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Attorneys for Level 3 Communications, LLC ORIGINAL
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
IN THE MA TIER OF LEVEL 3
COMMUNICATIONS, LLC'S PETITION FOR
ARBITRATION PURSUANT TO SECTION
252(B) OF THE COMMUNICATIONS ACT
OF 1934, AS AMENDED BY THE
TELECOMMUNICATIONS ACT OF 1996
AND THE APPLICABLE STATE LAWS FOR
RATE, TERMS, AND CONDITIONS OF
INTER CO NNECTI 0 N WITH QWEST
CORPORATION
Case No. QWE-- T --05--11
BEFORE THE IDAHO UTILITIES COMMISSION
DIRECT TESTIMONY OF TIMOTHY J GATES
TABLE OF CONTENTS
INTRODUCTION .................................................................................................................................................
Summary of Recommendations ...........................................................................................................
Issue 1: Interconnection Architecture. .............................. ............. ................. ....... .................... ....... 8
Issue 2: Separate T runking................................................................................................................. 23
Issue 3: VNXX, ISP~Bound Traffic and RUF................................................................................. 28
VNXX for ISp.. Bound Traffic.........
................ .............. ...................
..................................... 29
Relative Use Factor.........
.......... .......... ................. ................... .....................
"""""""'" """"" 41
Issue 4: V oIP ........................................................................................................................................... 46
INTRODUCTION
PLEASE STATE YOUR NAME, OCCUPATION AND BUSINESS
ADDRESS.
My name is Timothy J Gates. My business address is QSI Consulting, 819
Huntington Drive, Highlands Ranch, Colorado 80126.
WHAT IS QSI CONSULTING, INC. AND WHAT IS YOUR POSITION
WITH THE FIRM?
QSI Consulting, Inc. ("QSI") is a consulting firm specializing in traditional
and non~traditional utility industries, econometric analysis and computer
aided modeling. I currently serve as Senior Vice President.
PLEASE DESCRIBE YOUR EDUCATIONAL BACKGROUND AND
WORK EXPERIENCE.
I received a Bachelor of Science degree from Oregon State University and a
Master of Management degree in Finance and Quantitative Methods from
Willamette University s Atkinson Graduate School of Management. Since I
received my Masters, I have taken additional graduate--level courses in
statistics and econometrics. I have also attended numerous courses and
seminars specific to the telecommunications industry, including both the
NAR U C Annual and NAR U C Advanced Regulatory Studies Programs.
Prior to joining QSI, I was a Senior Executive Staff Member at MCI. I was
employed by MCI and/or MCIIWorldCom for 15 years in various public
policy positions. While at MCI I managed various functions, including
tariffing, economic and financial analysis, competitive analysis, witness
training and MCI's use of external consultants. Prior to joining MCI, I was
employed as a Telephone Rate Analyst in the Engineering Division at the
Texas Public Utility Commission and earlier as an Economic Analyst at the
Oregon Public Utility Commission. I also worked at the Bonneville Power
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Level 3 Communications, LLC
Administration (United States Department of Energy) as a Financial Analyst
doing total electric use forecasts while I attended graduate school. Prior to
doing my graduate work, I worked for ten years as a reforestation forester in
the Pacific Northwest for multinational and government organizations.
Exhibit 101, attached hereto to this testimony, is a summary of my work
experience and education.
HAVE YOU EVER TESTIFIED BEFORE THIS COMMISSION?
Yes. I have submitted testimony or comments in no less than four (4)
docketed proceedings before the Commission in the last eighteen (18) years
most of which pertain to opening Idaho telecommunications markets to
competition. I have also testified more than 200 times in 43 other states and
filed comments with the FCC on various public policy issues ranging from
costing, pricing, local entry and universal service to strategic planning, merger
and network issues. As noted above, a list of proceedings in which I have
filed testimony or provided comments is attached hereto as Exhibit 101.
ON WHOSE BEHALF WAS THIS TESTIMONY PREPARED?
This testimony was prepared on behalf of Level 3 Communications, LLC.
Level 3"), a certificated competitive local exchange carrier ("CLEC") in
Idaho.
WHAT IS THE PURPOSE OF YOUR TESTIMONY?
The purpose of my testimony is to address certain issues identified in the
Level 3 Petition for Arbitration ("Petition l Specifically, I will address:
Issue 1: Interconnection Architecture; Issue 2: Separate Trunk Groups; Issue
3: Internet Service Provider ("ISP") Bound Traffic, Relative Use Formula
See, Petition of Level 3 Communications LLC for Arbitration of an Interconnection
Agreement with Qwest Corporation, pursuant to Section 252(B) of the Telecommunications Act of
1996; filed on May 13, 2005 ("Petition
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Level 3 Communications, LLC
RUF"), and Virtual NXX ("VNXX"); and Issue 4: Voice Over Internet
Protocol ("VoIP"
).
Some of these disputes are primarily engineering issues
but I will be addressing them from an economic perspective.
HOW IS YOUR TESTIMONY ORGANIZED?
My testimony is organized by issue. The various discussions of the Tier
issues can be found on the following pages:
Issue 1 Interconnection Architecture ....................... Page 9
Issue 2 Separate Trunk Groups ...............................Page 25
Issue 3 ISP--Bound Traffic, VNXX and RUF .........Page 31
Issue 4 VoIP ................................................................... Page
WHAT KEY ECONOMIC PRINCIPLES APPLY TO THE ISSUES IN
THIS ARBITRATION?
All of my recommendations in this matter are based on a few simple but
important economic principles:
First neither party to an interconnection agreement should be
able to impose unnecessary costs on the other. Obviously the process of
interconnection itself entails certain costs, some of which fairly and properly
fall on each party. But neither party should be able to insist on
interconnection arrangements that are costly to the other party for no good
reason. As a society, we want interconnection arrangements to be as efficient
as possible; requiring needless expense is inconsistent with that goal.
Second, interconnection arrangements should reflect the most
efficient technical means for handling any particular situation, even if that
that is not the technical arrangement currently in place for one of the parties.
If a party can prevent an efficient arrangement simply because that party has
not taken the time or effort to become efficient itself, the interconnection
agreement will, in this respect, become a government~sanctioned transfer of
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Level 3 Communications, LLC
wealth from the more efficient party to the less efficient party. A similar
transfer of wealth will occur if the incumbent is allowed to force inefficiencies
on the party with which it interconnects. Such inefficiencies do not make any
economic sense and are not in the public interest.
Third, it needs to be very clear that the incumbent s way of
doing things is not necessarily the most efficient way of doing things. From
an economic perspective the purpose of the 1996 Act is to enable and facilitate
competition in traditionally monopolized telecommunications markets by
removing economic and operational impediments? Further, with the rapid
pace of technological advances in transport and switching technologies, no
rational provider would adopt the traditional technologies and methods of
operation of the incumbent. Facilitating and enabling competition, therefore
necessarily requires analyzing interconnection and intercarrier compensation
issues from a forward~ looking perspective in which the technology that is
most efficient from a long--run economic cost perspective that may not
include the technology currently in use by the incumbent. It follows that
because the incumbent does it that way" is not only not a good argument in
favor of a particular resolution of an issue in many cases it might be a good
reason to reach the opposite conclusion.
Fourth and finally, a recognition of the critical role that
technological advance has played in contributing to economic welfare in the
field of telecommunications justifies a preference for the result that favors
and enables, new technology. There is no dispute that communications
technology is a decreasing cost industry. From an economic perspective
In the Matter of Implementation of the Local Competition Provisions in the
Telecommunications Act of 1996; FIRST REPORT AND ORDER; CC Docket No. 96~98; Released
August 8, 1996; at 93. Hereinafter referred to as the FCC'Local Competition Order.
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Level 3 Communications, LLC
anyone who has a large sunk investment in a particular technical approach
will rationally do whatever he can to prevent new technologies from making
his technology obsolete. But this private interest in protecting existing
investment from the forces of competition is directly contrary to the public
interest in innovation and the deployment of new, more efficient
technologies. From an economic perspective it is not only appropriate but
necessary for decisions regarding interconnection disputes to take this factor
into account.
Summary of Recommendations
WITH THOSE PRINCIPLES IN MIND, PLEASE SUMMARIZE YOUR
RECOMMENDATIONS ON THE KEY ISSUES SEP ARA TING QWEST
AND LEVEL 3 IN THIS ARBITRATION.
Issue 1 relates to interconnection architecture. Level 3 wants the agreement
to clearly state that it is entitled to interconnect with Qwest at a single point
of interconnection ("POI") in each LATA; to state that all types of traffic will
be exchanged by means of that physical POI; and that each party will bear the
costs of its facilities and arrangements on its side of the POI, including all
costs of getting its own traffic to the POI. This is the correct result from an
economic viewpoint.
Qwest's network architecture reflects a mix of technology and
economic decisions that Qwest has made over many decades. That
architecture does not remotely reflect what an efficient firm would construct
today. It follows that Qwest should not be able to force Level 3 to spend
money to duplicate or mirror Qwest s architecture - which is essentially
what a multiple-- POI requirement does. Rather, each carrier should be
responsible for its own network, with the hand--off of traffic between the
networks occurring at a single, efficient point. Of course, this does not
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Level 3 Communications, LLC
preclude the parties from voluntarily agreeing to establish whatever
additional POls they may choose in particular cases. It does, however
prevent Qwest from imposing transport and other responsibilities onto Level
3 that arise from Qwest's legacy network architecture.
Issue 2 relates to the use of trunk groups that carry different "types" of
traffic on a combined basis to and from the POI. Level 3 wants all traffic
exchanged between Qwest and Level 3 switches within a LATA to be carried
on a single trunk group between its network and the POI. Qwest wants Level
3 to separate the traffic and route it over different trunk groups based on
whether the traffic falls into arbitrary categories. There is no sound economic
basis for Qwest s proposal. As Mr. Ducloo testifies, from a technical
perspective, taking a large volume of traffic and breaking it up into a set of
smaller trunk groups degrades trunking efficiency, so that a higher total
number of trunks - and therefore trunk ports on switches is needed. In
economic terms, this results in a pure deadweight loss - c. costs are imposed
with no corresponding economic or societal benefit.
Qwest says that it needs traffic on separate trunk groups in order to properly
apply different billing rates to the different types of traffic, but that is simply
not true. All that is required is to measure the total volume of traffic on a
trunk group, and then apply factors (based on a periodic analysis of the
traffic) indicating what proportion of the traffic is subject to reciprocal
compensation, what proportion is subject to access charges, etc. These
jurisdictional factors have been used for decades.
Issue 3 relates generally to whether ISP--bound traffic should be
subject to the FCC--mandated rate of $0.0007 per minute even when the ISP'
equipment is not in the Qwest~determined originating local calling area of the
end user dialing up the ISP. Level 3 maintains that this low rate should apply
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Level 3 Communications, LLC
because the FCC has preempted the states as to intercarrier compensation for
this traffic; Qwest apparently takes the view that if the ISP's equipment is not
in the originating local calling area, not only should Qwest not pay Level 3 the
$0.0007, but Level 3 should actually pay Qwest originating access charges.
Qwest also wants to impose its own network costs on Level 3. Qwest
position is simply wrong. When Qwest delivers an ISP~bound call originated
by its customer to Level3's POI for termination, Qwest s costs are not
affected in the slightest by the location of the ISP's equipment. Moreover
Qwest's position would impose a penalty on Level 3 for working with ISP
customers to efficiently configure their equipment in a manner to minimize
both their and Level3's costs, or, put another way, would create an incentive
on Level 3 and its ISP customers to configure their equipment inefficiently
simply in order to avoid regulatorily~imposed payments to Qwest. From an
economic perspective, Qwest's position is totally irrational and
discriminatory and should be rejected.
Issue 4 relates to the application of the $0.0007 rate to IP--enabled
voice traffic, generally referred to as Voice over Internet Protocol or "V oIP", as
well as purely "ISP--bound" traffic. This type of traffic should not be burdened
with "access charges." Further, there is no technical or economic reason to
treat VoIP differently from other ISP~bound traffic. Qwest wants to either
exclude this type of traffic entirely from interconnection or impose special
higher charges for terminating that traffic. Here again, Qwest's position
makes no economic sense. Qwest does not incur any costs for terminating
this VoIP traffic that differ from its costs in terminating traffic that Qwest
would acknowledge is subject to the lower rate. From an economic
viewpoint, it appears that Qwest is trying to ensure that growth of this new
technology is inhibited by means of making it more costly than necessary to
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actually complete such calls. This is contrary to the public interest and to the
efficient development and operation of the market. Unless there is some
compelling legal or policy reason that requires the application of higher
charges to this traffic and I am certainly not aware of any it makes sense
to have the lower rate apply. I discuss each of these issues in more detail
below.
