REPORT TO THE MICHIGAN GOVERNOR

AND LEGISLATURE

ON

PUBLIC ACT OF 1991 AS AMENDED

SECTION 353

REPORT ON LOCAL TELEPHONE INTERCONNECTION

February 1998

Submitted by

THE MICHIGAN PUBLIC SERVICE COMMISSION

Michigan Department of Consumer and Industry Services

In Compliance With

Public Act 179 of 1991 as Amended by

Public Act 216 of 1995

Introduction

Section 353 of Public Act 179 of 1991 as amended states:

"The [Michigan Public Service] commission shall issue a report and make recommendations to the legislature and the governor on or before January1, 1998 involving the issues, scope, terms, and conditions of interconnection of telecommunication providers with the basic local exchange service."

MCL 484.2353; MSA 22.1469(353).

Public Act 179 of 1991 as amended by Public Act 216 of 1995 (the "Michigan Telecommunications Act" or "The Act") focuses on the purposes of competition in the telecommunications industry, licensing competitive local exchange carriers (CLECs), dispute resolution, tariff design, price design and protection of special needs.

The onset of competition in the local telecommunications market required a quick means for merging telephone companies' equipment so that competitive local companies could reach the telephone user without the impractical and immensely expensive need for building redundant equipment networks. The most practical solution was to require the incumbent telephone companies to lease their networks in whole or in part to competitive companies. This solution requires interconnection of equipment by the parties. The definition of how that arrangement is designed and what services it includes is negotiated or arbitrated between the incumbent local exchange carriers (ILECs) and competitive local exchange carriers (CLECs). The agreements are called interconnection agreements. The Michigan Public Service Commission mediates, arbitrates and approves agreements made between ILECs and CLECs.

Michigan's Competitive History

Michigan introduced the concept of competition in the local telephone market several years before the federal government passed the Federal Telecommunications Act of 1996 (FTA). This process began with the implementation of The Act in 1992⁽¹⁾. Pursuant to The Act, the MPSC established standards regarding how a competitive local company⁽²⁾ would interact with the incumbent telephone company in the territory it planned to serve. Between 1992 and 1995, the MPSC continued to refine the process by establishing new procedures, some obviated by the dispute resolution process. There was a small measure of cooperation between the incumbents and competing companies in establishing methods to frame reciprocal compensation and equipment interconnection. The companies relied on tariffs or contracts as defined by state law and MPSC procedures. In November 1995, the state formalized the process with the enactment of Act 216, defining a future path for local telephone competition from Michigan's original beginnings in introducing competition for local telephone service.

A few months later, in February 1996, the FTA was passed, formalizing a different process for achieving interconnection which concentrated on agreements resulting from negotiation, mediation and arbitration. The interconnection requirements were similar to those developed by the state, but the process varied. The MPSC has redirected its operations to attempt to comply with both the federally defined process and existing state law.

Status of Interconnection

At the end of October 1997:

28 CLECs were licensed to provide basic local exchange service

11 CLECs had interconnection agreements

8 LECs had interconnection agreements and approved tariffs

1 Wireless Provider was actively competing in GTE territory (source: GTE)

5 ILECs were licensed to compete with each other

Status of Competition

Sec 101(2)(b) establishes that the purpose of The Act is to "Allow and encourage competition to determine the availability, prices, terms, and other conditions of providing telecommunication services." Further, Sec 101(2)(d) establishes that The Act should "Encourage the introduction of new services, the entry of new providers, the development of new technologies, and increase investment in the telecommunication infrastructure in this state through incentives to providers to offer the most efficient services and products."

As a gauge of the existence of a competitive market for a telecommunications market, Sec 208(3) of The Act identifies five criteria, three of which must be met for a service to be competitive. One criterion is "Competition and end-user usage has been demonstrated and measured by independent and reliable means."⁽³⁾

Neither The Act nor the FTA establishes any quantitative benchmark number of competitors or end-user usage to determine the competitiveness of the market. With this in mind, several statistics on local interconnection, and thus the state of local competition, may be noteworthy. In October 1997, Ameritech reported to the Securities and Exchange Commission that it had 5,300,000 access lines in Michigan.⁽⁴⁾ In Ameritech Michigan's service area there are approximately 200,000 (approximately 3.77% of total lines) access lines being operated by CLECs. Of that 200,000, roughly 20,000 utilize unbundled network elements purchased from Ameritech. The balance, approximately 180,000, are bundled services purchased by CLECs at wholesale and resold to end-users. Unbundled network elements are being purchased primarily in the Grand Rapids area with some concentration in the Flint and Detroit areas.

