconnection structure. Teleport Main Brief at p. 36.
Bell opposes a capacity-based charge in the form of a flat charge for a DS1 port per month as an appropriate mechanism for the termination rate. Bell states that the FCC abandoned this same rate structure for Feature Group A Access and subsequently instituted a usage-based rate structure. Bell states this was done because interconnectors increased their minutes of use per line, imposing additional cost on LECs without paying any additional charges.
Thus, according to Bell, a flat charge per month encourages inefficient use of the network. Bell
Main Brief at p. 5.
3. Bill and Keep
Teleport argues that given the absence of any cost information in the record of this proceeding, the Commission must use "bill and keep" since it is the only expressly acknowledged reciprocal compensation mechanism condoned by the Federal Act. Teleport Main Brief at p. 26. It cites to the orders of several commission which have ordered "bill and keep" including the Washington Utilities and Transportation Commission, the Oregon Public Utilities Commission, the Connecticut Public Utilities Commission, and the Florida Public Service Commission. Teleport Main Brief at p. 31.(28) Under "bill and keep", each LEC would bill the end-user, keep the revenue and pay no terminating charges to the local carrier that actually terminated the call. PTA Stmt. 1-R (DeFalco) at 15; PTA Main Brief at p. 37.
The benefits cited by Teleport include ready implementation with minimal billing requirements.
It also creates incentives for carriers to terminate traffic at the least possible cost to themselves.
Laub Direct Testimony at 5-7; Murray Direct Testimony at 12; OTS Cr. Ex. No. 3; Teleport
Main Brief at p. 32. TCG argues that based upon the record in this proceeding and the Telecom
Act, the Commission must adopt this arrangement given the absence of record evidence on Bell's
costs. Teleport Main Brief at p. 32.
MFS also supports implementation of a "bill and keep" system of reciprocal compensation. MFS Main Brief, p. 2. MFS argues that since Bell has not made a demonstration of its incremental costs to terminate a local call, "bill and keep" is the only method of compensation available which is also consistent with the Federal Act. MFS Main Brief at p. 2. MFS likens "bill and keep" to the system currently in place for Extended Area Service ("EAS") routes between LECs in Pennsylvania and the most common system of local traffic compensation between incumbent LECs across the country. TCG Stmt. 2.0 (Gabel) at 22-23; MFS Main Brief at p. 10.(29) MFS also prefers "bill and keep" for administrative reasons in that it would "avoid the expense of billing, verification, and potentially expensive dispute resolution." Laub Direct at 5-6; MFS Main Brief at p. 10. MFS favors "bill and keep" for the further reason that it has the added advantage of completely precluding the possibility of a price squeeze which would prevent carriers such as MFS from competing on a fair basis. MFS Main Brief at p. 2.
Both OTS and OCA also support the use of "bill and keep". OCA witness Johnson also supported the use of "bill and keep". Dr. Johnson testified:
....[o]nly if traffic volumes are greatly out of balance would any cash payments be necessary or appropriate. In the event the Commission rejects this bill and keep approach, or decides a rate is necessary where traffic is greatly out of balance, I recommend that the rate be set at a relatively low level per minute.
OCA Stmt. 1.0 (Johnson) p. 31.Bell opposes "bill and keep". Bell claims it violates the fundamental principle that users of the network should pay for its use. Bell argues that the premise underlying "bill and keep" that the traffic between carriers will be balanced so that compensation is in-kind is fallacious. Bell cites to data submitted by TCG for Massachusetts which showed that more calls terminated on NYNEX's network than on TCGs. Finally, Bell argues that "bill and keep" may only be used in those instances where it is agreed to by the affected carriers. Bell cites to language in the Federal Act referring to "waiver" of mutual recovery. Subsection (d) refers to recovery of costs, and also includes a qualifier that the subsection not be construed to preclude "bill and keep" arrangements.
PTA argues that in order to use "bill and keep", the following tests would have to be met: (1) both the ILEC and the CLEC would have to originate and terminate exactly the same amount of traffic between each other, (2) both the ILEC and the CLEC would have to have exactly the same terminating costs, and, (3) both the ILEC and the CLEC would have to have the same regulatory constraints and resultant costs (otherwise their terminating cost structures will be different). PTA Main Brief at p. 37; PTA Stmt. 1-R (DeFalco) at 15-16.
