NOTICE ************************************************************************* NOTICE ************************************************************************* This document was originally prepared in Word Perfect. If the original document contained-- * Footnotes * Boldface & Italics --this information is missing in this version The document format (spacing, margins, tabs, etc.) is changed too. If you need the complete document, download the Word Perfect version. For information about downloading documents (FTP) see file pnmc5021. File pnmc5021 (.txt & .wp) is in directory \pub\Public_Notices\Miscellaneous. ************************************************************************* $// NYNEX; MO&O; Petition for Waiver; DA 95-523 // $/ Section 0.291 Delegated Authority /$ TRANSMITTED FOR FCC RECORD ONLY DA 95-523 ///newjob/// $///DA 95-523 RO 4-14-95///$ DA 95-523 Before the FEDERAL COMMUNICATIONS COMMISSION Washington, D.C. ) In the Matter of ) ) New York Telephone Company and ) New England Telephone and ) Telegraph Company ) ) Petition for Waiver ) MEMORANDUM OPINION AND ORDER Adopted: March 16, 1995; Released: March 20, 1995 By the Chief, Common Carrier Bureau: I. INTRODUCTION 1. In the Special Access Expanded Interconnection Order, the Commission required most Tier 1 local exchange carriers (LECs) to permit competitors and access customers to terminate their own special access transmission facilities at LEC central offices and to interconnect with LEC special access services. In particular, the Commission required LECs to provide physical collocation, except under limited circumstances for which LECs were permitted to seek exemption from the physical collocation requirement. In the Special Access Expanded Interconnection Order the Commission required LECs to apply nonrecurring reconfiguration charges in a neutral manner that would not differentiate charges based on whether the customer chooses to use interconnector or LEC facilities for special access service unless there are specific, identifiable cost differences. Reconfiguration charges are imposed when a customer shifts between DS1 special access service and DS3 service, or replaces its LEC-provided special access service with a service provided by a competitive access provider (CAP). 2. On September 2, 1993, the Commission adopted the Second Reconsideration Order in that docket, which clarified this requirement. Specifically, nonrecurring charges (NRCs) applicable when a customer shifts to an interconnector's services must be set no higher than cost-based levels. In addition, any difference between the NRCs applicable when a customer shifts to an interconnector's services and those applicable when a customer reconfigures its service, but remains on the LEC network, must be cost-based. The Commission also stated that the presumption of reasonableness applicable to other within-band, below-cap rate changes would not apply to revisions to NRCs associated with special access reconfigurations. All LECs who had tariffed special access NRCs that were inconsistent with these requirements were ordered to file revised NRCs on or before October 18, 1993. In its petition for reconsideration, NYNEX asked the Commission to "confirm" that its rate structure complied with the Commission's rules. The NYNEX tariff did not apply a NRC when customers reconfigured their services to use NYNEX facilities different from those previously used in the same central office, but did apply a NRC when customers moved their traffic from NYNEX facilities to CAP facilities. The Commission determined that NYNEX's rate structure, as described in its petition for reconsideration, appeared to violate the standards set forth in the Second Reconsideration Order. The Commission stated that it would consider waiving the nondiscriminatory NRC requirement only if a LEC could demonstrate that any differential treatment would not undermine competition or otherwise violate the Communications Act. 3. In Bell Atlantic v. FCC, the Court of Appeals concluded that mandatory physical collocation is a taking of property within the meaning of the Fifth Amendment, and that the Commission had no authority under the Communications Act to take property. The Court vacated the Commission's physical collocation requirement, and remanded the virtual collocation provisions and other expanded interconnection rules. On July 14, 1994, the Commission adopted the Expanded Interconnection Remand Order, which required LECs to file tariffs offering virtual collocation on September 1, 1994. LECs could be exempted from this requirement, however, by choosing to continue to offer physical collocation in accordance with the expanded interconnection rules. The Commission also specifically reaffirmed its policies on nonrecurring reconfiguration charges in the Expanded Interconnection Remand Order. 4. On February 7, 1994, New York Telephone Company and New England Telephone and Telegraph Company (together, NYNEX) filed a petition for waiver of the standards governing nonrecurring charges for expanded interconnection services established in the Special Access Expanded Interconnection Order. Five parties filed oppositions to or comments on NYNEX's petition, and NYNEX filed a reply. For reasons discussed below, we grant NYNEX's petition, subject to the conditions specified below. II. PLEADINGS A. Petition 5. NYNEX states that its current reconfiguration charge for shifting traffic from DS1 to DS3 facilities for customers remaining on its network is zero, while the charge for shifting a customer's traffic from NYNEX's network to an expanded interconnection multiplexing node is $285.00. NYNEX permits access customers to pay this rollover charge in six monthly installments, a change it made after the Second Reconsideration Order. NYNEX maintains that its NRCs comply with the Second Reconsideration Order, but seeks a waiver of that Order to the extent it is necessary. NYNEX claims that it eliminated its DS1-to-DS3 reconfiguration charge to encourage customers to switch to fiber- based services, which NYNEX believes are less costly to provide and maintain. NYNEX also asserts that its $285 rollover charge, imposed when a customer switches from NYNEX to interconnector facilities, is cost-based. NYNEX admits, however, that there is no difference in the costs of performing the work associated with CAP rollovers and LEC reconfigurations. 