*Pages 1--19 from Microsoft Word - 9903.doc* Federal Communications Commission DA 01- 1525 1 Before the Federal Communications Commission Washington, D. C. 20554 In the Matter of Bell Atlantic Telephone Companies Revisions in Tariff FCC Nos. 1 and 11 Verizon Telephone Companies Tariff FCC Nos. 1 and 11 ) ) ) ) ) ) ) CC Docket No. 01- 140 Transmittal Nos. 1373 and 1374 Transmittal Nos. 23 and 24 ORDER DESIGNATING ISSUES FOR INVESTIGATION Adopted: June 26, 2001 Released: June 26, 2001 Direct Case Due Date: July 17, 2001 Oppositions to Direct Case Due Date: July 31, 2001 Rebuttal Due Date: August 7, 2001 By the Chief, Common Carrier Bureau: TABLE OF CONTENTS Paragraph No. I. INTRODUCTION....................................................................................................................... 1 II. BACKGROUND......................................................................................................................... 3 III. ISSUES DESIGNATED FOR INVESTIGATION..................................................................... 17 A. Input Prices................................................................................................................... 17 B. Comparison to Previous Cost Studies ............................................................................ 24 C. Central Offices Supporting Collocation Arrangements .................................................. 27 D. Engineering, Furnished and Installed (“ EF& I”) Factor .................................................. 30 E. Building and Land Investment Factors .......................................................................... 37 F. Annual Cost Factors (“ ACFs”)...................................................................................... 42 G. Switching Depreciation ACF......................................................................................... 46 H. Overhead Loading Factors ............................................................................................ 53 I. Comparisons with Other Carriers’ Rates........................................................................ 56 J. Cumulative Analysis ..................................................................................................... 58 K. Non- Recurring Charge Augmentation Fee..................................................................... 59 L. Terms and Conditions ................................................................................................... 61 IV. PROCEDURAL MATTERS ..................................................................................................... 71 V. ORDERING CLAUSES............................................................................................................ 78 1 Federal Communications Commission DA 01- 1525 2 I. INTRODUCTION 1. On April 11, 2001 and April 12, 2001, the former Bell Atlantic Telephone Companies filed Transmittal Nos. 1373 and 1374, respectively, to revise Tariff FCC Nos. 1 and 11. 1 Both became effective on April 26, 2001. The revisions in Tariff FCC No. 1 revise the monthly rate for DC power for physical collocation, and establish a new rate element for DC power for virtual collocation, in the Bell Atlantic– South region. The revisions in Tariff FCC No. 11 revise monthly rates for DC power for physical and virtual expanded interconnection arrangements in New York/ Connecticut and New England. 2. On April 17, 2001, Conversent Communications filed a petition to reject or, in the alternative, to suspend and require an accounting of Verizon’s tariff filings. 2 On April 18, 2001, Sprint Corp. filed a petition to reject or suspend and investigate; 3 Qwest Communications International, Inc. and Qwest Communications Corporation filed a joint petition for suspension or rejection; 4 WorldCom, Inc. filed a petition to suspend and investigate; 5 AT& T Corp. filed a petition to suspend and investigate; 6 and the Association for Local Telecommunications Services, Allegiance Telecom, Inc., Choice One Communications, Inc., Covad Communications Company, Network Plus, Inc., Rhythms Links, Inc., and XO Communications, Inc. (“ Joint CLECs”) filed a petition to suspend, investigate, or reject Verizon’s tariff filings. 7 On April 25, 2001, Verizon filed a reply. 8 On that same day, the Common Carrier Bureau suspended the tariffs for one day, and set them for investigation. 9 In this Order, we designate issues for the investigation of Verizon’s transmittals, and we direct Verizon to file additional information as described below. 