High Court Rests on FCC’s Interconnection Order

Posted: 03/1999

Regulatory News

High Court Rests on FCC’s Interconnection Order
By Kim Sunderland

Clearly, the majority of the U.S. Supreme Court’s recent ruling in AT&T Corp. et
al v. Iowa Utilities Board et al
bodes well for competitors vying for a slice of the
local telephone market. But there’s a catch, as there always is, and ultimately it’s going
to be a matter of guessing when a new lawsuit will be filed.

On Jan. 25, the High Court reinstated federal rules aimed at opening the $100 billion
local telephone market to competition. In its opinion, the Supreme Court took issue with
several rulings by the U.S. Court of Appeals for the 8th Circuit, which had vacated key
portions of the Federal Communications Commis-sion’s (FCC’s) landmark 1996 interconnection
order (Common Carrier Docket No. 96-98). The FCC had adopted rules in that order on new
local market entry, including what the incumbent local exchange carriers (ILECs) could
charge new entrants to interconnect with their equipment. In mid-1997, however, the ILECs
and several state utility commissions said the FCC’s order usurped the powers of the
states. The 8th Circuit agreed, setting aside massive segments of the FCC’s order.

But now the Supreme Court has sided with the FCC, determining not only that the
commission should design a pricing methodology, but also that most of its rules governing
unbundled access are consistent with the Telecommunications Act of 1996 and its "pick
and choose" rule stands.

The Supreme Court vacated the FCC’s Rule 319, the primary unbundling rule that sets
forth a minimum number of network elements that ILECs must make available to requesting
carriers. The court ruled that Rule 319 is inconsistent with the Telecom Act because the
FCC didn’t fully consider all factors "when it gave requesting carriers blanket
access to network elements."

In other words, the court wonders if the FCC is giving competitors access to network
elements that go beyond what is necessary to provide basic local service, which is all the
Telecom Act called for. The court said the FCC virtually ignored the Telecom Act’s
requirement that it consider whether forcing the ILECs to provide access to each network
element was "necessary" to promote competition, and whether new entrants would
be "impaired" by having to get the network element on their own.

This portion of the decision, policy experts say, could speed the ILECs’ deployment of
high-speed Internet access services to consumers and make it more difficult for new local
entrants to link to the ILECs’ systems, especially those that deliver advanced services.
That’s because some unbundled network elements (UNEs) may be deemed unnecessary to
providing anything other than basic phone service.

"UNEs that allow [competitors] to provide high-speed data services are in
question," says Rosemary McMahill, manager of regulatory services for Cathey, Hutton
& Associates Inc., Austin, Texas. "Are they necessary or not to provide local

"The 8th Circuit, which has to review the UNE portion of the interconnection order
that it declined to address before, may direct the FCC to reduce the number of UNEs ILECs
are required to provide," McMahill adds. That would be hard on competitors because
then they’d have to foot the bill to get those needed elements on their own.

H. Russell Frisby Jr., president of the Competitive Telecommunications Association
(CompTel), says that until these platforms are defined, "the FCC will be hard-pressed
to approve any applications to provide services across local access and transport areas
(LATAs) under Section 271" of the Telecom Act.

But the ILECs and GTE Corp. are encouraged by this part of the ruling. They say it’s
unfair for them to invest billions on such network upgrades, only to be forced to lease
those lines at a discount. Under the Supreme Court ruling, the Bells could argue that such
lines are not necessary for competitive LECs (CLECs) to establish competing services.

"It’s hard to tell whether this will turn into a big deal," says Brian
Cotton, a research manager for consulting firm Frost & Sullivan, Mountain View, Calif.
"The ILECs have begrudgingly allowed competition and they’ve had to take a hit
[financially] to do it. I can see how they’d be overjoyed with this Rule 319

The United States Telephone Association (USTA), which represents the LECs, says it will
be watching the FCC "very closely" to see how it develops a new set of rules
determining which parts of the ILECs’ networks must be resold using the "necessary
and impaired" standard. The process could take months and when the new rules are
made, it’s unlikely the list of UNEs the ILECs are required to provide will be as long as
it was before.

Cotton warns that if the FCC makes a wishy-washy determination on this portion of the
High Court’s ruling, then the entire issue will be headed back to court.

The court also upheld the FCC’s rules barring the ILECs from unbundling their networks
and then charging competitors to reassemble them. This means the Bell companies must lease
their networks at deep discounts.

"The Supreme Court essentially has removed a stalling tactic of the ILECs,"
says Frost & Sullivan’s Cotton. "This makes it easier for CLECs and IXCs
(interexchange carriers) who are still at a disadvantage in terms of having massive
capital like that of the ILECs."

