[Federal Register Volume 61, Number 196 (Tuesday, October 8, 1996)]
[Rules and Regulations]
[Pages 52706-52709]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-25820]


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FEDERAL COMMUNICATIONS COMMISSION

47 CFR Part 51

[CC Docket Nos. 96-98 and 95-185; FCC 96-394]


Implementation of the Telecommunications Act of 1996

AGENCY: Federal Communications Commission.

ACTION: Final rule; sua sponte reconsideration.

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SUMMARY: The Federal Communications Commission here reconsiders on its 
own motion two specific issues addressed in its First Report and Order 
implementing the Telecommunications Act of 1996. First, the Commission 
establishes a default proxy range for line ports, and clarifies that 
the default proxy for unbundled local switching applies to the traffic-
sensitive components of the local switching element, including the 
switching matrix, the functionalities used to provide vertical 
features, and the trunk port. Second, the Commission clarifies that 
interexchange carriers or competitive access providers may not purchase 
access to an incumbent local exchange carrier's unbundled switch in 
order to provide interexchange traffic to customers for whom they do 
not provide local exchange service. The intended effect of this item is 
to provide an additional, interim proxy range for use by the states and 
to clarify one aspect of our rules governing the provision of unbundled 
network elements.

EFFECTIVE DATE: October 8, 1996.

FOR FURTHER INFORMATION CONTACT: Steve Weingarten, 202-418-1520 and 
Lisa Gelb, 202-418-1580.

SUPPLEMENTARY INFORMATION:
    Adopted: September 27, 1996; Released: September 27, 1996.

I. Summary

    1. In Implementation of the Local Competition Provisions of the 
Telecommunications Act of 1996, CC Docket No. 96-98, FCC 96-325 
(released August 8, 1996), 61 FR 45476 (August 29, 1996) (First Report 
and Order), petition for review pending sub nom., Iowa Utilities Board 
et al. v. FCC, No. 96-3321 and consolidated cases (8th Cir. filed 
September 6, 1996), we adopted regulations implementing sections 251 
and 252 of the Telecommunications Act of 1934, as amended by the 
Telecommunications Act of 1996, that require local exchange carriers 
(LECs) to open their networks to competition by providing 
interconnection, access to unbundled network elements, and retail 
services at wholesale rates. Pursuant to section 1.108 of the 
Commission's rules, 47 CFR Sec. 1.108, we here reconsider on our own 
motion two specific issues addressed in the First Report and Order. We 
expect that parties may raise other issues in petitions for 
reconsideration. First, we establish a flat-rated default proxy range 
for the non-traffic sensitive costs of basic residential and business 
line ports associated with the unbundled local switching element. The 
default proxy range for local switching adopted in the First Report and 
Order will continue to apply to the traffic-sensitive components of the 
local switching element, including the switching matrix, the 
functionalities used to provide vertical features, and the trunk port. 
Second, we clarify that, because the First Report and Order concluded 
that the local switching element includes dedicated facilities, the 
requesting carrier is thereby effectively precluded from using 
unbundled switching to substitute for switched access services where 
the loop is used to provide both exchange access to the requesting 
carrier and local service by the incumbent LEC. Finally, we make a non-
substantive rule change to correct a typographical error.

II. Unbundled Local Switching Default Proxy

    2. Background. To implement the pricing standards for 
interconnection and unbundled elements of the 1996 Act, we concluded in 
the First Report and Order that state commissions, in arbitrations, 
should set interconnection and unbundled element rates pursuant to a 
forward-looking economic cost pricing methodology. Specifically, we 
concluded that the prices that new entrants pay for interconnection and 
unbundled elements should be based on the incumbent LEC's Total Element 
Long Run Incremental Cost (TELRIC),

