A LOCAL TELEPHONE SERVICE PRIMER: REGULATING THE PATH TO COMPETITION

Transcription

1 A LOCAL TELEPHONE SERVICE PRIMER: REGULATING THE PATH TO COMPETITION Patrick R. Cowlishaw Partner, Jackson Walker LLP The University of Texas School of Law 4 th Annual Telecommunications Law Conference March 6, 7, & 8, 2002 Omni Richardson Hotel

2 TABLE OF CONTENTS I. WHAT IS LOCAL TELEPHONE SERVICE?...1 A. The telecommunications network...1 B. The Act defines telecommunications service broadly...2 C. The distinction between local and long distance telephone service...2 D. Local telecommunications services...2 E. Advanced services and broadband services...3 II. WHO ARE LOCAL TELEPHONE SERVICE PROVIDERS UNDER THE ACT?...3 A. Incumbent local exchange carriers (ILECs)...3 B. Competing local exchange carriers (CLECs)...3 C. Wireless Carriers...3 III. HOW THE ACT PROVIDES FOR LOCAL COMPETITION: SUMMARY...3 A. Broad Statutory Market-opening Requirements...3 B. FCC Regulations Flesh Out the Act s Requirements...4 IV. THE ACT S SUBSTANTIVE REQUIREMENTS: THREE MODES OF ENTRY INTO THE LOCAL MARKET -- INTERCONNECTION, UNBUNDLED NETWORK ELEMENTS, AND RESALE....5 A. Context...5 B. Interconnection Definition and general duty Interconnection requirements other than pricing Interconnection pricing requirements Collocation...7 C. Unbundled Network Elements (UNEs) the most contentious (and most promising near-term) route of entry General unbundling obligation Definition Why require unbundled access to the incumbent s network elements? Access to UNEs must be nondiscriminatory What network elements must the ILEC unbundle?...10 a. Applying the necessary and impair standards...10 b. The FCC s revised list of required UNEs...11 c. Triennial review of UNE list Combinations of unbundled network elements - the UNE Platform Unbundled network element pricing section 252(d)(1) s cost-based standards and the FCC s TELRIC methodology Use of UNEs to provide exchange access services D. Resale...21 i

3 V. THE ACT S PROCEDURAL REQUIREMENTS: IMPLEMENTING THE ILEC S MARKET-OPENING DUTIES THROUGH NEGOTIATING AND ARBITRATING INTERCONNECTION AGREEMENTS A. Negotiation of Interconnection Agreements Voluntary negotiations Arbitration of open issues...23 B. State Commission Review of Interconnection Agreements Negotiated agreements Arbitrated agreements...24 C. Federal Judicial Review of State Commission Decisions Under the Act Eleventh Amendment immunity Scope of interconnection agreement review by state utility commissions Judicial review of state commission decisions Scope of federal judicial review D. Pick and Choose E. Statement of Generally Available Terms (SGAT)...26 F. The Long-Distance Carrot...26 G. Performance Data and Self-Enforcement Performance measurements Self-enforcing monetary sanctions H. Summary: A Procedural Scheme Only a Lawyer Could Love...28 VI. VII. THE TEXAS EXPERIENCE: MEGA-ARBITRATIONS AND THE T2A...28 A. Mega-Arbitrations...28 B. Texas 271 Agreement...29 APPLYING THE FEDERAL ACT TO CHANGING TECHNOLOGY: THE BROADBAND NETWORK...29 A. The Issue...29 B. FCC Rulemaking Proceedings Related to Broadband Regulation...30 C. Federal Legislation...31 D. State Commission Arbitration...31 VIII. TEXAS LAWS AND REGULATIONS AFFECTING LOCAL TELEPHONE OPERATIONS A. Public Utility Regulatory Act (PURA), Texas Utilities Code Chapters 1 through B. Substantive Rules Applicable to Telecommunications Service Providers, 16 Texas Administrative Code Chapter C. Access to Public Rights-of-Way, Local Government Code Chapter D. Carrier Access to Multi-tenant Buildings...33 E. Texas Commission Website...33 ii

4 LOCAL TELEPHONE SERVICE: REGULATING THE PATH TO COMPETITION Patrick R. Cowlishaw Jackson Walker L.L.P. There is no more intensely regulatory process than deregulation. -- former Assistant Attorney General Joel I. Klein Overview Providers of telecommunications services are subject to a complicated array of federal and state statutes and regulations, laws that are constantly changing yet continually lagging the changes in technology used to provide telecommunication services. This paper concentrates on the laws that apply to the wholesale relationships between competing providers of local telephone service, in particular, the federal Telecommunications Act of 1996, 47 U.S.C. 251 et seq. (the Act or FTA ), and implementing regulations promulgated by the Federal Communications Commission ( FCC ), 47 C.F.R. Part 51. Until recently, local telephone service had been considered a natural monopoly, subject to traditional public utility regulation in each state. With the stated purpose of eliminating the incumbent telephone companies control over bottleneck local network facilities and in hopes of replacing the regulated monopoly model with competition, the Act created a set of duties and procedures for formation and enforcement of interconnection agreements to enable would-be competitors to obtain essential wholesale services from the incumbent local telephone companies. As parties with conflicting interests seek to apply the Act s broad terms to the details of operating in competition, a plethora of litigation has followed, resulting in several major FCC orders, hundreds of state utility commission arbitration rulings, dozens of lower federal court decisions, and several trips to the United States Supreme Court. Six years after its passage, whether the Act will support sustained, meaningful competition in local telephone service especially in the mass residential market -- remains an unanswered question. Regulation of retail local telecommunications services has been primarily a matter of state law, now with a heavy federal law overlay. Texas statutes and regulations governing retail service also are touched upon below. I. WHAT IS LOCAL TELEPHONE SERVICE? A. The telecommunications network. Telephone calls are made possible by a network of transmission facilities connected by switching devices. Voice and data communications are delivered over this network in the form of analog or digital signals. Transmission facilities may be twisted pairs of copper wire, optical fiber, coaxial cable, or the air itself (wireless). These facilities include loops (transmission between end user premises and local switch/central office) and interoffice trunks or transport (transmission between switches). Today s switches are computers that not only provide dial tone and electronically connect loops to one another to complete calls (directly or across interoffice trunks), but also provide vertical features that provide additional services to 1

5 end users (e.g., call waiting, caller ID). Slide 1 shows a simplified view of the network components involved in completing a local telephone call. Other components may be involved. Providing local telephone service requires not only these network components, but also the systems and personnel that make it possible to provide information to customers interested in ordering service, to take and provision orders for service, to conduct maintenance, and to bill for services provided (operations support systems). B. The Act defines telecommunications service broadly. The Act defines telecommunications service as the offering of telecommunications for a fee directly to the public, or to such classes of users as to be effectively available directly to the public, regardless of the facilities used. 47 U.S.C. 153(46). And, the Act defines telecommunications as the transmission, between or among points, specified by the user, of information of the user s choosing, without change in the form or content of the information as sent and received. Id. at 153(43). C. The distinction between local and long distance telephone service is a legal one, not technical. Two distinctions are relevant. First, a local call may be defined as a call that does not incur additional long distance charges. State regulatory authorities, acting under state law, define the point at which a local call becomes a toll long distance call as part of regulating the retail rates and terms under which a local telephone company operates. Traditionally, state regulators in the U.S. have provided for flat monthly retail pricing of local service, while long distance rates have been based on usage (per minute). Second, the 1982 consent decree in the federal government s antitrust action against AT&T, which brought about the breakup of the Bell System, sought to separate the local telephone business AT&T had operated from its long distance and other businesses. The decree required AT&T to divest the regional Bell operating companies (BOCs or RBOCs), who would provide local service, and in turn prohibited the BOCs from providing long-distance services. See United States v. AT&T, 552 F. Supp. 131, (D.D.C. 1982). Specifically, the decree defined Local Access and Transportation Areas ( LATAs ), which generally can be equated with area codes. Under the divestiture decree, the BOCs were not permitted to provide service from one LATA to another (interlata service). The 1996 Act retained the definition of a LATA. 47 U.S.C. 153(25). Another paper in the primer discusses regulation of long distance service. As explained more fully there, section 271 of the 1996 Act provides an opportunity for a BOC to obtain authorization from the FCC to provide long-distance (interlata) service to customers within a state upon demonstration that it has satisfied certain requirements related to opening the local telecommunications market to competition in that state. D. Local telecommunications service includes: (1)local exchange service (transporting local calls within a LATA, see 47 U.S.C. 153(47), and providing related vertical features, such as caller ID and call waiting); (2) interexchange access service (providing long-distance carriers interexchange carriers ( IXCs ) with access to the local network so that they may carry long-distance calls to and from a LATA); and (3) intralata toll service (transporting calls within a LATA that are classified as long distance calls, i.e., incur a toll charge). All these services are important components of the economics of providing local telecommunications service. 2

6 E. Advanced services, including broadband services, fall within the definition of telecommunications services, according to the FCC. The pro-competitive provisions of the Act apply equally to advanced services and to circuit-switched voice services. In re Deployment of Wireline Services Offering Advanced Telecommunications Capability, CC Docket No , First Report and Order at 15 (March 31, 1999). See also Association of Communications Enters. v. Federal Communications Comm n, 253 F.3d 29, 31 (D.C. Cir. 2001). The FCC has defined advanced services to mean high speed, switched, broadband, wireline telecommunications capability that enables users to originate and receive high-quality voice, data, graphics or video telecommunications using any technology. 47 C.F.R See further discussion in part VII below and in separate primer paper on broadband and wireless. II. WHO ARE LOCAL TELEPHONE SERVICE PROVIDERS UNDER THE ACT? A. Incumbent local exchange carriers (ILECs): the traditional local phone companies, including the regional Bell Operating Companies and independent companies (ICOs). For any given area, the ILEC is the company that was providing local exchange service on the effective date of the Act (or its successor or assign) and was a member of the National Exchange Carrier Association, 47 U.S.C. 251(h), an association established under federal law to prepare and file access tariffs. 47 C.F.R (b). B. Competing local exchange carriers (CLECs). CLECs may provide voice service, data service, or both. CLECs may or may not also be long-distance providers or, in industry parlance, interexchange carriers (IXCs). C. Wireless Carriers. The Act treats wireless carriers (providers of commercial mobile radio communications service) as telecommunications carriers, but excludes them from the definition of local exchange carriers. 47 U.S.C. 153(26). Wireless carriers are subject to a separate, limited regulatory scheme under 47 U.S.C. 332(c), discussed in a separate primer paper on broadband and wireless. III. HOW THE ACT PROVIDES FOR LOCAL COMPETITION: SUMMARY A. Broad Statutory Market-opening Requirements. Section 251 of the Act identifies specific legal duties that apply to telecommunications carriers. All telecommunications carriers have duties to interconnect with other carriers and to refrain from installing network features, functions, or capabilities that fail to meet standards of network interconnectivity. 47 U.S.C. 251(a). All local exchange carriers, including ILECs and CLECs have these duties: not to prohibit or unreasonably limit resale of their services; to provide number portability, dialing parity, and access to rights-of-way; and to establish reciprocal compensation arrangements for transport and termination of traffic. 47 U.S.C. 251(b). 3

