TELRIC UNDER FIRE AS PARTIES DISAGREE ON REVISIONS

In a joint comment, CompTel/Ascent Alliance and the Promoting Active Competition Everywhere (PACE) Coalition asked the FCC to provide additional guidance to the states about how to apply the standard used for developing UNE prices in light of the changes adopted in its Triennial Review Order (TRO). They said in the TRO, the FCC had changed the assumptions on which the TELRIC rules were based by: (1) Imposing new limits on access to certain UNEs, which results in partial unbundling. “However, the TELRIC pricing methodology currently in use is based on the theory that when the FCC determines a network element should be unbundled, the unbundling obligation applies to the entire network element, not just a portion of it,” they said. (2) Curbing unbundling obligations regarding the legacy network, which, they said, could result in an “atrophying network” if the incumbent telco chooses to focus all new investment on its emerging network. CompTel/Ascent and PACE urged the Commission to provide states with guidance allocating shared plant costs between UNE and non-UNE rates, and to reconcile any “forward- looking” cost approach where the incumbent doesn’t intend to make any future investment that would be subject to unbundling.

Meanwhile, the USTA strongly criticized the current TELRIC system and urged the FCC to reform its UNE pricing methodology, so that it: (1) “Accomplishes the goals of sending efficient entry and investment signals to all carriers.” (2) Permits ILECs to recover their actual forward-looking costs of providing UNEs. The USTA again expressed concern that hypothetical assumptions underlying current applications of TELRIC produced UNE rates “so low that they [created] a significant disincentive to investment” and did “not come close to approximating the costs that ILECs bear in providing UNEs to CLECs.” It urged the Commission to “ground UNE rates in the ILECs’ real-world networks.” For example, it said while TELRIC pricing was based on an assumption that a carrier would “instantaneously and ubiquitously and repeatedly” deploy the most efficient technology, “in the real world, no carrier -- incumbent or new entrant -- would or could engage in the pace of technological replacement that TELRIC assumes.”

Verizon echoed USTA’s concerns, saying TELRIC pricing hampered economic growth and hurt consumers. “The current FCC pricing formula helped create an annual decline in economic output and national income equal to $101 per every American household,” said Verizon Senior Vp-Federal Regulatory Affairs Susanne Guyer. She said with a “$2 trillion-plus” devaluation in the worth of telcos and equipment companies, “analysts have found that telecom was the only sector in the S&P 500 with negative revenue growth in the 2nd quarter of 2003.” Qwest Senior Vp-Public Policy Steve Davis said in a statement the FCC must create a “consumer friendly system” by reflecting “common sense pricing in contrast to the current anticompetitive scheme, which is harmful to consumers.”

Progress & Freedom Foundation (PFF) Pres. Raymond Gifford, former chmn. of the Colo. PUC, called for major TELRIC reform. He called the rules an “abomination,” saying TELRIC required manipulation and “regulatory gaming.” Gifford, who said the comments represented personal not PFF views, said along with unbundling, TELRIC was “the problem with implementation of the Telecommunications Act of 1996,” because it introduced an “unacceptable level of analytic indeterminacy into the process of implementing the Act” that “allows illegitimate secondary considerations.”

Gifford called for “a rate-setting method that has more methodological, real world integrity.” He said the FCC should reform TELRIC to be “forward-looking, definite,” and “capable of consistent principled implementation.” He suggested the FCC should “moor a forward-looking cost methodology to actual costs for the incumbent” and “consider a ‘costing cap’ rate-setting method.” He said the agency could also consider “baseball-style arbitration proceedings” to minimize regulatory gaming. In this case, he said, state commissions would have authority to decide rates, “without the wide latitude that exists now.”

However, ALTS argued the current TELRIC methodology satisfied the Commission’s goals of encouraging efficient market entry and investment and allowing ILECs to recover their forward-looking costs of providing UNEs. It said UNE access would continue to play a “pivotal role” in reducing barriers to entry and encouraging effective competition even if competitors eventually deployed their own facilities: “This is especially true in situations where it is not economically feasible for competitors to install their own facilities.” ALTS said CLECs, like ILECs, had invested “heavily” in facilities since the Telecom Act’s enactment, which it said proved that “current rules provide ample incentive for investment and recoupment of costs.”

ALTS argued the transition to effective competition hadn’t been accomplished, because: (1) ILECs retained a “very large” share of access lines and, in most states, had been “consistently earning profits far in excess of the levels that would occur under conditions of effective competition…. There is no valid policy justification for the Commission to adopt new rules that might allow [ILECs] to earn even higher profit at the expense of their CLEC competitors and consumers.” (2) There’s a “nearly complete absence” of ILEC entry outside traditional territories. ALTS expressed concern that changes to the TELRIC rules, which “have the effect of increasing UNE rates will tend to exacerbate these barriers to entry, making entry and expansion even more difficult for competitors.”

CompTel/Ascent and PACE wondered whether many suggested modifications to UNE pricing would inhibit competition rather that fostering it. “It seems particularly counterintuitive for the FCC to launch a reexamination of its TELRIC rules so soon after the Supreme Court affirmed them following years of litigation and the resulting regulatory uncertainty,” they said in their filing. The groups urged the Commission to “ensure that the pricing methodology is fully consistent with well-established economic principles -- whether TELRIC (total element long-run incremental cost) or a short-run pricing methodology rather than a mix of various methodologies that is designed to achieve a specific result.”

Z-Tel argued the reasons for the Commission’s proposals to simplify TELRIC were “ephemeral.” It said state commissions had “routinely utilized” forward-looking analysis as a rate-setting tool for not only telecom, but electric and other services. “Rather than basing its ‘comprehensive review’ in vague ‘concerns’ about a purported need to ’simplify’ the pricing methodology, the Commission should empirically examine whether TELRIC, as implemented by the states, has had the undesirable effects that Commission fears,” it said. Z-Tel strongly argued that TELRIC pricing hadn’t discouraged ILEC investment, but rather that such investment had been “greater” in areas with more bundling. It said the state commission had, on the whole, established rates for unbundled loops that match or exceed long-run forward-looking costs: “State commissions seem to have consistently priced unbundled circuit switching well above long-run forward-looking costs.” Z-Tel also said there was “no troubling ‘variability’ in state-by-state TELRIC implementation.”