GTE and GTE Systems operate approximately 700,000 access lines in Michigan. There are no CLECs operating in GTE Michigan service areas.

Data Collection

In order to provide the best information available regarding the experience companies in Michigan have had obtaining interconnection, the Commission's Communications Division sent questionnaires to the participants of the process requesting information and comments. Following are the results of the inquiries.

The Communications Division sent questionnaires to Ameritech and GTE, the two major ILECs, requesting the following information:

1. The number of CLECs with whom they were interconnected.

2. The number of providers in Q.1. who provided basic local exchange service in their territory.

3. The number of providers in Q.1. with whom they interconnected pursuant to

a) negotiations, b) arbitrations, c) tariffs, and d) other.

• The number of providers with whom they are negotiating for interconnection.

5. The scope of interconnection between the ILEC and CLECs.

6. The scope, terms and conditions of interconnection which are relatively the same for most CLECs with whom they interconnect in Michigan. The same information for ILECs with whom they are interconnected.

7. The scope, terms and conditions of interconnection which vary for most CLECs with whom they interconnect in Michigan. The same for ILECs.

8. In which ways are the interconnection requirements of The Act and the FTA a) the same, and b) different.

9. The most problematic issues regarding interconnection between incumbent providers and the CLECs.

10. The recommendations they would make to facilitate interconnection between local exchange carriers in Michigan.

Another questionnaire was sent to each of the CLECs licensed to provide basic local exchange service and with an approved interconnection agreement asking:

1. How their interconnection agreement was accomplished, i.e., negotiated, arbitrated, purchased from tariffs, etc.

2. The scope, terms, and conditions of their agreement.

3. The most problematic issues regarding interconnection between incumbent providers and the CLECs.

4. What recommendations they would make to facilitate interconnection between local exchange carriers in Michigan.

Ten CLECs replied.

Three wireless companies of six responded to Staff's request for the following information. ⁽⁵⁾

• Terms and conditions of their interconnection agreement.
• What, in your opinion, has been the most problematic issues regarding interconnection between incumbent providers and the CLECs?
• What recommendations do you have that would facilitate interconnection between local exchange carriers in Michigan?

Competitive Company Comments

Interconnection agreements between CLECs and Ameritech were accomplished in a variety of ways. Five agreements were negotiated and five required arbitration.⁽⁶⁾ The remaining company was previously interconnected with Ameritech for extended area service.

The information that follows reflects the experiences CLECs had with Ameritech since there are no CLECs operating in GTE territories in Michigan. The agreements between Ameritech and CLECs are similar, defining the physical interconnection of the companies'

networks, leasing details of bundled or unbundled network elements (UNEs), the resale of Ameritech retail services and reciprocal compensation agreements. When asked to identify the most problematic issues they found regarding interconnection, each respondent mentioned several issues. It must be noted that these comments are those of the competitive companies and not necessarily the opinion of the PSC.

Below is a list of the issues and the number of CLECs which mentioned that particular issue (if more than one).

• •Problems with CLEC customers' data being available in the E911 data base (four companies).