The High Court ruling also will lend a new uniformity to pricing policies by giving the
FCC jurisdiction to set those prices. Opponents had wanted that power to go to the states.
The pricing decision supports the FCC’s order on what the ILECs can charge new entrants
for interconnecting with their equipment using the total element long-run incremental cost
(TELRIC) method to determine those costs.

The High Court also determined that the FCC can force a "pick and choose"
rule on ILECs that allows competitors to buy or lease any service or network element under
the same terms as they were provided under any previous agreement, without having to
accept the entire agreement.

McMahill of Cathey, Hutton explains that many of the state commissions already followed
the FCC’s interconnection order, including the 8th Circuit’s stayed pricing and "pick
and choose" provisions. "This saved a lot of money and time on both sides,"
she says.

Finally, the Supreme Court also issued what amounted to a parting shot saying, "it
would be gross understatement to say that the Telecommunications Act of 1996 is not a
model of clarity."

"It is in many important respects a model of ambiguity or indeed even
self-contradiction," according to the Court’s decision. "That is most
unfortunate for a piece of legislation that profoundly affects a crucial segment of the
economy worth tens of billions of dollars."

Bells Lose in U.S. Supreme Court
By Kim Sunderland

The U.S. Supreme Court has flatly rejected appeals by three of the nation’s Bell
telephone companies seeking to overturn certain requirements of the Telecommunications Act
of 1996.

Without comment, the High Court Jan. 19 rebuffed appeals by SBC Communications Inc., US
WEST Inc. and Bell Atlantic Corp., which argued that the Telecom Act unconstitutionally
singles them out for punishment by not allowing them into certain lines of business,
namely the long distance market. The Supreme Court’s decision, while unexpected, wasn’t

"The last, best hope for the Baby Bells to win regulatory relief to sell long
distance to their customers was squashed today by the Supreme Court," telecom
industry analyst Jeffrey Kagan reported when the decision was announced. "For the
Baby Bells, it’s back to the drawing board."

The Bells must meet the Telecom Act’s 14-point competitive checklist to receive Section
271 approval from the Federal Communications Commission (FCC) to provide long distance. To
date, none of the Bells have received such approval because the FCC has not been convinced
that checklist requirements have been met. Specifically, the FCC says the Bell markets
still are not open to local competition.

The Bells, however, say they have dedicated hundreds of millions of dollars to opening
their local markets to competitors and have met the requirements of the Telecom Act.

"While we do question the constitutionality of portions of the act, we have
pressed ahead to prove we have complied with the 14-point checklist," James R. Young,
Bell Atlantic’s executive vice president and general counsel, said following the High
Court’s decision.

Bell Atlantic is expected to be the first Bell actually to land 271 approval in New
York, where it currently is involved in an intense application process involving state
regulators and competitors. "And we are on track to file our New York long distance
application [with the FCC] in the first quarter," Young revealed.

On the heels of the Supreme Court’s news, Wall Street trading jumped up noticeably on
stocks for the large long distance carriers.

FCC Authorizes ISR Between U.S., Hong Kong
By Jennifer Knapp

In an effort the Federal Communications Commission (FCC) hopes will increase
competitive pressures on rates for international telecommunications services to Asia, the
telecom division of the FCC’s International Bureau approved international simple resale
(ISR) provisioning–switched, basic services over private lines that are interconnected
with the public switched telephone network (PSTN)–between the United States and Hong

This approval came as a result of requests by AT&T Corp. and MCI WorldCom Inc. for
ISR with Hong Kong. The carriers each filed notifications with the FCC of accounting rate
reductions negotiated with Hong Kong Telecommunications International that provide for a
per-minute settlement rate of 6.9 cents, which satisfies the commission’s benchmark rate
of 15 cents.

The addition of Hong Kong brings the number of countries to and from which U.S.
carriers can use ISR to 18, including Australia, Austria, Belgium, Canada, Denmark,
France, Germany, Hong Kong, Ireland, Italy, Japan, Luxembourg, the Netherlands, New
Zealand, Norway, Sweden, Switzerland and the United Kingdom.

FCC’s International Settlement Rates Survive Appeals Court
By Kim Sunderland

The Federal Communications Commission’s (FCC’s) benchmark order regulating
international settlement rates is "a valid exercise of the commission’s regulatory
authority," states the U.S. Circuit Court of Appeals for the District of Columbia.

Ruling unanimously Jan. 12 in Cable & Wireless plc v. FCC (case no.
97-1612), the court’s three judges upheld "in its entirety" the FCC’s 1997 order
setting benchmark rates for terminating international calls.