7 The Act establishes additional duties applicable only to incumbent local exchange carriers. 47 U.S.C. 251(c). These duties, described in detail below, are the key market-opening terms of the Act. They are designed to eliminate barriers to competition created by the incumbents control over bottleneck local facilities. The Act envisions three paths of entry into the local telecommunications market: interconnection -- construction of new networks interconnected with the incumbent s network; unbundled network elements, or UNEs -- the use of unbundled components of the incumbent s network to provide telecommunications services; and resale of the incumbent s retail services. The Act defines the incumbent LEC s particular duties to provide CLECs access to each of these modes of entry, to provide notice of network changes that may affect connecting carrier service, and to permit collocation of CLEC equipment at the incumbent s premises. 47 U.S.C. 251(c)(2)-(6). Costbased pricing standards to be followed in setting the wholesale charges for interconnection, UNEs, and resold services are set out in section 252(d). Incumbent LECs have a duty to negotiate in good faith to establish terms of interconnection agreements that will fulfill all these substantive duties. (CLECs who request interconnection agreements also are to negotiate in good faith.) 47 U.S.C. 251(c)(1). B. FCC Regulations Flesh Out the Act s Requirements. The Act called for the FCC to establish regulations to implement the requirements of section 251 within 6 months following the effective date. 47 U.S.C. 51(d)(1). Those rules have been the subject of much litigation, and are currently headed back to the Supreme Court for a second review. The FCC issued a comprehensive set of local competition rules, with detailed supporting explanation. In the Matter of Implementation of the Local Competition Provisions in the Telecommunications Act of 1996, CC Docket No , First Report and Order (FCC August 8, 1996) (commonly cited as Local Competition Order ), aff d in part and rev d in part sub nom. Iowa Utilities Board v. FCC, 120 F.3d 753 (8 th Cir. 1997) ( Iowa Utilities Board I ), aff d in part and remanded, AT&T v. Iowa Utilities Board, 525 U.S. 366, 119 S. Ct. 721 (1999). The FCC s local competition rules are codified at 47 C.F.R. Part 51. In Iowa Utilities Board I, the Eighth Circuit vacated FCC rules prescribing a methodology for state commissions to follow in setting wholesale prices for interconnection, UNEs, and resold services. It also vacated a rule that required ILECs to provide CLECs combinations of unbundled network elements without first separating them (the existing combinations rule) and a rule which permitted a CLEC to pick and choose terms from an incumbent s publicly filed interconnection agreements with other carriers. The Supreme Court reversed these decisions and reinstated the FCC rules at issue. At the same time, the Supreme Court vacated the FCC s rules defining the network elements that an incumbent LEC must unbundle under section 251(c) and remanded those rules to the FCC for reconsideration under a revised standard. The FCC has revised its standards for determining which network elements incumbent LECs must provide on an unbundled basis and restated its list of elements that must be unbundled. In the Matter of Implementation of the Local Competition Provisions of the 4

8 Telecommunications Act of 1996, CC Docket No , Third Report and Order (November 5, 1999) ( UNE Remand Order ). The FCC has further addressed loop unbundling requirements as they relate to a CLEC s ability to provide advanced data (xdsl-type) services using unbundled loops. See In the Matter of Implementation of the Local Competition Provisions of the Telecommunications Act of 1996, CC Docket No , Fourth Report and Order, CC Docket No , Fourth Report and Order (December 9, 1999) ( Line Sharing Order ) and Fourth Report and Order on Reconsideration (January 19, 2001) ( Line Sharing Reconsideration Order ). Meanwhile, the Eighth Circuit has completed its merits review of the FCC s pricing methodology rules and vacated them as inconsistent with the Act and has reaffirmed its ruling vacating an FCC rule that required incumbent LECs to combine network elements for CLECs when the requested elements are not currently combined in the incumbent s network but are of a type that the incumbent combines for itself in support of its retail operations (the new combinations rule). AT&T Corp. v. Iowa Utilities Board, 219 F.3d 744 (8 th Cir. 2000) ( Iowa Utilities Board II ), cert. granted, 69 U.S.L.W (January 22, 2001). The Supreme Court is reviewing both of these rulings, as well as the Eighth Circuit s decision that an incumbent s historical costs need not be incorporated into the rates it may charge for access to UNEs. The case was argued to the Supreme Court in October, and a decision is pending. The substance of the FCC s pricing and UNE rules, and the related Eighth Circuit and Supreme Court rulings, is addressed below in connection with the three modes of entry into the local market. Whatever the ultimate outcome of these proceedings, the repeated changes in the basic local competition rules have added great uncertainty for anyone seeking to enter the local telecommunications markets since the Act s passage IV. THE ACT S SUBSTANTIVE REQUIREMENTS: THREE MODES OF ENTRY INTO THE LOCAL MARKET -- INTERCONNECTION, UNBUNDLED NETWORK ELEMENTS, AND RESALE. A. Context -- the Act is asking a lot: A salient feature of these market-opening provisions is that a competitor s success in capturing local market share from the BOCs is dependent, to a significant degree, upon the BOCs cooperation in the nondiscriminatory provisioning of interconnection, unbundled network elements and resold services pursuant to the pricing standards established in the statute. Because the BOCs, however, have little, if any, incentive to assist new entrants in their efforts to secure a share of the BOCs markets, the Communications Act contains various measures to provide this incentive, including section 271 (the requirement that BOCs demonstrate they have opened their local telecommunications markets to competition before receiving authorization to provide long-distance service in their incumbent territories). In the Matter of Application of Ameritech Michigan Pursuant to Section 271 of the Communications Act of 1934, as amended, To 5

9 B. Interconnection Provide In-Region, InterLATA Services in Michigan, CC Docket No , Memorandum Opinion and Order 14 (FCC 1997) (emphasis added). 1. Definition and general duty. Interconnection refers to the physical linking of two networks for the mutual exchange of traffic (allowing customers of one network to complete calls to customers of the second network, and vice versa). Local Competition Order 176. Interconnection may be accomplished by the ILEC providing interconnection trunking (transport facilities between an ILEC switch and a CLEC switch), by physical or virtual collocation (discussed under subsection 4 below), meet point arrangements (ILEC and CLEC each extend trunking facilities to a meet point ), or any technically feasible method. Id. at ILECs are required to provide, for the facilities and equipment of any requesting carrier, interconnection with the ILEC s network for the transmission and routing of telephone exchange service and exchange access. 47 U.S.C. 251(c)(2)(A). 2. Interconnection requirements other than pricing. An incumbent LEC must provide interconnection at any technically feasible point within the carrier s network. 251(c)(2)(B). Technical feasibility refers only to technical or operational concerns. It does not include economic, space, or site considerations. Local Competition Order 198. The FCC s interpretation of this term was upheld by the Eighth Circuit, Iowa Utilities Board I, 120 F.3d at 810, and not further addressed in the Supreme Court s review of the Eighth Circuit decision. The ILEC also must provide interconnection that is at least equal in quality to that provided to itself. 251(c)(2)(C). Under this provision, an ILEC must design and operate interconnection facilities to meet the same technical criteria and service standards that are used for interoffice trunks in its own network. Local Competition Order Interconnection must be provided on rates, terms and conditions that are just, reasonable and nondiscriminatory, in accordance with the terms of the agreement and the requirements of sections 251 and (c)(2)(D). Pricing aside, see discussion below, this requirement means that an incumbent may not discriminate against CLECs, relative to its retail operations, in the timeliness with which it installs or repairs interconnection trunks, 47 C.F.R (a)(5), and that it must provide two-way trunking arrangements upon request, where technically feasible. 47 C.F.R (f); Local Competition Order Performance data used to assess compliance with these requirements include trunk blockage data, as well as measures of the timeliness and quality of trunk installation and repair. 3. Interconnection pricing requirements. State commission determinations of the rates that an ILEC may charge for interconnection are subject to the same cost- 6

10 based pricing standards as bundled network elements. 252(d)(1). The FCC s TELRIC pricing methodology rules apply to interconnection, as well as to UNEs. 47 C.F.R (a). The Act s pricing standards, the FCC s pricing rules, and the pending Supreme Court review of those rules are discussed in connection with the UNEs below. 4. Collocation. Physical and virtual collocation are forms of interconnection that must be provided under 251(c)(2). Section 251(c)(6) provides separately that an ILEC must provide for physical collocation of equipment (that is necessary for interconnection or access to UNEs) at the ILEC s premises. Physical collocation must be provided on rates, terms and conditions that are just, reasonable and nondiscriminatory. 251(c)(6). A carrier may provide for virtual collocation if the ILEC demonstrates that physical collocation is not practical for technical reasons or because of space limitations. Id. a. The FCC determined several collocation-related issues in the Local Competition Order. The FCC expanded and modified its collocation rules and in a docket addressing competition in the delivery of advanced services. Deployment of Wireline Services Offering Advanced Telecommunications Capability, CC Docket No , First Report and Order and Further Notice of Proposed Rulemaking (March 31, 1999) ( Advanced Services Order ). The collocation rulings in the Advanced Services Order were challenged on appeal, with mixed results. GTE Services Corp. v. FCC, 205 F.3d 416 (D.C. Cir. 2000). The FCC has reconsidered the issues that were remanded to it, issuing two further orders in CC Docket No , Order on Reconsideration and Second Further Notice of Proposed Rulemaking (August 10, 2000) ( Advanced Services Order on Reconsideration ) and Fourth Report and Order (August 8, 2001) ( Collocation Remand Order ). Parties have challenged the Collocation Remand Order in Verizon California, Inc. v. FCC, No , D.C. Circuit, filed August 23, That appeal is pending. Subject to the uncertainty created by the pending appeal, the FCC s collocation rules are highlighted below. b. Where can CLECs collocate? The premises where an ILEC must permit collocation include all buildings or similar structures owned or leased by the ILEC that house ILEC network facilities, and all structures on public rights of way that house such facilities, such as huts, cabinets, and controlled environmental vaults. Local Competition Order 573, 579. c. What equipment can CLECs collocate? ILECs must permit collocation of equipment if the primary purpose and function of the equipment, as the requesting carrier seeks to deploy it, are to provide the requesting carrier with "equal in quality" interconnection or "nondiscriminatory access" to one or more unbundled network elements. If one of the functions of the equipment would not meet this standard as a stand-alone function, that function must not cause the equipment to significantly increase the burden on the incumbent's property. Collocation Remand Order 12. (The FCC s initial rule on this issue had been vacated and 7