PTA argues that none of the three prongs of the test are met.
PTA argues that ILECs and CLECs should pay each other terminating local access charges which cover their company-specific costs. PTA Main Brief at p. 44. PTA argues that the ILECs should not be forced to subsidize the new entrants. PTA Main Brief at p. 44. The goal of competition should be to provide benefits to end-users and not to initiate competition for the sake of competition. PTA Main Brief at p. 44. GTEN witness Vogel agrees that rates for interconnection for the various carriers (LECs and CLECs) should not be symmetrical since this presupposes that TSLRICs are the same for the various carriers when in reality they are not. GTEN Stmt. 6.1 (Vogel) p. 4.
4. TSLRIC
AT&T states that competition in the local exchange is given its best opportunity to thrive when co-carrier interconnection are priced efficiently. AT&T Main Brief at p. 55. Dr. Mayo also testified that economic efficiency is maximized when the price of call termination is driven by the incremental cost of providing that service, or TSLRIC. AT&T Main Brief at p. 55; Exhibit 1 to AT&T Stmt. 1.0 (Darrah) at 11, 13-14. AT&T further states that only by pricing call termination at incremental cost can the Commission ensure that new entrants are not being prevented by improper pricing signals or anti-competitive pricing strategies from effectively competing in the local market. AT&T Main Brief at p. 56.
AT&T argues that the Federal Act requires that charges for call termination be mutual, reciprocal and based on the additional costs of terminating calls. Consequently, AT&T argues that the Federal Act requires the incremental pricing of co-carrier call termination. AT&T Main Brief at p. 56. AT&T provides the direct incremental cost of Bell for local switching, i.e., both call origination and call termination at both the end office and the tandem. AT&T Reply Brief at p. 56.
MCI, MFS and OTS believe that the Commission should adopt a termination rate of TSLRIC if it does not adopt "bill and keep." MFS further argues that any contribution toward shared and common costs should be kept to an "absolute minimum." Id. OCA witness Johnson estimated the typical cost of tandem switching and interoffice trunking plus end office switching at the terminating end of a call to be approximately $.0042 per minute and testified that the local interconnection rate be set at no more than $.005 per minute, thereby providing a small contribution to common costs. OCA Stmt. 1.0 (Johnson) p. 31. Dr. Johnson believes that the rate should be the same for all carriers, regardless of the specific costs they incur, or their market power.
Bell opposes prices that are based TSLRIC stating that this is a prescription for financial disaster. Bell Main Brief at p. 13. Bell argues that local call termination and switched access services should be priced at or near the same level since from a network perspective the termination of local calls and toll calls are identical. Bell Main Brief at p. 13 (citing AT&T St. 1.0 (Darrah) at 27. Bell also states that the Commission has already found that both unbundled facilities used to provide local exchange service in competition with Bell and BUS should provide contribution to the joint and common coasts of the company and that there is no reason to treat termination rates any differently. Bell Reply Brief at p. 9.
GTEN opposes TSLRIC based local interconnection rates, without any contribution to company overheads. GTEN Main Brief at p. 45 (citing GTEN Stmt. 6.1 (Vogel) pp. 7, 9-12). GTEN Witness Vogel testified that there are few examples of wholesalers selling inputs at TSLRIC. GTEN Main Brief (citing GTEN Stmt. 6.1 (Vogel) at pp. 9, 10).
