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.

*************************************************************************
FCC 96-378

 Before the
 FEDERAL COMMUNICATIONS COMMISSION
 Washington, D.C. 20554

In the Matter of )
 )
Implementation of the Local Competition ) CC Docket No. 96-98
Provisions in the Telecommunications Act )
of 1996 )
 )
Interconnection between Local Exchange ) CC Docket No. 95-185
Carriers and Commercial Mobile Radio )
Service Providers )
 )

 ORDER

Adopted: September 16, 1996 Released: September 17, 1996

By the Commission:

 I. Introduction

 1. On August 1, 1996, the Commission adopted rules implementing the local
competition provisions of the Telecommunications Act of 1996 (1996 Act). On August 28,
1996, GTE Corporation (GTE) and the Southern New England Telephone Company (SNET)
filed a joint motion for stay of the Commission's rules pending judicial review. Oppositions
to the joint motion for stay were filed by the United States Department of Justice and 16
private parties. On September 6, 1996, after we received these oppositions, U S West, Inc.
("U S West") filed a stay petition similar to that filed by GTE and SNET. The Competitive
Telecommunications Association and ALTS filed oppositions to U S West's petition.

 2. For the reasons set forth below, we deny the motions for stay.

 II. Summary of the Motions and Oppositions

 3. GTE and SNET assert that a petition for review of the Commission's First Report
and Order is likely to succeed on the merits because the Commission has exceeded its
statutory authority and has acted arbitrarily and capriciously in implementing provisions of the
1996 Act. In particular, GTE and SNET contend that the Commission lacks authority to
establish national pricing standards for interconnection and unbundled network elements.
GTE and SNET argue that, even if the Commission has such authority, the pricing standards
in the First Report and Order would force incumbent LECs to offer interconnection,
unbundled network elements, and resold services at below-cost rates, allegedly effecting an
uncompensated taking in violation of the Fifth Amendment to the United States Constitution.
GTE and SNET also maintain that the Commission has established default pricing proxies
that are inconsistent with the 1996 Act and the cost study methodology the Commission
adopted for use by state commissions. In addition, GTE and SNET assert that the ability of
competitors to "reassemble" unbundled network elements nullifies the resale and exchange
access provisions of the 1996 Act. Finally, GTE and SNET argue that the First Report and
Order establishes a number of specific requirements with regard to resale and exchange
access charges that conflict with express terms of the 1996 Act.

 4. GTE and SNET contend that they will suffer irreparable harm in the absence of a
stay because the Commission's rules will stifle the negotiation process and will require
incumbent LECs to offer unbundled elements or services to competitors at below-cost prices.
GTE and SNET argue that a stay will cause no harm to others because private negotiations
and state-supervised arbitrations can proceed in the absence of Commission rules. GTE and
SNET also assert that the public interest favors a stay because of the disruption to business
plans that would result if the Court of Appeals reverses the First Report and Order and the
Commission subsequently modifies its rules.

 5. U S West agrees with SNET and GTE's arguments, but additionally claims that our
default proxy prices, along with our misinterpretation of 47 U.S.C. section 252(i), the 1996
Act's "most favored nation" provision, will impermissibly "dictate" the result of negotiations,
as a practical matter.

 6. In general, parties opposing grant of the stay motion contend that GTE's and
SNET's motion does not satisfy the four factors that we must consider in deciding whether to
stay one of our orders. These parties contend movants are unlikely to prevail on the merits
of their claims; that movants will suffer no irreparable harm if a stay is not granted; that grant
of a stay will harm third parties; and that the public interest does not favor the grant of a
stay.

 III. Discussion

 7. Petitioners' motions do not justify relief under the four-part test for evaluating
requests for interim relief. That test requires proponents of a stay to demonstrate: (1) that
they are likely to prevail on the merits; (2) that they will suffer irreparable harm if a stay is
not granted; (3) that other interested parties will not be harmed if the stay is granted; and (4)
that the public interest favors the grant of a stay. As discussed below, we do not believe that
petitioners have satisfied any, much less all, of these requirements.