1 The former Bell Atlantic Telephone Companies are now doing business as Verizon Communications (Verizon). Subsequent to filing Transmittal Nos. 1373 and 1374, Verizon filed its Transmittal Nos. 23 and 24 in order to issue the Verizon Telephone Companies Tariff FCC Nos. 1 and 11 to replace Bell Atlantic Tariff FCC Nos. 1 and 11. These became effective April 28, 2001. The tariff revisions filed under Bell Atlantic Transmittal Nos. 1373 and 1374 were moved into the Verizon tariffs without change. 2 Conversent Communications, Petition to Reject or, in the Alternative, Suspend and Require an Accounting of, the Proposed Revisions of Verizon to its Monthly DC Power Rates in FCC Tariff No. 11 (filed Apr. 17, 2001) (“ Conversent Petition”). 3 Sprint Corporation, Petition to Reject or Suspend and Investigate (filed Apr. 18, 2001) (“ Sprint Petition”). 4 Qwest Communications International, Inc. and Qwest Communications Corporation, Joint Petition for Suspension or Rejection of Revisions to Verizon Communications Tariff FCC Nos. 1 and 11 (filed Apr. 18, 2001) (“ Qwest Petition”). 5 WorldCom, Inc., WorldCom Petition to Suspend and Investigate (filed Apr. 18, 2001) (“ WorldCom Petition”). 6 AT& T Corp., Petition of AT& T Corp. (filed Apr. 18, 2001) (“ AT& T Petition”). 7 Association for Local Telecommunications Services, Allegiance Telecom, Inc., Choice One Communications, Inc., Covad Communications Company, Network Plus, Inc., Rhythms Links, Inc. and XO Communications, Inc., Petition to Reject or Suspend and Investigate Proposed Tariff Revisions (filed Apr. 18, 2001) (“ Joint CLEC Petition”). 8 Reply of Verizon to Petitions to Suspend and Investigate (filed Apr. 25, 2001) (“ Verizon Reply”). The Common Carrier Bureau grants Verizon’s Motion to Accept Late- Filed Reply (filed Apr. 24, 2001). Verizon also filed Transmittal No. 1375 on April 24, 2001, to remove certain penalty provisions that the petitioners have contested. Verizon notes that it may file the penalty provisions through a separate transmittal on a later date. 9 The Bell Atlantic Telephone Companies, Revisions for Tariff FCC Nos. 1 and 11; The Verizon Telephone Companies, Tariff FCC Nos. 1 and 11, Order, DA 01- 1077 (Com. Carr. Bur. rel. Apr. 25, 2001). 2 Federal Communications Commission DA 01- 1525 3 II. BACKGROUND 3. The historic dominance of incumbent local exchange carriers (“ ILECs”) and the ubiquity of their networks led the Commission, in a series of orders beginning in 1992, to order certain ILECs to file tariffs offering expanded interconnection services to competitive access providers (“ CAPs”), interexchange carriers (“ IXCs”), and end users. 10 Expanded interconnection allows parties to collocate network equipment dedicated to their use in the LECs’ central offices, thus providing them with direct access to bottleneck facilities and enabling them to compete on a facilities basis with LEC access services by interconnecting their circuits with those of a LEC at a LEC central office. 11 The Commission found that the availability of expanded interconnection at reasonable rates, terms, and conditions would result in numerous public interest benefits, including enhanced choices for telecommunications services, increased efficiency, technological innovation, and lower prices for interstate access services. 12 4. When Congress passed the Telecommunications Act of 1996 to promote the development of competition in all telecommunications markets, it too recognized the essential role of collocation in fostering facilities- based entry. Congress required incumbent LECs “to provide for physical collocation of equipment necessary for interconnection or access to unbundled network elements at the premises of the local exchange carrier.” 13 In the Local Competition Order, the Commission adopted the existing interstate expanded interconnection requirements, with some modifications, for collocation provided under section 251, 14 one difference being that section 251 does not require tariffing of collocation services. The existing tariffing requirements continue to apply, however, for interstate special access and switched transport expanded interconnection. 