6. According to NYNEX, setting CAP rollover charges at zero, or setting LEC reconfiguration charges equal to CAP rollover charges, would give interconnectors an unfair competitive advantage. NYNEX contends that it has faced competition from CAPs since 1985. NYNEX also asserts that, although its region represents only 10 percent of nationwide LEC revenues, its region represents 50 percent of the revenues of MFS and Teleport. NYNEX further explains in an ex parte statement that NYNEX started to offer intrastate physical collocation voluntarily in 1990, and this has allowed CAPs to establish more collocated premises in the NYNEX region than in any other region, and to achieve greater market penetration. According to NYNEX, the areas where CAPs provide service generate 35 percent of NYNEX's business and access revenues in New York and 28 percent of NYNEX's business and access revenues in Massachusetts. In New York City, NYNEX claims that CAPs have gained as much as 40 percent of the high capacity special access market in the offices where they are interconnected. NYNEX states that more carriers have been certificated to provide local telephone service in New York State than in any other state. NYNEX notes that CAPs are collocated in 10 of the 11 central offices below 59th Street in Manhattan. NYNEX further reports that it has connected more than 100 DS1 switched access circuits to CAP facilities collocated in NYNEX offices in New York, and it received orders to disconnect 32 percent of its switched access trunks below 59th street and to rearrange those circuits to collocated CAPs. NYNEX argues that it must be permitted to waive its NRCs to meet competition from CAPs who waive their NRCs. 7. NYNEX argues that although it does not charge explicitly NYNEX customers for reconfiguration costs, it effectively recovers these costs over time through the revenues it receives from recurring rates for the service ordered by the NYNEX customer. This practice reduces NYNEX's profit margins for the service for the period of time until the nonrecurring costs are recovered. NYNEX argues that it cannot recover the nonrecurring costs associated with rollovers through recurring charges because it derives no recurring revenues from circuits that have been rolled over to a collocator. NYNEX acknowledges that it does collect expanded interconnection recurring rates from collocators, but asserts that it cannot recover the costs of a CAP rollover through these rates because they must be set at cost. NYNEX also asserts that if it must impose a CAP rollover charge of zero, it would be unable to recover its own costs associated with the rollover, while the collocator would not bear any rollover costs. At the same time, NYNEX also asserts that it would be disadvantaged if it must impose a nonrecurring charge for LEC reconfigurations, because, it claims, interconnectors often recover nonrecurring costs from their customers gradually through recurring rates, or even waive installation charges. NYNEX claims that there is substantial evidence that CAPs are, in fact, waiving nonrecurring charges to their customers. B. Comments 8. A number of parties assert that NYNEX has not shown special or unique circumstances that would warrant a waiver. LOCATE maintains that NYNEX should have filed a petition for rulemaking rather than a waiver petition. LOCATE and MFS contend that the Commission considered and rejected arguments for the rate structure contemplated in NYNEX's waiver petition in the Second Reconsideration Order. They then argue that granting NYNEX's petition would prejudge an issue designated in the expanded interconnection investigation. Teleport notes that the Commission stated it would consider waivers of the nondiscriminatory NRC requirement only if granting the waiver would not be anticompetitive or otherwise violate the Communications Act. 9. Several parties also argue that if granted, NYNEX's waiver request would permit unreasonably discriminatory rates in violation of Section 202 of the Communications Act, 47 U.S.C.  202, because a charge would apply when access customers move from NYNEX to CAP facilities, but not when they move from CAP to NYNEX facilities. These parties maintain that there are no cost differences between performing work associated with CAP rollovers and LEC reconfigurations. LOCATE and Teleport argue that recovering nonrecurring costs through recurring rates cannot justify otherwise discriminatory rates. LOCATE maintains that NYNEX's rate structure is discriminatory because nonrecurring costs are recovered from NYNEX customers gradually through recurring rates, while nonrecurring costs are recovered from CAP customers in one up-front payment. MFS contends that recovering nonrecurring costs through recurring rates is an improper bundling of services in violation of Sections 61.40(a)(1) and 69.114(a) of the Commission's