A. Irreparable Harm

 8. A concrete showing of irreparable harm is an essential factor in any request for a
stay. "'The key word'" in an analysis of irreparable harm is "'irreparable.'" "[E]conomic
loss does not, in and of itself, constitute irreparable harm." Also, because competitive harm
is merely a type of economic loss, "revenues and customers lost to competition which can be
regained through competition are not irreparable." Moreover, even if the alleged harm is not
fully remediable, the irreparable harm factor is not satisfied absent a demonstration that the
harm is "both certain and great; ... actual and not theoretical." "Bare allegations of what is
likely to occur are of no value" under this factor, because we "must decide whether the harm
will in fact occur." Petitioners' three different claims of harm absent a stay do not satisfy
these exacting standards.

 9. First, GTE and SNET argue specifically that they are harmed by our interpretation
of the "just and reasonable" standard of 47 U.S.C.  251(c)(2) and (3) for the pricing of
interconnection and unbundled network elements. They complain, in particular, that the
pricing methodology adopted in the First Report and Order unconstitutionally prevents them
from recovering the joint and common costs (hereinafter collectively referred to as "common
costs"), and the historical "embedded" costs of such offerings to competing carriers. Such
"below-cost" pricing of section 251 offerings, they claim, will result in unrecoverable lost
revenues, customers, and goodwill, particularly if state regulators do not allow them to
"rebalance" (raise) rates for certain retail services that allegedly have been subsidized in the
past by the pricing regime that the section 251 offerings will erode.

 10. These claims mischaracterize the First Report and Order. Contrary to GTE's and
SNET's assertions, our pricing methodology does not require "below-cost" pricing. On the
contrary, it affirmatively provides for the recovery of all the economic costs of providing
interconnection and unbundled network elements, and includes a reasonable profit. As we
explained, economic costs are forward-looking costs or, in other words, the costs that an
efficient provider would incur to provide the service or facility. We also specifically
provided that unbundled element prices shall include a "normal profit." In mischaracterizing
our pricing methodology as "below-cost," GTE and SNET must be claiming that historical
embedded costs are always greater than economic costs, and that sections 251 and 252 must
be read to entitle them to recover historical costs even where those costs exceed economic
costs. Both assertions are unfounded. Nothing in section 251 or 252 creates an entitlement
for GTE, SNET and other incumbent LECs to assess rates for interconnection and unbundled
network elements that are designed to recover historical costs that exceed economic costs.
Economists generally agree that historical embedded costs are not the relevant costs in
competitive markets, and would, in fact, interfere with the development of efficient
competition. Moreover, GTE and SNET are simply wrong in claiming that the
Commission's pricing methodology denies them an opportunity to recover common costs. We
stated clearly in the First Report and Order that "for the aggregate of all unbundled elements,
incumbent LECs must be given a reasonable opportunity to recover their forward-looking
common costs attributable to operating the wholesale network."

 11. Even accepting GTE's and SNET's reliance on historical costs, their contention
that the First Report and Order requires below-cost pricing is speculative. In any given
instance, forward-looking costs "may be higher or lower than historical embedded costs."
Thus, the claimed loss of revenues -- which does not present a question of constitutional
deprivation in any event -- is premature because the actual revenues that GTE and SNET
will receive will not be known until completion of the voluntary negotiations and state
arbitration proceedings that will actually set interconnection and unbundled element prices.
Speculation about anticipated lost revenues in the future does not approach, at this stage, a
showing of irreparable harm.

