commenting on FCC's proposal, noted that, as outlined, it could lead to a dramatic increase in access charges for private line and MTS/WATS-like services, which would in turn, narrow opportunities for market entry because of increased capital requirements and lower return on investment. The National Association of Regulatory Utility Commissioners also expressed reservations on the effects of FCC's proposal--noting the uncertainties which exist in determining the local exchange cost assignments which should be made to interstate services and the need to ensure fair treatment of all carriers so as to preserve the "continued viability of our nationwide communications network."

FCC's proposal to establish an industrywide pooling

arrangement has also led to concerns that such an arrangement may facilitate the opportunities for the exercise of anticompetitive behavior by dominant carriers and promote inefficiency and distort entry conditions at the local exchange. In this regard, particular concern exists that the pooling arrangement proposed by FCC would place the dominant interstate carrier on the inside, as pool administrator, and leave competitors on the outside. Along these lines, the National Telecommunications and Information Administration also expressed concern that the pooling arrangement would expand and institutionalize features of the existing settlements process which are least compatible with the development of a freer, more competitive telecommunications market. In addition, as FCC has recognized, the use of a pooling arrangement using average nationwide access charges would tend to promote economic inefficiency since access charges would be overpriced in low-cost areas and underpriced in high-cost areas. This could in turn, insulate local exchange carriers with high costs from competition.

We also have reservations concerning FCC's reliance on the use of negotiations as a means to resolve existing access arrangements problems--as is proposed in its Third Supplemental notice. In general, FCC's approach appears to be based on two primary reasons. First, it believes that flexible access charges arrangements are needed, which can be revised as conditions change. Thus, it declines to prescribe any single access charges arrangement which might create "a regulatory straightjacket." Secondly, the Commission expressed hope that the ENFIA II negotiations will resume, in spite of their past failure to produce an agreement.

We fully endorse the Commission's desire for the development of flexible access arrangements. The development of a complete "menu" of local access arrangements at compensatory prices from which interexchange carriers can choose and which can be modified as conditions change, is likely to produce the optimum benefit both to communications suppliers and consumers. While the involvement of communications firms in the formulation of such arrangements will undoubtedly be needed, given the importance of this task, we question whether negotiations should be relied on to produce such a result. At best, it appears the ENFIA negotiations will produce a new interim solution which will still leave access questions unresolved.

In this regard, we believe the biggest problem with FCC's present proposals is that they do not provide a comprehensive framework from which all of the basic access questions can be addressed and long-term solutions developed. For example, they do not directly deal with the issue of what changes in industry structure and intercompany arrangements may be needed to ensure nondiscriminatory access; they do not--and presumably cannot-deal with access for intrastate toll services; and they do not directly address the issue of what continuing Commission involvement is needed to ensure the maintenance of nondiscriminatory access conditions and the rapid resolution of access-related problems.

To resolve all of the basic access questions, we believe legislation is needed.

LEGISLATIVE CHANGE REPRESENTS THE
MOST COMPREHENSIVE APPROACH FOR
ADDRESSING ACCESS QUESTIONS

During the past decade FCC has taken actions, and is presently proposing further actions, to address problems relating to both access arrangements and access charges. However, FCC's proposals as it has recognized do not and, in some respects, cannot address in a comprehensive manner all access-related questions.

To develop a comprehensive system for ensuring equivalency of access to local exchange facilities by all interexchange carriers, we believe that the Communications Act of 1934 needs to set forth the basic framework to ensure the existence of fair, nondiscriminatory access arrangements and charges. Important elements to be considered in establishing this framework include the following:

--FCC has regulatory authority over all interexchange
facilities and services whether or not they cross State
boundaries,

--All carriers who control local exchange facilities offer access to all interexchange carriers or other customers on a fair, nondiscriminatory basis. To ensure this, rates, terms, and conditions relating to the offering of local exchange access services would be filed under tariff and mechanisms created which would allow FCC to promote compliance.

--Procedures are established which can be used to provide, on an interim basis, funds obtained from interexchange service revenues which would offset drastic increases in local exchange costs which may occur during the development of an access charges system.

--A Federal-State joint board created to assist FCC in
determining the appropriate costs for access services
and carrying out other tasks attendant to the development
of an access system.

Basic actions and conditions needed to ensure fair, nondiscriminatory access

As long as the present situation exists under which interexchange services are divided between FCC regulated interstate and State regulated intrastate services, the formulation of a fully workable access charges system will be made difficult--since determinations of access charges may differ from jurisdiction to jurisdiction. Placing the development of access charges for all interexchange services under FCC's jurisdiction will consolidate within one agency responsibility for the development and maintenance of a system which can ensure nondiscriminatory access for all interexchange services. States would retain jurisdiction over local service, except for those facilities and service offerings used primarily for the origination and termination of interexchange traffic.

Legislatively requiring that access be offered under tariff and empowering FCC with additional regulatory tools to promote compliance could assure that all local exchange carriers offer a full array of access services to all interexchange carriers and other customers on a fair, non-discriminatory basis. Such an approach would, in our view, open access arrangements to greater public scrutiny and help alleviate concerns regarding competitive fairness which exist under separations and settlements procedures. These tariffs should set forth access terms, conditions and rates, that apply to all carriers and all service offerings, including those cases in which a carrier offering interexchange services obtains access through an affiliated local exchange company.