"This is a big win for the FCC," says Mitchell F. Brecher, partner at the
Washington law firm of Fleischman & Walsh. "The commission was very aggressive
when it made its original order in 1997 and now it’s been vindicated by the appeals

U.S. Settlement Rates with World Trade
Organization Member Countries

Group A: Countries with Full Market Access
Effective 1998





Benchmark Rate

Effective Date

Australia $0.225 $0.210 $0.150 $0.15 1/1/99
Austria $0.215 $0.205 $0.135 $0.15 1/1/99
Belgium $0.280 $0.185 $0.135 $0.15 1/1/99
Canada $0.110 $0.100 $0.100 $0.15 1/1/99
Chile $0.500 $0.500 $0.360 $0.19 1/1/00
Denmark $0.145 $0.135 $0.110 $0.15 1/1/99
Dominican Republic $0.450 $0.350 $0.300 $0.19 1/1/01
El Salvador $0.550 $0.440 $0.385 $0.19 1/1/01
Finland $0.255 $0.205 $0.160 $0.15 1/1/99
France $0.175 $0.130 $0.105 $0.15 1/1/99
Germany, Federal Republic of $0.115 $0.100 $0.105 $0.15 1/1/99
Guatemala $0.500 $0.450 $0.385 $0.19 1/1/01
Iceland $0.470 $0.375 $0.240 $0.15 1/1/99
Italy $0.260 $0.165 $0.110 $0.15 1/1/99
Japan $0.455 $0.430 $0.145 $0.15 1/1/99
Korea, Republic of $0.615 $0.490 $0.425 $0.19 1/1/00
Luxembourg $0.290 $0.135 $0.135 $0.15 1/1/99
Malaysia $0.445 $0.395 $0.395 $0.19 1/1/00
Mexico $0.485 $0.395


$0.19 1/1/00
Netherlands $0.180 $0.135 $0.095 $0.15 1/1/99
New Zealand $0.215 $0.135 $0.135 $0.15 1/1/99
Norway $0.145 $0.110 $0.080 $0.15 1/1/99
Philippines $0.500 $0.500 $0.360 $0.19 1/1/01
Spain $0.320 $0.240 $0.135 $0.15 1/1/99
Sweden $0.085 $0.060 $0.060 $0.15 1/1/99
Switzerland $0.255 $0.170 $0.135 $0.15 1/1/99
United Kingdom $0.110 $0.070 $0.060 $0.15 1/1/99
Group A:
Average Settlement Rate
Percent Change
$0.309 $0.252
*The service providers are negotiating settlement rates for service
between the United States and Mexico during 1998.

Source: Federal Communications Commission

So it stands that under the FCC’s 1997 order, settlement rates negotiated by U.S.
carriers may not exceed 15 cents per minute for foreign carriers in upper-income nations;
19 cents per minute for foreign carriers in middle-income nations; and 23 cents per minute
for foreign carriers in lower-income nations.

The impact of the court’s decision, Brecher explains, should lower settlement rates
between U.S. and foreign carriers, lower retail rates for U.S. consumers and reduce
subsidy dollars U.S. carriers pay foreign carriers. However, there should be no direct
impact on local competition in foreign countries, he adds.

A spokesman for Cable & Wireless plc called the decision "inappropriate,"
however, and says his company plans to appeal the decision. "Because rates between
carriers are properly established on a bilateral basis, and in light of declining
settlement rates worldwide, Cable & Wireless considers that the commission’s action
was inappropriate," says Peter Eustace, group head of media relations in London.

"The FCC order itself recognized the desirability of a multilateral solution to
the problem of establishing appropriate compensation rates for the termination of
international traffic. We will continue to engage with other interested parties to achieve
a more equitable result, and remain committed to a multilateral resolution of this
issue," Eustace says.

If this is true, the appeals court ruling may not be the last on this long-standing

Currently, international call termination is handled pursuant to an operating agreement
made between a foreign carrier and a U.S. long distance carrier. The FCC requires the two
carriers to divide the price of the call (i.e., the accounting rate) evenly; each
carrier’s share is called the settlement rate.

For years, most international calls have traveled from the United States to a foreign
carrier, so net settlement rates consistently run from the U.S. carriers to foreign
carriers. And this is where the potential for abuse comes in.

While the U.S. telecom market has become more competitive, the court explains in its
decision that telecommunications services remain non-competitive in much of the rest of
the world, influencing settlement-rate negotiations. For instance, foreign monopoly
carriers can pit competing U.S. carriers against one another to drive up termination
costs. The extra money has "effectively subsidize[d] government-owned telephone
services in foreign countries," the court states.

