Federal Communications Commission DA 07-3840 Before the Federal Communications Commission Washington, D.C. 20554 In the Matter of ) ) Petition of the Embarq Local Operating ) Companies for Phase I and Phase II Pricing ) Flexibility for Special Access and Dedicated ) WCB/Pricing File No. 07-13 Transport Services in the Lima, Ohio and ) Mansfield, Ohio Metropolitan Statistical ) Areas and Phase I and Phase II Pricing ) Flexibility for Channel Termination Services ) in the Lima, Ohio Metropolitan Statistical Area ) ORDER Adopted: September 5, 2007 Released: September 5, 2007 By the Associate Chief, Wireline Competition Bureau: I. INTRODUCTION 1. On April 30, 2007, the Embarq local operating companies (Embarq) filed a petition seeking pricing flexibility pursuant to sections 1.774 and 69.701 et seq. of the Commission’s rules1 for: (1) certain special access and dedicated transport services in the Lima, OH and Mansfield, OH Metropolitan Statistical Areas (MSAs); and (2) certain channel termination services in the Lima, OH MSA.2 We issued a public notice seeking comments on May 18, 2007,3 but received no comments. As detailed below, the Commission established the rules for granting pricing flexibility for special access and dedicated transport services in its Pricing Flexibility Order.4 In doing so, the Commission recognized the importance of granting pricing flexibility to incumbent local exchange carriers (LECs) as competition develops in the market for interstate access services “to ensure that our own regulations do 1 47 C.F.R. §§ 1.774, 69.701 et seq. 2 See Petition of the Embarq Local Operating Companies for Phase I and Phase II Pricing Flexibility for Special Access and Dedicated Transport Services in the Lima, Ohio and Mansfield, Ohio Metropolitan Statistical Areas and Phase I and Phase II Pricing Flexibility for Channel Termination Services in the Lima, Ohio Metropolitan Statistical Area (filed Apr. 30, 2007) (Petition); Pleading Cycle Established for Embarq Petition for Pricing Flexibility for Special Access and Dedicated Transport Services and Channel Termination Services, WCB/Pricing No. 07-13, Public Notice, 22 FCC Rcd 9195 (Wireline Comp. Bur. rel. May 18, 2007). A list of the specific services for which Embarq seeks pricing flexibility can be found in the Appendix to this order. 3 Id. 4 See Access Charge Reform, CC Docket No. 96-262, Fifth Report and Order and Further Notice of Proposed Rulemaking, 14 FCC Rcd 14221 (1999) (Pricing Flexibility Order), aff’d, WorldCom, Inc. v. FCC, 238 F.3d 449 (D.C. Cir. 2001). Federal Communications Commission DA 07-3840 2 not unduly interfere with the operation of these markets.”5 For the reasons that follow, we grant Embarq’s petition. II. BACKGROUND 2. To recover the costs of providing interstate access services, incumbent LECs charge interexchange carriers (IXCs) and end users for access services in accordance with the Commission’s Part 69 access charge rules.6 In the Access Charge 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.7 At that time, the Commission deferred resolution of the specific timing and degree of pricing flexibility to a future order.8 Subsequently, in the Pricing Flexibility Order, the Commission provided detailed rules for implementing the market-based approach.9 3. The framework the Commission adopted in the Pricing Flexibility Order grants progressively greater flexibility to LECs subject to price cap regulation as competition develops, while ensuring that price cap LECs: (1) do not use pricing flexibility to deter efficient entry or engage in exclusionary pricing behavior; and (2) do not increase rates to unreasonable levels for customers that lack competitive alternatives.10 In addition, the reforms are 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.11 4. 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 certain “triggers,” to demonstrate that market conditions in a particular area warrant the relief they seek. Pricing flexibility for special access and dedicated transport services12 is available in 5 Pricing Flexibility Order, 14 FCC Rcd at 14224, para. 1. 