Rules, 47 C.F.R.  61.40(a)(1), 69.114(a). MFS and LOCATE also maintain that this bundling makes it difficult to determine whether NYNEX's NRCs are set at cost-based levels. Teleport observes that even after a customer rolls over from NYNEX's network to Teleport's network, NYNEX still imposes special access channel termination charges and multiplexer charges on the end user. Teleport asserts that NYNEX could use these revenues to offset its costs if NYNEX waived its CAP rollover NRCs, just as it uses revenues for the services provided after a LEC reconfiguration to recover the nonrecurring costs of the LEC reconfiguration. Teleport argues that, under price cap regulation, LECs do not recover specific costs from specific rates, and thus NYNEX cannot claim that it is recovering nonrecurring costs through recurring rates from its customers. MCI argues that it might be reasonable for NYNEX to recover these nonrecurring costs through recurring rates, because the public interest is served by encouraging access customers to upgrade to newer technologies. 10. Teleport discounts NYNEX's argument that NYNEX is forced by competitive pressure to waive its installation NRCs. Teleport believes its own waiver of its installation charge is distinguishable from NYNEX's waiver because Teleport's waiver is designed to attract new customers while NYNEX's waiver is designed to keep existing customers. Teleport maintains that it must often waive installation charges to attract customers, because NYNEX customers incur no NRC if they remain with NYNEX. MCI argues that NYNEX waives its reconfiguration NRCs because it benefits when interexchange carriers move from DS1 to DS3 circuits. According to MCI, such reconfigurations give NYNEX fewer circuits to maintain, and those circuits employ newer technologies that are less costly to maintain. Repeating the arguments made in its petition to reject NYNEX's special access expanded interconnection tariff, MFS denies that NYNEX's expanded interconnection rates are cost- based. Thus, MFS rejects NYNEX's assertion that it cannot waive CAP rollover NRCs because its expanded interconnection charges are cost-based. 11. Southwestern Bell argues that the rate structure proposed in NYNEX's waiver petition is reasonable, because the relevant costs of CAP rollovers and LEC reconfigurations would be recovered from the respective cost-causers. Southwestern Bell also argues that it would be arbitrary and capricious to preclude NYNEX from waiving installation charges when its competitors do. C. Reply 12. NYNEX replies that it has provided good cause for waiver, because it faces more competition from CAPs than do LECs in other parts of the country. Therefore, NYNEX asserts that it should be permitted to use the rate structure used by its competitors. According to NYNEX, this rate structure would not be discriminatory because it is the same rate structure used by its competitors. Further, NYNEX asserts that because access customers are permitted to pay CAP rollover charges in six monthly installments without interest, CAP customers can pay nonrecurring charges over time in the same manner as NYNEX's customers. In response to MCI's argument that it may be reasonable to recover nonrecurring costs through recurring charges in this case, NYNEX states that it is willing to consider recovering these costs through some other expanded interconnection recurring rate element if the Commission would allow it. Finally, NYNEX maintains that Teleport's recommendation of offsetting nonrecurring rollover costs with recurring revenue from the terminating services connected to the collocation arrangement amounts to a cross-subsidy from other services to rollovers. III. DISCUSSION 13. The Commission may exercise its discretion to waive a rule where there is "good cause" to do so, because the particular facts would make strict compliance inconsistent with the public interest. Waiver is thus appropriate only if special circumstances warrant a deviation from the general rule and such a deviation will better serve the public interest than adherence to the general rule. Further, the Commission's grant of a waiver must be based on articulated, reasonable standards that are predictable, workable, and not susceptible to discriminatory application. In evaluating the public interest, the Commission stated in the Second Reconsideration Order that it would consider waiving the NRC standards established in that Order only if the differential treatment resulting from the waiver would not undermine competition or otherwise violate the Communications Act. For the reasons stated below, we find that NYNEX has made the required showing. 14. NYNEX has shown that it faces special circumstances relating to the extent of competition it faces in its region. While we lack sufficient data to reach conclusive findings regarding competition in the rapidly-changing access marketplace in the NYNEX region, NYNEX has provided sufficient evidence to convince us that special circumstances exist to justify this specific limited waiver, as conditioned below. Specifically, NYNEX has demonstrated that CAPs have been operating in the New York Telephone region for a substantial period of time. NYNEX voluntarily decided to offer physical collocation in 1990, and as explained above, this has allowed CAPs to establish more collocated premises in the NYNEX region than in any other region, and to achieve greater market penetration. In particular, NYNEX submits that CAPs have gained 40 percent of the high capacity special access market in the New York City central offices in which they are located, which are generally Zone 1 central offices. Furthermore, according to NYNEX, CAPs are located in 10 of the 11 central offices below 59th Street in Manhattan. In addition, NYNEX reports that it has received orders to disconnect 32 percent of its switched access trunks below 59th street and to rearrange those circuits to collocated CAPs. We therefore conclude, for the geographic area identified below, that NYNEX has met its burden of demonstrating that it faces a special circumstance under our waiver standards. 