5. Expanded interconnection can promote competitive entry, however, only if it is offered at rates that reflect costs and under terms and conditions that are just and reasonable. Competitive providers 10 Expanded Interconnection with Local Telephone Company Facilities, First Report and Order, 7 FCC Rcd. 7369 (1992), vacated in part and remanded, Bell Atlantic Telephone Companies v. FCC, 24 F. 3d 1441 (1994) (“ Bell Atlantic v. FCC”); Expanded Interconnection with Local Telephone Company Facilities, Memorandum Opinion and Order, 8 FCC Rcd. 127 (1993), vacated in part and remanded, Bell Atlantic v. FCC; Expanded Interconnection with Local Telephone Company Facilities, Second Memorandum Opinion and Order on Reconsideration, 8 FCC Rcd. 7341 (1993); Expanded Interconnection with Local Telephone Company Facilities and Amendment of Part 36 of the Commission’s Rules and Establishment of a Joint Board, Second Report and Order and Third Notice of Proposed Rulemaking, 8 FCC Rcd. 7374 (1993), vacated in part and remanded, Bell Atlantic v. FCC; Expanded Interconnection with Local Telephone Company Facilities, Memorandum Opinion and Order, 9 FCC Rcd. 5154 (1994) (“ Virtual Collocation Order”), remanded for consideration of 1996 Act, Pacific Bell v. FCC, 81 F. 3d 1147 (1996) (collectively referred to as “Expanded Interconnection”). 11 Physical collocation allows an interconnector to locate its own transmission equipment in a segregated portion of the LEC central office. The interconnector pays the LEC for use of the central office space and may enter the space to install, maintain, and repair its equipment. Virtual collocation is a service that allows an interconnector to terminate its circuits in central office transmission equipment owned by the LEC and under the physical control of the LEC. The interconnector has the right to designate its choice of central office equipment, which is dedicated to the exclusive use of the interconnector, and is installed, maintained, and repaired by the LEC. 12 See Local Exchange Carriers’ Rates, Terms, and Conditions for Expanded Interconnection Through Physical Collocation for Special Access and Switched Transport, CC Docket No. 93- 162, Second Report and Order, 12 FCC Rcd. 18730, 18733 (1997) (“ Physical Collocation Tariff Investigation Order”). 13 47 U. S. C. § 251 (c)( 6). 14 See Implementation of the Local Competition Provisions in the Telecommunications Act of 1996, CC Docket No. 96- 98, First Report and Order, 11 FCC Rcd. 15499, 15787 (1996). 3 Federal Communications Commission DA 01- 1525 4 must buy collocation and all associated inputs, including power, from their ILEC competitors. We must ensure, therefore, that ILECs offer these services at just and reasonable rates so as not to raise their rivals’ costs. 6. Carriers employing either physical or virtual collocation arrangements require electrical power to operate their collocated telecommunications equipment. Verizon’s Transmittal Nos. 1373 and 1374 modify the rates and rate structure applicable to its provision of –48V DC (direct current) power. DC power provided by an ILEC to collocated competitors must be provisioned on an uninterrupted basis in order for the collocators to provide services comparable in quality to those offered by the ILEC. If the flow of commercial AC (alternating current) power is disrupted for any reason, the ILEC’s central office power serving arrangements, which ordinarily will include a back- up generator, batteries, rectifiers, and other equipment, 15 ensure a continuous flow of power to the collocators’ equipment. A collocator typically orders two power “feeds” to deliver power from the ILEC’s fuse panel to its collocated equipment. 16 One feed is the primary feed, or A- feed, and the other is a back- up feed, or B- feed, again ensuring a continuous power supply in the event that the flow on one feed is disrupted for some reason. 17 The feeds are connected to fuses on the fuse panel, and it appears to be standard industry practice to fuse the feeds somewhere between 125% and 250% of predicted peak load. 18 In the instant transmittals, Verizon proposes to change the basis for determining its monthly DC power rates from a “per- fused amp” basis to a “per- load amp” basis. Under the previous per- fused amp rates, a collocator’s power usage was assessed and billed based upon the total fused capacity of each power feed ordered by the collocator on its collocation application. 19 When power is charged on a per- load amp basis, however, a collocator’s power usage is assessed and billed on a per- load amp basis for the total number of amps ordered by the collocator on its collocation application for all feeds. 20 7. Verizon’s proposed monthly DC power rates, determined on a per- amp basis, are $25.32 per load amp in New York/ Connecticut, $16.61 per load amp in the rest of its New England region 15 See, e. g., Physical Collocation Tariff Investigation Order, 12 FCC Rcd. at 18791. 16 See, e. g., Conversent Petition at 8. 17 See, e. g., id.; see also Verizon Transmittal No. 1373; Tariff FCC No. 1, § 19. 3. 9 (A) and Tariff FCC No. 11, § 28. 2. 1( C). 