• •Ameritech unilaterally withholding reciprocal compensation payments ⁽⁷⁾ (two companies, also two wireless companies).
• •Lack of nondiscriminatory access to Operational Support Systems (OSS) (two companies).
• •Ameritech has not met its guaranteed service interval installation guidelines for unbundled loops and number portability (two companies).
• •Missing commitment dates on service orders, causing customers to be frustrated with the CLEC (two companies).
• •Ameritech is providing inferior technical connections compared to those it utilizes itself (two companies).
• •Charges made to CLECs by incumbents for "escort fees"of $100 per hour for CLEC employees to reach their leased space in an Ameritech central office, rent for collocation facilities, ongoing fees for maintenance and training Ameritech's employees on CLEC equipment.
• •Failure to acknowledge rights-of-way needed to connect new CLEC customers. Fees of $1000 are imposed on CLECs each time they request hook ups for a new customer. The CLEC must guess at where Ameritech's right-of-way is because Ameritech does not have right-of-way maps and cannot identify paths, then another $1000 for another guess if Ameritech notifies the CLEC (after two weeks) that their previous guess was not correct. It then costs an additional charge for Ameritech to hire an outside contractor to physically investigate the possibility of additional equipment. One company was asked to pay $100,000 to fix a crushed conduit which prevented them from connecting to a customer.
• •Getting enough trunks to handle traffic.
• •Charging for number portability although no charges have been approved by the MPSC.
• •MPSC has no enforcement tools to implement favorable terms and conditions for local entry.
• •Ameritech's refusal to provide shared transport.
• •Ameritech processes its own orders in a shorter time than CLEC's orders.
• •Extra charges for construction that Ameritech does not charge its own customers.
• •Problems coordinating cut overs.
• •Failure to provide billing information to CLECs on a timely basis.
• •Multifaceted roadblocks thrown up to make the process as time consuming and expensive as possible, making a small company's chances of entering the market nearly impossible.

No CLEC reported the process of obtaining an interconnection agreement or physical interconnection went smoothly. Small companies expressed doubt in their ability to compete because of the uncertainties and difficulty of the process which they often saw as unnecessary and only a means for the ILECs to make competition impossible.

Recommendations offered by the CLECs for facilitating competition were varied. They felt that these ideas, if enacted, would encourage competition in the local telephone market more successfully than the uncertainties they face now. The following is a list of CLEC recommendations. These are CLEC recommendations and not necessarily those of the PSC. They include recommendations for both legislative and PSC action.

• •The MPSC should take more swift and positive action when contract violations occur (four companies).
• •Access to the ILECs Operational Support Systems to track orders, trouble tickets and overall performance of the CLECs' network (three companies).
• •Establish pricing guidelines that encourage the growth of CLECs (two companies).
• •Impose a 30-day comment period on changes in ILEC rate changes rather than the 24-hour file and use policy now in effect.
• •End the ability of Ameritech to unilaterally stop reciprocal compensation payments. It seriously damages revenue flows for the CLECs. A reasonable notice would allow the Commission to suspend the action if appropriate (three companies).
• •Work toward achieving the required FCC standards for OSS parity in both resale and unbundled network element contexts by establishing and implementing performance standards and measures (four companies).
• •A "fresh look" period for customers who signed long term contracts with ILECs before competition was available. The contracts are cost prohibitive to end early and many were written shortly before competition was introduced (two companies).
• •Allow the MPSC to impose financial penalties when Ameritech and GTE unilaterally act anticompetitively (three companies)
• •Establish an expedited dispute resolution mechanism (four companies).
• •Reform access service rates so that all universal service subsidies are made explicit and competitively neutral. Currently the rate payer is paying 400% of the cost, contributing heavily to Ameritech profits.
• •The Commission should explore other initiatives such as customer balloting and Ameritech structural wholesale/retail separation.
• •The Commission should initiate a generic proceeding to develop a standard interconnection agreement applicable to Ameritech. The agreement should establish terms, conditions and time frames, and significant penalties for Ameritech's noncompliance.

Wireless Company Comments

Wireless companies negotiate reciprocal compensation agreements with the incumbent companies. The scope, terms and conditions of reciprocal compensation agreements include rates for transport and termination of traffic originated on their respective networks and physical arrangement associated with exchange of traffic that is eligible for reciprocal compensation. Also included are the rates for elected services, multiparty traffic, and separate trunk groups. Wireless companies are not generally considered CLECs. They are not licensed in Michigan as providers of basic local exchange service.

The problematic issues the wireless companies found in negotiating and implementing interconnection agreements with the incumbent companies are included in the list below. These are the comments of the wireless companies and not necessarily those of the PSC.