Finally, I note that Issue 5 in this matter is largely "legal" in nature, relating to
the incorporation of certain terms by reference into the parties
interconnection agreement. I do not address that issue in this direct
testimony.
Issue 1 Interconnection Architecture.
PLEASE SUMMARIZE THE POSITIONS OF LEVEL 3 AND QWEST
WITH REGARD TO INTERCONNECTION ARCHITECTURE.
Level 3 wants to exercise its right to establish a single POI for each LATA for
the exchange of all types of traffic with Qwest, with each party responsible
for the facilities on its side of the POI.3 Moreover, the only charges from one
party to the other for terminating traffic delivered to the POI would be the
applicable per~minute charges (reciprocal compensation or access). Qwest
seeks to require the establishment of multiple POls in some circumstances
and to improperly impose onto Level 3 the cost of establishing and
maintaining trunking arrangements put in place for Qwest's own
convenIence.
As will be discussed later in this testimony, a POI is the point at which two networks
interconnect for the exchange of traffic.
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Level 3 Communications, LLC
PLEASE PROVIDE A GENERAL OVERVIEW OF THE ECONOMIC
RATIONALE FOR INTERCONNECTION PURSUANT TO THE ACT.
Interconnection of networks is essential for the provision of
telecommunications services. If two networks are not interconnected, their
subscribers cannot call each other, which reduces the value of both networks.
However, the economic effect of denial of interconnection is not the same for
each network. If a large network denies interconnection to a smaller one, the
impact on the large network may well be very small (since few of its
customers will want or need to contact customers of the other network),
while the denial of interconnection will be devastating to the smaller
network, since its few subscribers would not be able to call anyone other
than others on the same network. Where the dominant network became
dominant as a result of government policy (as is the case with the ILECs), it
would be wrong to ignore the potential that smaller networks might be
harmed as a result of denial of interconnection, or by inefficient
interconnection, when government policy (the Telecom Act of 1996) now
recognizes the importance of promoting competition.
DID CONGRESS RECOGNIZE THE IMPORTANCE OF INTERCONNECTION
TO THE DEVELOPMENT OF COMPETITION?
Yes.Congress recognized the importance of interconnection by requiring
all telecommunications providers to interconnect, directly or indirectly, in
Section 251( a)(1) of the Act. But Congress also recognized that the ILECs
were and would remain the overwhelmingly largest networks and the
dominant carriers in any given area for the foreseeable future (and, nearly
years after the passage of the Act, this remains true). This situation gives the
ILECs powerful economic leverage over CLECs: the ILEC will be strongly
motivated to use its control over access to its large base of subscribers either
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Level 3 Communications, LLC
to out~and--out destroy its competitors (by not allowing interconnection at
all) or hamper their growth by only permitting interconnection on expensive
or inefficient terms. So, Congress quite rationally from an economic
standpoint imposed special interconnection duties on ILECs.
WHAT WERE THOSE SPECIAL INTERCONNECTION DUTIES
IMPOSED ON ILECS?
In Section 251( )(2) of the Act, ILECs are required to permit a "requesting
telecommunications carrier" to physically interconnect its network with that
of the ILEC for the exchange of traffic. This limits the ability of the ILEC to
exploit its market power arising from its control of access to the
overwhelming majority of subscribers in an area to the detriment of
competitors and consumers who would benefit from a choice in providers.
The FCC implemented this basic interconnection requirement with its specific rules to mCi
Specifically, at CjJ 995 of the Local Compctition Ordcr the FCC said:
(IJf a company provides both telecommunications and information
services, it must be classified as a telecommunications carrier for
purposes of section 251... . (TJelecommunications carriers that
have interconnected or gained access under sections 251(a)(I),
251(c)(2), or 251(c)(3), may offer information services through
the same arrangement, so long as they are offering
telecommunications services through the same arrangement as
weD. Under a contrary conclusion, a competitor would be
precluded from offering information services in competition with
the incumbent LEC under the same arrangement, thus increasing
the transaction cost for the competitor. We find this to be
contrary to the pro~competitive spirit of the 1996 Act. By rejecting
this outcome we provide competitors the opportunity to compete
effectively with the incumbent by offering a full range of services
to end users without having to provide some services inefficiently
through distinct facilities or agreements.
See Local Competition Order at 9 995 (emphasis added).
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Level 3 Communications, LLC
This is plainly the correct policy from an economic perspective. Once
the investment has been made to establish a facility interconnecting two
networks, it makes no sense to limit the use of that facility to particular types
of traffic, if there are other types of traffic that also need to be exchanged.
Instead, the most efficient use should be made of whatever physical
interconnection facilities are established. As the FCC itself has noted, the
obligations identified in section 251 are necessary to support the FCC I S goal
of developing competition for the benefit of consumers and the economy.
Interconnection should be established on a cost--based, efficient basis that
inhibits the ILEC's use of market power in anti~competitive ways to erect
barriers to the establishment of an effectively competitive market.
HOW DO THESE CONSIDERATIONS RELATE TO THE QUESTION
OF USING A SINGLE POI PER LATA FOR INTERCONNECTION?
The use of a single POI per LATA is generally an efficient and effective way to
exchange all traffic between an ILEC and a CLEC's network. Requiring the
CLEC to establish multiple POls boils down to making the CLEC duplicate
some or all of the ILEC's preexisting network architecture. This will not be
efficient, given that the CLEC may serve a different customer base than the
incumbent and willlikel y use different (and more modern) technology. As a
result, there is every reason to think that requiring the CLEC to mirror the
ILEC's network architecture will be inefficient and not in the public interest.
Therefore, all that should be required is a single POI interconnection
architecture.
PLEASE DEFINE A "POINT OF INTERCONNECTION" OR "POL"
Total Telecommunications Services, Inc and Atlas Telephone Company, Inc v. AT&tT Corp,
Memorandum Opinion Order FCC 01~, 925 (reI. Mar. 13, 2001).
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Level 3 Communications, LLC
In order for Level 3 and Qwest to exchange traffic between their
respective customers, they must physically interconnect their
networks. Per the FCC's rules
, "
interconnection" refers to the
physical linking of two networks for the mutual exchange of traffic
between customers subscribed to the respective networks.6 A POI is
simply the place where the two networks interconnect. It is also
normally viewed as the financial and physical demarcation point that
defines where one party's financial and operational obligations end
and the other party's begin.
WHO SHOULD BEAR THE COSTS OF INTERCONNECTION?
Basically, each provider should bear its portion of the cost. Each carrier
subscribers benefit from the ability to make calls to and/or receive calls from
the other carrier s subscribers. Of course, each carrier is really only able to
control the costs and activities on its own network, not on the other party
network. Therefore, it is sensible to require that each carrier be responsible
for the costs of its own network, on its side of the POI. This is precisely what
the FCC has required in Rule 51.703(b). This rule says that each carrier is
fully responsible for the costs incurred in getting traffic from its network to
the POI?
WHAT ARE THE ECONOMIC BENEFITS OF USING A SINGLE POI
PER LATA?
The key benefit of a single POI architecture is that it allows the carrier
delivering traffic to aggregate that traffic onto a large, efficient transmission
facility to the other carrier, while at the same time it allows the carrier
See Local Competition Order at 9 176.
51.703(b) states
, "
A LEC may not assess charges on any other telecommunications carrier for
telecommunications traffic that originates on the LEC's network."
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Level 3 Communications, LLC
receiving the traffic to route that incoming traffic in whatever manner is most
efficient based on its own traffic and network. Now, obviously, a large
established carrier would benefit by being able to require its dependent
competitor to deliver traffic to each and every switch in the established
carrier s network, but from an overall societal point of view that would be
terribly inefficient.
HOW WOULD THE DOMINANT PROVIDER BENEFIT BY
REQUIRING A CLEC TO DELIVER TRAFFIC TO EVERY SWITCH?
The most obvious benefit would be increasing the cost of the potential
competitor and thereby disadvantaging that CLEC with respect to its
entrance to, and operation in, the market. The FCC recognized the ILEC
incentive to disadvantage CLECs. Specifically, the FCC noted:
Given the incumbent LEC will be providing interconnection to
its competitors pursuant to the purpose of the 1996 Act, the
LEC has the incentive to discriminate against its competitors
by providing them less favorable terms and conditions of
interconnection than it provides itself.
Requiring multiple POls disadvantages the CLECs by increasing their
costs. If the ILEC had the same customer and traffic characteristics as the
CLEC it would also operate with a single POI. As such, requiring multiple
POls for CLECs when they are not justified is both anticompetitive and
discriminatory, not to mention inefficient from both an economic and
engineering perspective.
YOU SAID THAT QWEST'S PROPOSAL WOULD INCREASE LEVEL
S COSTS. IS THAT COMMON IN ARBITRATIONS?
See Local Competition Order at 9 218.
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Level 3 Communications, LLC
Yes, unfortunately such proposals are common. It is not in the best interest of
Qwest to make it easy or cheap for Level 3 to interconnect. In fact, former
Chairman Powell recognized the ILEC incentives when he stated
, "
At times
as I have observed, it is tempting to play the regulatory "game" in the way the
incumbents often do. Begging for regulatory protection. Seeking regulatory
favoritism that raises the costs of your competitors.
WHY WOULD IT BE INEFFICIENT TO REQUIRE A COMPETITOR
TO INTERCONNECT AT MANY DIFFERENT POINTS ON THE ILEC'
NETWORK?
In economic terms, the location of the ILEC's switches reflects a series of
choices made over a period of decades about the placement of multiple
switches as compared to the use of transport from a smaller number of
switches to reach subscribers. In the past when switching was relatively
cheap and transmission was relatively expensive, it made sense to have lots of
dispersed switches, with relatively short transport links between switches
and to subscribers. Today, however - although the costs of both switching
and transport have declined over time - switching is relatively expensive and
transmission is relatively cheap, and it makes economic sense to have a small
number of switches and relatively long transmission links to customers. So
even if it was perfectly efficient and rational for an ILEC to deploy a particular
set of switches at various locations in the past, that does not remotely mean
that it would be efficient and rational for a CLEC to duplicate those choices
today, given the technologies available today and the particular geographic
distribution of the CLEC's customers.
Prepared Remarks of Michael K. Powell Before the Association of Local
Telecommunications Services; "Local Competition...CLECs in the Midst of an Explosion.
Convention, Las Vegas, Nevada; December 2, 1998.
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Level 3 Communications, LLC
DOES THE ACT RECOGNIZE THESE DIFFERENCES BETWEEN
ILECS AND CLECS?
Yes. The 1996 Act recognizes this by giving the CLEC, not the ILEC, the
choice of where to interconnect as long as it is technically feasible. Section
251(c)(2) of the Act says that the CLEC can choose to exchange traffic at "any
technically feasible point" within the ILEC's network. The criterion is
technical feasibility, not the economic impact - albeit minimal.. on the ILEC
of having to carry its traffic to or from the technically feasible point selected.
PLEASE EXPLAIN WHY IT MAKES SENSE FOR THE CLEC TO HAVE
THE DISCRETION TO SELECT POlS AND NOT THE ILEC.
It makes perfect economic sense, in light of the principles discussed above, to
give the choice of where to locate a POI or POls to the CLEC and not the
incumbent.lO As noted above, the incumbent built out its network over many
years in response to a wide variety of then existing economic, technological
and demographic conditions. It would be irrational to assume that a
competitor would find it economic to re~create anything like the same
network today, even to serve the same customer base - and of course no
competitor will have the kind of ubiquitous customer base as the ILEC. It
follows that, where it is economically reasonable for the CLEC to establish
multiple POls at multiple points on the ILEC's network, it will do so. In fact
Level 3 has a history of working closely with the ILECs in the establishment
of additional POls where traffic warrants such additional facilities. But
where it does not choose to establish multiple POls, that is solid evidence
that there is no economic reason to require it to do so. To the contrary,
10 Indeed
, footnote 464 of the Local Competition Order states
, "
Of course, requesting carriers have
the right to select points of interconnection at which to exchange traffic with an incumbent LEC
under section 251(c)(2)." Many orders since the Local Competition Order have supported the CLEC
right to have only one POI per LATA.