11 remanded by the D.C. Circuit). The FCC takes the view that switching and routing equipment typically meet this equipment standard because an inability to deploy such equipment would, as a practical, economic, or operational matter, preclude a requesting carrier from obtaining nondiscriminatory access to the unbundled local loop. Id. However, illustrating the second aspect of its equipment standard, the FCC has stated that ILECs generally need not allow collocation of traditional circuit switches, which are very large pieces of equipment compared to newer, more advanced switching and routing equipment. Id. d. What restrictions may be placed on collocation arrangements? CLECs may not be restricted to collocating equipment in individual collocation cages. With collocation space in ILEC central offices a limited commodity, the FCC has required that incumbent LECs must offer cageless collocation and must permit CLECs to share collocation cages. Advanced Services Order 142. An incumbent may not apply security requirements to collocators that are more stringent than the requirements that the incumbent applies to itself Id. at 27, 41. (The D.C. Circuit found that the FCC s interpretation in support of cageless collocation was reasonable and consistent with the statutory purpose of promoting competition, without raising the threat of unnecessary takings of LEC property. 205 F.3d at 416.) Incumbents also may not impose unreasonable minimum space requirements on collocating CLECs. Advanced Services Order 43. Incumbent LEC policies and practices for assigning and configuring physical collocation space must be consistent with the statutory requirement that the incumbent provide for physical collocation "on rates, terms, and conditions that are just, reasonable, and nondiscriminatory." Collocation Remand Order 12 (the FCC adopted this principle in place of specific rules, remanded by the D.C. Circuit, that gave carriers requesting physical collocation the option of picking their physical collocation space from among the unused space in an incumbent LEC's premises, that precluded an incumbent LEC from restricting physical collocation to space separated from space housing the incumbent's equipment, and that precluded an incumbent from requiring the construction and use of a separate entrance to access physical collocation space). C. Unbundled Network Elements (UNEs) the most contentious (and most promising near-term) route of entry. 1. General unbundling obligation. An incumbent LEC has the duty to provide, to any requesting telecommunications carrier for the provision of a telecommunications service, 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 accordance with the terms and conditions of the agreement and the requirements of this section and section 252 of this title. An incumbent local exchange carrier shall provide such unbundled network elements in a manner that allows requesting carriers to combine such 8

12 elements in order to provide such telecommunications services. 47 U.S.C. 251(c)(3). 2. Definition: a network element is a facility of equipment used in the provision of a telecommunications service and includes features, functions, and capabilities that are provided by means of such facility or equipment, including subscriber numbers, databases, signaling systems, and information sufficient for billing and collection or used in the transmission, routing, or other provision of a telecommunications service. 47 U.S.C. 153(29). A network element need not be part of the physical facilities and equipment used to provide local phone service. AT&T v. Iowa Utilities Board, 119 S. Ct. at 734. The Supreme Court upheld the FCC s broad application of the term network element to include operations support systems (OSS), such as the background software systems used by the incumbent to manage ordering, billing, and repair functions, and to include vertical switching features, such as caller ID. Id 3. Why require unbundled access to the incumbent s network elements? We continue to believe that the ability of requesting carriers to use unbundled network elements, including various combinations of unbundled network elements, is integral to achieving Congress objective of promoting rapid competition to all consumers in the local telecommunications market.... For effective competition to develop as envisioned by Congress, competitors must have access to incumbent LEC facilities in a manner that allows them to provide the services that they seek to offer.... Despite the development of competition in some markets, incumbents still control the vast majority of the facilities that comprise the local telecommunications network, giving them advantages of economies of scale and scope not enjoyed by competitive LECs. Because competitors do not yet enjoy the same economics of scale, scope and ubiquity as the incumbent, they may be impaired if they do not have access, at least initially, to certain network elements supplied by the incumbent LEC. UNE Remand Order 5, Access to UNEs must be nondiscriminatory. Based on the statutory requirement to provide nondiscriminatory access to UNEs in section 251(c)(3), FCC rules require that the quality of a UNE that an incumbent LEC provides, as well as the access to that UNE, must be the same for all requesting carriers and must be at least equal in quality to that which the incumbent LEC provides to itself. 47 C.F.R (a-b); Local Competition Order 312. Similarly, the terms and conditions on which an ILEC provides access to UNEs must be offered equally to all requesting carriers and shall be no less favorable than the terms and conditions under which the incumbent LEC provides such elements to itself. 47 C.F.R (a)-(b). The Eighth Circuit vacated 9

13 provisions of these rules that had required ILECs to provide, upon request, UNEs and access to UNEs superior in quality to that which the incumbent provides itself. Iowa Utilities Board I, 120 F.3d at 813. However, the Eighth Circuit expressly affirmed the FCC s determination that the section 251(c)(3) requires ILECs to modify their network facilities to the extent necessary to accommodate access to UNEs. Id. at n. 33. See UNE Remand Order at 173. Where an incumbent LEC does not provide access to network elements to itself, it must provide access to CLECs in a manner that provides a requesting carrier with a meaningful opportunity to compete. UNE Remand Order 491; Local Competition Order 315. This requirement is grounded in the language of section 251(c) that provides for access to UNEs on terms and conditions that are just and reasonable, as well as nondiscriminatory. In assessing ILEC performance in providing access to UNEs, state commissions and the FCC distinguish between wholesale support functions provided by ILECs that is analogous to wholesale support that ILECs provide to their own retail operations, and wholesale support functions for which no retail analogy can be identified. Where a retail analogy is available, performance is generally measured by comparing the ILECs performance for the CLECs with its performance for its own retail operations. Where a retail analogy is not available, performance should be measured against a fixed benchmark set so as to provide a meaningful opportunity to compete. 5. What network elements must the ILEC unbundle? a. Applying the necessary and impair standards. In determining what network elements should be made available under section 251(c)(3), the Act requires the FCC to consider, at a minimum, whether access to proprietary network elements is necessary and whether the failure to provide access to nonproprietary elements would impair the ability of the telecommunications carrier seeking access to provide the services that it seeks to offer. 47 U.S.C. 251(d)(2). In the Local Competition Order, the FCC adopted Rule 319, requiring ILECs to provide access to a minimum list of seven UNEs the local loop, the network interface device, switching capability (local and tandem), interoffice transmission facilities (dedicated and common), signaling networks and call-related databases, operations support systems functions, and operator services/directory assistance. The Supreme Court vacated this rule, finding that the FCC had not adequately considered the Act s necessary and impair standards, citing, in particular, the lack of consideration to the availability of elements from sources outside the incumbent s network and the assumption that any increase in cost caused by denial of access to an element would impair the entrant s ability to provide its desired services. AT&T Corp. v. Iowa Utilities Board, 119 S. Ct. at

14 On remand, the FCC has revised its application of the necessary and impair standards and issued a revised list of elements that require unbundling under section 251(c)(3). UNE Remand Order. Access to a proprietary network element will be considered necessary if, taking into consideration the availability of alternative elements outside the incumbent s network (including elements available through self-provisioning or from third parties), lack of access to that element would, as a practical, economic, and operational matter, preclude a requesting carrier from providing the services it seeks to offer. Id. at 44 (emphasis in original). An ILEC s failure to provide access to a nonproprietary network element impairs a requesting carrier if, again taking into consideration the availability of alternatives elements outside the incumbent s network, lack of access to that element materially diminishes a requesting carrier s ability to provide the services it seeks to offer. Id. at 51. This impair analysis looks at the totality of the circumstances and considers the cost, timeliness, quality, ubiquity, and operational issues associated with use of alternatives to the incumbent s element. Id. at 66, The FCC rejected the incumbent LECs proposal to base the impair standard on the essential facilities doctrine discussed in antitrust cases. Id. at The FCC s UNE Remand Order has been challenged. After being abated for some time, the appeal is scheduled for oral argument on March 7, USTA v. FCC, No and Consolidated Cases (D.C. Cir.). b. The FCC s revised list of required UNEs. Having set forth these standards, the FCC in the UNE Remand Order then applied them to create a revised minimum list of network elements to be unbundled on a national basis. The FCC also recognized discrete product and geographic market exceptions to the incumbent s duty to unbundle the elements on this national list. Id. at 120. The FCC expects to reexamine its national list of UNEs every three years. Id. at 151. (As further discussed below, the FCC has very recently opened its first triennial review of the list of UNEs). State commissions may impose unbundling obligations on ILECs beyond those contained in the national list, so long as the state determinations meet the requirements of section 251(d)(3) of the Act and section of the FCC rules. Id. at 155. A state commission may not remove elements on the FCC s national list from ILECs unbundling obligations in a particular state, but may retract or modify unbundling obligations that the state commission itself has added. The FCC s revised national list of network elements that ILECs must unbundle under section 251(c)(3), as set out in the UNE Remand Order, includes the following: (1) Loops The local loop network element includes all features, functions, and capabilities of the transmission facilities, including dark fiber and attached electronics (except those used for the provision of advanced services, such 11

15 as DSLAMs) owned by the incumbent LEC, between an incumbent LEC s central office and the loop demarcation point at the customer premises. UNE Remand Order 167. ILECs are required to condition loops in order to provide requesting carriers with access to full loop functionality (for example, removing devices from copper loops that have been added to enhance voice service but interfere with the ability to provide digital subscriber line DSL service over the loop). Id. at 167, Loop types. The Local Competition Order listed, as examples of transmission facilities falling within the definition of a loop, 2-wire and 4-wire analog voice grade loops and 2-wire and 4-wire loops conditioned to transmit digital signals for services such as ISDN, ADSL, HDSL, and DS1-level signals The FCC has clarified that those examples were not intended to be limiting, and that the ILECs obligation to provide unbundled access to loops includes high-capacity loops (DS1 and higher). UNE Remand Order 176, 184,187. Dark fiber (optical fiber that has not been connected to the electronic devices that activate it) falls within the loop s features, functions and capabilities when it is located between the central office and customer premises. ILECs must provide unbundled access to dark fiber in the loop. Id. at 174, At the customer s end, the loop terminates where the incumbent LEC s control of the wire ceases (the demarcation point ). Id. at 169. Where the incumbent owns inside wire, the loop will include that inside wire. The demarcation point may be at the network interface device ( NID discussed below), outside the NID, or inside the NID. The FCC has ruled that the high frequency portion of the loop ( HFPL ), which may be used to provide advanced services, must be provided to requesting carriers as a separate unbundled network element. Line Sharing Order. An ILEC providing voice service to an end user over a loop must use line sharing to provide a requesting carrier with access to the HFPL so that it may provide data service simultaneously over the same loop. Id. An ILEC also must facilitate line splitting, by which either a single CLEC, or CLEC partners, provide voice and data service over the same unbundled loop. Line Sharing Reconsideration Order. Subloop elements portions of the loop that can be accessed at terminals in the incumbent s outside plant also must be unbundled under section 251(c)(3). UNE Remand Order 206, 209. Outside plant (loop) facilities may be divided into distribution facilities, closer to the end user, and feeder facilities, closer to the central office. 12