6 47 C.F.R. Part 69. Part 69 establishes two basic categories of access services: special access services and switched access services. Compare 47 C.F.R. § 69.114 with 47 C.F.R. § 69.106. Special access services employ dedicated facilities that run directly between the end user and an IXC point of presence (POP), the physical point where an IXC connects its network with the LEC network. Charges for special access services generally are divided into channel termination charges and interoffice facility charges. Channel termination charges (which can include a flat-rated charge and a mileage component) recover the costs of facilities between the customer’s premises and the LEC end office and the costs of facilities between the IXC POP and the LEC serving wire center. See 47 C.F.R. § 69.703(a). Interoffice facility charges recover the costs of facilities between the LEC serving wire center and the LEC end office serving the end user. See Pricing Flexibility Order, 14 FCC Rcd at 14226-27, paras. 8-10. For the interoffice facility, carriers often have separate termination and mileage charges. 7 Access Charge Reform, CC Docket No. 96-262, First Report and Order, 12 FCC Rcd 15982 (1997) (Access Charge Reform First Report and Order), aff’d, Southwestern Bell Tel. Co. v. FCC, 153 F.3d 523 (8th Cir. 1998). 8 Access Charge Reform First Report and Order, 12 FCC Rcd at 15989, para. 14. 9 Pricing Flexibility Order, 14 FCC Rcd at 14225, para. 4. 10 Id. at 14225, para. 3. The Commission instituted price cap regulation for the Regional Bell Operating Companies (RBOCs) and GTE in 1991, and permitted other LECs to adopt price cap regulation voluntarily, subject to certain conditions. Policy and Rules Concerning Rates for Dominant Carriers, CC Docket No. 87-313, Second Report and Order, 5 FCC Rcd 6786, 6818-20, paras. 262-79 (1990). The Pricing Flexibility Order applies only to LECs that are subject to price cap regulation. Pricing Flexibility Order, 14 FCC Rcd at 14224, para. 1 n.1. 11 Pricing Flexibility Order, 14 FCC Rcd at 14225, para. 3. 12 For purposes of pricing flexibility proceedings, “dedicated transport services” refer to services associated with entrance facilities, direct-trunked transport, and the dedicated component of tandem-switched transport. Id. at (continued….) Federal Communications Commission DA 07-3840 3 two phases, based on an analysis of competitive conditions in individual MSAs or non-MSA parts of the study area.13 Pricing flexibility for channel termination services14 is also available in two phases, based on an analysis of competitive conditions in individual MSAs or non-MSA parts of the study area.15 5. Phase I Pricing Flexibility. A price cap LEC that obtains Phase I relief is allowed to offer, on one day’s notice, contract tariffs16 and volume and term discounts for qualifying services, so long as the services provided pursuant to contract are removed from price caps.17 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.18 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.19 In particular, to receive pricing flexibility for dedicated transport and special access services (other than channel terminations to end users), 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 have collocated in wire centers accounting for 30 percent of the LEC’s revenues from these services within an MSA.20 In both cases, the price cap LEC also must show, with respect to each wire center used to satisfy the trigger, that at least one collocator is relying on transport facilities provided by an entity other than the incumbent LEC.21 6. Higher thresholds apply for obtaining Phase I pricing flexibility for channel terminations between a LEC’s 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.22 As a result, 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 have collocated in wire centers accounting (Continued from previous page) 14234, para. 24 n.54. These services are defined in 47 C.F.R. § 69.2(oo) (direct-trunked transport), § 69.2(qq) (entrance facilities), and § 69.2(ss) (tandem-switched transport). 13 See 47 C.F.R. § 22.909(a) (definition of MSA). See also Pricing Flexibility Order, 14 FCC Rcd at 14261, para. 76 (pricing flexibility will be granted to price cap LECs within the non-MSA parts of a study area if they satisfy the applicable triggers throughout that area). 14 For purposes of pricing flexibility proceedings, a channel termination between a LEC end office and a customer premises is defined as a “dedicated channel connecting a LEC end office and a customer premises, offered for purposes of carrying special access traffic.” 