 12. Second, petitioners contend that they will be harmed by the application of the
interim default proxy rates that the Commission adopted. This argument is fatally flawed in
that there is no certainty that those proxies will ever be applied to petitioners. These proxies
were established for use by the states if a state was not able to set prices based on economic
cost studies consistent with our methodology within the statutory arbitration periods. If, as
these carriers assert, the proxy rates are unreasonably below costs, they have every incentive,
and possess the information necessary, to present credible economic cost studies to the
relevant state commissions to allow the state commissions to set prices for interconnection
and unbundled network elements that are based on actual cost studies, rather than by proxies.
Their claims of harm thus lack the requisite certainty and concreteness for a stay. Further, as
discussed below, the carriers' challenges to those proxies mischaracterize the Commission's
action and are unfounded on the merits.

 13. Third, petitioners argue that the Commission's rules unreasonably constrain both
their ability to negotiate the terms of voluntary agreements with other telecommunications
carriers that request interconnection or unbundled network elements, and the states' ability to
arbitrate the terms of such agreements if voluntary negotiations fail. Quite apart from the
fact that the statute directs the Commission to adopt implementing rules in 47 U.S.C. 
251(d)(1), these allegations of harm also are too speculative to justify injunctive relief. Our
rules clearly do not prohibit voluntary negotiations between incumbent LECs and their
potential competitors, as contemplated in 47 U.S.C.  252(a). Indeed, they facilitate them.
Petitioners are free to negotiate agreements with other carriers upon any terms they choose so
long as they are not discriminatory and are consistent with the public interest. Although we
fully expect the existence of our rules to provide a context in which free negotiations can
proceed consistent with the pro-competitive purposes of the 1996 Act, petitioners cannot
plausibly suggest in view of the explicit mandate of 47 U.S.C.  251(d)(1) that they have a
cognizable right to negotiate without any rules adopted by the FCC.

 14. We also conclude that petitioners have not demonstrated that the FCC's decision
to interpret the just and reasonable rate standard would necessarily harm them, as compared
with a decision to allow states independently to interpret that standard in arbitration
proceedings. To the extent that states might adopt different standards absent any FCC
guidance, such standards could conceivably be either more or less favorable to incumbent
local exchange carriers.

 15. Finally, it is a meaningful response to all of the harms that petitioners allege that
nothing in the First Report and Order prevents incumbent local exchange carriers from taking
steps substantially to protect themselves by seeking to insert into their voluntary agreements
provisos that permit reformation of the terms of those agreements in the event that the order
is overturned or modified pursuant to judicial review. Similarly, nothing in the order prevents
states, in arbitrating such agreements, from imposing such provisos.

B. Harm to Others

 16. Petitioners also have not proved that a grant of their motions would not harm
others. As discussed more fully below (paras. 28-31), the "stay" they seek would not simply
maintain the status quo, but rather would have a significant impact on whether potential new
competitors currently involved in negotiations and state arbitration proceedings choose to
enter local exchange and exchange access markets at this crucial time, and, if so, whether
their entry would be pursuant to statutory standards as interpreted by the Commission, or
some other standards. To the extent that petitioners claim that the Commission's
interpretations burden them with lost revenues and competitive harm, other interpretations
allowing them to charge new entrants higher rates or to impose upon them more restrictive
terms likely would burden new entrants and, consequently, retard or even eliminate
competitive entry. As between incumbent LECs and new entrants, the former are more likely
to be able to repair the adverse consequences of any erroneous decision on whether to grant a
stay.

 17. Moreover, to the extent that petitioners argue not only that the Commission
adopted an erroneous pricing standard, but also that the Commission erred by failing to leave
the standard to individual states, the carriers are advocating a system that clearly would cause
new entrants particular harm and might even discourage them from entering these markets.
As we noted in the First Report and Order, efficient entry strategies in many cases require
entry on a regional, rather than state-by-state, basis. The removal of national standards
could severely impede, or at least increase the cost of, such strategies.