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Level 3 Communications, LLC
forcing the CLEC to take account of the ILEC's network architecture choices
- beyond requiring the POI to be "within" the ILEC's network essentially
forces the legacy network design choices and the inefficiencies of the ILEC
onto the CLEC.
AS YOU UNDERSTAND THE FCC'S RULES, DO ILECS SUCH AS
QWEST HAVE THE RIGHT TO SELECT POls?
No. As just noted, that right is limited to CLECs and does not extend to
ILECs. The FCC explained that this is so because the ILEC "has the incentive
to discriminate against its competitors by providing them less favorable terms
and conditions of interconnection than it provides itself.n Eventually, of
course, the hope is that CLEC networks become sufficiently robust such that
the erstwhile dominant ILEC literally cannot afford to treat CLECs badly:
competition eventually will eliminate the ability of an incumbent local
exchange carrier to use its control of bottleneck local facilities to impede free
market competition.
ARE YOU SAYING THAT A CLEC, SUCH AS LEVEL 3, WILL ALWAYS
ESTABLISH A SINGLE POI IN A LATA?
No. The specifics will vary from case to case, but depending on the traffic mix
and where the CLEC already has facilities, it may well make sense for the
CLEC to establish more than one POI in a LATA. The point, however, is that
the choice has to be with the CLEC, not the ILEC. This is because the ILEC
will always want to force the CLEC to interconnect at points that are
favorable to the ILEC and its legacy network. From my economic perspective
it is clear that the FCC was correct when it recognized the ILEC incentives
See Local Competition Order at 9 218.
Id. at 9 4.
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Level 3 Communications, LLC
and abilities at paragraph 10 of the Local Compctition Ordcrwherein it states in
pertinen t part:
Because an incumbent LEC currently serves virtually all
subscribers in its local serving area, an incumbent LEC has
little economic incentive to assist new entrants in their efforts
to secure a greater share of that market. An incumbent LEC
also has the ability to act on its incentive to discourage entry
and robust competition by not interconnecting its network
with the new entrant s or by insisting on supracompetitive
prices or other unreasonable conditions for terminating calls
from the entrant s customers to the incumbent LEC'
subscribers.
HAS LEVEL 3 ESTABLISHED MORE THAN ONE POI PER LATA IN
CERTAIN AREAS?
Yes. In the past, Level 3 has negotiated interconnection agreements that
provide for additional POls if demand or other circumstances merited such an
investment. However, establishing additional POls should be based on the
need for such additional POls, and on traffic patterns, not on Qwest
attempts to force inefficient costs onto Level 3. Moreover just because Level
3 may have multiple POls in certain LATAs does not mean that Level 3 should
be forced to add POls in every LATA at Qwest's discretion. To the contrary,
from an economic perspective, the fact that in some cases Level 3 has
voluntarily established multiple POls, but in other cases has not, simply
confirms that it is not efficient to require Level 3 to mirror Qwest's network
architecture. Rather, this fact demonstrates, on the basis of actual market
behavior, that Level 3 needs flexibility to establish one or more POls where it
is efficient to do so. Qwest s proposal would not give Level 3 that flexibility.
The Commission should be extremely wary of establishing any
obligations in an interconnection agreement that would require Level 3 to
deploy significant amounts of capital in situations where Level 3 would not
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Level 3 Communications, LLC
independently find doing so in its interest. Since the implosion of the
competitive telecommunications industry in 2000, it has become increasingly
difficult for CLECs to attract capital; investors are understandably wary of
this sector. SBC has asserted in testimony filed in other state arbitrations
that more than 200 CLECs have ceased operations in SBC territory since
2000. I have no reason to think that the numbers would be any different for
Qwest's territory. Forcing CLECs to build or lease facilities, where margins
are slim or nonexistent, simply to require the CLEC to duplicate the ILEC'
legacy network, would only worsen CLEC prospects for attracting capital.
Such a result would be inefficient from both an economic and operational
standpoint and has consequently been regularly rejected by regulators as not
in the public interest. The likely result of such a requirement would not be
more CLEC investment; it would be fewer CLECs entering the market
because the regulatorily--imposed capital requirements do not justify the
investment.
BUT REGARDLESS OF THE FCC RULES AND ECONOMIC
PRINCIPLES DISCUSSED ABOVE, ISN'T IT UNFAIR TO QWEST TO
GIVE LEVEL 3 THE CHOICE OF WHERE AND WHETHER TO
ESTABLISH POls?
Not at all. As discussed elsewhere in my testimony, the ILEC is entitled to be
paid for the work it does in terminating traffic it receives from the CLEC at a
single POI or multiple POls just as the CLEC is entitled to compensation for
terminating traffic its receives from the ILEC. Although this point is
sometimes obscured by the FCC's $0.0007 rate for ISP--bound traffic, the
FCC's rules for reciprocal compensation provide for a higher level of payment
if traffic has to be routed through an ILEC tandem switch to get to the
Gates , Di
Level 3 Communications, LLC
appropriate end office than if the traffic does not have to go through the
tandem switch.
It is not "unfair" to Qwest to have to bear certain costs arising from its
status as an incumbent; or, rather, if it is "unfair " that "unfairness" is simply a
means to compensate for the fact that it was "unfair" to the public and to
potential competitors to allow Qwest to operate in a monopoly environment
for many decades prior to the enactment of the 1996 Act. A policy decision to
promote competition, such as that embodied in the 1996 Act, necessarily and
inevitably means that certain advantages that would otherwise accrue to the
incumbent are being taken away.
Obviously an ILEC such as Qwest does not benefit from
accommodating Level 3 in its efforts to attract customers, and would like to
charge Level 3 as much as possible for whatever it is called upon to do. That
is simply rational behavior by a monopolist trying to hold on to its monopoly
position. The reason interconnection agreements are subject to statutory
standards as to their content, and regulatory oversight via the arbitration
process, is precisely to allow regulators such as this Commission to prevent
13 Under the FCC's rules for compensation for ISP~bound calling, an ILEC may choose to avoid
paying reciprocal compensation rates for calls its customers make to ISPs by opting into the FCC'
special regime for such traffic. Implementation of the Local Competition Provisions in the
Telecommunications Act of 1996, Inter~Carrier Compensation for ISP~Bound Traffic Order on Remand
and Report and Order 16 FCC Red 9151 (2001) at gg 89~93. If the ILEC does so it only has to pay
$0.0007 per minute for calls its customers make to ISPs. But if the ILEC chooses to protect itself
economically by electing to only pay $0.0007 per minute for ISP~bound traffic, it is obliged to accept
all traffic from the competitor network for termination at the same $0.0007 rate, whether that traffic
is delivered at a tandem, at an end office, or elsewhere. So it is probably true that Qwest would not
get any higher payment from Level 3 for traffic Level 3 delivers at the tandem (or elsewhere) as
compared to at the end office. But that is only because Qwest has chosen to protect itself from
having to pay full reciprocal compensation rates for ISP~bound traffic by opting into the FCC'
regime. From this perspective, giving up additional tandem~based compensation for inbound traffic
is part of the price Qwest has chosen to pay in exchange for paying less for outbound ISP~bound
traffic.
Gates , Di
Level 3 Communications, LLC
the ILEC from refusing to reasonably accommodate CLECs and to charge
CLECs too much for what the ILEC has to do.
In this regard, a useful model to consider is what would happen if
there were three competing carriers in an area, each serving one third of the
customer base, with each carrier s customers equally valuable to the others.
In this competitive situation, if anyone of the carriers remained unconnected
it would suffer terribly in the marketplace, and so each carrier would be
highly motivated to establish efficient interconnection with the others, at
some convenient point to all three. None of them would be in a position to
dictate to the others where interconnection would occur, and none of them
would be in a position to demand that the others pay for its own costs of
running its network. Obviously we do not have anything like this kind of
competitive situation today, but this hypothetical model provides a good
reference point for what makes sense in establishing interconnection
arrangements under the 1996 Act.
Whenever Qwest makes a demand for multiple POls, or for Level 3 to
have to pay for the privilege of terminating traffic originated by Qwest's
customers, or for Level 3 to split its traffic among different trunk groups
based on Qwest's preferred categorization when one trunk group would be
more efficient, it is reasonable to ask whether one of our three hypothetical
equally--sized competitive carriers could ever hope to get its two competitors
to agree to such a thing. If not, then it's a pretty good bet that Qwest isn
being reasonable but, instead, is trying to abuse its position as the dominant
provider of services.
Gates , Di
Level 3 Communications, LLC
PLEASE SUMMARIZE YOUR TESTIMONY REGARDING
ESTABLISHING A SINGLE POI.
Competitors using new technology should not be limited by the historic
decisions of Qwest network planners who established switch locations and
local calling areas decades ago based upon the more limited technology
available to them. Those decisions, even if justifiable and supportable then
would certainly be different today given the changes in technology. As such
forcing competitors to conform to the ILEC's legacy network topology would
be inconsistent with the goals of the Local Compctition Ordcr and the Act.
Rather, the promotion of efficient markets dictates that a competitor such as
Level 3 only be required to interconnect in a specific area where its own
assessment of traffic volumes, customer demand, and available technology
justify investment in facilities needed to reach that area. Level 3 should not be
required to extend its facilities to POls unilaterally identified by Qwest;
instead, Qwest is obligated to provide interconnection for Level 3 facilities at
POls which Level 3 properly determines best serve its network architecture
and business plans. This concept actually allows Qwest to continue to design
a network around its own needs, while allowing Level 3 to do the same thing.
HOW SHOULD THE COMMISSION DECIDE THIS ISSUE?
The Commission should adopt Level3's position which permits the flexibility
of a single POI per LATA and reject Qwest's proposed language.
WHAT TYPES OF TRAFFIC SHOULD BE EXCHANGED OVER THE
PHYSICAL INTERCONNECTION FACILITIES ESTABLISHED AT ANY
GIVEN POI?
Any and all traffic should be exchanged over the physical facilities at a given
POI. It is economically irrational to require the establishment of different
Gates , Di
Level 3 Communications, LLC
physical facilities for different "types" of traffic when one facility will handle
the traffic efficiently.
IS THIS CONCLUSION LIMITED TO WHETHER THE TRAFFIC
FALLS INTO THE REGULATORY CATEGORY OF
TELECOMMUNICATIONS" OR NOT?
No. Once a POI has been established, Qwest should be required to use that
POI (and should be required to permit Level 3 to use that POI) for the
exchange of all types of traffic, whether they are classified as
telecommunications services
" "
information services
" "
local services
" "
access
services
" "
251(b )(5) traffic," or anything else. Assuming that transmitting a
particular type of traffic over a given physical facility is technically feasible, it
makes no economic sense to require the establishment of additional
duplicative facilities based on the regulatory classification of the traffic. As I
noted above, the FCC recognized as much at the very inception of
competition under the 1996 Act: once a physical interconnection arrangement
has been established for any type of traffic for which such an arrangement is
properly called for under the Act, the competitor is permitted to use that
same physical arrangement to deliver other types of traffic as well, even
including traffic for which interconnection might not be legally required.
The express policy behind this requirement is to prevent ILECs from forcing
competitors to establish duplicative physical facilities for which there is no
independent technical or economic need.
See Local Competition Order at 9 995.
Gates , Di
Level 3 Communications, LLC
Issue 2: Separate T runking
PLEASE SUMMARIZE THE DISPUTE REGARDING SEP ARA TE
TRUNKING.
Mr. DuCloo provides technical testimony on this point. Very briefly, a trunk
is a single transmission path between switching systems, and a trunk "group
is a number of trunks similarly configured to act together to carry traffic
between the same two end points. While more traffic requires more trunks in
a trunk group, as Mr. DuCloo explains, the number of trunks needed to
handle the traffic does not rise at the same rate as the traffic. It does not take
twice as many trunks to handle twice as much traffic; it takes fewer than
twice as many. Traffic engineering is similar for telecommunications and road
design. You can gain efficiencies in handling traffic by adding trunks (or
lanes on a highway), but the relationship is not one to one. These efficiencies
are important to controlling costs for both the ILEC and the CLEC.