[[Page 52707]]

including a reasonable profit, plus a reasonable share of forward-
looking common costs. We concluded in the First Report and Order that 
``a combination of a flat-rated charge for line ports, which are 
dedicated to a single new entrant, and either a flat-rate or per-minute 
usage charge for the switching matrix and for trunk ports, which 
constitute shared facilities, best reflects the way costs for unbundled 
local switching are incurred and is therefore reasonable.'' We remain 
convinced that the pricing methodology and rate structure established 
in the First Report and Order are correct and should be implemented by 
state commissions in arbitration proceedings.
    3. For states that are unable to review or conduct an economic cost 
study consistent with the methodology we prescribed within the 
statutory time frame for arbitrating interconnection disputes, we 
established default proxy price ranges and ceilings that the states 
could apply, on an interim basis, to set prices for unbundled local 
switching and other unbundled elements in arbitrations. We did not 
establish separate default proxy price ranges or ceilings for the 
dedicated, non-traffic sensitive costs of line ports and the traffic-
sensitive costs of the unbundled local switching element. Rather, we 
stated that states that do not establish the rate for the unbundled 
local switching element based on a forward-looking economic cost study 
in compliance with the rules adopted in the First Report and Order may, 
in the interim, set the rate so that the sum of the flat-rated charge 
for line ports and the product of the minutes of use per port and the 
usage-sensitive charges for the switching matrix and trunk ports, all 
divided by the projected minutes of use, does not exceed 0.4 cents 
($0.004) per minute of use and is not lower than 0.2 cents ($0.002) per 
minute of use. We also observed that states that use our proxy and 
impose flat-rated charges for unbundled local switching should set 
rates so that the price falls within the range of 0.2 cents ($0.002) 
and 0.4 cents ($0.004) per minute of use if converted through the use 
of a geographically disaggregated average use factor.
    4. Discussion. We now reconsider on our own motion a limited aspect 
of that decision and establish a default proxy range for basic 
residential and business line port costs of the local switching 
element. We see no reason at this time to revise the default proxy 
range for unbundled local switching that will apply to the traffic-
sensitive components of the local switching element, including the 
switching matrix, the functionalities used to provide vertical 
features, and the trunk port. Moreover, we find no basis at this time 
for modifying the default proxy range for the termination of calls.
    5. We relied on several studies in the record to support the 
default proxy range that we established for both the unbundled local 
switching element, pursuant to sections 251(c)(3) and 252(d)(1), and 
termination of calls, pursuant to sections 251(b)(5) and 252(d)(2). 
These data described a range for the ``additional costs'' of end office 
switching, from a low estimate of 0.18 cents ($0.0018) to a high of 1.5 
cents ($0.015) per minute of use, with the forward-looking cost studies 
in the record ranging from 0.18 cents ($0.0018) to 0.35 cents ($0.0035) 
per minute of use. We determined that the studies in the record 
supported a default proxy range of 0.2 cents ($0.002) to 0.4 cents 
($0.004) per minute of use. Based on further analysis of those studies, 
we conclude that the default proxy range of 0.2 cents ($0.002) to 0.4 
cents ($0.004) per minute that we established using these data is a 
reasonable approximation of the cost of the usage-sensitive components 
of the unbundled local switching element, but that none of the cost 
estimates on which we relied to establish the default proxy range for 
usage-sensitive local switching included the costs of line ports. 
Accordingly, we now establish a default proxy ceiling for a charge to 
recover those costs.
    6. The data support the default proxy we established for the 
termination portion of transport and termination, as defined in section 
251(b)(5), because we found that the ``additional cost'' to the 
incumbent LEC of terminating a call that originates on another network 
includes only the usage-sensitive costs, including the switching matrix 
and the trunk ports, but not the non-traffic sensitive costs of local 
loops and line ports associated with the local loops. Such non-traffic-
sensitive costs, by definition, do not vary in proportion to the number 
of calls terminating over the LEC's facilities and, thus, are not 
``additional costs.'' Since all the studies we discussed in the Order 
included all the usage-based or ``additional costs,'' these studies 
fully support our conclusion that the default proxy for traffic 
termination, in the context of transport and termination, should be in 
the 0.2 cents ($0.002) to 0.4 cents ($0.004) per minute of use range. 
Accordingly, as stated, we find no basis at this time for modifying the 
default proxy range for the termination of calls. By contrast, the 
unbundled local switching element, as defined in section 251(c)(3), 
includes not just the usage-sensitive switching matrix and trunk port 
costs, but the non-traffic sensitive costs of the line ports as well. 
Thus, we now hold that the default proxy rate of 0.2 cents ($0.002) to 
0.4 cents ($0.004) per minute of use should apply only to the traffic-
sensitive components of the local switching element, including the 
switching matrix, the functionalities used to provide vertical 
features, and the trunk ports, but that line ports should be assessed a 
separate, flat-rated charge. We reject AT&T's arguments that we should 
not modify our existing rule. AT&T argues that it is not clear that the 
existing proxy range fails to include costs attributable to line ports 
and, even if it does fail to include such costs, LECs could recover 
their line port costs and the total would still be within the existing 
range. As previously stated, our conclusion is that the studies we 
relied upon in setting the existing range did not include a line port 
increment, and thus we believe that the local unbundled switching proxy 
must be modified.
    7. We have reviewed several examples of rates set by state 
commissions that had available evidence from forward-looking cost 
studies. The Illinois Commission set rates of $1.62 and $1.10 per line 
per month for basic business and residential exchange line ports, 
respectively, after reviewing a forward-looking cost study submitted by 
Ameritech. The Florida Commission set interim line port rates of $2.00 
for BellSouth. In a subsequent proceeding, the Florida Commission 
adopted a rate of $6.00 per line port for GTE, but the basis of that 
rate is not entirely clear. In that order, the Florida commission also 
set an interim rate of $7.00 per line port for United/Centel. The 
Florida commission in that proceeding required United/Centel to refile 
cost studies for all elements, and the basis for the $7.00 rate is even 
less clear than for GTE. The Connecticut Commission set an interim rate 
for Southern New England Telephone (``SNET'') of $1.90 per line per 
month, which it estimated was in excess of SNET's forward-looking 
economic cost. The Oregon Commission set a rate of $1.20 per line port.
    8. Based on this record we adopt an interim default price range of 
$1.10 to $2.00 per line port per month for ports used in the delivery 
of basic residential and business exchange services. Our default price 
range is derived from existing state commission decisions based, at 
least in part, on forward-looking costs. With the exception of the 
Florida Commission's rates for GTE, state commissions with forward-
looking cost data available have set line port rates that range from 
$1.10 for residential line ports in Illinois to $2.00