Because the filing of access tariffs by each of the approximately 1,500 telephone companies in the United States would place a substantial burden on FCC, we believe that several actions can be taken. FCC needs to be given authority to delegate responsibility to State public utility commissions for the approval of tariffs submitted by small telephone companies, under rules and guidelines which it promulgates. Further, carriers need to be allowed to file tariffs using average schedules or to participate in voluntary pooling arrangements under rules developed by FCC, to the extent that such actions are consistent with the development and preservation of fair, nondiscriminatory access conditions.

Beyond a tariff provision, additional tools could also increase FCC's ability to promote compliance with the nondiscriminatory access requirement. One such tool would involve authorizing FCC to adjust access fees so as to provide incentives for local exchange carriers to provide nondiscriminatory interconnection.

Procedures are also needed which can be used to offset, on an interim basis, any drastic increases in local exchange costs which may result from the implementation of an access charge

system. 1/ During recent years the relative amount of local exchange costs assigned to interstate services has gradually increased, giving rise to the notion that rates for such services subsidize intrastate rates, and in particular local exchange rates. The existence and magnitude of any such subsidy, however, is unclear. In this regard, some parties have argued that while the interstate cost burden has increased, no subsidy exists since much of the local exchange plant was designed exclusively for the provision of long distance services. A detailed cost study will apparently be needed to determine what local exchange costs interexchange services should ultimately bear and whether any subsidy presently exists.

Ultimately, we believe that the access charges for interexchange services need to be strictly based on cost. However, if it is determined that the cost burden presently placed on such services through the separations process exceeds the "proper" cost assignment and a shift to a cost-based assignment would result in a substantial increase in local rates, it may be necessary to continue some subsidization of local services on an interim basis. Thus, procedures should be established which can ensure the equitable provision of such a subsidy, if it is found to be necessary. One possible mechanism for providing this subsidy would be the creation of a pool which would be used to collect a surcharge applied on a nondiscriminatory basis to interexchange access charges. These surcharges would then be redistributed to certain local exchange carriers on the basis of need. The amounts of such surcharges should be determined by FCC. In addition, payments to local carriers from the pool should only be made under congressionally mandated guidelines and on approval by FCC of applications from carriers which clearly indicate the need for and uses to be made of such funds. In general, we believe that such subsidies should be directed primarily at small local exchange carriers who are least likely to be able to adjust to increased cost burdens without significantly raising local rates.

We believe that a legislatively established FCC-State joint board will also facilitate the development of a comprehensive access system by providing State public utility commissions a voice in determining the outcome of decisions which will affect services subject to their regulatory jurisdiction. jurisdiction. In this regard, the Joint Board needs to be involved in determining local exchange boundaries, apportioning local exchange costs between exchange and interexchange operations, making changes in separations and settlements procedures to the extent necessary to facilitate transition to an access charges system, and establishing and overseeing

1/As noted on page 172, the access charges proposal set forth by FCC in the second supplemental notice of the MTS/WATS inquiry would continue to be based on existing separations and settlements procedures and, thus, should in and of itself, have no direct effect on local exchange rates.

the management of the subsidy mechanism. We believe, however, that FCC needs to have the ultimate responsibility for approving the assignment of costs to interexchange services, establishing schedules of access surcharges, approving applications for subsidy payments and taking actions to ensure the existence of nondiscriminatory access arrangements.

Steps needed during transition to a comprehensive access system

As is clear from the magnitude and complexity of the tasks we have described, the transition to a fully workable comprehensive system for interexchange access to local exchange facilities is likely to be long and arduous. While no precise estimate of the time frame during which such a system could be established exists, a minimum of several years would not be surprising. In the interim, we believe that establishing procedures which would replace the existing compensation arrangements with a unified, tariff based system may be beneficial. However, such a system should be established in accordance with the criteria we noted on page 177.

To better determine the need for and desirability of establishing some interim solution before a long term access system is established, we believe, however, that more information is needed. Thus, we believe that following the enactment of legislation, the Congress needs to require within a short timeframe (6 months would seem reasonable) FCC, in consultation with the joint board to develop a plan which will set forth the steps needed to develop a fully workable access system and specify the timeframes needed for its implementation. In light of this plan, FCC should be in a better position to determine whether interim action is needed and how any such action proposed will facilitate or hinder the development of a long-term access system.

The tasks which must be undertaken to develop a workable access system are also likely to be resource intensive. For example, FCC and the Joint Board will be responsible for, among other things, redefining jurisdictional boundaries, determining cost assignments, processing access tariffs, administering subsidy procedures, if necessary, and taking action to detect and prevent the recurrence of access discrimination. Once a workable access system is fully developed and in place, the need for regulatory involvement will undoubtedly decline. However, during transition, we believe that it is important that adequate resources be assigned to carry out the tasks needed to develop a comprehensive access system and thereby facilitate the establishment of a fully competitive environment.

CONCLUSIONS

Since competition was first allowed in interstate telecommunications services, a decade ago, FCC has set forth the requirement that all carriers offering authorized interstate