PLEASE EXPLAIN.
By efficiencies, I mean that the more traffic that can be included within a
single trunk group, the less money it costs both carriers to handle the traffic.
On the other hand, for any given volume of traffic between two switches, the
more trunk groups into which the traffic is subdivided, the more expensive it
becomes at the margin to carry it.
Given this, Level 3, understandably, wants to include all of the traffic
exchanged between any given Qwest switch and Level 3 on a single trunk
group. From an economic perspective, the technical "trunking efficiencies
noted above guarantee that a single large trunk group will be the most
economically efficient solution. Qwest, however, wants to require that the
traffic to and from a particular Qwest switch be routed over separate trunk
groups based not on the technical characteristics of the traffic, but rather on
Gates , Di
Level 3 Communications, LLC
the regulatory classification of the traffic. This makes no economic sense, and
Qwest s position should be rejected.
Adding insult to injury, not only does Qwest want Level 3 to
artificially divide traffic into different trunk groups based on economically
irrelevant (for these purposes) regulatory classifications, Qwest wants to
charge Level 3 for establishing these separate trunk groups. Qwest is entirely
responsible for the cost of getting its traffic to Level 3; and, while Level 3 is
entirely responsible for paying Qwest intercarrier compensation for
terminating Level3..originated traffic, that compensation is set on a per..
minute basis and does not entail Qwest charging Level 3 for setting up trunks
at all.
HOW WOULD LEVEL 3 BE DISADVANTAGED BY THE LANGUAGE
PROPOSED BY QWEST?
As Mr. DuCloo explains at page 22 of his testimony, under Qwest's proposal,
Level 3 will have to spend more on switch programming, trunk
administration, trunk ports on switches, digital cross~connect systems, and
fiber optic terminals; and at some point will have to spend more on switches
themselves. There is no operational or economic justification for imposing
these costs on CLECs. Their only purpose would be to disadvantage CLECs
vis"a~vis Qwest. In fact, Qwest s proposal would increase its own costs as
well. I urge the Commission to reject Qwest's proposal.
ARE THERE OPERATIONAL PROBLEMS ASSOCIATED WITH LEVEL
3 USING TRUNKS TO CARRY BOTH LOCAL AND TOLL TRAFFIC?
No. As Mr. DuCloo explains, there are no technical or operational problems
associated with Level3's proposal to combine different "types" of traffic on a
single trunk group that would be avoided by separate trunks. Requiring
Gates , Di
Level 3 Communications, LLC
separate trunk groups, as suggested by Qwest, results in a deadweight
economic loss to society, as I noted earlier.
IS THERE ANY JUSTIFICATION FOR REQUIRING SEPARATE
TRUNKS FOR DIFFERENT TYPES OF TRAFFIC?
No. Qwest says that traffic subject to different billing rates should be put
onto separate trunks in order to keep the billing straight, but that makes no
sense from an economic perspective either.
WHY NOT?
There is a simple, inexpensive way to keep the billing straight that does not
entail the significant network inefficiencies of separate trunking. All that is
needed is for the parties to periodically sample the traffic going between them
and develop factors for how much is subject to reciprocal compensation, how
much to access charges, etc. Then all that is required is to keep track of the
total minutes exchanged in a given month, apply the factors, and determine
the appropriate bill. Mr. DuCloo addresses this in his testimony as well.
HAVE THESE FACTORS BEEN USED IN THE PAST FOR BILILNG
PURPOSES?
Yes. These billing factors have been used for decades with great success.
HAVE OTHER REGULATORS ACCEPTED THE FACT THAT BILLING
CAN BE ACCOMPLISHED USING FACTORS RATHER THAN
INEFFICIENT SEPARATE TRUNKS?
Yes. The use of factors to allocate traffic on a particular facility or trunk into
different billing categories has a long history in the telecommunications
business going back at least as far as the early 1980s, when "other common
carriers" used business lines to connect to the network to provide their
competing long distance services. Eventually they became known as "Feature
Group A" lines, and the industry agreed to certain assumptions regarding
Gates , Di
Level 3 Communications, LLC
total traffic on such lines and on how much of the traffic was interstate versus
intrastate.
Since the passage of the 96 Act, commissions have approved the use of
jurisdictional factors that allows the efficient use of interconnection trunks.
For instance, the Michigan Public Service Commission found in a
Sprint/ Ameritech arbitration proceeding that:
It appears to the Commission that economic entry into the
market requires that Sprint by permitted to use its existing
trunks for all traffic whenever feasible. IS (emphasis added) In
Texas, the Commission there ordered Verizon to allow Sprint
to carry local, intrastate intra LATA and intrastate interLATA
traffic on the same trunks.16 Other states, such as Indiana
have required the use of PLU s (percentage local usage) or
other allocators (e., PIUs - percent interstate usage) to
reflect the )urisdiction of traffic on such trunks for billing
purposes.
OTHER THAN BILLING, IS THERE ANY OTHER ARGUMENT FOR
QWEST TO REQUIRE SEP ARA TE TRUNKING ARRANGEMENTS
FOR DIFFERENT TYPES OF TRAFFIC?
, in fact, Qwest would be disadvantaging itself by requiring CLECs to
separate traffic of different types onto multiple trunk groups rather than
carrying all traffic on a single trunk group. To put it simply, not only is it
most efficient for Level 3 to carry all traffic on a single trunk group, it is
15 In the Matter of the Application of Sprint Communications Company, LP. for Arbitration to
Establish an Interconnection Agreement with Ameritech Michigan, MPSC Case No. U~1l203, Order
Approving Arbitration Agreement with Modifications, J an 15, 1997.16 Texas Public Utility Commission; In the Matter of the Petition of Sprint for Arbitration with Verizon;
Docket No. 24306; Final Order Modifying Arbitration Award and Approving Interconnection
Agreement; dated February 17,2004.17 Indiana Utility Regulatory Commission; In the Matter of AT&T Petition for Arbitration
with Indiana Bell Telephone Company; Cause No. 40571~INT~03; November 20 2000. Further, in its
Revised Response to Level 3 Request No. 22 in the Illinois arbitration, SBC Illinois stated
, "
SBC
Illinois uses a PLU methodology to distinguish local versus intra LATA toll in cases where the CLEC
does not provide calling party number (CPN) information.
Gates , Di
Level 3 Communications, LLC
efficient from Qwest s perspective as well. Both parties would have to pay
extra for trunk ports, switch capacity, etc., if traffic is artificially forced onto
separate trunk groups.
WHY WOULD QWEST INSIST ON CONTRACT LANGUAGE THAT
WOULD BE DISADVANTAGEOUS TO ITSELF?
I cannot answer for Qwest, but it would appear that Qwest is willing to
absorb costs in the short term in order to disadvantage or drive its
competitors from the marketplace.Is This is, of course, totally contrary to the
public interest in the development of efficient competitive
telecommunications networks, but might well be rational from the
perspective of Qwest's private interest. This is particularly true if, as Mr.
DuCloo notes, Qwest has excess capacity of trunk ports on its switches. If
Qwest has already invested in an excessive number of trunk ports (perhaps
due to overly aggressive estimates of growth of traffic on its network), then it
will, in effect, have trunk ports "lying around" unused. This would create a
situation in which the short--run cost to Qwest of requiring inefficient
trunking is relatively small, while the cost to Level 3 of using inefficient
trunking would be large. Qwest could therefore engage in the classic
monopolist's strategy of increasing competitors' costs at very little cost to
itself by seeking and obtaining a regulatory obligation on competitors to use
inefficient trunking. This is entirely rational behavior from Qwest's
perspective of trying to maximize shareholder wealth through protection of
its monopoly, but of course it makes no sense at all from the perspective of
the public interest.
18 Given the fragile nature of the competitive telecommunications industry, it would take very
little to eliminate facilities~based competition. As such, any decision that disadvantages competitors
as compared to Qwest will further diminish the chances for effective competition.
Gates , Di
Level 3 Communications, LLC
WHAT ARE YOUR RECOMMENDATIONS REGARDING THIS ISSUE?
I recommend that the Commission adopt Level3's position and allow it to
carry different types of traffic on one trunk group. Qwest s proposed
language would result in the inefficient use of the network, additional costs
to all carriers, and give an unfair competitive advantage to Qwest.
Issue 3 - VNXX. ISP--Bound Traffic and RUF
PLEASE INTRODUCE THESE ISSUES.
The ISP--bound traffic and virtual NXX issues are very much intertwined.
way of background, ISPs providing dial--up service receive local calls from
their customers in order to allow those customers to access the Internet. ISPs
do not market and do not expect to receive long distance calls from customers
seeking to connect to the Internet because long distance calls have
traditionally had per--minute charges associated with them.19 Thus, making
long--distance calls to ISPs is uneconomical for end users. For the ISP, this
means that it is important for end users to be able to reach the ISP by means
of a local call.
It is, however, terribly inefficient for an ISP to establish a physical
presence in each and every ILEC--established local calling area where the ISP
might have customers or where it might want to attract customers.
Therefore, it is quite common I would go so far as to call it the standard
operating arrangement in the industry for ISPs to obtain telephone
numbers from CLECs or ILECs that are "local" to areas where they have
customers. Because the CLECs or ILECs are providing local numbers for the
ISPs, where they have no local presence, the service is referred to as virtual
19 Of course it is technically possible for a person to use a long--distance call to connect to his or
her ISP. The point of this testimony is that experience has shown that consumers are not willing to
pay long~distance charges to access the Internet.
Gates , Di
Level 3 Communications, LLC
NXX or VNXX service, and is in essence identical to the FX service offered by
Qwest, at least from a end user customer perspective.
VNXX for ISP
--
Bound Traffic
DOES THE ISP HAVE FACILITIES IN EACH OF THE LOCAL CALLING
AREAS WHERE THEY HAVE LOCAL NUMBERS?
Not usually. As noted above, it would be very expensive for the ISPs to put
their own facilities in the many thousands of local calling areas around the
country. Instead, they purchase local services from carriers like Qwest and
Level 3 in those areas where they have or desire customers.
DOES LEVEL 3 PROVIDE SUCH A SERVICE TO ISPS? AND, IF SO
WHAT IS IT CALLED?
Yes. Level 3 sells its direct inward dial ("DID") service to ISPs where it is a
certificated CLEC. This service arrangement is usually referred to as "virtual
NXX " or "VNXX" service. It is just another name for the functionality that
has been provided for decades by ILECs under the name "foreign exchange
or "FX" service. Mr. DuCloo describes FX service in his testimony.
DOES QWEST PROVIDE FX SERVICE IN IDAHO?
Yes. In response to Level 3 Request No. 021, Qwest indicated that it does
offer FX service in Idaho. Qwest also provided its Idaho tariff for FX service.
(See Exhibit 102)
PLEASE EXPLAIN THE MARKET FOR VNXX SERVICE.
Where ISPs, such as Earthlink or AOL, want to offer dial--up Internet access
they contact an ILEC or CLEC to purchase local service. In Level3'
situation, the ISP subscribes to Level3's DID service and is assigned local
numbers from the Level 3 switch in the exchanges where dial--up service is
being offered and where Level 3 offers service. The ISPs advise their
customers of the numbers that the ISPs have been assigned, who then
Gates , Di
Level 3 Communications, LLC
program the numbers into their computers for accessing the Internet. The
customers' computers then dial these local numbers; the calls are routed from
the ILEC to Level 3 in exactly the same manner as other local calls; and Level
3 delivers the calls to the ISP being called.
PLEASE EXPLAIN HOW THE VNXX CALLS ARE ROUTED IN THE
NETWORK.
Actually, "VNXX" calls are routed in exactly the same way as non~ VNXX
local calls. There is nothing special about these calls.
PLEASE EXPLAIN.
Assume that Level 3 has a single POI in a LATA located at a Qwest tandem in
Boise. Assume further that Level 3 serves all of its ISPs who have customers
in that LATA from a single switch that Level 3 uses to serve the entire LATA.
Now assume that a customer of one of those ISPs, who takes telephone
exchange service from Qwest, uses his or her computer s modem to connect
to the ISP. In that case, Qwest's switch will receive the number as dialed by
its customer, recognize it as a Level 3 number, and direct the call to a trunk
group that connects to Level3's POI. Level 3 then accepts the traffic and
routes it to its switch and then on to its ISP customer. This is the same
manner in which all local calls are routed.