16 The distribution wires serving a neighborhood may be brought together at a feeder/distribution interface ( FDI ), from which they are extended to the central office along a single right-of-way. Integrated digital loop technology ( IDLC ) allows a carrier to multiplex (combine) the signals from multiple copper loop distribution components at a remote terminal (RT), and to deliver that combined traffic over higher-speed feeder directly into the switch. CLECs who wish to connect unbundled loops to their switches generally cannot access IDLC loops at the incumbent s central office. Providing unbundled access to the distribution subloop at the remote terminal enables CLECs to obtain access to IDLC loops before the signals are multiplexed. Id. at 217. Similarly, where the incumbent multiplexes copper loops at, a remote terminal onto fiber feeder, CLECs seeking to provide xdsl service will need the option of accessing the copper portion of the loop at the remote terminal. Id. Indeed, the FCC has recognized that the remote terminal has, to a substantial degree, assumed the role and significance traditionally associated with the central office. Id. at 218. At the same time, the FCC has made clear that access at the remote terminal is not the CLEC s only option. ILECs also have the obligation to permit a CLEC who collocates advanced services equipment at the central office to obtain access through the fiber feeder to the high frequency portion of the copper distribution subloop, and thus use the entire unbundled loop from the end user premises to the central office, rather than being required to collocate at the remote terminal. Line Sharing Reconsideration Order. (2) Network Interface Devices (NIDs). The NID is any means of interconnection of customer premises wiring to the incumbent LEC s distribution plant, such as a cross-connect device used for that purpose. UNE Remand Order 233. The FCC recognizes the NID as a separate UNE, not included in any other subloop component. Id. at 235. However, when the CLEC purchases the unbundled loop, it will include the NID, unless the ILECs control of the wire ceases before reaching the NID. (3) Local Switching ILECs must offer local circuit switching capability including tandem switching as a UNE. UNE Remand Order To date the FCC has recognized an obligation to unbundle packet switching capability only in limited circumstances. Id. at Circuit switching: includes the basic function of connecting lines and trunks, and the basic services made available through the switch to the ILEC s customers (e.g., telephone number, white page listing, dial tone), as well as all other features the switch is capable of providing (includes all vertical features, such as caller ID, Centrex, and any customized routing 13

17 functions, such as routing a customer s operator services/directory assistance calls to a particular OS/DA platform). Id. at 244. Exception: based on its analysis of marketplace developments and application of the impair standard, the FCC recognized a limited exception to ILECs obligation to unbundled local circuit switching. ILECs are not required to offer local circuit switching as a section 251(c)(3) UNE to serve customers with four of more lines in the densest areas (density zone 1) of the top 50 metropolitan statistical areas. Id. at 278. (In Texas, these include Houston and Dallas.) The FCC found that CLECs had deployed a large number of switches in these areas to serve medium and large business customers and were not impaired in their ability to serve these customers without access to unbundled switching. Id. at 297. However, this exception is conditional it applies only where ILECs have provided nondiscriminatory, cost-based access to enhanced extended links ( EELs ). EELs are combinations, of loop and interoffice transport UNEs, which enable a CLEC to serve customers from a CLEC switch without collocating in every ILEC central office. Id. at Packet switching: the function or routing individual data units (packets), based on address or other routing information contained in the packets. Packet switching includes all the necessary electronics (e.g., routers and DSLAMs). Id. at 304. In the UNE Remand Order, the FCC recognized an obligation to unbundle packet switching only in limited circumstances in which the ILEC has placed digital loop carrier systems in the feeder section of the loop or has placed its own DSLAM in a remote terminal (and does not permit a CLEC to collocate its DSLAM in the remote terminal on the same terms and conditions). Id. at 313. The FCC declined to recognize a broader obligation to unbundled packet switching, citing the nascent nature of the advanced services market. Id. at 306. The extent of the obligation to unbundle packet switching, and application of the limited unbundling obligation recognized by the FCC, continue to be examined in state proceedings, based on major increases in the deployment of fiber and next generation digital loop carrier in the local network by incumbent LECs to extend the reach of their advanced services capabilities, such as Southwestern Bell s Project Pronto. Last summer a panel of arbitrators for the Texas Commission found that CLECs had demonstrated that they would be impaired in their ability to offer high-speed data services in competition with Southwestern Bell if they did not have unbundled access to the Project Pronto broadband loop architecture, including its packet switching components, and issued an award that would require Southwestern Bell to provide such access. PUCT Docket No , Revised Arbitration Award at (Sept. 21, 2001). Review of that award remains pending before the Texas 14

18 Commission. The next phase of that proceeding will be to set wholesale prices for the unbundled broadband loop and its components. (4) Interoffice Transmission Facilities Dedicated Transport. ILECs must offer unbundled access to dedicated interoffice transport facilities. These are ILEC transmission facilities dedicated to a particular customer or carrier that provide telecommunications between ILEC wire centers or switches owned by the ILEC or requesting carriers. ILECs must unbundle both digital transport (DS1-DS3) and optical transport (OC3-OC192) and such higher capacities as evolve over time. Dedicated transport includes dark fiber. UNE Remand Order at The FCC found that neither self-provisioning nor third-party suppliers of dedicated transport provided an adequate alternative to unbundled access to the ubiquitous transmission facilities of the incumbent LEC. Id. at 332. Shared Transport (or common transport). This element is defined as transmission facilities shared by more than one carrier, including the incumbent LEC, between end office switches and tandem switches, and between tandem switches, in the incumbent LEC s network. Using shared transport, calls originated by CLEC customers who are served using the ILEC s unbundled switch are routed over the incumbent s interoffice network using the same routing tables and transport facilities as calls originated by ILEC customers. Where an incumbent LEC provides requesting carriers with access to UNE switching, it also must provide access to UNE shared (or common ) transport. UNE Remand Order The FCC recognized that shared transport meets the definition of an unbundled network element because it is separately priced from the switching element, even though it may be technically inseparable from unbundled switching. Id. at 372 (citing Supreme Court s analysis in AT&T v. Iowa Utilities Board, 119 S. Ct. at 737, that the section 251(c)(3) obligation to provide network elements on an unbundled basis does not refer to physically separated elements but to separately priced elements). (5) Signaling and Call-Related Databases. Incumbent LECs must offer unbundled access to the signaling network element, which includes signaling links and signaling transfer points (STPs). UNE Remand Order Signaling links are transmission facilities that connect a local switch to STPs, high capacity packet switches that can transmit messages to establish a call path on the voice network between the switch that serves the customer originating the call and the terminating switch. Local Competition Order 456. In today s network, each local switch is linked to a single signaling network. For signaling CLECs who purchase unbundled switching, the ILEC must 15

19 provide access to its signaling network in the same manner in which the ILEC obtains such access itself. For a CLEC who uses its own switching facilities, the ILEC must offer access to the ILEC s signaling network for each of the requesting carrier s switches, connected in the same manner as theilecconnectsoneofitsswitchestoanstp. UNE Remand Order Through a network of signaling links and STPs, a local switch also can send queries to call-related databases, which provide the switch with customer information or instructions for call routing. Id. at 457. Call-related databases include, without limitation, the Line Information database (LIDB), Toll Free Calling database, Number Portability database, Calling Name (CNAM) database, Operator Services/Directory Assistance database, Advanced Intelligent Network (AIN) databases, and the AIN platform and architecture. UNE Remand Order ILECs are required to provide unbundled access to their call-related databases, by means of physical access at the STP linked to those databases. Id. at 410. ILECs also must provide unbundled access to the AIN platform and architecture, equivalent to the access the ILEC provides itself, so that CLECs may design and deploy AIN-based services. Id. at 412. The FCC found that AIN service software itself is a proprietary element and, applying the necessary standard, concluded that ILECs were not required to provide unbundled access to this element. Id. at (6) Operations Support Systems Operations support systems (OSS) are made up of the various systems, databases, and personnel that an incumbent LEC uses to commercially provision telecommunications services to its customers (and to resellers and purchasers of UNEs). OSS includes manual, as well as automated systems, together with associated business processes and the up-to-date data maintained in those systems. The FCC has identified five OSS functions needed by CLECs in order to deliver local services at the level expected by customers and state regulators: pre-ordering, ordering, provisioning, repair and maintenance, and billing. UNE Remand Order 425 and n Local Competition Order 518, 523. Incumbent LECs must provide requesting carriers with unbundled access to their OSS. UNE Remand Order 433. The incumbents OSS provides access to key information that is unavailable outside the incumbents networks and is critical to the ability of other carriers to provide local exchange and exchange access service. Id. Access to OSS must be provided, whether or not the requesting carrier is ordering other UNEs or resold services from the ILEC. Id. at