AT&T argues that economic efficiency would best be served if the interconnection rate that MFS charges to Bell corresponds to the incremental cost associated with the provision of the service. As a practical matter, however, it is probably unnecessary to engage in expensive cost studies to determine the incremental cost of MFS's terminating interconnection
5. Inverse Imputation
Finally, MFS urges the Commission to adopt the "inverse imputation" rule to "keep call termination rates reasonable in relation to the Bell Atlantic end user local usage rates" that MFS and other co-carriers will be competing against. MFS Main Brief at p. 2. MFS argues that an inverse imputation rule would ensure that incumbent LEC recovery of common costs is reasonable in relation to incumbent LEC end user rates. MFS Stmt. 1.0 (Ball) at 11-13. MFS recommends that the contribution portion of Bell's call termination rate should not exceed one-half the contribution to common costs recovered (on average) by Bell's local usage charges for all customer classes (both business and residence). Bell's maximum call termination charges would be determined in relation to the local usage charges it applies to its own end users. MFS Main Brief at p. 14. MFS argues that the Commission should not consider call termination rates that fail the inverse imputation test. MFS Main Brief at p. 16. Bell replies that the inverse imputation rule to calculate a price ceiling for Bell's call termination rate should be rejected since it has not been adopted by any jurisdiction and has no basis in economic theory. Bell Reply Brief at p. 8.
B. Discussion
In the MFS I proceeding, we encouraged carriers to negotiate a market-driven resolution of this issue. Given the parties' inability to conclude successful negotiations on this matter, we instructed parties to address the issue in this proceeding. Since then, in at least three arbitrations involving Bell, the Commission has approved interim termination rates.
Our determination today with respect to permanent rates is guided in large part by the Federal Act at § 252(d)(2) which provides that:
(A) ...For purposes of compliance by an incumbent local exchange carrier with section 251(b)(5), a State commission shall not consider the terms and conditions for reciprocal compensation to be just and reasonable unless--(i) such terms and conditions provide for the mutual and reciprocal recovery by each carrier of costs associated with the transport and termination on each carrier's network facilities of calls that originate on the network facilities of the other carrier; and(ii) such terms and conditions determine such costs on the basis of a reasonable approximation of the additional costs of terminating such calls.(B) RULES OF CONSTRUCTION.--This paragraph shall not be construed---(i) to preclude arrangements that afford the mutual recovery of costs through the offsetting of reciprocal obligations, including arrangements that waive mutual recovery (such as bill-and-keep arrangements); or(ii) to authorize the Commission or any State commission to engage in any rate regulation proceeding to establish with particularity the additional costs of transporting or terminating calls, or to require carriers to maintain records with respect to the additional costs of such calls.While we decline to adopt "bill and keep" today, we disagree with Bell Atlantic that the Federal Act proscribes the use of "bill and keep" unless the affected carriers agree to its use and "waive" their right to compensation. Clearly, this Commission has the authority to implement "bill and keep" under § 252(d)(2)(B). Had Congress intended to include as a precondition to its use, ILEC waiver of same, it could have easily included language to this effect.
We recognize that there may be certain benefits associated with the "bill and keep" approach including "ready implementation with minimal billing requirements." See Teleport Main Brief at p. 32. Nonetheless, we believe that these advantages are outweighed by the disadvantages or inequities associated with "bill and keep". For instance, there was no evidence in the record that traffic volumes for the CLEC and ILEC would be balanced. Indeed, the only evidence available on this point was submitted by Bell and showed just the opposite. Bell cited to data submitted by TCG of Massachusetts showing that more calls terminated on NYNEX's network than on TCGs. Bell also presented evidence which showed that according to an update for Boston, TCG sent considerably more of the exchanged traffic to NYNEX than NYNEX sent to TCG. Bell Main Brief at p. 9. In addition, there is no evidence in the record that traffic volumes will balance out over time other than the anecdotal statements of OTS. (OTS argues that while traffic may not be in balance initially, experience indicates that traffic will tend to equalize over time (generally within two years). OTS Main Brief at p. 39.
While OTS further argued that since the CLECs' costs of termination are higher than the ILECs, everything will balance out, we note the evidence presented by Bell that it is actually likely to incur greater costs than the CLEC if "bill and keep" is adopted. Both GTEN and Bell witness Eichenlaub presented testimony that because CLECs have lower volumes of traffic, they are therefore likely to terminate calls at Bell's access tandem resulting in Bell incurring both tandem switching and tandem transport costs. Bell's and GTEN's traffic, on the other hand, is likely to be terminated at the CLEC's end office so that it will avoid extra switching costs. Bell Main Brief at pp. 9-10 (citing Bell St. No. 5.1 (Eichenlaub) at 10).