IF THIS CALL HANDLING IS THE SAME AS ALL LOCAL CALLS
THEN WHAT IS THE DISPUTE BETWEEN QWEST AND LEVEL
If the Qwest customer making the call happens to be in the same Qwest retail
originating local calling area as the ISP's equipment, then Qwest would say
that the call is "local" and there is no dispute. On the other hand, if the ISP'
gear is in a different Qwest retail local calling area, Qwest says that the call is
a "VNXX" call and is not local.
Gates , Di
Level 3 Communications, LLC
DOES THE LOCATION OF THE ISP EQUIPMENT IMP ACT THE
JURISDICTION OF THE CALL, THE HANDLING OF THE CALL, OR
THE COST OF GETTING THE CALL TO THE POI?
No. Qwest's responsibilities , and costs, are absolutely identical regardless of
the location of the ISP equipment. In each case, a locally dialed call is routed
to the POI for termination. All that Qwest does is determine that the dialed
telephone number is a Level 3 number and ship the call off to Level 3 on an
appropriate trunk group. And, what Level 3 does is the same in both cases: it
recognizes the incoming traffic as bound for one of its customers and sends
the traffic on to that customer. The only difference is whether the ISP's gear
receiving the call is at the end of a short circuit (close to Level3's switch, and
thus often not in the calling party s retail local calling area) or a longer circuit
(away from Level3's switch, and thus, possibly, in the calling party's retail
local calling area). Regardless of the distance, it is Level3's responsibility to
complete the call. In other words, it is Level 3 and not Qwest that is
providing the Level 3 ISP customer with the FX--like functionality. It makes
no economic sense whatsoever to make any distinction in Qwest s financial
obligations depending on whether Level 3 uses a long or short circuit to
connect its customers to its switch.
As the discussion above (I hope) illustrates, from an economic
perspective, Qwest s proposal is completely arbitrary and irrational. There is
simply no sound economic basis upon which to distinguish these two
situations.
IS THE ROUTING OF VNXX CALLS DIFFERENT IN ANY WAY FROM
THE ROUTING OF ANY OTHER LOCAL CALL?
No. As described above, and by Mr. DuCloo, it is exactly the same.
Gates , Di
Level 3 Communications, LLC
DO THE PHYSICAL END POINTS OF THE CALLS HAVE ANY
IMP ACT ON QWEST'S RESPONSIBILITIES OR COSTS?
No. In response to Level 3 Request No. 020, Qwest stated in pertinent part
The costs Qwest incurs do not vary based upon the physical location of the
Level 3 customer." (See Exhibit 103)
IS QWEST'S PROPOSAL CONSISTENT WITH THE HISTORICAL
HANDLING OF LOCALLY --DIALED CALLS?
No. As Mr. DuCloo explains, Qwest is actually trying to invent a new way to
classify calls that has no operational or historical basis in the telephone
network. Qwest's proposal is to rate and distinguish traffic based on the
actual physical location of customers as opposed to the numbers the
customers are assigned. This flies in the face of the way calls have been rated
since the establishment of the PSTN. What's really going on here is that it is
more efficient for a new competitor like Level 3 to offer FX--like services to
ISPs than it is for Qwest to do so, leading to ISPs "voting with their feet" and
moving their business to competitors like Level 3. Qwest is essentially trying
to recoup its losses in the marketplace, and to punish its competitors, for
being willing and able to offer a more efficient serving arrangement to the
ISPs.
DID QWEST AGREE IN DISCOVERY THAT CALLS ARE NOT RATED
BASED ON THE ACTUAL PHYSICAL LOCATION OF CUSTOMERS?
Yes. In response to Level 3 Request No. 021A, Qwest said that
, "
The
telephone numbers that Qwest uses for call routing purposes are assigned to
its end users based on NPA~NXXs associated with specific LCAs in the state.
(See Exhibit 104) This is consistent with Level3's position in this proceeding.
Qwest also noted correctly that "
...
switches do not route calls based on
specific addresses stored within the switches...." (Id.) Indeed, neither
Gates , Di
Level 3 Communications, LLC
Qwest s tariffs nor its switches contain customer specific location
information that would be required to implement Qwest's proposal in this
proceeding.
ARE THERE NEGATIVE CONSEQUENCES ASSOCIATED WITH
QWEST'S PROPOSAL TO TREAT VNXX CALLS AS SOMETHING
OTHER THAN LOCAL CALLS?
Yes. Qwest's proposal would impose substantial additional costs on ISPs. If
Level 3 is required to pay access charges for calls it receives to its ISP
customers who use VNXX services (or is denied intercarrier compensation for
such calls), Level3's cost of doing business will increase and it may have to
raise its rates to its ISP customers. In order to deal with those rate increases
the ISP customers will either have to deploy otherwise unnecessary and
inefficient facilities so that their equipment actually is in the calling parties
local calling areas (thereby relieving Level 3 of some of the economic burdens
caused by Qwest's proposal), or keep the efficient equipment arrangement
but be subject to the higher costs. Either way, the ISPs may have to raise
rates to their customers, and, particularly for some areas, may simply decline
to provide dial~up access, in order to minimize costs. This is plainly contrary
to the public interest.
Moreover, Qwest's proposal to not pay reciprocal compensation on
calls to customers who are not "physically located" in the same local
exchange, or require toll treatment for such calls, would give Qwest yet
another competitive advantage over CLECs. Qwest's proposal would
improperly benefit its own affiliated ISPs, increase the cost of Internet access
and reduce competition to the detriment of consumers and the economy.
20 Qwest has yet to answer Level 3 Request No. 004. In other states, however, such as
Colorado Qwest has two affiliates offering Internet access services: Qwest Communications
Gates , Di
Level 3 Communications, LLC
Qwest's proposal would put in jeopardy any competition for ISP dial--up
services, thereby depriving consumers of choice in what has become an
indispensable information, education and economic tool, especially for those
still significant portions of customers who cannot yet afford the costs of
dedicated broadband connections to the Internet.
ARE THERE ANY ADDITIONAL NEGATIVE CONSEQUENCES
ASSOCIATED WITH QWEST'S PROPOSAL?
Yes. In developing its multi--billion dollar nationwide network, Level 3 did
not simply duplicate the network of Qwest and other ILECs. Instead, Level 3
has deployed a softswitch technology--based network which is much less
capital intensive, and much more location insensitive than traditional ILEC
networks. Using this advanced technology, Level3's network is designed to
operate most efficiently by serving large regions of the country on an
integrated basis. It is indifferent to ILEC legacy central office boundaries. By
taking advantage of such technology shifts, competitors such as Level 3 can
participate in the natural progression of market development, perhaps even
pulling even" with ILECs who, by virtue of the presence of their existing
networks have incredible inherent market advantages. Qwest's proposal
would therefore at least partially negate efficiencies Level 3 designed into its
network - which efficiencies Level 3 continues to invest in, as demonstrated
by its recent decision to upgrade its network with optical equipment capable
Corporation and Qwest !nterprise America, Inc. I would expect those affiliates offer services in Idaho
as well.
Gates , Di
Level 3 Communications, LLC
of carrying up to 400 gigabits per second over a single fiber strand. These
efficiencies are of no use to anyone, however, if Qwest is permitted to burden
Level 3 with such arbitrary and unwarranted interconnection and
compensation provisions.
DOES LEVEL 3'S SERVICE PROVIDE THE SAME FUNCTIONALITY
FOR CONSUMERS AS THE FX AND FX.. TYPE SERVICES PROVIDED
BY QWEST AND OTHER ILECS?
Yes. As Mr. DuCloo explains, functionally Level3's VNXX service is identical
, and competes with, traditional ILEC FX services. In trying to obtain a
regulatory ruling that would make VNXX service uneconomic for the major
class of consumers who use that service (ISPs), Qwest is trying to enlist the
regulators in an effort to stamp out this type of competition. This
Commission should reject that invitation.
DOES QWEST OFFER ISPS A SERVICE SIMILAR TO VNXX SERVICE?
Yes. In addition to standard offerings such as FX, Qwest offers its "Wholesale
Dial" service. According to its online literature, Qwest s service "provides a
secure, reliable, cost~effective dial--up network infrastructure solution for
ISPs. The service provides the ISPs' end users with seamless dial--up
functionality that remains transparent." One of the benefits touted by Qwest
is the availability of "local access telephone numbers.21 So, as you can see
this is yet another example of services provided to ISPs for the purpose of
providing local dial--up access for consumers in areas where the ISPs mayor
may not have a physical presence.
YOU NOTED EARLIER THAT QWEST WANTS TO IMPOSE ACCESS
CHARGES ON LEVEL 3 IN CONNECTION WITH CALLS THAT
See "Qwest Wholesale Dial" in its Product Catalog. http://www.qwest.comJpcat
Gates , Di
Level 3 Communications, LLC
QWEST CUSTOMERS MAKE TO ISPS SERVED VIA VNXX NUMBERS.
IS THERE ANY ECONOMIC RATIONALE FOR DOING SO?
No. FXNNXX service is a "local" service to which access charges do not
apply. Instead, the VNXX calls are ISP~bound calls that terminate (from
Qwest s perspective) at the POI. Neither Qwest nor Level 3 imposes any sort
of toll charge in connection with calls to VNXX numbers. As a result, there is
no economic basis on which any sort of "access charge" could be imposed.
DOES QWEST APPLY ACCESS CHARGES TO ITS FX OR FX.. TYPE
SERVICES?
No. A quick review of the relevant tariffs shows that access charges are not
applied to any portion of the ILEC FX service. Further, in response to Level 3
Request No. 1--029, Qwest indicated that, calls to and from end users in the
local calling area where the FX customer purchases an FX connection are
treated as local. (See Exhibit 105) As such, Qwest does not apply access
charges to its FX service.
WHAT WOULD BE THE ECONOMIC EFFECT OF ADOPTING
QWEST'S PROPOSAL?
It would simply eliminate an efficient and technologically advanced means of
providing dial--up Internet access to customers throughout the State of Idaho.
This would obviously be counter to the public interest.
IS DIAL.. UP ACCESS TO THE INTERNET IMPORTANT TO THE
STATE OF IDAHO?
Yes. Dial--up for Internet access is the universal service equivalent of a
primary line for voice service. In other words, not all people can afford
broadband access to the Internet, but most people have a single line with
which they can access the Internet over a dial--up connection. Dial--up access
is especially important where broadband connections are not yet available.
Gates , Di
Level 3 Communications, LLC
Rural residents report less broadband availability than their
counterparts in suburban or urban areas of the United States. In fact, a Pew
Internet & American Life Project study found that rural residents were two
to five times more likely to not have broadband availability than urban and
suburban residents.22 Pew research associate Peter Bell also noted:
While gaps in income and age appear to be partly responsible
the difficulty of getting Internet access remains a big barrier
for many rural users. Major Internet service providers
accounted for about 40 percent of use among rural residents
whose most frequent reason for choosing an ISP was that
was the only one available to them. In contrast, online users in
metropolitan areas usually chose from a range of providers by
seeking the best deal.
Although dial~up Internet access is critical in rural areas, as a
percentage of the total, it is decreasing. While DSL and cable broadband
connections showed large increases, from 2001 to 2003 dial--up Internet access
actually decreased by 12.7 percent. The same study showed that in rural areas
74.7 percent of the Internet connections were dial--up connections.
IS DIAL..UP STILL AN IMPORTANT SOURCE OF INTERNET ACCESS
IN IDAHO?
Yes. Although broadband is growing dramatically and dial--up is becoming a
smaller proportion of the total
22 See Pew Internet & American Life Project; Rural Areas and the Internet; "Rural AmericanInternet Use Has Grown, But They Continue to Lag Behind Others ; February 17,2004.23 See, T odaysSeniorsNetworkcom; "Rural use of Internet continue to lag, Costs, access remainbarriers, new data shows.June 7,2005.24 See
, "
A Nation Online: Entering the Broadband Age ; U.S. Department of Commerce
Economics and Statistics Administration National Telecommunications and InformationAdministration; September, 2004, at 5 13.