C. Public Interest

 18. GTE and SNET assert that a stay would serve the public interest because it would
leave interconnection negotiations to private parties, and arbitrations in the hands of state
regulators, where Congress intended them to be. They also contend that "progress toward
competition will be gravely impaired" in the absence of a stay because the Commission's
rules will give potential competitors false signals that may "encourage entry by companies
that would not normally enter if they had known the true costs involved." GTE and SNET
claim that this means that a stay is necessary to protect the public from such "uneconomic
entry" and from the disruptions that would attend corrective actions if the Commission's rules
were overturned. U S West additionally claims that the public interest will be harmed
because the Commission's rules and "inflexible prices" will "prevent carriers from negotiating
interconnection agreements with each other on terms that are more advantageous than the
defaults."

 19. Contrary to GTE's and SNET's argument that a stay is needed to avoid "entry by
companies that would not normally enter," a stay might discourage entry by some who have
every reasonable qualification to compete and would do so under our rules. A stay in this
crucial initial period for the development of local exchange and local access competition
would not serve the public interest unless our rules were virtually certain to be set aside on
review and the actions taken on interconnection requests in the meantime were irreversible.
We believe that our rules correctly carry out the objectives of Congress in adopting section
251. Congress expressly mandated rulemaking by the Commission to implement effectively
the new statutory requirements. Congress also made clear that time was of the essence,
directing us to "complete all actions necessary to establish [such] regulations" by August 8,
1996. As explained more fully below (paras. 30-31), a stay of our rules would subvert
Congress' plan to have such rules in place during arbitration proceedings. Moreover, as we
emphasized in the First Report and Order, the rules we adopted under
section 251 will have a significant impact on the implementation of
other provisions of the 1996 Act. We noted, for example, that our 251
rules "will help the states, the DOJ, and the FCC carry out their
responsibilities under section 271, and assist BOCs in determining
what steps must be taken to meet the requirements of section
271(c)(2)(B), the competitive checklist."

 20. As to any necessary corrections after the fact, we believe that
agreements and arbitrations can take account of this possibility. As
noted above (para. 15), agreements and arbitrations could include
provisos calling for revisions if the Commission's rules should be struck
down. The joint motion acknowledges that the agreements can be
revised after the fact if the Commission's rules are upheld after a stay is
granted; its assertion that such revisions would not work if a stay is
denied and the rules later are struck down is implausible and
unexplained.

 21. We further reject U S West's argument that our rules will
harm the public interest by providing carriers with insufficient
flexibility to negotiate agreements. For the reasons set out in this
Order and in the First Report and Order, we believe that our rules
provide all carriers with a full and fair opportunity, pursuant to the
requirements of the 1996 Act, voluntarily to negotiate interconnection
agreements.

 22. In summary on this point, the primary beneficiary of the
competitive policies our rules were designed to implement is the public.
We conclude that a stay would disserve the public interest profoundly
by eliminating our rules from the process of negotiation and arbitration
at the very most crucial time.

D. Likelihood of Success on the Merits

 23. Because of the clear failure of petitioners to meet the
irreparable harm, harm to others, and public interest requirements for
obtaining a stay, we do not address specifically in this order all their
claims that we exceeded our statutory authority or that we acted
arbitrarily or capriciously. All the significant arguments raised by the
petitioners were squarely addressed in the First Report and Order. We
addressed issues concerning the Commission's authority under the
1996 Act to establish national pricing rules in section II.C. and II.D. of
the order. We discussed the legal and economic bases for the
establishment of the Commission's pricing methodology, including the
Fifth Amendment takings issue and the justification for the default
proxy ceilings and ranges, in section VII of the order. We addressed
arguments about whether we should permit competitors to reassemble
unbundled network elements, including possible effects on the resale
provisions of the 1996 Act and our access charge rules, in sections V.H.
and VII.B., respectively. In section V.J., we set forth our rationale for
including vertical features within the definition of unbundled local
switching; and in sections IV.H., V.J., and VII.B., we discussed the
compensation to incumbent LECs for modifications made to their
networks to accommodate interconnection and unbundling. Finally, in
section XIV.B of the First Report and Order, we addressed arguments
regarding the rights of third parties to obtain "any individual
interconnection, service, or network element arrangement" under
section 252(i). We need not repeat those discussions in this order.