15. The Commission stated that it will consider a waiver of the NRC standards to be in the public interest only if the differential treatment resulting from the waiver would not undermine competition or otherwise violate the Communications Act. Because CAPs have a significant presence in NYNEX's Zone 1 central offices in New York, it does not appear that NYNEX's waiver, as conditioned below, would undermine nascent competition. As explained below, NYNEX will recover nonrecurring costs over time from both NYNEX customers and CAP customers. Thus, the difference between the treatment given to NYNEX customers and the treatment given to CAP customers will be minimal. For this reason, it seems unlikely that NYNEX's rate structure will undermine competition. 16. We disagree with LOCATE and MFS that there are no relevant differences between the rate structure NYNEX proposed in the Second Reconsideration Order and the rate structure it proposes here. In the Second Reconsideration Order, NYNEX did not apply a NRC when customers reconfigured their services from facilities previously used in the same central office to NYNEX facilities, but did apply a NRC when customers moved their traffic from NYNEX facilities to CAP facilities. In its waiver petition, however, NYNEX explained that its customers do pay nonrecurring costs when they move their traffic from CAP facilities to NYNEX facilities, but those costs are bundled into recurring rates and recovered over time. By permitting customers moving from NYNEX facilities to CAP facilities to pay nonrecurring charges in monthly installments, nonrecurring costs are recovered over time from both NYNEX customers and CAP customers. Therefore, the rate structure in NYNEX's waiver request is distinguishable from the rate structure the Commission rejected in the Second Reconsideration Order. Given the extent of competition in Zone 1 of New York, we conclude that this rate structure is not likely to harm competition significantly. 17. While we conclude that the apparent extent of competition in NYNEX's Zone 1 New York central offices justifies this waiver, we do not believe that a waiver should apply outside New York State, or even outside the Zone 1 offices in New York. NYNEX's description of increased competition in its area seems to focus specifically in New York City, or particularly in Manhattan south of 59th Street. There is no evidence in the record before us in this proceeding that the competition NYNEX faces outside its Zone 1 central offices in New York is as substantial as the competition it faces in Zone 1. Accordingly, we conclude that NYNEX has not shown good cause for waiver at central offices outside Zone 1. 18. Although, as explained above, it appears that granting NYNEX a waiver would not undermine competition, the public interest would be best served by placing some additional conditions on NYNEX's waiver. Under a waiver of limited duration, we can observe whether the waiver we now grant affects the development of competition in NYNEX's region. We grant NYNEX's waiver petition only for one year following the release date of this Order. If NYNEX's rate structure has some unreasonably anticompetitive effects, we can limit further or rescind NYNEX's waiver before any serious damage to competition occurs. Although NYNEX has shown that it recovers nonrecurring costs over time from both NYNEX customers and CAP customers, it is not clear from the record before us whether the six month period given to CAP customers is comparable to the time over which nonrecurring costs are recovered from the recurring rates paid by the NYNEX customers. Therefore, NYNEX's waiver will be conditioned on it permitting CAP customers to pay the CAP rollover NRC over 12 months. 19. If NYNEX desires to continue to recover its reconfiguration costs through recurring charges after this waiver of the expanded interconnection NRC standard expires, it must obtain another waiver. If NYNEX decides to seek such a waiver, it should file its petition no later than nine months from the release date of this Order. NYNEX must show in that petition that competition in its region has not been undermined by its NRC rate structure. IV. ORDERING CLAUSES 20. Accordingly, IT IS ORDERED, pursuant to Section 1.3 of the Commission's Rules, 47 C.F.R.  1.3, that the petition for waiver filed by New York Telephone Company and New England Telephone and Telegraph Company IS GRANTED, subject to the conditions described above. 21. IT IS FURTHER ORDERED that New York Telephone Company and New England Telephone and Telegraph Company SHALL FILE, no later than 10 days from the release date of this Order, on not less than 15 days' notice, tariff revisions that comply with the conditions placed on its waiver as described above. 22. IT IS FURTHER ORDERED that, for these purposes, we waive Sections 61.58, and 61.59 of the Commission's Rules, 47 C.F.R.  61.58, 61.59. New York Telephone Company and New England Telephone and Telegraph Company should cite the "DA" number of the instant Order as the authority for this filing. FEDERAL COMMUNICATIONS COMMISSION Kathleen M.H. Wallman Chief, Common Carrier Bureau