Gates , Di
Level 3 Communications, LLC
DESPITE THE DOWNWARD TREND IN DIAL..UP ACCESS, DO YOU
THINK IT WILL REMAIN AN IMPORTANT TYPE OF INTERNET
ACCESS?
Yes. As I mentioned above, dial~up is critical to rural consumers where
broadband is not always available and competitive alternatives are limited.
Garry Betty, Earthlink's chief executive stated
Despite compelling reasons to switch to broadband, dial~up
lines will always have a place in American homes. Customers
in rural areas where broadband is not available will continue
to log on via a dial~u~ connection; other people may prefer the
simplicity of dial--up. 5
For those citizens of Idaho that can t either afford or don t have
available to them broadband connectivity, dial--up internet provides access to
one of - if not the ~ cornerstone of economic and community vitality. The
ability to apply for jobs, get weather reports, crop price forecasts on a real
time basis, participate in educational endeavors, gain community information
on safety and health, and communicate via e--mail to friends and businesses
form the very fabric of commerce in the world we live in. Non--participation
or lack of access, simply stated, sentences portions of our society to second
class status. Without vigorous competition to ensure low cost dial--up
Internet access, both the citizens of Idaho and the State itself will suffer
irreparable harm as a significant segment of the population is unable to
compete economically, advance educationally and establish community ties.
IT IS SOMETIMES SUGGESTED BY ILECS THAT INDUSTRY
NUMBERING GUIDELINES PROHIBIT THE ASSIGNMENT OF
NUMBERS FOR FX OR SIMILAR SERVICES. IS THAT TRUE?
See, The New York Times
, "
Dial~up Internet Going the Way of Rotary Phones ; June 21
2005.
Gates , Di
Level 3 Communications, LLC
No. In fact Section 2.14 of the Numbering Guidelines specifically identifies
FX services as being eligible for number assignment:
2.14 It is assumed from a wireline perspective that CO
Codes/blocks allocated to a wireline service provider are to be
utilized to provide service to a customer s premise physically
located in the same rate center that the CO codes/blocks are
assigned. Exceptions exist, for example tariffed services
such as with the exception of foreign exchange service.
(emphasis added)
If it were improper or a violation of the guidelines to use virtual NXX
codes then all ILECs currently providing FX and FX--type services would be
in violation today.
WHAT ARE NXX NUMBER BLOCKS?
NXX number blocks are groups of numbers assigned to carriers for
distribution to customers. The blocks contain 10 000 numbers, or where
number pooling is in place, blocks of 1 000 numbers. The NXX codes are the
fourth through sixth digits of a ten--digit telephone number. For instance, the
NXX code for my telephone number (303~424--4433) is 424. These codes are
used as rate center identifiers for rating and routing of calls.
MUST A CARRIER BE LOCAL NUMBER PORTABILITY ("LNP"
CAPABLE TO PARTICIPATE IN NUMBER POOLING?
Yes. Level 3 is LNP capable and able to participate in number pooling.
Further, Level 3 normally utilizes only numbers in the 4 000 block within a
000 block. By not contaminating the numbers in the other thousand
blocks, should jeopardy occur and pooling be imposed, Level 3 could return
numbers to the administrator.
26 Alliance for Telecommunications Industry Solutions; Sponsor of Industry Numbering
Committee; Central Code (NXX) Assignment Guidelines; Released May 28, 2004.; hereinafter
referred to as "Numbering Guidelines
Ga~s , ill
Level 3 Communications, LLC
HOW ARE CARRIERS ASSIGNED AN NXX CODE?
Carriers who meet the criteria for the assignment of central office codes, like
Level 3 and Qwest, request and are assigned blocks of telephone numbers by
the numbering administrator?? The numbers are loaded into Level3's switch
and referenced in the Local Exchange Routing Guide ("LERG") for routing by
other carriers. Level 3 then assigns numbers from within those blocks to its
customers as requested.
HOW IS THE RATING OF CALLS IMP ACTED BY THE NUMBERS
ASSIGNED TO CUSTOMERS?
Standard industry practice and procedure provides that each NXX code is
associated with a particular rate center within a local calling area. A single
rate center may have more than one NXX code, but each code is assigned to
one and only one rate center. This uniquely identifies the end office switch
serving the NXX code, so that each carrier that is routing a call knows which
end office switch to send the call to.
IS IT UNCOMMON FOR NXX CODES TO BE ASSIGNED TO
CUSTOMERS WHO ARE NOT PHYSICALLY LOCATED IN THE
LOCAL CALLING AREA WHERE THE NXX IS "HOMED" OR
ASSIGNED?
No. It is also not uncommon for the "routing" point for an NXX code to differ
from the "rating" point for the same code. In other words, although an NXX
may be rated or homed to a specific end office switch, the routing information
in the LERG may specify that calls to that NXX code be routed to a different
wire center, for instance, a tandem.
See Numbering Guidelines, Section 4.
Gates , Di
Level 3 Communications, LLC
IS IT IMPROPER OR AGAINST ANY RULES FOR CLECS TO PROVIDE
NUMBERS TO THEIR CUSTOMERS?
, not at all. In fact, as noted above, carriers must request numbers in order
to provide service in a particular exchange. Based on my review of Level3'
practices, Level 3 utilizes and abides by the Numbering Guidelines.28 In fact
Level 3 has developed its own LNP solution and has established stringent
guidelines that result in very efficient use of numbering resources.
PLEASE SUMMARIZE YOUR TESTIMONY ON VNXX TRAFFIC.
VNXX traffic is a competitive response to ILEC FX service and is the primary
service used by ISPs to provide local dialing for their customers. Calls to
VNXX numbers are local calls in every sense of the phrase and do not impose
any additional costs or responsibilities on Qwest. The CLEC assignment
numbers in exchanges where they serve is completely consistent with the
industry numbering guidelines. Qwest's proposal to impose access charges
on these calls should be rejected.
Relative Use Factor
PLEASE DESCRIBE THE DISPUTE BETWEEN THE PARTIES
REGARDING THE "RELATIVE USE FACTOR " OR "RUF.
Prior to recent FCC rulings, it was commonplace for some CLECs to call on
the ILEC to establish a transmission facility (often called an "entrance
facility ) running from some point on the ILEC's network to the CLEC'
switch location. In its original ruling regarding interconnection under the
1996 Act 29 the FCC addressed the question of rates applicable to
transmission facilities that are dedicated to the transmission of traffic
between two networks" (emphasis added), and ruled that the cost should be
The Numbering Guidelines require compliance as a condition of receiving numbers.
See Local Competition Order at 9 1062.
Gates , Di
Level 3 Communications, LLC
apportioned in accordance with relative use of the facility. In cases where a
CLEC obtained an entrance facility from the ILEC to connect to the CLEC'
switch, the effect of this rule (which remains embodied in 47 CFR
51.709(b)) was to reduce the ILEC's charges for the entrance facility based on
what proportion of the traffic going over it was ILEC~originated, as opposed
to CLEC~originated. This is, generally speaking, what the "RUF" is intended
to capture (although Qwest's particular language does not properly track the
FCC's rule). The FCC'Triennial Review Remand Ordcr however, held that
entrance facilities were no longer to be provided at least not at TELRIC~
based rates for these purposes.30 This suggests that even Qwest would not
think that the RUF would apply between the parties.
WOULD A RUF APPLY FOR FACILITIES ON EITHER SIDE OF THE
POI?
No. RUF logically applies in the case of a "meet point" interconnection at a
POI. The very definition of a "meet point" or POI~based form of
interconnection is that each party bears its own costs for the facilities needed
to get to the POI. The FCC in the Local Compctition Ordcr specifically
recognized that each party is responsible for its own costs in getting to a meet
point, and expressly found that it is perfectly reasonable to require the ILEC
to build out new facilities at its own expense, at least to some extent, to
accommodate a meet point interconnection.31 Level 3 seeks to interconnect
with Qwest at a single meet~point POI per LATA. It follows that there will
not be any situations in which there are "transmission facilities that are
dedicated to the transmission of traffic between" Level 3 and Qwest. Instead
30 See FCC Order on Remand in WC Docket No. 04~ 313, CC Docket No. 01~ 338, Released
February 4 2004 at 9 137.31
See Local Competition Order at 9 553.
Gates , Di
Level 3 Communications, LLC
the two networks will meet at a particular point with no inter~network
facilities, per se, at all. Each party will be responsible for the costs of its own
facilities up to the POI, which will constitute a "meet point" as the FCC used
that term.
WHAT IS LEVEL 3' S CONCERN WITH THE R UF?
Level 3 is concerned that Qwest is trying to use the "RUF" concept to avoid
the economic logic of establishing a meet--point POI. Level 3 is concerned
specifically, that even with a single POI, Qwest will try to assign some of the
costs of its own network on its side of the POI to Level 3, based in some way
on the amounts of traffic that Qwest sends Level 3 and vice versa. That is
unreasonable in and of itself.
ASSUMING THERE WAS A REASON TO MAKE A RUF
CALCULATION, DOES QWEST PUT FORTH A CORRECT
ALGO RITHM?
No. Qwest gets it wrong on the calculation, by seeking to unfairly and
unreasonably exclude the substantial volumes of ISP--bound traffic it sends to
Level 3 from calculating the "relative use" of the facilities it uses to deliver
that traffic. As described below, there is no basis for excluding ISP--bound
traffic from any RUF calculation that might be appropriate in light of the way
Level 3 and Qwest actually interconnect.
WHY IS THIS A CONTENTIOUS ISSUE?
It is contentious because of the traffic flows. A significant amount of the
traffic exchanged between Qwest and Level 3 will be calls originated by
Qwest customers for termination to Level 3 customers. The Level 3
customers tend to be ISPs. The one--way nature of this type of traffic means
that Qwest would pay for the vast majority of the interconnection facilities
assuming such a calculation were to be made.
Gates , Di .
Level 3 Communications, LLC
IS THAT UNFAIR?
No. To the contrary, it is completely consistent with the economic rule
cost--causation and the accounting concept of matching. It is the Qwest
customers who are originating the calls to the Level 3 customers. As such
Qwest is originating the traffic and causing the use and consequent costs of
the network facilities. As such, the cost causer - Qwest - should pay for the
costs. Further, Qwest customers are paying local rates to make those calls.
As such, Qwest has both the revenues and the costs associated with the calls.
To foist those costs on Level 3 while only Qwest enjoys the revenues would
violate the matching principle. It would be unfair and inequitable for Qwest
to impose those costs on Level
Perhaps an example would help clarify the situation. In some cities
people must pay tolls to travel on roads. The tolls supposedly pay for the cost
of the roads. Now suppose a new amusement park is opened and traffic
the toll roads to that amusement park is significant. Forcing the amusement
park to pay the tolls associated with the peoples' choice to visit the
amusement park would be unfair. After all, the people decided to visit the
amusement park and they decided to drive to the facility. It was their
decision to go and as such, they are the cost--causers with respect to the tolls.
Forcing Level 3 to pay for the Qwest facilities when Qwest originates
the vast majority if not all of the calls , would be like charging the amusement
park for the cost of getting the people to the park. Qwest customers
purchase Qwest local service and decide to make the calls and it is Qwest's
obligation - under the reciprocal compensation rules - to pay Level 3 for the
cost of terminating those calls. Rule 51.703(b) specifically states that "a LEC
Gates , Di
Level 3 Communications, LLC
may not assess charges on any other telecommunications carrier for local
telecommunications traffic that originates on the LEC's network.
Note in this regard that one of the effects of consumer demand for
dial~up Internet access was to lead consumers to purchase additional
telephone lines into their homes in order to allow the consumers to use dial--
up Internet access while also engaging in voice telephone conversations on
the other line. These second lines have almost exclusively been provided by
the ILEC. As time goes on, of course, more and more people are switching
from dial--up to broadband Internet access, which will simultaneously (from
Qwest s perspective) lower second line revenues, increase DSL revenues, and
lower intercarrier compensation payments for ISP--bound traffic. But looking
only at the dial--up segment, Qwest has received and will continue to receive
substantial additional revenues, in the form of second line revenues, in
connection with its customers' calls to ISPs. Given this, any claim that Qwest
has been or is being economically harmed by delivering ISP--bound calls
without receiving access charges, or any claim that Qwest cannot afford to
pay intercarrier compensation with respect to such calls, must therefore be
viewed with great skepticism.