18 See, e. g., Qwest Petition at 2 (standard industry practice for customer to order a fuse size up to 2.5 times the load amps ordered); id. at 5 (standard industry practice to fuse power cables for collocated equipment between 125% and 150% of predicted peak load); Verizon Transmittal No. 1373; Tariff FCC No. 1, § 19. 3. 9 (A) and Tariff FCC No. 11, § 28. 2. 1( C) (Verizon “will permit the Collocator to order a fuse size at up to 2. 5 times the load amps ordered”). This relationship between the load amps ordered and the fuse size is the “fusing factor.” 19 See Verizon Reply at 3. For instance, suppose that a given collocator requests two power feeds at 40 amps per feed in its collocation application. If we assume a fusing factor of 1. 5, which is the multiplier that converts the requested load amps per feed to fused feed capacity, the total number of amps billed monthly to the collocator would be: (2 feeds)*( 40 amps/ feed)*( 1.5 fusing factor) = 120 amps. 20 See Verizon Transmittal No. 1373; Tariff FCC No. 1, § 19. 3. 9 (A)( 1) and Tariff FCC No. 11, § 28. 2. 1 (C)( 1) (the collocator “will be charged on the basis of the total number of load amps ordered, . . . and not based on the total number of amps available for the fuse size ordered”). Again, assuming a request of two power feeds at 40 amps per feed, the total number of amps billed monthly to a collocator would be: (2 feeds)*( 40 amps/ feed) = 80 amps. 4 Federal Communications Commission DA 01- 1525 5 (“ Verizon New England”), and $20.23 per load amp in its southern region (“ Verizon South”). 21 Verizon does not propose to impose any non- recurring charges (NRCs) for DC power. 8. Verizon’s proposed monthly rates for DC power, determined on a per- load amp basis, reflect significant increases relative to its previous monthly rates per fused amp. Verizon’s previous monthly rates for DC power were $6.44 per fused amp in New York/ Connecticut, $4.88 per fused amp in Verizon New England, and approximately $8.72 per fused amp in Verizon South. As such, Verizon’s proposed monthly per- load amp rates represent increases of approximately 293%, 236%, and 132% relative to its monthly per- fused amp rates in New York/ Connecticut, Verizon New England, and Verizon South, respectively. 9. Verizon offers three primary reasons why its proposed monthly DC power rates are neither unreasonable nor anti- competitive, and should not therefore be subject to investigation. First, Verizon argues that it is not appropriate to compare monthly per- fused amp rate levels to monthly per-load amp rate levels because the latter rate structure reduces the total number of amps for which a given collocator will be billed on a monthly basis (all else equal). 22 Accordingly, because Verizon is entitled to recover the cost of providing power to collocators, its monthly per- amp rates will be higher than its monthly per- fused amp rates. Second, Verizon argues that the prices of inputs used to provide power to collocators have increased since the 1993 and 1996 cost studies that support the per- fused amp rates (e. g., inflation in power equipment prices). 23 Third, Verizon argues that the cost study used to determine its proposed rates (the “2000 study”) is a more accurate reflection of the actual costs incurred to provide DC power to collocators than its 1993 and 1996 cost studies. 24 For example, referring to the 1993 study and its former per- fused amp rates, Verizon states that “[ t] he rates that Verizon charges currently in its FCC tariffs are based on cost studies that are outdated, and that were done with very little experience providing power to expanded interconnection. Verizon’s inexperience in expanded interconnection 8 years ago resulted in studies that grossly underestimated the costs of providing collocation.” 25 10. Verizon’s methodology for determining its monthly recurring DC power rates in its 2000 study can be conceptualized as an “inverted cost pyramid.” At the base of this pyramid are the fundamental materials costs used to derive initial unit investment estimates. Verizon then applies a successive series of “cost factors” to these initial estimates, causing the base of the inverted cost pyramid to expand upward and outward. The rate at which the pyramid grows is largely determined by the levels of the various cost factors used in its methodology. The width of the “top” of the inverted cost pyramid determines Verizon’s proposed monthly DC power rates. 11. In light of this approach, the monthly DC power rates that Verizon charges to collocated competitors will be increased significantly (i. e., widening the top of the inverted cost pyramid) if: (1) the initial unit investment estimates derived from its materials, labor, and power plant data are too high; 21 The remaining states in Verizon New England are Massachusetts, Maine, New Hampshire, Rhode Island, and Vermont. Verizon South includes Washington, D. C., Delaware, Maryland, New Jersey, Pennsylvania, Virginia, and West Virginia. 