[[Page 52708]]

per line port in Florida for BellSouth. We also note that the range we 
adopt is consistent with the cost estimates derived by the Hatfield 
Model Version 2, Release 1 and the Cost Proxy Model. We thus set the 
proxy range between $1.10 and $2.00 per line port, consistent with 
these state commission decisions. We decline to rely on the Florida 
commission's decision regarding GTE. We note that that price is more 
than three times as large as any of the other rates set by state 
commissions with forward-looking cost studies available. In addition, 
the basis for that rate is not entirely clear. For example, it appears 
that the rate included marketing costs, some of which may be retail 
costs. The inclusion of retail costs would not be consistent with the 
pricing methodology we adopted in the First Report and Order. Under 
these circumstances, where we are establishing a pricing proxy that is 
intended for nationwide use by states that are unable to conduct an 
economic cost study within the time required for arbitrations, we 
conclude that we should not take this rate into account in setting the 
interim default proxy range for line ports.
    9. We emphasize that we are adopting this proxy range for use only 
in the event a state commission is unable to set a price pursuant to 
the forward-looking methodology we outlined in the First Report and 
Order within the statutory arbitration period. States setting prices 
based on this proxy price range are required to replace those prices 
when they have approved an economic cost study complying with our rules 
or when the Commission adopts new proxies. Additionally, we find that 
states with existing rates for line ports that fall within our default 
price range need not readopt those rates pending the completion of a 
forward-looking cost study that complies with the methodology outlined 
in the First Report and Order.

