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If you need the complete document, download the WordPerfect version or Adobe Acrobat version, if available. ***************************************************************** Before the Federal Communications Commission Washington, D.C. 20554 In the Matter of BellSouth Petition for Pricing Flexibility for Special Access and Dedicated Transport Services ) ) ) ) ) ) ) ) ) CCB/CPD No. 00-20 MEMORANDUM OPINION AND ORDER Adopted: December 14, 2000 Released: December 15, 2000 By the Chief, Common Carrier Bureau: I.introduction. 1. In this order, we grant for the first time a petition for flexibility in the pricing of access services by an incumbent local exchange carrier (LEC). As detailed below, the Commission established the parameters for granting such relief in the Access Reform Fifth Report and Order released in August of last year. In doing so, the Commission recognized the importance of allowing incumbent LECs such pricing flexibility in order to "ensure that our own regulations do not unduly interfere with the operation of [interstate access] markets as competition develops." BellSouth's petition requests both Phase I and/or Phase II relief for various access services in a number of metropolitan statistical areas (MSAs) within its region. For the reasons that follow, we grant BellSouth's petition. II.Background. 3. To recover the costs of providing interstate access services, incumbent local exchange carriers (LECs) charge interexchange carriers (IXCs) and end users for access services in accordance with our Part 69 access charge rules. The Commission has long recognized that it should allow incumbent LECs progressively greater flexibility in the pricing of access service as they face increasing competition for the provision of these services. In the Access Reform First Report and Order, the Commission adopted a market-based approach to access charge reform, pursuant to which it would relax restrictions on incumbent LEC pricing as competition emerges. At that time, the Commission deferred resolution of the specific timing and degree of pricing flexibility to a future order. Subsequently, in the Access Reform Fifth Report and Order, the Commission provided detailed rules for implementing the market-based approach, pursuant to which price cap LECs would receive pricing flexibility in the provision of interstate access services as competition for those services develops. 4. The pricing flexibility framework the Commission adopted in the Access Reform Fifth Report and Order is designed to grant greater flexibility to price cap LECs as competition develops, while ensuring that: (1) price cap LECs do not use pricing flexibility to deter efficient entry or engage in exclusionary pricing behavior; and (2) price cap LECs do not increase rates to unreasonable levels for customers that lack competitive alternatives. In addition, the reforms were designed to facilitate the removal of services from price cap regulation as competition develops in the marketplace, without imposing undue administrative burdens on the Commission or the industry. 5. In keeping with these goals, the Commission established a framework for granting price cap LECs greater flexibility in the pricing of interstate access services once they make a competitive showing, or satisfy "triggers," to demonstrate that market conditions in a particular area warrant the relief at issue. Relief is granted in two phases and on an MSA basis. 6. Phase I Pricing Flexibility. A price cap LEC that obtains Phase I relief is allowed to offer, on one day's notice, contract tariffs and volume and term discounts for those services for which it makes a specific competitive showing, so long as the services provided pursuant to contract are removed from price caps. To protect those customers that may lack competitive alternatives, a price cap LEC receiving Phase I flexibility must maintain its generally available price cap constrained tariffed rates for these services. To obtain Phase I relief, a price cap LEC must meet triggers designed to demonstrate that competitors have made irreversible, sunk investments in the facilities needed to provide the services at issue. In particular, to receive pricing flexibility for dedicated transport and special access services other than channel terminations, a price cap LEC must demonstrate that unaffiliated competitors have collocated in at least 15 percent of the LEC's wire centers within an MSA or collocated in wire centers accounting for 30 percent of the LEC's revenues from these services within an MSA. In both cases, the price cap LEC also must show, with respect to each wire center, that at least one collocator is relying on transport facilities provided by a transport provider other than the incumbent LEC. 7. Higher thresholds apply for obtaining Phase I pricing flexibility for channel terminations between a LEC end office and an end user customer. A competitor collocating in a LEC end office continues to rely on the LEC's facilities for the channel termination between the end office and the customer premises, at least initially, and thus is more susceptible to exclusionary pricing behavior by the LEC. In that case, a price cap LEC must demonstrate that unaffiliated competitors