47 C.F.R. § 69.703(a)(2). 15 See supra n.12. 16 A contract tariff is a tariff based on an individually negotiated service contract. See Competition in the Interstate Interexchange Marketplace, CC Docket No. 90-132, Report and Order, 6 FCC Rcd 5880, 5897, para. 91 (1991) (Interexchange Competition Order); 47 C.F.R. § 61.3(o). See also 47 C.F.R. § 61.55 (describing required composition of contract-based tariffs). 17 Pricing Flexibility Order, 14 FCC Rcd at 14287-88, para. 122. 18 Id. at 14234-35, para. 24. 19 Id. at 14234-35, 14274, paras. 24, 94. 20 Id. at 14274-77, paras. 95-98; 47 C.F.R. § 69.709(b). 21 47 C.F.R. § 69.709(b). 22 Pricing Flexibility Order, 14 FCC Rcd at 14278-79, paras. 102-103. Federal Communications Commission DA 07-3840 4 for 65 percent of the LEC’s revenues from these services within an MSA.23 Again, the LEC also must demonstrate, with respect to each wire center used to satisfy the trigger, that at least one collocator is relying on transport facilities provided by an entity other than the incumbent LEC.24 7. 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.25 The LEC, however, is required to file, on one day’s notice, generally available tariffs for those services for which it receives Phase II relief.26 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 to end users), 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 have collocated in wire centers accounting for 65 percent of the LEC’s revenues from these services within an MSA.27 The LEC also must demonstrate, with respect to each wire center used to satisfy the trigger, that at least one collocator is relying on transport facilities provided by an entity other than the incumbent LEC.28 8. 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 have collocated in wire centers accounting for 85 percent of the LEC’s revenues from these services within an MSA.29 To obtain Phase II relief for channel terminations to end users, the LEC also must demonstrate, with respect to each wire center used to satisfy the trigger, that at least one collocator is relying on transport facilities provided by an entity other than the incumbent LEC.30 9. Competitive Showing. Pricing flexibility may 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.31 For special access and dedicated transport services and channel termination services the incumbent must identify: (1) the total number of wire centers in the MSA; (2) the number and location of the wire centers in which competitors have collocated; and (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. 32 In addition to these three requirements, the petitioner must show either: (A) that the percentage of wire centers in which competitors have collocated and use competitive transport satisfies 23 Id. at 14280-81, paras. 105-06; 47 C.F.R. § 69.711(a), (b). 24 47 C.F.R. § 69.711(a), (b). 25 See Pricing Flexibility Order, 14 FCC Rcd at 14301, para. 153. 26 Id.; 47 C.F.R. § 69.727(b)(3). 27 Pricing Flexibility Order, 14 FCC Rcd at 14299, paras. 148-49; 47 C.F.R. § 69.709(c). 28 47 C.F.R. § 69.709(c). 29 Pricing Flexibility Order, 14 FCC Rcd at 14235, 14299-300, paras. 25, 150; 47 C.F.R. § 69.711(c). 30 47 C.F.R. § 69.711(c). 31 Pricing Flexibility Order, 14 FCC Rcd at 14309, para. 172. 32 47 C.F.R. § 1.774(a)(3)(i)-(iii). Federal Communications Commission DA 07-3840 5 the trigger the Commission adopted with respect to the pricing flexibility sought by the incumbent LEC;33 or (B) that the percentage of total base period34 revenues that are attributable to the wire centers upon which the petitioner relies satisfies the applicable pricing flexibility triggers.35 III. DISCUSSION 10. Embarq seeks Phase I and Phase II pricing flexibility in the Lima, OH and Mansfield, OH MSAs for dedicated transport and special access services, other than channel terminations between its end offices and end user “customer premises,” and Phase I and Phase II pricing flexibility in the Lima, OH MSA for channel terminations between its end offices and end user “customer premises,” as listed in its petition and set forth in the Appendix.36 As noted above, pricing flexibility may 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.37 11. Embarq has demonstrated