IS QWEST'S POSITION CONSISTENT WITH 47 C.R. ~ S1.703(B)?
No. This rule is very straightforward and simple in its reading. Qwest may
not assess charges on any other telecommunications carrier for
telecommunications traffic that originates on its network. Qwest's position
is just the opposite. Qwest wants to exclude the ISP~bound traffic, even
though it is originated by its own customers, from the relative use calculation.
47 C.F.R., ~51 703(b).
Gates , Di
Level 3 Communications, LLC
There is simply no support for that position and it is clearly contrary to the
existing rules and the economic principles of cost causation.
IS THERE ANY OTHER REASON TO EXCLUDE ISp.. BOUND TRAFFIC
FROM THE RELATIVE USE CALCULATION?
No. Again, it is clear that RUF calculations are not appropriate in a POI
situation. But if for some reason the Commission were to decide to apply the
RUF, ISP traffic must be included in the calculation. Simply because the calls
are directed to an ISP does not change the fact that these are locally dialed
telecommunications calls that traverse the circuit switched network in
exactly the same fashion as any other local call. The effect of Qwest
mathematical manipulation of the formula is to transfer to Level 3 a large
portion of the costs of delivering Qwest~originated traffic. There is simply no
economic, engineering or public policy reason to exclude the traffic from the
calculation.
PLEASE SUMMARIZE YOUR POSITION ON THE RELATIVE USE
CALCULA TI 0 N.
There is no need to apply a RUF calculation on each side of the POI since
each party is responsible for getting its traffic to the POI. Nevertheless, if a
RUF calculation is made it must include the ISP--bound traffic. The traffic is
telecommunications traffic originated by Qwest customers and, as such, is the
responsibility of Qwest.
Issue 4 - VoIP
PLEASE INTRODUCE THIS ISSUE AND THE DISPUTE BETWEEN
LEVEL 3 AND QWEST.
IP--Enabled services, such as IP~enabled voice traffic the most common form
of which is referred to as voice over Internet protocol or VoIP are becoming
more common as they offer significant efficiencies from both an economic and
Gates , Di
Level 3 Communications, LLC
network operations perspective. Qwest and Level 3 disagree on the proper
regulatory treatment of these services. To the extent that this Commission
has regulatory authority over any aspect of these services, Level 3 urges the
Commission take a "hands--off" approach to regulation. As described below
V oIP constitutes a form of "enhanced" or "information" service, like Internet
access, so that under existing FCC rules it would not be appropriate for such
services to be subject to access charges in any event. But putting aside that
point, from an economic perspective it would be a mistake to subject VoIP
services to traditional access charges, whether or not it would be permissible
to do so from a legal or regulatory perspective. In contrast, Qwest encourages
the Commission to treat these services like traditional long distance calls, and
impose access charges on this traffic, unless the VoIP provider s point of
presence is in the same local calling area as the called party.
WHAT IS VOICE OVER INTERNET PROTOCOL OR "VOIP"
TRAFFIC?
Mr. DuCloo discusses this in more detail. Briefly, VoIP services involve using
the same network that carries Internet traffic to carry packetized voice
communications. Because voice data packets can be dispersed among other
types of Internet traffic, such as e--mail messages, web pages, Instant
Messaging conversations, music downloads from iTunes or similar services
etc., VoIP doesn t use as much bandwidth as in a circuit--switched network.
This makes phone calls essentially as cheap to transmit as e--mail.33 Indeed
VoIP is a good example of the convergence of computers, telephones and
television into a single and more efficient integrated information
environment.
33 See Comments of VON Coalition in CC Docket No. 01--, WC Dockets No. 02~ 361, 03~ 211
03~ 266 , 04~ 36; filed August 19 2004, at page 2.
Gates , Di
Level 3 Communications, LLC
PLEASE DESCRIBE THE FUNDAMENTAL DIFFERENCES BETWEEN
VOIP CALLS AND TYPICAL PSTN CALLS.
In the simplest of terms, VoIP is an information service application that uses
the Internet backbone and discrete data packets to deliver real--time voice
communications. Rather than voice information being transmitted across the
traditional circuits of the PSTN, VoIP uses the Internet Protocol, and the
Internet backbone, or some other private IP network. In addition to this
difference in transmission, VoIP calling, being IP--enabled, facilitates the
introduction and integration all sorts of potential capabilities not present
with PSTN circuit switched calls.34 From a regulatory perspective the IP--
based capabilities distinguish VoIP - an information service - from basic
circuit~switched telecommunications services.
IS QWEST OFFERING VOIP SERVICES TODAY?
Yes. On December 8 , 2004, Qwest announced that its VoIP service (Qwest
OneFlex ) is available to business customers nationwide. In that same press
release Qwest noted that if offers a range ofVoIP solutions including
One Flex TM Integrated Access, One Flex TM Hosted VoIP and IP Centrex
Prime.
HAS QWEST ADMITTED IN DISCOVERY THAT ITS ONEFLEX
SERVICE PROVIDES UP TO FIVE VIRTUAL NUMBERS THAT
ALLOW PEOPLE TO CALL THE SUBSCRIBER ON A LOCAL INSTEAD
OF A TOLL BASIS?
34 For instance, when you have a missed call on Vonage service, you get an email detailing the
call information (time, calling number, etc.). The features and capabilities of VoIP services are many
and expanding.35 See Qwest Press Release entitled
, "
Qwest Launches Expanded Nationwide VoIP Service for
Businesses." Released December 8 2004.
Gates , Di
Level 3 Communications, LLC
Yes. I have attached Qwest's Response to Level 3 Request No. 1--063SI, in
which Qwest admits that Qwest Communications Corporation ("QCC"
does offer OneFlexTM with virtual numbers. (See Exhibit 106)
IS THERE ANY ECONOMIC jUSTIFICATION FOR TREATING LEVEL
S SERVICES FOR ESPs THAT PROVIDE VOIP APPLICATIONS LIKE
TYPICAL TELEPHONE SERVICES?
No. As noted by the FCC in its IP--Enabled Services NPRM
, "
Dial~up, or
narrowband, Internet access utilizes the same PSTN infrastructure that
telephone subscribers use to place traditional circuit--switched voice calls.
Broadband VoIP services do not impose any additional costs on the ILECs or
their network either. As such, treating these services as if they were
traditional long distance telecommunications services, and imposing their
associated access charges, would allow ILECs to over~recover their network
costs. At the same time, imposing these high call origination and termination
rates on this new technology would suppress the use of the new services and
effectively, tax a new, efficient competitor for the benefit of the legacy,
incumbent operator. Such a result would not only constitute a windfall for
ILECs, but it would impede the natural efficiency of the market by
unnecessarily burdening the development of new services. There is simply no
economic justification for treating IP~Enabled services as if they were
traditional services.
IS THERE PRECEDENT IN THE TELEPHONE INDUSTRY FOR
ADOPTING POLICIES THAT INSULATE NASCENT, INNOVATIVE
TECHNOLOGIES FROM BEARING AN UNDUE PORTION OF THE
COSTS OF THE LEGACY NETWORK?
See FCC Notice of Proposed Rulemaking; WC Docket No. 04~ 36; Released March 10, 2004
FN32.
Gates , Di
Level 3 Communications, LLC
Yes. In fact, the FCC has repeatedly recognized that encouraging innovation
in this industry requires exempting nascent technologies and industry
segments from providing support to the legacy network. One of the earliest
examples of this policy dates from the 1970s and early 1980s. Historically, all
customer premises equipment ("CPE") had been provided to customers by
the regulated telephone company as part of telephone service. In the 1960s
the FCC ruled (in a famous case called Cartcrphonc) that the Bell System could
not forbid the attachment of "foreign" devices that did not harm the
network. 37 In response, the Bell System grudgingly permitted non~ Bell CPE
to be connected to the network, but imposed charges for "protective
connecting arrangements" on that new CPE. The FCC responded to this
anticompetitive tactic by establishing network interconnection specifications
that applied to all CPE - Bell and non.. Bell alike - and then by requiring the
Bell System to provide all CPE on an unregulated basis, through a separate
subsidiary. This allowed the then~nascent competitive CPE market to
develop without having to pay a "legacy network tax" to the Bell System.
Another example of protecting nascent technologies and services from
supporting the legacy network is the "ESP Exemption" from access charges.
In 1983 the FCC ruled that even though interstate traffic to and from
enhanced service providers could, logically, be subject to per~minute access
charges, those charges would not apply. The explicit basis for this ruling was
that this new market should not be required to pay rates that include
subsidies for the traditional network. As noted above, I believe that this
37 The Carterphone case started as a court case and the FCC (Docket Nos. 16942 17073) then
found the A T&::T tariff to be unreasonable in that it prohibited the use of interconnection devices
(the Carterphone) which did not adversely affect the telephone system. See FCC 68~661, Adopted
June 26, 1968. I do not cite to this case for legal reasons, but only to show that unreasonable
interconnection requirements are not in the public interest.
Gates , Di
Level 3 Communications, LLC
exemption directly applies to VoIP; but whether it literally applies or not, the
policybehind it applies with full force here. VoIP is a nascent technology.
There are many different forms of these services. Different entities are
pursuing different technical and business strategies with respect to it. While
we should not ask legacy network operators like Qwest to provide explicit
subsidies to these new services, neither should we ask the new services to
provide subsidies to legacy network operators like Qwest. It follows, from an
economic perspective, that VoIP services should be permitted to interconnect
with the legacy network at low, cost~based rates (either Section 251(b )(5)
reciprocal compensation rates or the FCC~established $0.0007 rate), rather
than requiring those services to pay subsidy~laden access charges.
Still another example is the FCC's treatment of interconnection
between landline LECs and wireless carriers. The FCC has long sought to
encourage the growth of wireless services, free from the traditional
constraints of the legacy network. In the Local Compctition Ordcr the FCC
advanced this goal by establishing extremely broad geographic regions within
which traffic exchanged between landline and wireless carriers would be
viewed as "local" and thus not subject to access charges.39 As a result of this
ruling, a call from a wireless customer in western Wisconsin to a landline
customer in North Dakota (or vice versa) is "local " as is a call from southern
Idaho to southeastern South Dakota (or vice versa). Even though these calls
would be treated as "long distance" calls within the traditionallandline
network, the wireless carrier only has to pay the low reciprocal compensation
38 Even though interstate access rates have been declining over time, they are still well above
what an economist would view as a cost~based rate. To be cost~based from an economic perspective
requires that a rate be in line with forward~looking incremental cost. Intercarrier compensation
rates developed in connection with Section 251(b)(5) and ISP~bound calling reflect this approach;
traditional access rates do not.
Local Compeittion Order at 9 1036. See also 47 C.ER. ~ 51.701(b )(2).
Gates , Di
Level 3 Communications, LLC
rate when it is the originating carrier, and the wireless carrier gets paid that
rate as opposed to paying originating access charges - when it is the
terminating carrier. This decision to exempt large amounts of "long distance
wireless traffic from traditional access charges is, from an economic
perspective, an explicit policy decision by the FCC - and one of which I
completely approve to exempt this relatively new, growing technology
from having to pay subsidies to support the legacy network.
Just as sound regulatory policy exempted ESPs and wireless carriers
from having to support the legacy network by paying access charges, so too
sound regulatory policy supports exempting VoIP services from them as well.
Again, this is true from an economic perspective independent of whether, as a
legal or regulatory matter, the so--called "ESP Exemption" literally applies to
VoIP traffic.
HAS THE FCC STATED ANY POSITIONS REGARDING THE
ECONOMIC IMPACT OF REGULATING VOIP?
Yes. Former FCC Chairman Powell maintained this support for leaving IP--
Enabled services unregulated at the FCC Forum on Voice over Internet
Protocol in Washington, where he was quoted as saying, "As one who
believes unflinchingly in maintaining an Internet free from government
regulation, I believe that IP~based services such as VoIP should evolve in
regulation--free zone." Then Chairman Powell went on to caution regulators
with respect to IP--Enabled services' regulation, saying "No regulator, either
federal or state, should tread into this area without an absolutely compelling
justification for doing SO.40 Chairman Powell's statements were part of a
40 Opening Remarks of FCC Chairman Michael K. Powell at the FCC Forum on Voice over
Internet Protocol (VoIP) December 1 2003 - Washington, D.