 24. We will note, however that where the GTE and SNET address
the merits of the First Report and Order, they often mischaracterize and
distort the import of our analysis and conclusions. For instance, our
default proxy pricing measures are only interim approaches, setting
bounds for unbundled element pricing in the absence of state-approved
forward-looking cost studies. Our proxies will assist states in the very
near term when, because of time or staff resource constraints, they may
be unable to set prices by conducting or approving forward-looking
economic cost studies within the statutory time period set for
arbitrations. Indeed, the first set of state arbitrations must be
completed in early November under the deadlines established in the
Act.

 25. An example of GTE and SNET's misguided arguments on the
merits is their criticism of the Commission's unbundled loop proxy
calculation. In asserting that the Commission "might just as well have
picked the default prices out of a hat," petitioners omit any mention of
the several pages of the order describing how we calculated our loop
proxy figures. As detailed in section VII.C. of the First Report and
Order, our proxy ceilings are based on prices set by six state
commissions as their best estimates of forward-looking costs after
analysis of economic cost studies. We then derived price ceilings for
individual states throughout the nation by adjusting the average of the
prices in these six states by the relative loop costs in those states, as
estimated by the two forward-looking economic cost-based models that
received significant comment by parties during this proceeding. To
allow a reasonable margin to enable the proxy ceiling to capture the
variation among states' forward-looking economic costing prices, we
then adjusted the resulting prices upward by five percent.

 26. Contrary to GTE and SNET's arguments, it is no surprise, and
certainly not error, that the price ceiling for Florida -- or for
Connecticut, Colorado, Michigan, Illinois, or Oregon, for that matter --
does not equal the results of the cost studies in those individual states.
We concluded that an average of the six states' prices represented the
best estimate of forward-looking loop costs available to us at that time,
and that relying on an average of the nationwide relative costs from the
Hatfield and BCM models was the best method for deriving proxy price
ceilings in individual states. We believe our methodology is
reasonable, even though our proxy ceiling in Florida is $13.68 while the
Florida Commission set a $20 per loop price for GTE Florida. We
concluded that the reliability of our foundation estimate was enhanced
by using an average of the prices established in all six states for which
information was available, rather than using just one state or the six
states individually. We did not, and could not in the time frame
permitted under the statute, independently verify the accuracy of the
six states' unbundled loop prices, many of which also were interim in
nature. Instead, we emphasized that each state, in our judgment, used
a standard that appeared to be reasonably close to the forward-looking
economic cost methodology specified in the First Report and Order,
although perhaps not consistent in every detail with our prescribed
methodology. Finally, we also are unpersuaded by GTE and SNET's
assertion that it was fatal error to rely on the Florida cost studies
because the Florida Commission failed to include any "significant"
contribution to GTE Florida's common costs. It is not clear on its
face that the "insignificant" contribution to common costs is
inconsistent with our requirement that there be a reasonable allocation
of common costs. In addition, the Florida Commission affirmatively
found that their rates were not below GTE Florida's costs, and explicitly
provided for recovery of a reasonable profit. GTE and SNET have not
demonstrated that use of the Florida Commission prices as part of
setting a proxy ceiling for unbundled loop prices was so unreasonable
as to result in a flawed loop proxy methodology. In sum, we set default
proxy price ceilings and ranges for use by state commissions, in the
absence of fully approved forward-looking cost studies, based on the
best evidence available to us within the statutory time period for our
decision.

 27. Finally, petitioners' discussion of our proxy prices simply
ignores two key characteristics of our proxy rules. First, our order
makes clear that these proxies are interim in nature, and that states
utilizing the proxies must replace them with prices based on the results
of forward-looking cost studies as they become available. Second, our
rules permit incumbent LECs to obtain a price higher than the
Commission's proxy ceiling by submitting to a state commission during
an arbitration an economic cost study that demonstrates that the
incumbent LEC's costs do in fact exceed the proxy price. If the forward-
looking costs for petitioners are in fact higher than our proxy price
ceiling, as applied in an individual state, they need only demonstrate
that to the state commission.