20 Setting terms and conditions for CLEC access to OSS, and operationalizing that access, has been a subject of enormous controversy and has spawned its own body of jurisprudence in FCC orders ruling on incumbent LEC applications for long-distance authority under section 271, a subject to be addressed by other speakers. Those decisions, themselves controversial, consider not only terms and conditions of access to OSS, but the level of performance (based on commercial performance data or third-party testing) that is required to demonstrate that an ILEC is providing access to OSS that is nondiscriminatory and provides a CLEC with a meaningful opportunity to compete. See, e.g., In the Matter of Application by SBC Communications Inc., et. al, Pursuant to Section 271 of the Telecommunications Act of 1996 To Provide In-Region, InterLATA Services in Texas, CC Docket No , Memorandum Opinion and Order (FCC June 30, 2000). (7) Operator Services and Directory Assistance (OS/DA). An incumbent LEC need not provide access to its OS/DA as an unbundled network element under section 251(c)(3), where the incumbent LEC provides customized routing. UNE Remand Order Customized routing permits a CLEC to specify that OS/DA traffic from its customers who are served over the incumbent LEC s unbundled local switch, or who are served by resale, be routed over designated trunks to the CLEC s chosen OS/DA platform (either its own or third-party provided). Id. at 441, n ILECs still must provide competitors nondiscriminatory access to their OS/DA under section 251(b) but not as a UNE subject to the cost-based UNE pricing standards of the Act discussed below. Id. at 442. An arbitration claim to require Southwestern Bell to provide OS/DA as a UNE on the basis of state-specific factual showing and on state law grounds is pending before the Texas Commission in Docket No c. Triennial review of UNE list. The FCC recently commenced its first triennial review of the minimum list of network elements that must be unbundled under section 251(c)(3). In the Matter of Review of the Section 251 Unbundling Obligations of Incumbent Local Exchange Carriers, CC Docket No , Notice of Proposed Rulemaking (December 20, 2001). This proceeding is expected to be the venue for the FCC to rule a collection of recent proposed changes to its unbundling rules, such as incumbent LEC proposals to remove local switching, high-capacity loops (DS1 and above), and dedicated transport from the list, as well as CLEC proposals to clarify and strengthen access to enhanced extended loops (EELs). NPRM at 4, 12. The FCC has stated that this proceeding will focus on the facilities used to provide broadband services and explore the role that wireless and cable companies have begun to play and will continue to play both in the market for broadband services and the market for telephony services generally. Id. at 3. The FCC has sought comment on 17

21 whether and how its unbundling analysis should expressly consider the Act's goal of encouraging the deployment of advanced telecommunications capability. Id. at 22. In this regard the triennial review is one of a series of proceeding in which the FCC is reviewing the regulatory structure that applies, or should apply, to the delivery of broadband services, further discussed below. In the triennial UNE review the FCC also has invited comment on whether its unbundling rules should be revised to relate particular unbundling requirements to the specific services the requesting carrier seeks to offer, to allow for variation based on the type of facilities involved (potentially different rules for copper and fiber loops), and to allow for variation in unbundling obligations based on conditions in specific geographic markets and changes over time. 6. Combinations of unbundled network elements - the UNE Platform Another subject that has provoked great controversy is competitors right to use combinations of unbundled network elements, including combinations sufficient to establish end-to-end telecommunications service for a customer, without the CLEC supplying any network facilities of its own. Competitors efforts to purchase the same combination of elements that are used by the incumbent LEC to provide POTS service (plain old telephone service) to a retail customer (the UNE Platform or UNE-P ) have been at the center of this controversy. This UNE Platform has been viewed by many as the most promising, if not only, nearterm means for bringing competition in local telecommunications service to the mass residential market. The UNE Platform offers CLECs the opportunity to differentiate services in a way that resale does not, to obtain the elements at costbased UNE pricing (if those prices are properly set), and to provide exchange access services, to themselves or others, based on the cost-based charges for the elements, without also having to pay non-cost-based access charges to the incumbent. The UNE Platform enables CLECs to offer services to the mass market without the need to collocate equipment in every ILEC central office within the area to be served. The availability of the UNE Platform has been central to the limited local competition that has occurred under the Act to date. For example, in Southwestern Bell s Texas territory, use of the UNE Platform accounted for 94% of the net gain in lines served by competitors between January 2000 and June 2001 (1,062,233 UNE Platform lines out of a net gain of 1,208,344). The debate has been over whether CLECs are entitled under the Act to use this potent combination, and, if so, on what terms and conditions (particularly, who will connect the elements to one another, the ILEC or the CLEC). The history of the litigation over the UNE platform would fill a novel (probably a very bad one). The current state of the law regarding access to UNE combinations is as follows: a. The statute: recall that section 251(c)(3) requires an incumbent LEC to provide nondiscriminatory access to UNEs and further requires an incumbent LEC to provide such unbundled network elements in a manner that allows requesting 18

22 carriers to combine such elements in order to provide such telecommunications services. b. CLECs may use a UNE Platform. It is firmly established that a CLEC may rely solely on a combination of unbundled network elements obtained from the incumbent LEC to provide a telecommunications service to a customer. AT&T Corp. v. Iowa Utilities Board, 119 S. Ct. at The Supreme Court held that the FCC reasonably omitted from its local competition rules any requirement that a CLEC own or contribute facilities of its own in order to use the incumbent s UNEs, because the Act itself imposes no such obligation. Id. at 736. c. Who must combine the elements? This question now must be separated into two parts. The law is settled with respect to existing combinations, i.e., network elements that the incumbent currently combines. The law is disputed regarding so-called new combinations, a request for elements that the incumbent LEC does not currently combine. The line between existing and new combinations is itself disputed. Incumbent LECs generally assert that the definition turns on whether the particular elements ordered by the competitor to serve an individual customer are physically connected at the time the CLEC orders them. Competitors take the view that the distinction, rather, is between sets of elements that the incumbent ordinarily combines for purposes of its own retail operations ( existing combinations ) and that that it does not ( new ). This matter is currently in dispute in Texas in PUCT Docket No (1) Existing combinations: in its Local Competition Order, the FCC promulgated Rule 315(b), which forbids an ILEC to separate requested network elements that the incumbent currently combines. 47 C.F.R (b); see AT&T Corp. v. Iowa Utilities Board, 119 S. Ct. at The Eighth Circuit vacated that rule as inconsistent with section 251(c)(3), and the Supreme Court reinstated it. Id. The Supreme Court found that the statute was ambiguous regarding whether UNEs must be provided separately to a requesting carrier. According to the Court, the statutory phrase on an unbundled basis did not compel the conclusion that UNEs must be physically separated, noting that the sole dictionary definition of unbundled was to give separate prices for equipment and supporting services. Id. at 737. Recognizing that the rule was aimed at preventing ILECs from disconnecting previously connected elements, solely to impose wasteful reconnection costs on new entrants, the Court found that the FCC s rule was entirely rational, finding its basis in 251(c)(3) s nondiscrimination requirement. Id. (2) New combinations: the Eighth Circuit also vacated FCC Rules 315(c)-(f) in Iowa Utilities Board I. These rules required an ILEC to perform the functions necessary to combine UNEs in any technically feasible manner for a requesting carrier. The Eighth Circuit decision to vacate these rules was not reviewed by the Supreme Court in AT&T Corp. v. Iowa Utilities 19

23 Board. The Eighth Circuit reaffirmed its decision in Iowa Utilities Board II, 219 F.3d at The Ninth Circuit disagrees; it has affirmed a state commission s decision to require an interconnection agreement to include a term under which the incumbent LEC will perform the functions necessary to combine requested elements in any technically feasible manner, for an appropriate charge. The Ninth Circuit held that the Supreme Court s rationale for reinstating the FCC s existing combinations rule led to the conclusion that requiring ILECs to combine UNEs also is consistent with the Act. See US West Communications v. MFSIntelenet, Inc., 193 F.3d 1112, 1121 (9th Cir. 1999); see also MCI Telecommunications Corp. v. US West Communications, 204 F.3d 1262, 1268 (9th Cir. 2000); Southwestern Bell Telephone Company v. Waller Creek Communications, Inc., 221 F.3d 812, (5th Cir. 2000) (holds contract term requiring ILEC to combine elements is not illegal, without reaching question whether such a contract term is required by the Act). The validity of the FCC rule requiring ILECs to combine UNEs will be determined by the Supreme Court in its review of Iowa Utilities Board II. (3) Note that interconnection agreement terms requiring Southwestern Bell to combine elements for CLECs are currently available in Texas, Oklahoma, Kansas, Missouri, and Arkansas under the 271 Agreements (form interconnection agreements) approved by the commissions in those states as part of their review of Southwestern Bell s applications to enter the long-distance market. See discussion of Texas 271 Agreement below. However,thecommitmentmadeunderthoseagreementswasforalimited term (the Texas 271 Agreement expires in October 2003), and SWBT s commitment to provide new combinations even during that term is subject to limitations if the combination is used to serve a business customer. The extent of SWBT s legal obligation to provide new combinations, independent of the Texas 271 Agreement, is currently being arbitrated in PUCT Docket No Unbundled network element pricing section 252(d)(1) s cost-based standards and the FCC s TELRIC methodology. Section 252(d)(1) provides that state commission determinations of the just and reasonable rate for interconnection and unbundled network elements provided under section 251(c) shall be based on the cost of providing the interconnection or element ( determined without reference to a rate-of-return or other rate-based proceeding ) and nondisciminatory, and may include a reasonable profit. In its Local Competition Order, the FCC promulgated rules that prescribed a pricing methodology for state commissions to follow in making these determinations, and established proxy rates that could be used pending these rate determinations. Local Competition Order The FCC pricing rules 20

24 utilize a forward-looking economic cost methodology that is based on the total element long-run incremental cost (TELRIC) of an element. The FCC s TELRIC methodology bases UNE/interconnection rates on costs that assume the use of the incumbent s existing wire center locations and the most efficient technology available, whether or not that technology is actually used by the ILEC and provided to the CLEC. Id. at 685, 690. These assumptions were incorporated into Rule 505(b)(1). 47 C.F.R (b)(1). In Iowa Utilities Board I, the Eighth Circuit vacated the FCC s pricing rules on the ground that they exceeded the FCC s jurisdiction. The Supreme Court reversed that ruling and remanded the case for consideration of substantive challenges to the pricing rules. AT&T Corp. v. Iowa Utilities Board, 119 S. Ct. at 730. On remand, the Eighth Circuit rejected incumbent LECs argument that section 252(d)(1) requires that UNE and interconnection rates be based on ILECs historical cost. Iowa Utilities Board II, 219 F.3d at That court reasoned that rates based on the costs that an ILEC actually incurs or will incur in providing interconnection/unes will produce rates that permit the ILEC to recover its cost of providing the shared items and that a profit can be made, whether historical or forward-looking costs are used. Id. The Court also rejected the claim that universal service subsidies must be included in UNE/interconnection rates. Id. at 753. The Court rejected a takings claim as unripe. Id. at The Eighth Circuit did vacate one aspect of the FCC s pricing rules the hypothetical network standard contained in 47 C.F.R (b)(1). The court found the requirement to assume deployment of the most efficient technology available today to violate the plain meaning of the Act s requirement that the rates be based on the cost of providing the interconnection or network element. 219 F.3d at Viewing the new competitor as piggybacking on the ILEC s existing facilities, the court concluded that it is the cost to the ILEC of providing that ride on those facilities that the statute permits the ILEC to recoup. Id. at 751. In the Eighth Circuit s view, costs still could be forward-looking, without the hypothetical network standard, in that they can be calculated to reflect what it will cost the ILEC in the future to famish to the competitor those portions or capacities of the ILEC s facilities and equipment that the competitor will use including any system or component upgrading that the ILEC chooses to put in place for its own more efficient use. In our view it is the cost to the ILEC of carrying the extra burden of the competitor s traffic that Congress entitled the ILEC to recover.... Id. To this extent, incremental cost pricing would be consistent with the statute. Id. The Supreme Court granted certiorari to review the Eighth Circuit s decision regarding these pricing rules, and the Eighth Circuit decision has been stayed 21