have collocated in at least 50 percent of the LEC's wire centers within an MSA or collocated in wire centers accounting for 65 percent of the LEC's revenues from these services within an MSA. Because competition is likely to develop first for those services that carry traffic between points of high traffic concentration, the Commission set a lower threshold for the channel terminations between a LEC serving wire center and an IXC POP. Therefore, a price cap LEC seeking pricing flexibility for channel terminations between a LEC wire center and an IXC POP must demonstrate that unaffiliated competitors have collocated in at least 15 percent of the LEC's wire centers within an MSA or collocated in wire centers accounting for 30 percent of the LEC's revenues from these services within an MSA. In adopting these collocation triggers, the Commission required that the LEC exclude from its calculations both collocation in which transport is provided by the incumbent LEC pursuant to tariff and collocation that relies upon unbundled transport leased from the incumbent LEC. 8. Phase II Pricing Flexibility. A price cap LEC that receives Phase II relief is allowed to offer dedicated transport and special access services free from the Commission's Part 69 rate structure and Part 61 price cap rules. The LEC, however, is required to file, on one day's notice, generally available tariffs for those services for which they receive Phase II relief. To obtain Phase II relief, a price cap LEC must meet triggers designed to demonstrate that competition for the services at issue within the MSA is sufficient to preclude the incumbent from exploiting any individual market power over a sustained period. To obtain Phase II relief for dedicated transport and special access services other than channel terminations, a price cap LEC must demonstrate that unaffiliated competitors have collocated in at least 50 percent of the LEC's wire centers within an MSA or collocated in wire centers accounting for 65 percent of the LEC's revenues from these services within an MSA. Again, higher thresholds apply for obtaining Phase II pricing flexibility relief for channel terminations between a LEC end office and an end user customer. To obtain such relief, a price cap LEC must demonstrate that unaffiliated competitors have collocated in at least 65 percent of the LEC's wire centers within an MSA or collocated in wire centers accounting for 85 percent of the LEC's revenues from these services within an MSA. For the reasons discussed with respect to Phase I pricing flexibility, a price cap LEC seeking pricing flexibility for channel terminations between a LEC serving wire center and an IXC POP must demonstrate that unaffiliated competitors have collocated in at least 50 percent of the LEC's wire centers within an MSA or collocated in wire centers accounting for 65 percent of the LEC's revenues from these services within an MSA. III.DISCUSSION. 9. BellSouth has filed a petition seeking both Phase I and Phase II relief for various services. Specifically, BellSouth seeks Phase I pricing flexibility relief for certain special access and dedicated transport services in 39 metropolitan statistical areas (MSAs) and seeks Phase II pricing flexibility relief for those special access and dedicated transport services in 38 MSAs. BellSouth also seeks Phase I pricing flexibility relief for special access channel terminations to end users in 37 MSAs and seeks Phase II pricing flexibility relief for special access channel terminations to end users in 26 MSAs. 10. AT&T, WorldCom, and ALTS attack BellSouth's petition on three main grounds. The parties allege that: (1) the underlying Commission standards for allowing pricing flexibility are inadequate to protect new entrants; (2) BellSouth failed to prove that the collocation arrangements that it relies upon to meet the triggers are fully operational; and (3) BellSouth failed to provide sufficient revenue data to determine whether the wire centers' revenues exceed the triggers established by the pricing flexibility rules. AT&T and WorldCom also raise two additional complaints with respect to the substance of BellSouth's petition. AT&T complains that BellSouth's petition erroneously identifies AT&T as a collocator with competitive transport in two wire centers. WorldCom argues that BellSouth did not correctly segregate revenue associated with end office to end user channel terminations from other types of special access revenue. Finally, ALTS raises two general complaints with respect to a possible BellSouth section 271 petition. A. Standards For Granting A Petition For Special Access Pricing Flexibility. 