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PUCs in 1997: Managing the Competition?

Fortnightly Magazine - January 1 1998

the local exchange to competition. With the Telecommunications Act of 1996 federal legislators mandated what many states have been preparing for years.

Among other things, the act requires all incumbent local exchange carriers to make network services available to any requesting carrier on an unbundled and non-discriminatory basis. Local exchange carriers are now required to offer their local exchange services to competitors at wholesale, for resale as a retail service. Also, LECs must allow new market entrants the option of buying a variety of the unbundled network elements that make up local telephone service. The task of identifying a fair rate for each network element, as well as the proper overall "discount" for the resale offerings, has occupied regulators at both the federal and state levels during the past year.

In one of the most closely watched cases, the U.S. Court of Appeals for the 8th Circuit ruled that state regulators rather than the Federal Communications Commission have the authority to set rates for unbundled network services. %n29%n The court found the FCC had exceeded its authority in declaring rules for pricing interconnections, unbundled access, resale of services and for transport and termination of telecommunications traffic. %n30%n

Signaling victory over one of the more complex issues underlying the move to competition in the local telephone market, regulators in several states adopted cost-of-service models and settled many technical issues. This victory cleared the way for development of rate plans for unbundled interconnection services offered by incumbent local exchange carriers in their states.

In one case setting rates for unbundled network elements, the Connecticut Department of Public Utility Control endorsed most aspects of the carrier's proposed TSLRIC analysis %n31%n and approved rates based on a 25-percent mark-up above costs indicated in the TSLRIC study to account for joint and common costs. The carrier had proposed rates implying a 35-percent average mark-up, a level which the commission said "may yet be too high in a fully competitive environment." %n32%n

At the same time, significant controversy has emerged concerning the calculation of the proper discount LECs must offer to those new market entrants who choose new market entrants who choose to purchased service at wholesale for resale to local callers.

The Michigan Public Service Commission has ruled that for Ameritech Michigan, the resale discount for bundled retail services should be set at 25.96 percent, if the reseller does not require operator and directory assistance services, but only 19.96 percent if the reseller elects to purchase those services from the carrier.

In that case, the local carrier had asked the commission to prohibit an "illicit form of price arbitrage" described by the LEC as "sham unbundling" - i.e., the combination of unbundled network elements to create an end-to-end local service to undercut the higher rates that might apply under a resale tariff. The commission found that such a scenario was speculative and said that the effect of creating two possible avenues of market entry might serve the public by exerting downward pressures on retail prices for local telephone service. It explained that the pricing advantage cited by