25 D. Resale pending that review. Argument was heard in October, and a decision is expected at any time. Thus, UNE and interconnection pricing has remained a matter of great uncertainty from the effective date of the Act to the present. 8. Use of UNEs to provide exchange access services. Under section 251(c)(3), competitors may purchase UNEs for the purpose of offering exchange access services, or for the purpose of offering exchange access services to themselves in order to provide interexchange services to consumers. Local Competition Order 356; UNE Remand Order 484. ILECs may not impose any limitations, restrictions, or requirements on request for, or the use of, unbundled network elements that would impair the ability of a requesting telecommunications carrier to offer a telecommunications service in the manner [it] intends. 47 C.F.R (a). For further related developments, see Implementation of the Local Competition Provisions of the Telecommunications Act of 1996, Supplemental Order, CC Docket No , 15 FCC Rcd (FCC 1999) and Supplemental Order Clarification (FCC June 2, 2000) (regarding substitution of UNEs for tariffed special access facilities). Incumbent LECs have a specific obligation to offer for resale at wholesale rates any telecommunications services that the carrier provides at retail to subscribers who are not telecommunications carriers. 47 U.S.C. 251(c)(4)(A). ILECs may not prohibit, or impose unreasonable or discriminatory conditions or limitations on resale of such services. 251(c)(4)(B). Resale of ILEC services under this section is subject to the wholesale pricing requirement in section 252(d)(3). That section requires resale rates to be set on the basis of retail rates charged to subscribers for the telecommunications service requested, excluding the portion thereof attributable to any marketing, billing, collection, and other costs that will be avoided by the local exchange carrier. If the ILEC makes a telecommunications service available only to residential customers or a particular class of residential customers, a state commission may permit the ILEC to prohibit a CLEC from reselling those services under this section to persons who would not be eligible to obtain them from the ILEC. 47 C.F.R (a)(1). The wholesale discount does not apply to a special promotional rate for a retail service, where the promotion is in effect for no more than 90 days, unless the ILEC uses such promotional offerings to evade its wholesale rate obligation, such as through sequential short-term promotions. 47 C.F.R (a)(2). Volume discounts generally must be made available to resellers, and resellers may aggregate traffic from multiple end users to meet volume discount usage requirements. Local Competition Order

26 The FCC pricing rules call for states to set the wholesale rate discount based on the ILEC s avoided retail costs, defined as those costs that reasonably can be avoided when an incumbent LEC provides a telecommunications service for resale at wholesale rates to a requesting carrier. 47 C.F.R (b). The Eighth Circuit has vacated this rule, finding its use of costs that can be avoided to be inconsistent with the statutory phrase will be avoided. Iowa Utilities Board II, 219 F.3d at Note also that the D.C. Circuit has ruled that an ILEC may not avoid its section 251(c) resale and unbundling obligations with respect to advanced services by providing such services through a structurally separate affiliate. Association of Communications Enters. v. FCC, 235 F.3d 662, (D.C. Cir. 2001). Advanced services are addressed in another primer presentation. V. THE ACT S PROCEDURAL REQUIREMENTS: IMPLEMENTING THE ILEC S MARKET-OPENING DUTIES THROUGH NEGOTIATING AND ARBITRATING INTERCONNECTION AGREEMENTS. The Act does not directly require incumbent LECs to carry out the duties assigned under section 251(c). Rather, under section 252, an incumbent LEC must negotiate and arbitrate contract terms that will fulfill those duties at the request of a competing carrier (recall the ILEC s section 251(c)(1) duty to negotiate in good faith). See 47 C.F.R (defining duty to negotiate and providing examples of conduct that would violate the duty). A. Negotiation of Interconnection Agreements 1. Interconnection agreements arrived at entirely through voluntary negotiations need not conform to the standards set out in sections 251(b) and (c). Such agreements must include a detailed itemization of charges for interconnection and each service or element to be provided. The agreements must be filed with the state regulatory commission. 47 U.S.C. 252(a). 2. Any party to interconnection agreement negotiations may petition for arbitration of open issues under strict deadlines. A petition for arbitration must be filed between the 135 th and 180 th day after the ILEC receives the relevant request for negotiation. 47 U.S.C. 252(b)(1). Arbitration must be complete within 9 months after that request for negotiation was received. 47 U.S.C. 252(b)(4(C). Arbitration of the parties rights under the federal Act is delegated to the regulatory commission in each state with authority over telecommunications carriers intrastate operations (in Texas, the Public Utility Commission). 47 C.F.R Lest Congress involuntary appointment of state commissions as arbitrators cause Tenth Amendment concerns, the Act provides for the FCC to preempt a state commission s jurisdiction over any section 252 proceeding if the state commission fails to act. 47 U.S.C. 252(e)(5). 23

27 B. State commission review of interconnection agreements. 1. Negotiated agreements. The state commission may only reject a fully negotiated agreement if it discriminates against a carrier who is not a party or if implementation would not be consistent with the public interest, convenience, and necessity. 47 U.S.C. 252(e)(2)(A). 2. Arbitrated agreements. In addition to the grounds for rejecting a fully negotiated agreement, the state commission may reject an arbitrated agreement (or any part of it) if the agreement does not meet the requirements of section 251, FCC regulations implementing section 251, or the pricing standards for interconnection, resale, and UNEs in section 252(d). 47 U.S.C. 252(e)(2)(B). The Act leaves a state commission free to establish and enforce requirements of state law in connection with its review of both negotiated and arbitrated agreements. 47 U.S.C. 252(e)(3). C. Federal judicial review of state commission decisions under the Act. A party aggrieved by a state commission s decision to approve or reject an interconnection agreement may bring an action in federal district court to determine whether the agreement meets the requirements of sections 251 and U.S.C. 252(e)(6). The Act prohibits state courts from reviewing these decisions. 47 U.S.C. 252(e)(4). Moreover, a party aggrieved by a commission s approval or rejection decision does not have to exhaust state-law remedies and procedures before obtaining a review of the commission s decision in federal court pursuant to section 252(e)(6). See AT&T Communications Sys. v. Pacific Bell, 203 F.3d 1183, (9 th Cir. 2000). Important recurring issues related to federal judicial review of state commission determinations under the Act include: 1. Eleventh Amendment Immunity. The Third, Fifth, Sixth, Seventh and Tenth Circuits have held that the Eleventh Amendment does not bar actions under section 252(e)(6). More particularly, the Third, Fifth, Seventh and Tenth Circuits have reasoned that states waive Eleventh Amendment immunity when they accept Congress s invitation to regulate local telecommunications competition. MCI Telecommunication Corp. v. Bell Atlantic- Pa., 271 F.3d 491, (3 rd Cir. 2001); AT&T Communications v. BellSouth Telecommunications Inc., 238 F.3d 636, 647 (5 th Cir. 2001); MCI Telecommunications Corp. v. Illinois Bell Tel. Co., 222 F.3d 323, 341 (7 th Cir. 2000), cert. denied, 531 U.S (2001); MCI Telecommunications Corp. v. Public Serv. Commission of Utah, 216 F.3d 929, (10 th Cir. 2000), cert. denied, 531 U.S (2001). And, the Fifth, Sixth, Seventh and Tenth Circuits have reasoned that individual commissioners, in their official capacities, are amenable to suit in federal court under Ex Parte Young for continuing violations of federal law namely, determinations that are potentially contrary to the Act or implementing C.F.R. provisions. AT&T Communications, 238 F.3d at ; 24

28 MCI Telecommunications, 222 F.3d at ; MCI Telecommunications, 216 F.3d at 939; Michigan Bell Tel. Co. v. Climax Tel. Co., 202 F.3d 862, 867 (6 th Cir. 2000), cert. denied, 531 U.S. 816 (2000). The Fourth Circuit, however, has held that states do not waive Eleventh Amendment immunity by regulating local telecommunications competition. Bell Atlantic Md., Inc. v. MCI Worldcom, Inc., 240 F.3d 279, (4 th Cir. 2001), cert. granted, 121 S. Ct (2001); BellSouth Telecommunications, Inc. v. North Carolina Util. Comm n, 240 F.3d 270, 276 (4 th Cir. 2001). Also, the Fourth Circuit applies a more demanding analysis under Ex Parte Young that decreases but does not eliminate the amenability of state commissioners to suit in federal courts. See Bell Atlantic, 240 F.3d at 298. The Supreme Court has granted review of decisions from the Fourth and Seventh Circuits to consider this Eleventh Amendment issue. Matthias v. Worldcom Technologies, Inc., No ; Illinois Bell Telephone Co. v. WorldCom Technologies, Inc., No These cases are set for decision this term. 2. Scope of Interconnection Agreement Review by State Utility Commissions. The great weight of case law authority upholds the power of state utility commissions under section 252(e)(1) not only to approve or reject interconnection agreements, but also to interpret and enforce them. See U.S. West Communications, Inc. v. Sprint Communications Co., 2002 U.S. App. LEXIS 94, Nos & , at *27 (10 th Cir. Jan. 4, 2002); Bell Atl. Md., Inc. v. MCI Worldcom, Inc., 240 F.3d 279, 304 (4 th Cir. 2001), cert. granted sub nomine United States v. Public Service Comm n of Maryland, 121 S. Ct (2001); BellSouth Telecommunications, Inc. v. North Carolina Utils. Comm n, 240 F.3d 270, (4 th Cir. 2001); Southwestern Bell Tel. Co. v. Brooks Fiber Communications of Okla., Inc., 235 F.3d 493, 497 (10 th Cir. 2000); Southwestern Bell Tel. Co. v. Connect Communications Corp., 225 F.3d 942, 946 (8 th Cir. 2000); MCI Telecommunications Corp. v. Illinois Bell Tel. Co., 222 F.3d 323, 338 (7 th Cir. 2000), cert. denied, 531 U.S (2001); Southwestern Bell Tel. Co. v. Public Util. Comm n of Tx., 208 F.3d 475, (5 th Cir. 2000); Michigan Bell Tel. Co. v. Climax Tel. Co., 202 F.3d 862, 867 (6 th Cir. 2000), cert. denied, 531 U.S. 816 (2000). In a departure from this line of cases, the Eleventh Circuit very recently held that the authority of state commissions under section 252 does not extend to interpreting and enforcing interconnection agreements. Rather, according to that court, such disputes must be adjudicated in state court, like other contract disputes. See BellSouth Telecommunications, Inc. v. MCIMetro Access Transmission Services, Inc., No , Eleventh Circuit, January 10, The FCC has taken the position that a dispute arising from interconnection agreements and enforcement of those agreements lies within the state commissions responsibility under section 252, such that the FCC may step in and 25