10. As noted above, pricing flexibility will be granted upon the satisfaction of certain competitive showings. An incumbent LEC bears the burden of proving that it has satisfied the applicable triggers for the pricing flexibility it seeks for each MSA. In the Access Reform Fifth Report and Order, the Commission set forth two means of satisfying this burden. First, the incumbent may show the following: (1) the total number of wire centers in the MSA; (2) the number and location of the wire centers in which competitors have collocated; (3) in each wire center on which the incumbent bases its petition, the name of at least one collocator that uses transport facilities owned by a provider other than the incumbent to transport traffic from that wire center; and (4) that the percentage of wire centers in which competitors have collocated satisfies the trigger the Commission adopted with respect to the pricing flexibility sought by the incumbent LEC. Alternatively, the incumbent may show: (1) the total base period revenues generated by the services for which the incumbent seeks relief in the MSA for which the incumbent seeks relief; (2) in each wire center on which the incumbent bases its petition, the name of at least one collocator that uses transport facilities owned by a provider other than the incumbent to transport traffic from that wire center; and (3) that the wire centers in which competitors have collocated account for a sufficient percentage of the incumbent's base period revenues generated by the services at issue within the relevant MSA or non-MSA area to satisfy the trigger the Commission adopted with respect to the pricing flexibility sought by the incumbent LEC. 11. To identify MSAs qualifying for pricing flexibility relief, BellSouth chose, and has met, the requirements of the latter alternative. First, for each MSA in which relief was requested, BellSouth identified at least one collocator that uses transport facilities owned by a provider other than BellSouth to transport traffic from that wire center. BellSouth identified these competitive LECs (CLECs) using applications for collocation service provisioned by BellSouth's network organization. Using these records, BellSouth both was able to: (1) identify, and include in its petition, only those CLECs that employed non-BellSouth transport in their collocation arrangements and (2) identify, and include in its petition, only those arrangements where all work, including the placement of the non-BellSouth cable facilities, had been completed and the site was available for immediate occupancy by the CLEC. Second, BellSouth provided aggregate 1999 base period billing revenues generated by the services for which it seeks relief in each MSA. The billing revenues for those products and services eligible for pricing flexibility were pulled from BellSouth's Carrier Access Billing System (CABS) -- BellSouth's internal billing system -- billing data tapes, and BellSouth's internal customer service records. Using these resources, BellSouth was able to determine the identity of the purchasing customer, type of service ordered, and the location of the switch that provided the ordered service. Third, BellSouth submitted data showing that the wire centers in which competitors have collocated account for a sufficient percentage of its base period revenues generated by the services at issue within the relevant MSA or non- MSA area to satisfy the trigger the Commission adopted with respect to the pricing flexibility that it sought. Appendix A, attached hereto, lists each MSA and the percentage of revenue generated by the competitive wire centers in each MSA for both dedicated transport and special access (DT&SA) and for channel terminations to end users (CTEU). Based upon a review of the information submitted we conclude that BellSouth has satisfied its prima facie burden of demonstrating that it has met the applicable triggers for each of the various services and MSAs for which it requests relief. B. Revenue Segregation Issues. 12. WorldCom challenges this conclusion by asserting that BellSouth did not correctly segregate revenue associated with channel terminations to end users from other types of special access revenue. WorldCom argues that, instead, it appears that BellSouth segregates revenues according to the identity of the customer. In response to this concern, BellSouth submitted an ex parte letter that, in association with its Special Access Pricing Flexibility Petition, describes in detail its revenue allocation methodology. First, BellSouth identified revenue billed and collected by BellSouth. In making this calculation, BellSouth employed 1999 base period revenue obtained from its internal billing systems and customer service records. Using these records, BellSouth was able to determine the rate element, the universal service order code (USOC), the common language location identifier (CLLI) code of the wire center(s) associated with each rate element, and the revenues associated with the services. BellSouth then matched the CLLI code of the wire center(s) associated with each rate element to the appropriate pricing zone. Records were also grouped by state. Revenue was then aggregated to show all billed revenue (bearing the same rate element, pricing zone, and state classifications) associated with a single wire center. 13. After compiling the data as described above, BellSouth calculated the percentage of total revenue allocated to each wire center (by rate element, pricing zone, and state). To make this allocation, BellSouth developed factors for each rate element using unique USOC and Class of Service (COS) combinations. BellSouth then determined the percentage of each office's revenue as compared to the total revenue for the rate element, state, pricing zone combination. This percentage is represented by a fraction having a numerator of revenue for a specific rate element, pricing zone, and wire center and a denominator of the total of such revenue attributable to the same rate element and pricing zone for the entire state. 