22 Verizon Reply at 1- 2. 23 Id. at 5. 24 Id. Verizon has not submitted to the Commission the 2000 cost study to which it refers throughout its Reply. See, e. g., Verizon Reply at 5- 6, 10- 11. We direct Verizon to provide the study and all supporting data. See infra paragraph 23. 25 Id. at 4- 5 (emphasis added). 5 Federal Communications Commission DA 01- 1525 6 and/ or (2) any one of its cost factors is too high. 26 Of course, the potential impact of any such upward bias is greatly exacerbated if more than one of the cost factors is inappropriately large. 12. The specific steps comprising Verizon’s pricing methodology are as follows. Verizon first derives estimates of various state- specific “total DC power plant unit costs of investment.” 27 Verizon increases these unit investment estimates by application of an Engineered, Furnished and Installed (“ EF& I”) factor to derive an estimate of “total installed investment.” 28 Total installed investment is then inflated by Land and Building Factors. 29 The resulting state- specific investment estimate is then referred to as “total unit investment.” 30 13. The total unit investment estimates are then used to determine the state- specific annual direct cost of investment. Verizon disaggregates its total unit investment estimates into three distinct investment categories: land, building, and “switching” equipment. 31 Applied to each of these categories are six category- specific direct cost factors, otherwise known as Annual Cost Factors (“ ACFs”): (1) depreciation; (2) cost of money; (3) income tax; (4) maintenance; (5) administration; and (6) other tax. 32 Total annual direct costs, by state, are derived by multiplying all the ACFs by their respective category of investment, and then summing over all the categories. 33 Each state- specific annual direct cost 26 Verizon’s initial state- specific unit investment estimates are made with respect to: (1) the per- amp costs of individual power equipment items; and (2) the distribution of power plant types by state. Verizon’s subsequent application of the cost factors is made only at the unit investment level, not at the individual equipment or power plant level. See, e. g., Verizon Transmittal No. 1373; Workpaper 1.0, page 3, line 46; id. at page 2, lines 2- 10; id. at page 1, lines 2- 8. 27 See, e. g., Verizon Transmittal No. 1373; Workpaper 1. 0, page 3, line 46 (total unit investment in Washington, D. C.). 28 The EF& I factor generally reflects all costs associated with the provisioning of power arrangements to Verizon’s collocated competitors. 29 See, e. g., Verizon Transmittal No. 1373; Workpaper 1. 0, page 2, lines 6- 7 (land and building investment factors in Washington, D. C.). 30 See, e. g., Verizon Transmittal No. 1373; Workpaper 1. 0, page 2, line 10 (total unit investment in Washington, D. C.). 31 Note that the land and building components are identical to the total land and building expenses used to derive the total unit investment estimates. The “switching” investment is simply the difference between total unit investment and the sum of land and building investment, and is therefore identical to total installed investment. 32 See, e. g., Verizon Transmittal No. 1373; Workpaper 1. 0, page 1, lines 2- 7 (ACFs in Washington, D. C.). As a result, there are: (3 investment categories)*( 6 unique ACFs per category) = 18 unique ACFs for each state. 33 For example, the annual direct cost associated with the building investment category for a given state is: Building Direct Cost = (Building Investment)*( Building Depreciation ACF + Building Cost of Money ACF + Building Income Tax ACF + Building Other Tax ACF + Building Maintenance ACF + Building Administration ACF). A similar procedure is used to calculate the state- specific direct costs associated with the land (Land Direct Cost) and switching categories (Switching Direct Cost). Total annual direct costs, by state, are then calculated as: Annual Direct Cost = (Building Direct Cost) + (Land Direct Cost) + (Switching Direct Cost). 6 Federal Communications Commission DA 01- 1525 7 estimate is then weighted by the proportion of total access lines in the region that are located within each state. 