Brecher says the FCC and many domestic telecom carriers don’t see it this way, claiming
it’s "not the role of U.S. carriers and U.S. consumers to subsidize, for instance,
the infrastructure buildout or universal service costs of foreign carriers."

To combat the problems, the FCC during the ’80s required all domestic carriers on a
given international route to establish the same accounting rate with a foreign
correspondent and make all settlement rates equal 50 percent of accounting rates. Domestic
carriers also had to carry incoming traffic on the route in proportion to their share of
outgoing traffic.

These requirements, however, didn’t deter foreign carriers from charging above-cost
settlement rates, so the FCC issued further orders in 1991 encouraging domestic carriers
to negotiate cost-based settlement rates.

But by 1997, when the rates still hadn’t reached cost-based levels, the FCC took severe
action, mandating the maximum settlement rates that U.S. carriers may pay to their foreign
counterparts. This is the order the foreign carriers then took to court.

To the chagrin of the petitioners, which represented more than 100 foreign governments,
regulators and telecommunications companies, the judges dismissed each and every one of
their arguments. The court first rejected the foreign carriers’ arguments that the FCC had
overstepped its authority by setting rates foreign carriers could charge for terminating
U.S.-originated calls.

The court agreed that the Communications Act of 1934 authorizes the FCC to regulate
"foreign telecommunications" in the context that commission rules apply only to
the settlement rates that U.S. carriers may pay for termination of traffic originating

The petitioners further argued that even if the FCC’s order doesn’t regulate foreign
carriers, it unlawfully regulates domestic carriers by restricting the prices they may pay
to non-FCC-regulated entities.

The court disagreed, citing three sections of the Communications Act (sections 201[b],
205[a] and 211[a]) that authorize the FCC to regulate the settlement rates that U.S.
carriers pay to foreign carriers.

The petitioners also argued that the benchmark settlement rates are arbitrary,
capricious and unsupported by substantial evidence. But the court disagreed, saying the
FCC’s tariffed components price (TCP) methodology does not undercompensate foreign
carriers. Using the TCP, the FCC calculated its benchmark rates by summing the estimated
prices for three services: international transmission, international switching and
national extension, which are necessary for terminating an international long distance
call. And by using the TCP, the FCC overestimated costs on the side of foreign carriers,
who "withheld the very cost data that would have enabled the commission to establish
precise, cost-based rates," the court stated. "We have no firm basis for
accepting petitioners’ claim that the benchmark rates are not fully compensatory."

Bell Atlantic’s Not Ready for Prime Time Yet in New York
By Kim Sunderland

At press time, test results weren’t in yet on whether Bell Atlantic Corp.-New York’s
operation support system (OSS) was up to snuff, its biggest remaining headache before
gaining approval from the state to provide in-region long distance service.

In early January, a long-delayed stress test on the Bell’s OSS began with an expected
completion date set for the end of January. The test will help the New York Public Service
Commission (PSC) determine whether Bell Atlantic-New York is opening its market to

"The critical component of a [Section] 271 approval is the actual OSS," says
David Flanagan, spokesman for the New York PSC. "Bell Atlantic must establish a
working OSS that can handle large volumes of transactions when competitors place orders to
switch local customers to a new carrier. The test to determine that is still
ongoing," he adds.

Bell Atlantic-New York is on its way toward obtaining long distance approval in New
York if its OSS passes the stress test. The telco is widely expected by the industry to be
approved in New York to provide in-region interLATA (local access and transport area)
services, and to be the first Bell to successfully achieve such approval from the Federal
Communications Commission (FCC).

Outside accounting firm KMPG Peat Marwick is managing the stress test and has been told
by the New York PSC that it must ensure the readiness of Bell Atlantic-New York’s OSS.

"We are now moving into the next stage of OSS testing," Flanagan explains.
"We are working to get to a point where we feel comfortable that Bell Atlantic has an
OSS that can handle large volumes of transactions." He would not comment on the New
York PSC’s current assessment of the telco’s OSS.

The New York PSC does feel, however, that the electronic bonding deal struck between
Bell Atlantic and Allegiance Telecom Inc., Dallas, in January "is another step
forward in terms of developing a successful OSS," according to Flanagan.

The electronic bonding deal, according to Allegiance Chairman and CEO Royce Holland,
will make it possible to change a customer’s local exchange carrier (LEC) in five business
days, rather than the 25 to 30 business days it typically takes when requests are
submitted by fax.

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