14. BellSouth then separated revenue associated with dedicated transport and special access from revenue associated with channel terminations to end users. In particular, BellSouth conducted a special study for each local channel USOC/CLLI combination to determine the percentage of revenue for channels that connected the end user to the central office. In conducting this study and assigning revenues, BellSouth delved beyond the identity of the purchaser of the circuit. When an end user purchased a circuit, the revenues at the first office were assigned to the end user category and the revenues at the last office were assigned to the carrier category. When a circuit was purchased by a carrier, the revenues at the first office were assigned to the carrier category and the revenues at the last office were assigned to either the end user category or the carrier category after examining the Subscriber Name Field Identifier (SN FID). The SN FID identifies the subscriber at the premises, as opposed to the purchaser of the circuit. The resulting percentages then were applied to apportion the revenue between dedicated transport and special access and channel terminations to end users. 15. Using network provided information, such as applications for collocation, BellSouth then determined which wire center had at least one collocator using non-BellSouth transport facilities. Finally, BellSouth determined whether the MSA was eligible for pricing flexibility. In particular, BellSouth summed the rate element revenue by MSA, collocation indicator, and category, i.e., direct transport/special access or channel termination/end user. Within each MSA and for each category, BellSouth divided collocated revenues by total revenues to determine the percentage of revenue located in offices with at least one collocator. BellSouth then applied the applicable Commission trigger to determine whether or not each MSA met the rules for pricing flexibility. In light of the detailed information submitted by BellSouth, and despite WorldCom's assertions to the contrary, it is apparent that BellSouth did not segregate revenues according to the identity of the purchaser, but rather by the type of circuit and location of the channel termination. Based upon its description of its methodology, we find that BellSouth correctly separated revenue associated with end office to end-user channel terminations from other types of dedicated transport and special access revenue. C. Operational Collocation Issues. 16. Commenters also argue that BellSouth has failed to demonstrate that the CLEC collocations listed in its petition are operational, i.e., serving at least one customer. In response, BellSouth asserts that once collocation space is turned over to a competitive provider, BellSouth does not know, and cannot reasonably ascertain, what use is made of the space and what customers, if any, are served through the arrangement. BellSouth further argues that it cannot be assumed that CLECs would be forthcoming in providing this information to BellSouth, one of their competitors. Thus, to identify collocation arrangements, BellSouth asserts that it used information that it obtained from internal records and site examinations. As it was required to do, BellSouth also provided copies of pertinent data to each CLEC upon which it relied to make the showing necessary to obtain the desired pricing flexibility relief. BellSouth notes that no party has come forward to assert that any collocation identified in the data provided by BellSouth should be eliminated on the grounds that it is not operational. 17. Based on their internal records, site examinations, and notifications to affected CLECs, we find that BellSouth has ascertained to the best of its ability that the collocations listed in support of its petition are in fact operational. We find significant the fact that, with the exception of AT&T, no CLEC has come forward to refute or deny BellSouth's claim that its collocation with BellSouth is operational. AT&T contends that BellSouth has erroneously listed AT&T as a collocator for two wire centers. In response, BellSouth asserts that AT&T Local Services did in fact collocate in one of the wire centers in question and that AT&T's subsidiary, Teleport, did in fact collocate in the other wire center in question. AT&T did not provide a rebuttal to BellSouth's affidavit. We find that we do not need to resolve this dispute because BellSouth's filing identified five other collocators in one wire center and two other collocators in the second wire center that satisfy the standard. Thus, we reject the arguments that BellSouth has failed to satisfy its burden in this regard. D. Aggregation and Quality of Data Issues. 