34 14. Verizon’s region- specific monthly weighted direct cost estimate is calculated by summing over each state’s weighted annual direct cost estimate and dividing by 12. Verizon increases its region- specific monthly weighted direct cost estimate by multiplying it by a region- specific overhead loading factor. The specific overhead loading factors employed by Verizon in its 2000 study are 1.32 for New York/ Connecticut, 1.23 for states in Verizon South, and 1.0 for Verizon New England. The resulting region- specific calculations are referred to as the “monthly rates.” 15. Verizon appears to have conducted its 2000 study for each state and corresponding region with respect to: (1) power provision at less than or equal to 60 amps; and (2) power provision at greater than 60 amps. Verizon then assigned weights to the resulting rates to derive the single blended monthly recurring rates reflected in its tariffs. 35 16. Given the significant potential for Verizon’s methodology to yield inflated estimates of the actual monthly costs of providing DC power to collocated competitors and the apparently significant rate increases, we designate in this Order several issues for investigation. We also direct Verizon to conduct additional studies and file information as described below. III. ISSUES DESIGNATED FOR INVESTIGATION A. Input Prices 17. Historical Prices. Verizon cites inflation as one reason for its rate increases (i. e., increases in the cost of inputs used to produce power). 36 WorldCom claims, however, that Verizon’s revised rates indicate a quadrupling of direct costs that would amount to an equivalent annual inflation rate of almost 19 percent. 37 34 For example, in Verizon South, the weights used are: Proportion of Total Verizon South State Access Lines in State Washington, D. C. 0.03644 Delaware 0. 02566 Maryland 0.16245 New Jersey 0.29196 Pennslyvania 0. 29019 Virginia 0. 15549 West Virginia 0. 03782 TOTAL 1. 00000 35 Again, the tariffed monthly DC power rates are as follows: $25.32 per load amp in New York/ Connecticut, $16.61 per load amp in Verizon New England, and $20. 23 per load amp in Verizon South. See Verizon Transmittal No. 1373; Workpapers 1- 1, 1- 2, 2- 1. 36 Verizon Reply at 5. 37 WorldCom Petition at 3. WorldCom notes that the actual rate of inflation experienced by telecommunications firms is significantly lower. Id. The Joint CLECs cite to a recent Commission study that observed an increase in the gross domestic product chain- type price index (GDP- CPI) of 17 percent cumulatively since October 1992. Joint CLEC Petition at 5 (citing Annual Adjustment of Revenue Threshold, Public Notice, DA 01- 903 (Apr. 11, 2001). 7 Federal Communications Commission DA 01- 1525 8 18. To the extent that Verizon seeks to justify the reasonableness of its new rates on the basis of inflation, we direct Verizon to provide a time series for the period 1993 to 2000 of nominal annual material prices for the following power equipment items: (1) microprocessor plant (BUSS BAR); (2) rectifiers; (3) batteries; (4) automatic breakers; (5) power distribution cabinets; (6) emergency engines/ turbines; (7) battery distribution fuse bays; (8) plant distribution bays; and (9) any other plant associated with the provision of DC power, including jumpers, distribution cable, and any other bundled cable or connection equipment used in providing this service. 38 Verizon also must provide supporting billing and/ or vendor price data used in setting its annual equipment price estimates. 19. Verizon must calculate and present an annual chain- type power equipment price index derived from the price data of all equipment directly related to the provision of DC power. This shall include each individual power item referred to above, and any other plant used in establishing a typical power arrangement, including jumpers, distribution cable, and any other bundled cable or connection equipment used in providing this service. In addition, Verizon must fully document and justify its method of performing this calculation. This index shall be provided for the years 1993 through 1999. 20. Verizon also must compare the annual changes in the power equipment price index it constructs pursuant to paragraph 19, above, against the annual changes in the telecommunications equipment price indexes with respect to private fixed investment in equipment and software provided by the U. S. Bureau of Economic Analysis (BEA). 39 21. Current Prices. AT& T and the Joint CLECs criticize Verizon’s lack of supporting data to verify the costs it seeks to recover in its DC power rates. 40 We direct Verizon to provide a detailed description of the precise functionality of each general type of hardware and plug- in item used to calculate the total material investment estimate. 41 For example, without limitation, in Pennsylvania, one plug- in item is listed as “202T Modem.” Verizon sho