III. Unbundled Local Switching Element

    10. Several parties have raised a question as to whether 
interexchange carriers (IXCs) or competitive access providers (CAPs) 
may purchase access to an incumbent LEC's unbundled switch in order to 
originate or terminate interexchange traffic to customers for whom they 
do not provide local exchange service. Based on these inquiries, it 
appears that some parties believe that the First Report and Order could 
be interpreted to permit carriers to use unbundled switching elements, 
rather than standard access arrangements, to originate and terminate 
interexchange traffic to end users. Parties have noted that the First 
Report and Order does not specifically prohibit this, and that, if a 
carrier is entitled to purchase an unbundled switching element, the 
First Report and Order does not impose restrictions on the use of that 
element. In light of these inquiries, it appears that our resolution of 
this issue in the First Report and Order may not have been sufficiently 
explicit. See, e.g., Letter from Todd F. Silbergeld, Director, Federal 
Regulatory, SBC Communications, Inc. to William F. Caton, Acting 
Secretary, FCC, September 19, 1996; Letter from Genevieve Morelli, Vice 
President & General Counsel, Competitive Telecommunications Association 
to William F. Caton, Acting Secretary, FCC, September 23, 1996; Letter 
from Mary L. Brown, Director-Corporate Rates and Federal Regulatory 
Analysis, MCI Telecommunications Corporation to William F. Caton, 
Acting Secretary, FCC, September 24, 1996; Letter from W. Scott 
Randolph, Director--Regulatory Affairs, GTE Service Corporation to 
William F. Caton, Acting Secretary, FCC, September 24, 1996. In this 
Order, we seek to remove any ambiguity that may exist with respect to 
this issue.
    11. In section V.J.2. of the First Report and Order, we stated that 
``when a requesting carrier purchases the unbundled local switching 
element, it obtains all switching features in a single element on a 
per-line basis.'' The unbundled switching element, as defined in the 
First Report and Order, includes the line card, which is often 
dedicated to a particular customer. Thus, a carrier that purchases the 
unbundled local switching element to serve an end user effectively 
obtains the exclusive right to provide all features, functions, and 
capabilities of the switch, including switching for exchange access and 
local exchange service, for that end user. A practical consequence of 
this determination is that the carrier that purchases the local 
switching element is likely to provide all available services requested 
by the customer served by that switching element, including switching 
for local exchange and exchange access. We further note that the 
pricing methodology set forth in the First Report and Order for the 
unbundled switching element included costs of components (e.g., line 
ports) necessary to provide switching for both local exchange and 
exchange access services, and contemplated that the carrier purchasing 
the unbundled switch would provide switching for both local exchange 
and exchange access services. Although, as noted above, line port costs 
were not included in the switching proxy, we have concluded that such 
costs must be included in the price for the unbundled switching 
element.
    12. Although we concluded in the First Report and Order that 
requesting telecommunications carriers are permitted under the 1996 Act 
to purchase unbundled elements for the purpose of providing exchange 
access, a carrier must, at least with respect to unbundled loops, 
provide to an end user all of the services that the end user requests. 
The First Report and Order concluded that carriers, ``as a practical 
matter, will have to provide whatever services are requested by the 
customers to whom those loops are dedicated.'' Similarly, the First 
Report and Order defined the local switching element in a manner that 
includes dedicated facilities, thereby effectively precluding the 
requesting carrier from using unbundled switching to substitute for 
switched access services where the loop is used to provide both 
exchange access to the requesting carrier and local exchange service by 
the incumbent LEC.
    13. We thus make clear that, as a practical matter, a carrier that 
purchases an unbundled switching element will not be able to provide 
solely interexchange service or solely access service to an 
interexchange carrier. A requesting carrier that purchases an unbundled 
local switching element for an end user may not use that switching 
element to provide interexchange service to end users for whom that 
requesting carrier does not also provide local exchange service. Using 
unbundled switching elements in such a manner would be inconsistent 
with our statement in the First Report and Order that ``a competing 
provider orders the unbundled basic switching element for a particular 
customer line * * * .''