We also reject Teleport's argument that we must adopt "bill and keep" since there is no evidence in the record on Bell's costs of call termination. We note that at least one party, AT&T, submitted evidence of Bell's costs of terminating traffic on its network. In addition, it is our intent to refer this issue to the OALJ for resolution in the MFS III proceeding, where we will be establishing permanent network element rates for Bell Atlantic. We also note that the other states which have adopted "bill and keep" have done so largely on an interim basis. We do not desire at this time to adopt yet another "interim" approach.
We reject GTEN and Bell's proposal to use switched charges as a proxy for local termination costs. In this regard, we take particular note of the testimony of AT&T witnesses who testified regarding Maryland's experience where the Maryland Commission initially established call termination prices at Bell's switched access rates. This apparently stymied competition in Maryland and forced one competitor from the marketplace completely. Since then, AT&T stated that the Maryland Commission adopted a cost-based, reciprocal and symmetrical interconnection structure. AT&T Main Brief at p. 58. It is also our opinion that GTEN's proposal to use switched access charge elements as a proxy for local termination rates would violate the provisions of TA-96 which require that local termination rates be based upon the additional costs incurred. Bell's switched access rates have never been determined to be reasonable by this Commission for purposes of setting local transport and termination rates.
In determining not to use components of ILEC's existing switched access rates as a proxy for local termination rates, we are not unmindful of the "arbitrage" concerns raised by Bell and others. One of Bell's primary arguments for urging the adoption of switched access charges (minus the CCLC) was that if the termination rate is fairly close to the switched access rate, CLECs' incentive to game the system will be reduced. Bell Reply Brief at p. 6. We also note Bell's representation that at least one CLEC claimed that it intended to manipulate the system and pay the local termination rate regardless of whether the call is local, toll, or interLATA. Bell Reply Brief at p. 6. We caution carriers against taking any action of this nature in direct contravention of our Order. Such action would be viewed as a direct violation of our rules or Order on this matter. Should we find that any carrier is engaging in arbitrage of this nature intentionally, our actions in remedying the situation will be swift and harsh.
We are also reluctant at this time to adopt a flat-rate structure as advocated by Sprint/United. We find compelling the testimony of GTEN witness Vogel on this point that a flat-rate mechanism would appear to be inequitable to the extent interexchange carriers are paying tariffed, usage-based switched access rates for similar, if not identical, functions. GTEN Reply Brief at p. 33. We also believe that a flat-rate structure would exacerbate the risk of arbitrage. Further, adoption of a flat-rate structure would be inconsistent with our actions in at least 5-6 recent arbitration decisions.
In at least three recent arbitrations under the TA-96, we have set interim rates for Bell Atlantic of $.003 per minute at the end office and $.005 per minute at the tandem switch. Additionally, for GTEN, this Commission recently approved end office termination rates of $.003 per minute and tandem termination rates of $.0045 per minute on an interim basis. Today, we make these rates available to others on an interim basis, pending the establishment of permanent rates in the MFS III and GTE II proceedings.
AT&T was the only party to submit evidence concerning Bell's incremental costs of providing call termination. AT&T urges us to adopt a termination rate based upon TSLRIC, without a contribution to joint and common costs. However, AT&T's position is contrary to our prior determinations on this issue. It has been this Commission's position consistently that cost is to include a reasonable amount of contribution to joint and common costs. Since the costs proposed by AT&T do not include a reasonable contribution to joint and common costs, we find that they are unacceptable on a stand-alone basis.
For purposes of MFS III, the Commission will entertain studies submitted by both Bell and AT&T, including the study relied upon by AT&T herein. Absent a TSLRIC study by Bell, parties shall use the end office and tandem switch rates calculated by AT&T (subject to verification that they are based upon an appropriate TSLRIC methodology) as a starting point and concentrate upon the development of the appropriate level of contribution to include in the costs of termination using the standards established herein for guidance. For that matter, the study ultimately endorsed by us must be prepared in accordance with the section of this Order addressing common costs and its underlying assumptions must be subject to scrutiny and examination by all parties. Additionally, since there was limited comment on MFS' request for "inverse imputation," we also ask parties to comment on this issue in MFS III and GTE II.