E. Special Circumstances of This Case

 28. In addition to movants' failure to satisfy the four-part test for
evaluating requests for stay, the circumstances of this specific case
particularly militate against the grant of their motions. Ordinarily
when we are asked to stay the effectiveness of one of our orders or
rules, the moving party seeks to maintain the status quo until a
reviewing authority can sort out the issues and render its decision on
the merits. That is not the case here, as the Joint Motion itself
recognizes. Under the terms of the 1996 Act, many voluntary
negotiations for private interconnection agreements and state-
supervised arbitrations that are now under way will be completed
before the end of the year, because Congress established strict
timetables to govern the negotiation and arbitration process. The
question is whether those proceedings will reflect the principles
established by the Commission to implement section 251.

 29. Petitioners do not seek to preserve the status quo, but to
overturn Congress's requirement that state arbitrators ensure that
approved interconnection agreements reflect the Commission's
regulations implementing section 251. It is doubtful, in these
circumstances, that the ordinary standards for evaluating stay motions
should apply because, where the objective of the motion is not to
maintain the status quo, the courts have applied a more demanding
standard.

 30. In our view, it is important that the regulations established in
the First Report and Order not be stayed while negotiation and
arbitration proceedings are taking place. As we stated in the First
Report and Order, the negotiations between incumbent LECs and new
entrants are not analogous to traditional commercial negotiations in
which each party owns or controls something the other party desires.
Under section 251, monopoly providers are required to make available
their facilities and services to requesting carriers that intend to
compete directly with the incumbent LECs for their customers and,
consequently, incumbents have strong incentives to resist such
obligations. Our national rules serve the critical role of equalizing
bargaining power by establishing certain baseline principles that will
"reduce delay and lower transaction costs" -- burdens that we have
found "impose particular hardships for small entities that are likely to
have less of a financial cushion than larger entities." A stay would
undermine that critical role at a most important time,
disproportionately harming the competition that the statute
contemplates from new entrants.

 31. Moreover, Congress made clear that it wants our rules to be
in place at this critical time. Congress specifically ordered the
Commission to "complete all actions necessary to establish regulations
to implement the requirements" of section 251 by August 8, 1996. It
explained that it is "important that the Commission rules to implement
new section 251 be promulgated within six months after the date of
enactment, so that potential competitors will have the benefit of being
informed of the Commission's rules in requesting access and
interconnection before the statutory window in new section
271(c)(1)(B) shuts." In section 252(c)(1), Congress further ordered
state arbitrators resolving interconnection disputes and imposing
conditions on telecommunications companies to "ensure that such
resolution and conditions meet the requirements of section 251,
including the regulations prescribed by the Commission." Under the
statute, those state arbitrators must "conclude the resolution of any
unresolved issues not later than 9 months after the date on which the
local exchange carrier received the [interconnection] request." Because
many LECs requested interconnection shortly after the enactment of the
1996 Act on February 8, 1996 (with the consequence that arbitration of
such requests must be completed soon), a stay of our rules would
frustrate implementation of the procedure established by Congress. As
a matter of mathematical certainty, the arbitrations cannot be
completed on the timetable established by Congress -- with the
arbitrators ensuring that the agreements reflect the regulations
prescribed by the Commission, as Congress directed in section 252(c)(1)
-- if the regulations are stayed.

 IV. Ordering Clauses

 32. Accordingly, IT IS ORDERED that the joint motion for stay
filed by GTE Corporation and the Southern New England Telephone
Company IS DENIED.

 33. IT IS FURTHER ORDERED that the motion for stay filed by U
S West, Inc., IS DENIED.

 FEDERAL COMMUNICATIONS
COMMISSION

 William F. Caton
 Acting Secretary