• •Ameritech changes to its cellular tariff will require a reconfiguration of the network, increasing cellular company costs and the physical complexity of interconnection arrangements. This will cause a multimillion dollar rate increase for landline customers with no cost justification because land line customers calling cellular customers will be required to pay toll charges they did not pay under the previous tariffs. End file and use tariffs (three companies).
• •GTE has made no effort to implement the rates that the Commission approved in March 1997.
• •Ameritech has not supplied the reports, guaranteed in their contract, that are needed to bill for reciprocal compensation.
• •Changes to Ameritech's MPSC Tariff 20 changes will force reprogramming of all customers' phones, causing them to bring the phones into company offices, an unreasonable inconvenience.
• •Employee reductions by the ILECs in recent years has forced service levels for installation and repair to an all-time low.
• •Recent changes to tariffs removing reverse billing as a service offering is a clear contract violation.
• •Exclusion of Type 1⁽⁸⁾ interconnection from reciprocal compensation, causing the wireless telco to pay retail prices rather than cost-based prices (two companies).
• •Ameritech should be responsible for compensating companies behind Ameritech's tandem rather than having companies who have calls terminating from a CLEC through Ameritech to another company negotiate with that company (two companies).

Wireless companies offered the following recommendations for facilitating the process of implementing competition. There was quite a bit of similarity between the companies in their comments. These are recommendations of the wireless companies and do not necessarily reflect the views of the PSC. They include recommendations for both legislative and PSC action.

• •The MPSC should take more positive action when contract violations occur and have the authority to impose financial penalties. Bringing a complaint is difficult financially as the large companies have more resources to litigate (two companies).

• •Access to the LEC's Operational Support Systems (OSS) so CLECs can track status of orders, trouble tickets, and overall performance of the network.

• •Establish price guidelines that encourage the growth of CLECs.
• •Change to delayed tariff implementation from the 24 hour file and use. A reasonable time for comments (e.g., 30 days) is more appropriate (two companies).
• •Ameritech should recognize all forms of interconnection and make the charges cost-based (two companies).
• •Ameritech should compensate all companies with which it interconnects, not expect companies to negotiate with each other for traffic that goes through Ameritech to another company (two companies).

Incumbent Comments

Comments from the two incumbents which represent connections to most of Michigan's telephone customers are reported below. GTE is interconnected with one wireless company, which is the only company that might be considered competing with GTE in its territory. The details of this interconnection were negotiated by the two companies. GTE is negotiating with 16 wireline and four wireless companies. The scope of their agreement with CLECs is for physical interconnection and the rates for reciprocal termination of local/Extended Area Service, intraLATA toll and jointly provided IntraExchange Carrier traffic. GTE identified pricing as the most problematic issue in interconnection, and fair pricing resolution is the one item which would facilitate interconnection. None of the GTE interconnection agreements approved by the Commission has been signed by the parties.

Ameritech reported that 14 companies are actively competing with it in its territory. It has ongoing negotiations with six companies for interconnection. The only ILEC that Ameritech has an agreement with is GTE, but Ameritech expects to have arrangements with all ILECs at some time.

Ameritech's comments in some situations conflict with those of the CLECs. Ameritech responded that it makes available to telecommunications carriers in Michigan each of the interconnection services, unbundled network elements and resold services in the competitive checklist in Section 271(c)(2)(B) of the FTA⁽⁹⁾. Ameritech states that most of the problems regarding interconnection have been resolved, agreement problems as well as operational problems. Although few of the problems have required the use of a dispute resolution process, the existence of the Commission's authority to resolve disagreements between providers has provided effective encouragement to carriers to resolve problems in a cooperative fashion. Ameritech offers as proof of the effectiveness of interconnection in Michigan:

• •The operational success of facilities-based providers such as Brooks Fiber, TCG, and MFS.
• •The extensive resale operations of AT&T, USN, and others.
• •The fact that competitors currently have resold lines or unbundled loops in all 348 wire centers that Ameritech Michigan serves in Michigan.
• •Market share loss annualized at 6.5%.
• •Each Ameritech customer has tariffed options for basic local exchange service today (although CLECs are concentrating on high volume and business customers).

Problematic operational issues between Ameritech and the CLECs from Ameritech's point of view are listed below. These are Ameritech's views and do not necessarily reflect the views of the PSC.