compliance with the requirements for Phase I and Phase II pricing flexibility. Embarq provided sufficient information to demonstrate that it meets the applicable pricing flexibility triggers for the relief it has requested. As explained in greater detail below, to make this showing, Embarq assigned wire centers to individual MSAs and identified wire centers within each MSA where service providers have obtained collocation with alternative facilities other than Embarq- provided transport.38 Embarq also gathered revenue data and assigned it either to dedicated transport and special access services (other than channel terminations to the end user), or to channel terminations between an end user’s premises and the Embarq end offices.39 12. Embarq identified the MSAs that qualify for pricing flexibility by: (1) assigning wire centers to individual MSAs and identifying wire centers within each MSA where service providers have obtained collocation with alternative facilities other than Embarq-provided transport; (2) calculating end- user channel termination revenue, together with all other special access and dedicated transport revenue earned in each MSA; (3) calculating end-user channel termination revenue, together with all other special access and dedicated transport revenue, that was attributable to each collocated wire center within the MSA; and (4) calculating the percentage of such revenue earned in the collocated wire centers against the total revenues earned in the MSA from such services.40 13. In order to identify wire centers with collocation, Embarq examined its billing records to determine those customers that were billed monthly recurring charges for collocation floor space and other applicable collocation rate elements.41 Embarq then performed a physical inventory to validate the 33 47 C.F.R. § 1.774(a)(3)(iv)(A). 34 For price cap LECs, the “base period” is the 12-month period (i.e., the calendar year) ending six months before the effective date of the LECs’ annual access tariffs. 47 C.F.R. § 61.3(g). 35 The revenues applicable to this requirement are those generated by the services for which the incumbent seeks relief. 47 C.F.R. § 1.774(a)(3)(iv)(B). 36 See Petition at 1; id. at Attach. E. See also infra Appendix. 37 Pricing Flexibility Order, 14 FCC Rcd at 14309, para. 172. 38 Petition, Attach. B at 1-2. 39 Petition at 3-6; id.,Attach. C, D. 40 Petition, Attach. B at 1-2, Attach. D. 41 Petition, Attach. B at 1-2. Federal Communications Commission DA 07-3840 6 accuracy of the billing information and to confirm that the collocation was operational.42 To confirm that the competitors were using transport facilities owned by a transport provider other than Embarq, Embarq used information supplied previously by the customer or physically verified that the competitor had transport facilities owned by a non-Embarq provider.43 In accordance with the Commission’s rules, Embarq served a copy of its petition on each of the collocating carriers upon which it relied, including, for each collocator, the information about that party upon which Embarq relied in its petition.44 14. To ascertain revenue associated with special access and dedicated transport services and channel termination services, Embarq gathered data for the twelve-month period ending December 31, 2005, from its internal databases.45 The revenue data were then aggregated into three categories: Channel Terminations, Transport, and Optional Features and Functions.46 Embarq then further aggregated the revenue by Universal Service Order Code (USOC) and Common Language Location Identifier (CLLI) code to determine the local channel revenues attributable to each wire center.47 In particular, for records that identified a single Embarq wire center, or identified two wire centers of which only one was an Embarq office, Embarq allocated one hundred percent of associated revenue to the Embarq wire center.48 For records that identified two Embarq wire centers, 50 percent of the associated revenue was assigned to each wire center.49 Embarq states that it differentiated revenues associated with local channels provided to end users from other special access and dedicated transport revenues.50 Embarq then determined the percentage of total base period revenues generated by services at issue in the relevant MSA in wire centers with collocation, and whether this percentage met the applicable trigger.51 15. After reviewing Embarq’s verification method as described in the petition and the data provided in the public and confidential versions of the petition, we find that Embarq has met the applicable triggers in section 1.774 and Part 69, Subpart H of the Commission’s rules.52 The method used by Embarq to capture and assign revenues to particular services and wire centers is consistent with the 42 Id. at 2. 