IV. Miscellaneous

    14. We also modify Rule 51.707(b)(2) of our rules to correct a 
typographical error, by changing ``51.513(d)(3), (4), and (5)'' to 
``51.513(c)(3), (4), and (5).''

V. Final Regulatory Flexibility Analysis

    15. In the First Report and Order we conducted a Final Regulatory 
Flexibility Analysis, as required by Section 603 of the Regulatory 
Flexibility Act, as amended by the Contract With America Advancement 
Act of 1996, Public Law Number 104-121, 110 Stat. 847 (1996). The 
changes we adopt in this order do not affect our analysis of regulatory 
flexibility in the First Report and Order.

[[Page 52709]]

VI. Ordering Clauses

    16. Accordingly, It is ordered that pursuant to authority contained 
in Secs. 251 and 252 of the Communications Act of 1934, as amended, 47 
U.S.C. 251, 252, and pursuant to Sec. 1.108 of the Commission's rules, 
47 CFR Sec. 1.108, the Commission reconsiders its decision in the First 
Report and Order on its own motion to the extent specified herein.
    17. It is further ordered that the policies and rules adopted here 
shall be effective October 8, 1996.

List of Subjects in 47 CFR Part 51

    Communications, common carriers, Telephone.

Federal Communications Commission.
William F. Caton.
Acting Secretary.

Rule Changes

    47 CFR, part 51, is amended as follows.

PART 51--INTERCONNECTION

    1. The authority citation for part 51 continues to read as follows:

    Authority: Sections 1-5, 7, 201-05, 218, 225-27, 251-54, 271, 48 
Stat. 1070, as amended, 1077; 47 U.S.C. 151-55, 157, 201-05, 218, 
225-27, 251-54, 271, unless otherwise noted.

    2. Paragraph (c)(2) of Section 51.513 is revised to read as 
follows:


Sec. 51.513   Proxies for forward-looking economic cost.

* * * * *
    (c) * * *
    (2) Local switching.
    (i) The blended proxy-based rate for the usage-sensitive component 
of the unbundled local switching element, including the switching 
matrix, the functionalities used to provide vertical features, and the 
trunk ports, shall be no greater than 0.4 cents ($0.004) per minute, 
and no less than 0.2 cents ($0.002) per minute, except that, where a 
state commission has, before August 8, 1996, established a rate less 
than or equal to 0.5 cents ($0.005) per minute, that rate may be 
retained pending completion of a forward-looking economic cost study. 
If a flat-rated charge is established for these components, it shall be 
converted to a per-minute rate by dividing the projected average 
minutes of use per flat-rated subelement, for purposes of assessing 
compliance with this proxy. A weighted average of such flat-rate or 
usage-sensitive charges shall be used in appropriate circumstances, 
such as when peak and off-peak charges are used.
    (ii) The blended proxy-based rate for the line port component of 
the local switching element shall be no less than $1.10, and no more 
than $2.00, per line port per month for ports used in the delivery of 
basic residential and business exchange services.
* * * * *
    3. Paragraph (b)(2) of Section 51.707 is revised to read as 
follows:


Sec. 51.707   Default proxies for incumbent LECs' transport and 
termination rates.

* * * * *
    (b) * * *
    (2) Transport. The incumbent LEC's rates for the transport of local 
telecommunications traffic, under this section, shall comply with the 
proxies described in Section 51.513(c)(3), (4), and (5) of this part 
that apply to the analogous unbundled network elements used in 
transporting a call to the end office that serves the called party.

[FR Doc. 96-25820 Filed 10-7-96; 8:45 am]
BILLING CODE 6712-01-P