18. AT&T and WorldCom argue that BellSouth has not met its burden of proof because it did not report its revenue data at the wire center level. Therefore, according to AT&T and WorldCom, it is impossible to verify that the total revenue associated with wire centers in which competitors have collocated does in fact account for a sufficient percentage of base period revenues to meet the pricing flexibility triggers. BellSouth responds that the public version of its petition identifies by name each wire center within the MSA and provides percentages of MSA service revenues represented by the wire centers so identified. According to BellSouth, parties accessing the confidential version of its petition under the Commission's Protective Order also receive the quantification at the MSA level, which is further divided into end user channel termination revenue and other special access/dedicated transport revenue. BellSouth contends that, using this information, reviewing parties can calculate revenue by service type collectively attributable to the wire centers on which BellSouth relies for its competitive showing in each MSA. 19. We have reviewed BellSouth's revenue allocation methodology and the data provided by BellSouth in both the public and confidential versions of its petition and find that BellSouth has met the requirements stated in the Section 1.774 of the Commission's rules. Furthermore, we note that the Commission's rules do not require that BellSouth report revenue data at the wire center level. We, however, caution future filers of pricing flexibility petitions that lack of data aggregated at the wire center level could provide a potential problem if the Commission were to determine that one of the wire centers did not meet the collocation requirements. If the data is aggregated above the wire center level, and the Commission rejects non-revenue evidence with respect to a particular wire center, the Commission would not have the data necessary to determine whether the remaining wire centers in the MSA provide the necessary revenue to meet the trigger. Accordingly, by aggregating the data at a level above the wire center level, the incumbent LEC runs the risk that it would have its petition rejected if, upon examination by the Bureau, it was determined that it had relied on a wire center that does not qualify under the Commission's rules. Because we have not rejected any of BellSouth's wire centers, however, the lack of revenue data at the wire center level is not a concern here. 21. In making its arguments, AT&T implies that BellSouth's revenue data are not credible because it is based on internal billing information. In response, BellSouth argues that its billing databases are highly reliable and are subject to the continuing oversight of state and federal regulation. We agree with BellSouth that there is no reason to doubt that its billing databases are reliable for these purposes. It is in BellSouth's interest to maintain their reliability for its own business purposes. Further, none of the commenters have submitted any data from their own purchasing records that would call BellSouth's data into question. Accordingly, we reject AT&T's argument. E. Other Issues. 22. In response to BellSouth's pricing flexibility petition, both AT&T and WorldCom contend that the competitive showings, or "triggers," that a LEC must satisfy in order to qualify for pricing flexibility do not provide a reliable indication of effective competition. AT&T further argues that, while the collocation test may show the existence of some competition for entrance facilities, it is in no way probative of the existence of competition for interoffice transport or channel terminations. 23. As noted by BellSouth and Verizon, the only issue before the Bureau in this particular proceeding is whether BellSouth's filing meets the Commission's current requirements for pricing flexibility for special access and dedicated transport services. An appeal of the underlying rules is currently pending before the Court of Appeals for the District of Columbia Circuit. The parties have filed briefs with the court and oral argument has been held. We agree with BellSouth that the court proceeding is the appropriate forum in which to litigate the merits of the underlying pricing flexibility rules promulgated by the Commission. 24. ALTS also contends that: (1) its members continue to experience difficulties and delays obtaining collocation arrangements with BellSouth and (2) the Commission's ruling in BellSouth's pricing flexibility proceedings should in no way pre-judge an application by BellSouth to provide interLATA services pursuant to section 271. We, however, do not find ALTS's concerns to be germane to our review of BellSouth's pricing flexibility petition and whether it meets the standards enumerated in section 1.774 of the Commission's rules. To the extent that ALTS is having difficulties obtaining collocation from BellSouth, it may file a complaint with the Commission or with the relevant state authority that has jurisdiction over such matters. In addition, our grant of pricing flexibility in no way prejudges whether BellSouth complies with the requirements of section 271 of the Communications Act. IV. ORDERING CLAUSES. 25. Accordingly, IT IS ORDERED, pursuant to Section 1.774 of the Commission's Rules, 47 C.F.R.  1.774, and the authority delegated by Sections 0.91 and 0.291 of the Commission's Rules, 47 C.F.R.  0.91 and 0.291, and the Access Reform Fifth Report and Order, that the petition filed by BellSouth IS GRANTED to the extent detailed herein. FEDERAL COMMUNICATIONS COMMISSION Dorothy T. Attwood Chief, Common Carrier Bureau