43 Id. 44 Petition, Attach. F; see also 47 C.F.R. § 1.774(e)(1)(ii). 45 Petition, Attach. B at 3. Embarq states that information extracted from the 2005 billing records was at the circuit level detail in order to assign the individual revenue elements to the proper pricing flexibility revenue category for each wire center. Id. The billing systems used for this process were the Customer Access Support System (CASS), which contains current customer records, and the Carrier Access Information Management System (CAIMS), which contains the historical billing records. Id. at n.3. All revenues were determined based on annual 2005 base period revenues. Id. at 6. 46 Id. at 5. 47 Id. 48 Id. at 3. 49 Id. 50 Id. at 3-4. Embarq’s billing system contains circuit location information. Circuit location “1” is associated with channel terminations between the serving wire center and another carrier’s point of presence. Circuit locations other than “1” are associated with end user channel terminations. Id. at 4. 51 Id. at 6; Petition, Attach. D. 52 47 C.F.R. §§ 1.774 and 69.701-69.731. Federal Communications Commission DA 07-3840 7 method the Wireline Competition Bureau has approved in prior pricing flexibility applications.53 Based upon a review of the information submitted, and having received no opposition to the petition, we conclude that Embarq has satisfied its burden of demonstrating that it has met the applicable requirements for each of the various services in the MSAs for which it requests relief. IV. ORDERING CLAUSE 16. Accordingly, IT IS ORDERED that, pursuant to section 1.774 of the Commission’s rules, 47 C.F.R. § 1.774, the Pricing Flexibility Order, 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, the petition filed by Embarq IS GRANTED to the extent detailed herein. FEDERAL COMMUNICATIONS COMMISSION Donald K. Stockdale Associate Chief, Wireline Competition Bureau 53 See, e.g., Sprint Local Telephone Companies Petition for Pricing Flexibility for Special Access and Dedicated Transport Services, WCB/Pricing File No. 05-35, 21 FCC Rcd 3412 (Wireline Comp. Bur. Apr. 3, 2006). Following the merger of Sprint Corporation and Nextel Communications, Inc., the former Sprint local telephone companies were transferred to Embarq Corporation. See Applications of Nextel Communications, Inc. and Sprint Corporation For Consent to Transfer Control of Licenses and Authorizations, WT Docket No. 05-63, Memorandum Opinion and Order, 20 FCC Rcd 13967 (2005). Federal Communications Commission DA 07-3840 APPENDIX SERVICES QUALIFYING FOR PRICING FLEXIBILITY Trunking Services Basket (Includes entrance facilities, direct trunked transport, flat-rated portion of tandem-switched transport, and the optional features and functions associated with these services.) Voice Grade DS1 DS3 OptiPoint CCS/SS7 Interconnection Service Special Access Basket (Includes channel terminations between the end office and the customer premises, channel terminations between the IXC POP and the serving wire center, channel mileage and the optional features and functions associated with these services.) Voice Grade Program Audio Video Digital Data DS1 (1.544 Mbps) Fractional DS1 (128.0 Kbps) Fractional DS1 (256.0 Kbps) Fractional DS1 (384.0 Kbps) DS3 (44.736 Mbps) OptiPoint Shared Sonet Ring Service Gateway Sonet Ring Service Sonet OC Ring Service Ethernet Transport Service Additional Labor and Miscellaneous Services (The requested pricing flexibility for these services is limited to their use in providing the trunking and special access services above in the qualifying price flex MSAs.) Access Order Charge Design Change Charge Additional Labor (Basic, Overtime and Premium) Additional Testing Additional Copies of Customer Monthly Billing Telecommunications Service Priority (TSP) System