29 preempt jurisdiction where the state fails to act. Starpower Communications, LLC Petition for Preemption of Jurisdiction of the Virginia State Corporation Commission, CC Docket No , Memorandum Opinion and Order 6 (FCC June 14, 2000). 3. Judicial Review of State Commission Decisions. The Act indisputably places the authority to review state commission decisions to approve or reject interconnection agreements in federal district courts pursuant to section 252(e)(6). However, the Fourth Circuit has narrowly construed this authority, holding that federal courts cannot go further and review commission decisions that interpret or enforce interconnection agreements. Rather, state courts are the appropriate forum for review of such interpretations and enforcement decisions. Bell Atl. Md., Inc. v. MCI Worldcom, Inc., 240 F.3d 279, 304 (4 th Cir. 2001), cert. granted sub. nomine United States v. Public Service Comm n of Maryland, 121 S. Ct (2001); BellSouth Telecommunications, Inc. v. North Carolina Util. Comm n, 240 F.3d 270, (4 th Cir. 2001). (The Eleventh Circuit, as noted above, now takes the view that state commissions themselves do not have authority to interpret and enforce interconnection agreements under section 252). The Fifth, Eighth and Tenth Circuits, on the other hand, have held that federal courts can review commissions interpretations and enforcement decisions pursuant to section 252(e)(6). U.S. West Communications, Inc. v. Sprint Communications Co., 2002 U.S. App. LEXIS 94, Nos & , at *27 (10 th Cir. Jan. 4, 2002); Southwestern Bell Tel. Co. v. Brooks Fiber Communications of Okla., Inc., 235 F.3d 493, 497 (10 th Cir. 2000); Southwestern Bell Tel. Co. v. Connect Communications Corp., 225 F.3d 942, (8 th Cir. 2000); Southwestern Bell Tel. Co. v. Public Util. Comm n of Tx., 208 F.3d 475, 481 (5 th Cir. 2000). The United States Supreme Court also granted review of this issue in United States v. Public Service Comm n of Maryland. That case was argued December 5, 2001 and should be decided this term. Because the Supreme Court is to decide whether a state commission decision enforcing a previously approved section 252 interconnection agreement is itself a determination under section 252, and thus reviewable in federal district court under section 252(e)(6), its decision may also shed light on the scope of state commission jurisdiction to enforce such agreements, recently questioned by the Eleventh Circuit in the face of much contrary authority. 4. Scope of federal judicial review. The Fifth Circuit, recognizing some conflict in case law from other circuits, has held that a district court in a section 252(e)(6) action should review de novo the question of whether an agreement violates sections 251 or 252 and should review all other determinations made by the state commission under an arbitrary and capricious standard. Southwestern Bell, 208 F.3d at 482. See also U.S. West 26

30 D. Pick and choose. Communications, Inc. v. Sprint Communications Co., 2002 U.S. App. LEXIS 94, Nos & , at *17 (10 th Cir. Jan. 4, 2002); Southwestern Bell Tel. Co. v. Brooks Fiber Communications of Okla., Inc., 235 F.3d 493, 498 (10 th Cir. 2000) (both applying de novo review to whether an agreement violates sections 251 and 252 and an arbitrary and capricious review to state-law determinations). Any individual interconnection, service, or network element arrangement contained in an approved interconnection agreement to which an incumbent LEC is a party must be offered to any other requesting carrier on the same rates, terms and conditions as provided in the approved agreement. 47 U.S.C. 252(i); 47 C.F.R This FCC rule was reinstated by the Supreme Court in AT&T v. Iowa Utilities Board, 525 U.S. 366, 119 S. Ct. 721, 738 (1999), after the Eighth Circuit had vacated it. Thus pick and choose rule provides competitors a powerful protection against discriminatory contract terms, but it also constrains negotiations because whatever is agreed to between the incumbent LEC and one competitor must be made available to all competitors. E. Statement of generally available terms (SGAT). As an alternative to interconnection agreements, an incumbent LEC may file a statement of generally available wholesale terms and conditions that it offers within a state to comply with section 251 requirements. 47 U.S.C. 252(f). The statute provides for review of an SGAT by the state commission before it can take effect. Id. F. The long-distance carrot. In order to obtain long-distance authority under section 271 of the Act, an RBOC must demonstrate compliance with a competitive checklist, which incorporates many of its section 251 duties and 252(d) wholesale pricing requirements. These are discussed in another primer paper. Suffice it to say here that, while many of the Act s requirements have been fleshed out through section 252 arbitrations and judicial review proceedings, much of that definition also has taken place in FCC rulings on RBOC applications for long-distance authority. G. Performance Data and Self-Enforcement. 1. Performance Measurements. The FCC has placed substantial emphasis on the development of objective performance data by incumbent LECs to assess whether or not they are meeting their statutory obligations to provide nondiscriminatory access to UNEs, interconnection, and resale and to provide a meaningful opportunity to compete. This development has occurred principally in the context of section 271 longdistance applications by RBOCs, to be discussed in another primer presentation. In that same context, the FCC has encouraged incumbent LECs to commit to self- 27

31 enforcing terms imposing liquidated damages and regulatory sanctions for discriminatory or substandard performance. For CLECs obtaining wholesale service from Southwestern Bell Telephone Company ( SWBT ) in its incumbent LEC territories, SWBT will post monthly performance data comparing its performance for an individual CLEC, and for CLECs in the aggregate within a state, to the performance it provides its retail operations or to fixed benchmark standards. These measurements primarily provide information about the timeliness and quality with which SWBT s operations support systems are functioning pre-order, ordering, provisioning, maintenance, and billing systems. For many measurements, results are reported separately for different wholesale items ordered by CLECs, e.g., resold business lines, UNE platform combinations, or unbundled DSL-capable loops. The performance data is posted at SWBT s CLEC website, Access to individual CLEC data is password-controlled. SWBT s performance measurements are subject to periodic review before the state commissions, historically coordinated and conducted by the Texas Commission. Measurements may be added, modified, or deleted during these reviews. The proceedings are open to SWBT and all interested CLECs. The FCC recently commenced a rulemaking to consider whether a national set of performance measurements should apply to incumbent LECs wholesale performance. See In the Matter of Performance Measurements and Standards for Unbundled Network Elements and Interconnection, CC Docket No , Notice of Proposed Rulemaking (November 19, 2001). 2. Self-Enforcing Monetary Sanctions. Under Attachment 17 to the Texas 271 Agreement, a standard form of interconnection agreement currently offered by SWBT and discussed below, a CLEC also has the right to recover liquidated damages for SWBT performance that fails to meet parity or benchmark requirements, applying defined statistical tests. Additional amounts are payable to the state treasury for repeated substandard performance toward CLECs in the aggregate. Based on its selfreported data, SWBT paid almost $ 12 million to Texas CLECs and the state treasury under this plan for substandard performance during Various features of this Texas Remedy Plan continue to raise serious questions about its efficacy, either as a deterrent against substandard performance or as a source of compensation for actual injury caused to CLECs. However, any competitor operating in SWBT territory should be aware of the remedies available under this plan and the limitations on those remedies. SWBT offers parallel remedy terms in Missouri, Kansas, Oklahoma, and Arkansas under the 271 Agreements approved in those states. H. Summary: a procedural scheme only a lawyer could love. 28

32 The Act s structure for opening the local market begins with consensual negotiations between incumbent regulated monopolies and would-be competitors who have nothing to offer the incumbents except an opportunity to lose market share, then looks to individual state commissions to apply federal law to arbitrate unresolved issues, with judicial review of these state government bodies lodged exclusively in federal court. Perhaps not surprisingly, the Supreme Court concluded that it would be a gross understatement to say that the 1996 Act is not a model of clarify. It is in many respects a model of ambiguity or indeed even self-contradiction. That is most unfortunate for a piece of legislation that profoundly affects a crucial segment of the economy worth tens of billions of dollars. AT&T Corp. v. Iowa Utilities Board, supra, 119 S. Ct. at 738. VI. THE TEXAS EXPERIENCE: MEGA-ARBITRATIONS AND THE T2A A. Mega-Arbitrations Many of the terms and conditions now found in Texas interconnection agreements were developed through two Mega-arbitrations, as the Texas Commission came to call them. In these proceedings, the Texas Commission consolidated several requests for arbitration of issues that could not be resolved through interconnection agreement negotiations. See PUCT Docket Nos , 16196, 16226, 16285, 16290, Arbitration Award (Nov. 7, 1996); PUCT Docket Nos , 16196, 16226, 16285, 16290, 16455, 17065, 17579, 17587, and 17781, Arbitration Award (September 30, 1997) (terms and conditions), Amendment and Clarification of Arbitration Award (November 25, 1997) (addressing motion for clarification on UNE combinations), Arbitration Award (December 19, 1997) (UNE pricing). The Mega-arbitrations had a procedural, as well as a substantive, impact. Procedures developed in those arbitrations continue to impact proceedings before the Texas Commission (e.g., witnesses appearing in panels, organized by subject matter, rather than traditional presentation of each party s witnesses individually). B. Texas 271 Agreement One product of SWBT s 271 proceedings before the Texas Commission, PUCT Project No , was SWBT s commitment to offer a standard form of interconnection agreement to Texas CLECs for a limited time. Dubbed the Texas 271 Agreement or T2A by the Texas Commission, the current form of that agreement may be accessed at the SWBT CLEC website, The T2A has both a controversial history and controversial provisions, but is an important source to any person interested in the wholesale terms available in Texas from Southwestern Bell today. The T2A is described in the FCC order granting SBC s section 271 application for Texas. See SBC Texas Order at 13. The initial four-year term of the T2A expires in October 2003, a fact that is likely to contribute more uncertainty to the marketplace as that date approaches. 29

