September 28, 1999

Priscilla Hill-Ardoin

Senior Vice President-FCC

SBC Telecommunications, Inc.

1401 I Street, N.W.

Suite 1100

Washington, D.C. 20005

Dear Ms. Hill-Ardoin:

On August 31, 1999, members of the Common Carrier Bureau staff met with
representatives from Southwestern Bell Telephone ("SWBT") to discuss
SWBT's proposed voluntary enforcement mechanism, the "Performance Remedy
Plan" (the "Plan"), which is designed to deter poor performance in the
provision of resale services and unbundled network elements to
competitors. The Plan was developed through a collaborative process in
Texas in conjunction with a proceeding addressing SWBT's application for
authority to provide in-region, interLATA services under section 271 of
the Telecommunications Act. We appreciate and commend the work of the
Texas Public Utilities Commission, in conjunction with SWBT and other
participating parties, in developing the Plan. We share the Texas Public
Utilities Commission's goal of ensuring that SWBT's performance will not
deteriorate after the company receives section 271 authorization, and
believe the Plan represents a critical step in this direction.

I would like to take this opportunity to summarize the Bureau's
concerns, as expressed by the staff at the August 31st meeting. These
views represent the current thinking of the Common Carrier Bureau and
are in no way binding on the Commission. Any final determination
concerning the merits of this performance plan will be made based on the
record in the section 271 application for Texas. It is my hope, however,
that the Bureau's views on these issues will provide useful guidance to
you and other Bell Operating Companies in formulating successful section
271 applications.

1.  **Exclusion Of CLECs From The Plan's Tier 2 Mechanisms**

The Bureau is concerned that the Plan's "Tier 2" mechanism will address
SWBT's performance only with respect to a sub-set of competitive local
exchange carriers ("CLECs") operating in Texas, rather than all CLECs,
and thus will inadequately protect the competitive marketplace as a
whole. The Plan contains two levels of incentive mechanisms. First, Tier
1 addresses SWBT performance with respect to individual CLECs, providing
for SWBT payments to a particular CLEC when an out-of-parity result
occurs. Tier 1 would replace any existing liquidated damages provisions
in a CLEC's interconnection agreement with SWBT. Second, Tier 2
addresses SWBT performance with respect to all CLECs in the aggregate,
providing for SWBT payments to the Texas state treasury when an
out-of-parity result occurs. SWBT has proposed making the Plan available
to CLECs in Texas as an attachment to its Proposed Interconnection
Agreement. A CLEC wishing to participate in the Plan would be required
to "opt into" this attachment. As currently proposed, only performance
data associated with those CLECs that decide to opt into the Plan (and
thereby agree to replace their negotiated liquidated damages provisions
with the Tier 1 remedies) would be included in the Tier 2 mechanism.

The Bureau is seriously concerned that the exclusion from the Tier 2
performance mechanism of CLECs that choose not to opt into the Plan
could substantially weaken the important deterrent effect of this aspect
of the Plan. Indeed, if several CLECs decide not to opt into the new
enforcement plan, then the protections offered to competition by Tier 2
on paper may not be realized in practice. Specifically, excluding any
CLEC from Tier 2 would necessarily decrease the number of data
observations. Because the payments under Tier 2 for most measurements
are calculated on a "per-occurrence" basis, the exclusion of CLECs not
opting into the Plan, and their corresponding "occurrences," could
substantially reduce the amounts at stake under Tier 2 in the event SWBT
fails to achieve the performance standards. Accordingly, staff suggested
that Tier 2 should address SWBT's performance with respect to [all
CLECs]{.underline} operating in the state. The Bureau is aware of no
operational reason for excluding from the Tier 2 incentive structure
those CLECs that choose to retain their own negotiated liquidated
damages provisions. In fact, SWBT indicated to Bureau staff that it
already collects performance data for all CLECs, and will continue to do
so after receiving section 271 authorization, regardless of whether
certain CLECs decide not to opt into the Plan.

2.  **Caps on Liability for Poor Performance**

The Bureau is also concerned that the \$120 million annual cap on SWBT's
potential payments for poor performance under the Plan may be too low to
foster parity performance in a market the size of Texas. In particular,
the Bureau believes that the potential liability under such a plan must
be high enough that an incumbent could not rationally conclude that
making payments under an enforcement plan is an acceptable price to pay
for hindering or blocking competition.

As a first step, the Bureau urges SWBT to consider increasing the \$120
million cap on payments under its plan. When viewed as a percentage of
SWBT's in-state gross local revenues (approximately 2.19%), this amount
of potential liability may be insufficient to provide the assurances
discussed above. As a second step, we emphasize that SWBT must justify
whatever cap is finally proposed. The Bureau is open to considering
whether there is a reasoned basis for concluding that the proposed
annual cap of \$120 million would provide adequate incentives for
maintaining performance levels. Finally, SWBT may wish to consider
adding some form of a "procedural cap" to its Plan, under which an
administrative proceeding to identify and correct performance problems
would be instituted automatically after payments under the Plan reach a
pre-determined amount during the course of a year.

3.  **Adequate Incentive Payments Associated With Low-Volume Services**

The Bureau is concerned that the Plan may not offer adequate protection
for nascent, low-volume services (particularly, innovative "advanced
services"), as opposed to services with higher CLEC volumes. The reason
for this is imbedded in the design of the plan. The vast majority of
performance measurements under the current plan provide for payments
calculated on a per-occurrence basis. For such measurements, payments
would reach substantial and meaningful levels when the number of
out-of-parity occurrences is high -- that is, when a measurement is
considerably out-of-parity for a service with high volumes, such as
Resale POTS service. The converse also is true: payments necessarily
will be small for low-volume services because the number of occurrences
will be low, even if a CLEC suffers seriously degraded service.
Competition could be significantly affected by poor incumbent LEC
performance in providing specialty services used by small CLECs, or
nascent services (particularly, innovative "advanced services") that
have not yet achieved high commercial volumes.

We hope that this letter will be useful to your company in preparing a
successful section 271 application. We emphasize, however, that, while
this letter sets forth the Bureau's major existing concerns about SWBT's
performance assurance plan, it is likely that additional concerns will
arise in the context of other section 271 proceedings. Also, any final
determinations regarding this proposed Plan will be made by the
Commission based on the record of SWBT's 271 application for the State
of Texas.

For information purposes, a copy of this letter will be placed in CC
Docket No. 98-121[^1] and CC Docket No. 98-56.[^2]

> Sincerely,

Lawrence E. Strickling, Chief

Common Carrier Bureau

Federal Communications Commission

cc: Ms. Magalie Roman Salas

Secretary

Federal Communications Commission

[^1]: Application of BellSouth Corporation, BellSouth
    Telecommunications, Inc., and BellSouth Long Distance, Inc., for
    Provision of In-Region, InterLATA Services in Louisiana, CC Docket
    No. 98-121, Memorandum Opinion and Order, 13 FCC Rcd 20599 (1998).

[^2]: Performance Measurements and Reporting Requirements for Operations
    Support Systems, Interconnection, and Operator Services and
    Directory Assistance, CC Docket No. 98-56, Notice of Proposed
    Rulemaking, 13 FCC Rcd 12817 (1998).