• •Requests for NPA/NXX codes for new networks before the networks are planned or implemented offer no way of testing for accuracy or level of completeness.
• •When the networks mentioned above are complete, some carriers do not perform the required translations on their switches to allow testing.
• •Telecommunication carriers' forecasts have caused blocked calls, exhaust of facilities, and exhaust of switch ports in end offices and tandems. Some carriers have sold services and activated them within their own switch knowing that the Ameritech originated call would not complete or be blocked.
• •Ameritech has had continuing difficulty obtaining data to update the 911 database.
• •Carriers making interim routing translations, facilities, or implementation of partial networks have caused serious service issues and a high degree of confusion between companies.
• •The claim of some companies that they are small providers so they do not have to compete fairly in some of their charges.

Ameritech offered some recommendations which the company felt would facilitate local telephone competition. These recommendations are those of Ameritech and are not necessarily those of the PSC.

• •Commission understanding that Ameritech has taken all of the necessary steps to encourage competition in the local market and should be supported in its filing to enter the in-region interLATA market.
• •The Commission should not allow itself to be influenced by stories of isolated incidents, alleged problems meant to delay Ameritech's entry into the in-region interLATA market.
• •The Commission should establish just and reasonable costing methodologies and pricing standards.
• •The Commission should build on the success to date and not disrupt what has already developed. Commission assistance should be available for dispute resolution, but reliance on cooperation between providers should be encouraged.
• •All providers should be obligated to play by the same rules.

The information above shows that CLECs and ILECs have greatly conflicting views on the status of cooperative interconnection of local exchange service providers in Michigan. The transition to sharing the telephone network in place and developing facilities-based competitive alternatives appears to be under way, but the smoothness or ease of entry appears to be suspect.

Conclusions

Based on the Commission's experience in processing cases before it, the Commission's activities related to implementing the interconnection features of The Act and the FTA, and responses to the Staff request for comments, the Commission concludes the following:

• •At this time, absent some form of oversight, the telecommunications market and the current and prospective participants in that market do not and cannot satisfy the Section 101(2)(b) mandate of The Act that competition be allowed to determine the availability, price, terms and other conditions of providing telecommunications services.
• •The price of telecommunications services has not yet, as had been hoped, declined.

• •At this time, the participants in the telecommunications market appear to be relying more on the regulatory and judicial process than market forces to determine the availability, prices, terms and other conditions of telecommunications services. In other words, the marketplace for local telecommunication services in Michigan is dominated by Ameritech Michigan and GTE and a truly open marketplace remains a goal, not a reality.

• •The comments received from most providers in response to Staff's survey are primarily extensions of previous, current and potential matters before the Commission, the FCC, state courts and federal courts.

Recommendations

The Commission believes the current regulatory process, while quite streamlined and refocused from traditional economic regulation, does not permit the Commission to respond in a timely manner to disputes related to interconnection matters.

• •The Commission suggests all interconnection disputes should move directly to a mediation process similar to the process in Section 203(a).
• •The Commission also suggests it should be vested with the power to immediately restrain behavior which has the possibility of being found inconsistent with the Michigan law related to interconnection. This authority could be embodied in concepts similar to temporary restraining orders, bonded rates, delayed implementation and other approaches of a similar nature determined by the Commission to be necessary with respect to the specific issues involved. These approaches could be permitted to become effective following the period prior to compulsory mediation and remain in effect until the Commission removes them by interim or final order pursuant to the procedures established in Sec 203 and 203a.
• •Finally, because The Act and the FTA both strive for the same goal--a competitive marketplace, the Commission suggests that it should be given specific authority to implement the FTA when that implementation leads to a competitive market in Michigan.

1. The Act became effective January 1, 1992.

2. Brooks Fiber Communications, then City Signal in case U-10555 dated October 12, 1994 and U-10647 order dated February 23, 1995.

3. Sec 208(3)(c)

4. MBT Form 10Q (9 months ended 9/10/97).

5. Of the companies that responded, two had substantive comments. The other company said that they had not been involved in the negotiation process long enough to provide significant information.

6. Not all of these companies have approved tariffs.

7. See January 28, 1998 order in cases numbered U-11178, U-11502, U-11522, and

U-11553.

8. Service which provides a trunk side connection with a line side treatment between a cellular provider's mobile switching center and an Ameritech end office.

9. The Commission's June 9,1997 consultation with the FCC found Ameritech complied with 11 of the 14 checklist items. The FCC agreed in its order rejecting Ameritech's application.

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