33 VII. APPLYING THE FEDERAL ACT TO CHANGING TECHNOLOGY: THE BROADBAND NETWORK Probably the most hotly-debated topic under the Act today is how its unbundling requirements apply, or should apply, to new network facilities being deployed by incumbent LECs to support their delivery of broadband services to more and more customers. The issue illustrates the difficulty of applying the broad requirements of the Act to fast-changing technology, where the economic stakes are extremely high and where the process itself including simultaneous pursuit of federal legislation, federal rulemaking proceedings, and state commission arbitration of interconnection agreement requirements (with requests for federal judicial review likely to follow) -- has left the relevant rules of the marketplace in protracted uncertainty. This topic is addressed in detail in another primer presentation and will be only briefly referenced here. A. The Issue The two primary means of delivering high-speed Internet and other data services to mass market customers today are the use of the incumbent s copper telephone loops to provide digital subscriber line ( DSL ) service and the use of coaxial cable to provide cable modem service. A recent study under the auspices of the National Academy of Sciences concludes that, for the foreseeable future, the incumbent LECs loops and cable TV providers cable will provide the only means of bringing broadband service to homes across much of the United States, even in large and medium-sized cities. DSL service is limited by distance. Beginning approximately in 1999, incumbent LECs have accelerated deployment of network facilities that extend optical fiber further into the loop and closer to the end user, so that the copper segment of the loop that remains will support DSL service. For example, SBC commenced its $ 6 billion deployment of Project Pronto architecture, placing next generation digital loop carrier (NGDLC) equipment at remote terminals closer to customers. High-speed data service is provided over this architecture across a loop that is comprised of a copper distribution component from the customer to the remote terminal, NGDLC equipment at the remote terminal, and fiber feeder back to the central office, where the loop terminates on an optical switch. Voice service also can be provided over this loop, terminating at the circuit switch in the central office. Incumbent LECs assert that the obligation to provide competitors with unbundled access to the components of such broadband-capable loop architecture, at TELRIC rates, will deter investment in such network facilities and place ILECs at a disadvantage in competing against cable providers to deliver broadband services. CLECs respond that, without access to these last-mile facilities at rates that will support competition, they are significantly disadvantaged in seeking to compete with the incumbent in providing broadband services, and therefore are entitled to unbundled access applying the impair test. 30

34 Much is at stake. Advanced services have appeared to offer an important opportunity to bring meaningful competition to the local telephony marketplace. Yet many of the competitors who first sought to use the incumbents loops to provide DSL service have liquidated or are in reorganization proceedings. RBOCs have asserted that unbundling requirements will cause them to delay or reduce investment in broadband facilties. CLECs have responded that, until CLECs began to offer DSL service using incumbent loops, the RBOCs showed little interest in bringing this technology, which had long been known to them, to the marketplace. Moreover, the issue has become enmeshed in a larger policy debate over how to achieve widespread broadband deployment in the United States. The debate currently occupies the FCC, the Congress, and state regulators. B. FCC Rulemaking Proceedings Related to Broadband Regulation The D. C. Circuit recently upheld an FCC ruling that advanced services, which include high-speed Internet services, see section I.E, supra, constitute telecommunications services. See ASCENT v. FCC, 253 F.3d 29, 31 (D.C. Cir. 2001). The FCC has said that the pro-competitive provisions of the Act apply equally to advanced services and to circuit-switched voice services. In re Deployment of Wireline Services Offering Advanced Telecommunications Capability, CC Docket No , First Report and Order at 15 (March 31, 1999). Nevertheless, the FCC currently is examining broadband-related issues in four proceedings. 1. The triennial UNE review. Discussed above in section IV.C.5.c, these proceedings will address ILECs wholesale obligations under section 251 to make their facilities available as UNEs to CLECs for the provision of broadband services. 2. Review of Regulatory Requirements for Incumbent LEC Broadband Services, CC Docket No , Notice of Proposed Rulemaking (December 20, 2001). This proceeding considers whether incumbent LECs that are considered dominant in the provision of traditional local exchange and exchange access service, and thus subject to certain requirements of Title II of the Communications Act, also should be considered dominant when they provide broadband services. 3. In the Matter of Appropriate Framework for Broadband Access to the Internet over Wireline Facilities, CC Docket No , Notice of Proposed Rulemaking (February 15, 2002). The FCC intends this proceeding to be a thorough examination of the appropriate legal and policy framework under the Communications Act of 1934, as amended, for broadband access to the Internet provided over domestic wireline facilities. 1. The proceeding will examine the appropriate regulatory classification of wireline broadband Internet access service, e.g., as an information service or a telecommunications service, and the consequences of that classification. 9,

35 4. Inquiry concerning High-Speed Access to the Internet Over Cable and Other Facilities, Notice of Inquiry, 15 FCC Rcd (2000). This Cable Modem Notice proceeding considers the appropriate regulatory classification for cable modem service, which is used to provide high-speed Internet access. The FCC has described the broadband wireline proceeding (immediately above) and the cable modem proceeding as functional equivalents, the former applying to the use of the traditional telephone platform to offer broadband Internet access service, the latter applying to the use of cable plant for that same purpose. C. Federal Legislation Note that the Supreme Court had occasion this term to comment on the FCC s failure to classify Internet services in National Cable & Telecommunications Ass n v. Gulf Power Co., No , slip op. at 9 (January 16, 2002). As Justice Thomas pointed out in dissent, lower courts have disagreed over the classification of Internet access service provided by cable modem. Id., dissenting slip op. at 3. Compare MediaOne Group, Inc. v. County of Henrico, 97 F.Supp. 2d 712, 715 (E.D. Va. 2000), aff d on other grounds, 257 F.3d 356 (4 th Cir. 2001) (Internet service over cable modem is a cable service), with AT&T Corp. v. City of Portland, 216 F.3d 871, 878 (9 th Cir. 2000) (Internet service over cable modem is a telecommunications service). Congress is considering the Tauzin-Dingell bill (formally the Internet Freedom and Broadband Deployment Act, HR 1542). This bill, vigorously supported by the regional Bell Operating Companies, reportedly would free them from the requirement to demonstrate compliance with the local market-opening provisions of the Act before providing interlata advanced services in the regions they serve as the incumbent LEC. The bill reportedly also would eliminate incumbent LEC obligations to provide competitors with UNEs for advanced services. This legislation, which has passed the House of Representatives but faces difficulty in the Senate, is discussed in detail in the primer paper devoted to broadband. D. State Commission Arbitration Texas provides an illustration of state arbitrators who confront this issue not in an openended policy debate, but in the context of applying the terms of the Act to a specific factual record. Last summer, a Texas Commission arbitration panel found that lack of access to SWBT s Project Pronto loops as UNEs would materially diminish CLECs ability to provide advanced services, because the evidence established that the alternatives available to CLECs are either not viable, not concrete, or do not offer comparable service. PUCT Docket No , Revised Arbitration Award at 64. That award remains subject to review by the Commission. 32

36 VIII. TEXAS LAWS AND REGULATIONS AFFECTING LOCAL TELEPHONE OPERATIONS. A. Public Utility Regulatory Act (PURA), Texas Utilities Code Chapters 1 through 63. PURA governs the operation of telecommunications (and electric) utilities in Texas. PURA s telecommunications provisions are codified in Chapters 51 through 63 of the Texas Utilities Code. Telecommunications utility is defined to include not only public utilities, but also any communications carrier who conveys, transmits, or receives communications wholly or partly over a telephone system, as well as resellers, IXCs, and others. Texas Utilities Code (11). B. Substantive Rules Applicable to Telecommunications Service Providers, 16 Texas Administrative Code Chapter 26. The substantive regulations issued by the Texas Commission governing telecommunications are found in Chapter 26 of the Texas Administrative Code. Like PURA itself, the Commission s substantive regulations address retail telecommunications operations, as well as wholesale interaction and competition. Subchapter L specifically addresses the wholesale market. Other regulations that may take on increasing importance are the recently revamped customer service and protection rules found in subchapter B. The relationships between telecommunications providers and their customers increasingly will be governed less by tariff and more by ordinary contract principles and consumer protection laws. One of the papers presented in the plenary sessions will address the increased risks associated with this change, e.g., a rise in consumer class actions, and techniques that may mitigate that risk, e.g., proper use of arbitration provisions. C. Access to Public Rights-of-Way, Local Government Code Chapter 283. One very practical requirement for any telecommunications carrier is obtaining the necessary access to public rights-of-way to install and maintain network equipment. Obtaining timely access at reasonable rates has created a major hurdle for competitors in some locales. In 1999, Texas passed House Bill 1777, now codified at Chapter 283 of the Local Government Code, to govern right-of-way access for certificated telecommunications providers in Texas (persons who hold certificates from the Commission (CCN, COA, SPCOA) that authorize the holder to provide local exchange telephone service) (2). That statute was intended to replace the polyglot of franchise and license fees with an exclusive, uniform, competitively-neutral method for calculating right-ofway access fees, based on the number of access lines served by a provider that terminate to end users within a municipality At the same time, the statute was intended to maintain the overall level of revenue the cities had received under the earlier regime. 33

37 The statute is not clear, and disputes persist, in its application to telecommunications facilities used to provide data services or used to provide a mix of local and long-distance services. The statute requires the Commission to review the definition and categories of access lines every three years in light of changes in technology, facilities, and competitive and market conditions The Commission should undertake its first three-year review of access lines this year. Section 253 of the federal Telecommunications Act preempts state and local right-of-way access requirements that have the effect of prohibiting a carrier from providing a telecommunications service. The caselaw under section 253 is a substantial topic unto itself. The system of access line fees created in Texas under House Bill 1777 has not been subjected to a preemption challenge under section 253 of the Act. D. Carrier Access to Multi-tenant Buildings Texas also has provided by statute that a private building owner generally must give nondiscriminatory access to the building to any telecommunications utility whose services are requested by a tenant. Texas Utilities Code The statute provides that the Texas Public Utility Commission has the authority to enforce its requirements. The Texas Commission has promulgated building access regulations, including factors to be considered in setting reasonable compensation for building access. 16 Texas Admin. Code A challenge to the constitutionality of the Texas statute is pending in Texas Building Owners and Managers Association, Inc. et al. v. Public Utility Commission of Texas, et al., No. GN (Travis County District Court). E. Texas Commission Website The Texas Commission s website is found at The site contains a wealth of information of interest to telecommunications industry participants and their *counsel in this state, including not only the statute and regulations listed above, but also information regarding current rulemaking proceedings and other matters of current interest. The site includes a retrieval service where an index of all filings at the Commission in open or recent proceedings may be searched and documents may be retrievedatnocharge. 34