[BETA] Fortnightly

A federal court blocks FCC's "TELRIC" cost rule, but some states endorse it anyway.

With the Federal Communications Commission (FCC) having lost a major court battle last fall, the state public utility commission (PUCs) have taken the lead in the deregulation of local telephone service promised a year ago when President Bill Clinton signed the Telecommunications Act of 1996 (the "Act").

Some states have opened generic investigations; others have chosen to proceed case-by-case in individual arbitration proceedings. Overall, state regulators are deciding a wide variety of issues surrounding rights and responsibilities between incumbent local exchange telephone carriers (LECs) and new entrants seeking a piece of the local calling market.

In most cases, the incumbent LEC is a former Bell system company. The new entrants, on the other hand, can be a small upstart company or an industry mainstay such as AT&T, MCI, MFS Communications, or Time-Warner. In Florida, for example, the state commission has approved negotiated interconnection agreements between Bell South and new entrants MCI Metro Transmission Services, Inc. %n1%n Time Warner AxS of Florida, L.P., %n2%n American MetroComm Corp., %n3%n and Teleport Communications Group. %n4%n

Among its many provisions, the Act directs state regulators to arbitrate disputes that may arise as new competitors seek to negotiate the terms and conditions for interconnection agreements with incumbent LECs, and the rates that new entrants will pay to LECs to purchase unbundled building blocks for local service.

That mandate calls for policy decisions across a wide field. For instance, what services must LECs must offer at wholesale to their new competitors? (The new competitors will then turn around and resell such services at retail.) And for such services, what is the appropriate wholesale discount? This step in effect "backs out" certain costs from the retail rate, requiring regulators to make judgments on the reasonableness of LEC costs, at the risk of leaving some costs stranded. Here, the debate has centered around a costing method known as "total-element, long-run incremental cost" (TELRIC).

In addition, state regulators must set rates for individual unbundled network elements. They must also decide how interconnected companies should compensate each other for transport and termination of calls (em i.e., adopt a "bill-and-keep" mutual compensation method, or develop a system of usage-based or flat-rate charges for such services.

Last summer the FCC attempted to get a jump on the process by handing down specific guidelines for the state PUCs. That decision, issued August 8, 1996, %n5%n turned out to be quite controversial. But a federal appeals court (eighth circuit) soon issued a temporary injunction, %n6%n blocking the federal rules on finding that the FCC had very likely overreached and intruded on traditional state authority to fix rates for local telephone service. The court said it would review claims by the LECs that the rate methods adopted by the FCC would produce rates that so low as subsidize new entrants and threaten the financial integrity of incumbent LECs.

Despite the tumult, many state PUCs are moving forward (em but not all in the same direction.

Follow FCC Rules

Should state PUCs give credence