Gates , Di
Level 3 Communications, LLC
daylong forum to address business, technical, service feature and policy
issues. Consistent with those statements, Chairman Powell stated
The burden should be placed squarely on government to
demonstrate why regulation is needed, rather than on
innovators to explain why it is not.
CAN YOU DISCUSS FURTHER WHY THE "HANDS..OFF"
APPROACH BY THE FCC HAS BEEN SO SUCCESSFUL?
Yes. By refraining from regulating technology, the FCC has eliminated the
uncertainty that regulation sometimes imposes on the industry. This has
allowed the capital markets and industry players to develop business plans
and to invest capital to meet consumer demand.
It is very difficult for companies to develop products and technology
when faced with a patchwork of regulatory requirements. The balkanization
of the regulatory landscape increases not only the costs of compliance - if
what constitutes compliance can even be determined - but also embeds an
unacceptable level of inefficiency resulting from an inability to achieve
economies of scale - economies of scale that the IlECs have enjoyed
throughout their life cycle by virtue of their monopoly hold on the market.
other words, there should be one unified regulatory approach to VoIP services
and technology, not a 50--state patchwork of regulation.
ARE YOU SUGGESTING THAT THE STATES SHOULD SIMPLY
FOLLOW THE LEAD OF THE FCC?
No. But the Federal approach has been very successful, so the states should
seriously consider what benefits would derive from imposing multiple and
perhaps wildly varying regulatory paradigms of their own. The Commission
41 See US News &t World Report
, "
Courting Calls - Telecom and Cable Firms Scramble to
Offer Internet Calls ; by Mary Kathleen Flynn; Feb 2, 2004.
Gates , Di
Level 3 Communications, LLC
should maintain Idaho s current policy of not applying access charges on IP--
Enabled traffic until the FCC completes its investigations in the NPRMs
(Developing a Unified lntcrcarrier Compcnsation Rcgimc CC Docket No. 01--92 and
IP~Enablcd Scrviccs WC Docket No. 04--36). The information gathered in the
FCC proceedings will be useful in the evolving policy debate at the state level.
IS Ip..ENABLED OR VOIP TRAFFIC A SIGNIFICANT PART OF THE
TOTAL TRAFFIC IN THE UNITED STATES?
, but it is a growing percentage. In the two charts below, a comparison of
various technologies is provided for 2003 and for 2008.42 The first chart
shows VoIP minutes were about one percent of total switched minutes of use
in 2003. In the second chart, we see projected 2008 VoIP minutes to be about
six percent of the total.
IMPACT OF TECHNOLOGY SUBSTITUTION ON 2003 INTERSTATE
SWITCHED AMOUS
III 2003 Estimated Interstate AMOUs Replaced by
VolP (AlIILECs)
36%
III 2003 Estimated Interstate Wireless MOUs
0 2003 Interstate Switched Access MOUs (All
ILECs)
42 These charts and their underlying data were taken from publicly available research sources
and compiled for use in FCC Docket Nos. 04~ 36, 03~ 266.
Gates , Di
Level 3 Communications, LLC
IMPACT OF TECHNOLOGY SUBSTITUTION ON 2008 ESTIMATED
INTERSTATE SWITCHED AMOUS
60/0 II1II 2008 Estimated Interstate AMOUs Replaced by
VolP (AlIILECs)
II1II 2008 Estimated Interstate Wireless MOUs
0 2008 Estimated Interstate Switched Access MOUs
(All ILECs)
At the same time, we see dramatic increases in the projected amount of
wireless minutes of use. So, while VoIP is getting significant attention today,
the volumes and revenues associated with that traffic are not yet significant.
Further, to the extent substitution is occurring in the market, the majority of
that substitution is occurring because of wireless and not VoIP.
WON'T ILECS BE HARMED BY NOT RECEIVING ACCESS CHARGES
ON Ip..ENABLED TRAFFIC, EVEN IF THAT TRAFFIC IS A SMALL
PERCENTAGE OF THE TOTAL?
No. First of all, as discussed above, the traffic to date is dc minimis. Second
Qwest is being fully compensated for the traffic, albeit at a lower rate.
IF QWEST AND THE OTHER RBOCS WERE CORRECT ABOUT THE
IMPACT ON REVENUES AND EARNINGS, WOULD THAT JUSTIFY
REGULATION OF Ip..ENABLED SERVICES?
No. Neither the ILECs' dire predictions of reduced local revenue (as market
share shifts to VoIP providers), nor their dire predictions of all long distance
traffic moving to VoIP to avoid access charges, even if they were correct
would justify common carrier regulation of IP~Enabled services. Moreover, as
Verizon s Chief Executive Officer Seidenberg has stated: "Our view is to let
Gates , Di
Level 3 Communications, LLC
cannibalization occur.43 Seidenberg has said that while VoIP probably
would reduce Verizon s local phone market share from 900/0 to 600/0, Verizon
plans to participate in VoIP both as a backbone provider and as an ISP
meaning more revenue per customer.
HAS QWEST SUPPORTED THE FEDERAL "HANDS OFF" APPROACH
TO Ip.. ENABLED SERVICES?
Yes. Qwest has supported the FCC's position against regulation of voice
communications over the Internet. In an article dated December 5, 2003
Qwest's CEO said
, "
.it would be inconsistent for the commission to regulate
what s known as "voice over Internet protocol" (VoIP) service when similar
services, such as telephone via cable connection and wireless phones, are not
regulated." He went on to note that Qwest was launching its VoIP service in
Minnesota and that VoIP could be more profitable to the company than
traditional phone service, because it does not have the added costs of
regulation.
HAVE ILECS ARGUED IN THE PAST THAT, IN THE ABSENCE OF
ACCESS CHARGE REVENUES, RA TEP AYERS WOULD BE
NEGATIVELY IMPACTED?
Yes. The faulty premise of the previous RBOC argument has been that the
impact of VoIP would negatively impact RBOC margins, resulting in the need
for RBOCs to increase local rates. Today, however, as discussed above, the
RBOCs are rapidly deploying VoIP services and embracing the new
technology. Indeed, the RBOCs are supporting the FCC decision to not
regulate these services, in part because of their offerings. In fact, on Qwest
Communications Daily, Oune 20, 2001).
rd.
Qwest Chief Backs Up FCC on Voice Over Internet"; Denver Post, Dee 5 2003.
Gates , Di
Level 3 Communications, LLC
web site it boasts about its IP network and its ability to provide "mission
critical applications" such as VoIP:
For years, Qwest's state~of~the--art IP network has been
transferring voice and data across the globe for businesses of
all sizes. The Qwest network has the capacity and advanced
capabilities to support today s mission critical applications
such as Voice over IP (VoIP), as well as bandwidth--intensive
business applications such as Enterprise Resource Planning,
Customer Relationship Management, and other business--to..
business functions.
AT&T has rolled out an aggressive VoIP initiative. Time Warner Cable has
said that it is teaming with MCI and Sprint to offer VoIP services nationally.
As such, this is not just a niche market, but one that all providers - ILECs
CLECs, cable providers, etc. - are rushing to participate in. As a U. S. News
and World Report article concluded
, "
The bottom line: Consumers and
businesses stand to benefit from lower prices and a wide range
sophisticated features. ,,
WHY WOULD QWEST SEEK TO IMPOSE ACCESS CHARGES ON
VOIP TRAFFIC WHEN IT IS DEPLOYING THE SERVICE?
Qwest is attempting to maintain its sinecure access revenue as a prop as
migrates itself to the IP platforms - the end result being a continuation of its
predominant market position and the lack of competition.
ASSUMING VOIP IS SUBSTITUTING FOR OTHER SERVICES, ARE
THERE OFFSETS TO THE SUBSTITUTION OCCURRING IN THE
INDUSTRY?
Yes. Over the last few years, RBOCs have been the beneficiaries of gaining,
for the first time, access to markets and associated revenues that have
46 See http://www.qwest.com/about/qwest/network/index.html.
47 See US News & World Report
, "
Courting Calls - Telecom and Cable Firms Scramble to
Offer Internet Calls ; by Mary Kathleen Flynn; Feb 2, 2004.
Gates , Di
Level 3 Communications, LLC
experienced tremendous growth. For example, Qwest announced last year
that it had achieved one million DSL subscribers. This growth in DSL
directly related to the growing popularity of the Internet and related services
including VoIP. Specifically Qwest stated:
As a direct result of strategic DSL investments and initiatives
Qwest Communications International Inc. (NYSE: Q)
announced today that it has achieved one million DSL
subscribers. This represents an important milestone for the
company and highlights the fact that Qwest's four consecutive
quarters of double~digit subscriber growth is outpacing the
current industry average.
Qwest s consumer data and Internet revenues were up nearly 50 percent in
2004. Qwest also ended 2004 with 4.6 million long~distance lines, more than
double the 2.2 million lines a year earlier. These significant gains, combined
with reduction in the access line losses, shows that Qwest is not being
harmed by the introduction of IP-- Enabled services.
PLEASE EXPLAIN WHAT YOU MEAN BY "REDUCTION IN ACCESS
LINE LOSSES.
Prior to the passage of the 96 Act and the introduction of competition in the
local market, ILECs had essentially 100 percent of the access lines. As CLECs
entered to the local market, ILECs saw a reduction in the total number of
access lines. Generally, the number of access lines lost increased over time.
Since the demise ofUNE~, however, and the continuing consolidation in the
CLEC market, the loss in access lines has decreased. In its fourth quarter
2004 financial reports, Qwest stated
The company continues to make significant inroads in
stemming competitive loss from facilities--based competitors.
Resold lines declined 28 000 sequentially as changes in the
48 See Qwest Press Release entitled
, "
Qwest Achieves One Million DSL Subscriber Milestone
released December 13 2004.
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Level 3 Communications, LLC
regulato~ environment have reduced competition from UNE
resellers. 9
In that same document Qwest also noted under Operational Highlights
Major drivers of Qwest s revenue included operational progress in
key growth areas, as well as improvement in access line losses." So the
reduction in access line loss" is an indication that Qwest is taking
back lines or losing fewer lines than in the past.
IS THERE ANY REASON WHY VOIP AND OTHER Ip.. ENABLED
OFFERINGS SHOULD NOT BE GIVEN THE FREEDOM TO DEVELOP?
No. The Internet, VoIP applications, wireless, fixed wireless and other
developing technologies only increase the value of local phone service. Today
we are seeing significant investments in newer technologies (3G wireless, IP
networks, IP CPE, PDAs, cable plant upgrades, automation and robotics, etc.
instead of continuing investment in the traditional circuit switched
network. so These new investments and technologies are resulting in more
efficient provisioning of service, new features and mobility, and flexibility in
managing services and features. In fact, IP--Enabled services, with their
integrated voice and data features, will make business and personal use of
communications much more efficient. This new trend is adding value to the
economy and consumers (residential and business alike) are enjoying new
services and flexibility.
WHY ARE V 0 IP, WIRELESS AND OTHER TECHNO LOG IES SO
INTRIGUING TO CONSUMERS?
There are several reasons why consumers are attracted to these new offerings.
These new services offer flexibility that a fixed wireline cannot offer and, as
49 See Qwest News Release
, "
Qwest Improves in Key Growth Areas and Sees Margin
Expansion in Fourth Quarter 2004.50 I am not suggesting that investment in the traditional PSTN has stopped. Investments
continue to be made, including maintenance on existing plant in service; the new investments
however, are focusing on new technologies.
Gates , Di
Level 3 Communications, LLC
such, provide an important complement to wireline services. Wireless and
VoIP services are portable so you can in effect take your service with you. In
certain environments this is a significant benefit to consumers. Efficiency,
which always entails a cost advantage, is also a consumer issue. Further
companies will enjoy savings and efficiencies through virtual call centers
reduced commuting costs as employees work more efficiently from home and
the obvious savings that competition will bring.
HAVE SOME STATES RECOGNIZED THE POTENTIAL EFFICIENCIES
AND SAVINGS THAT VOIP MIGHT PROVIDE?
Yes. A California Performance Review noted that "Moving to VoIP could
reduce the state s phone bill by between $20 million and $75 million a year.
An article on the review also referred to findings that "VoIP technology has
competitive features that would benefit the state. Internet--based phone
calling has built--in benefits such as integrated caller ID, flexibility and
network management tools that provide real--time monitoring of
bandwidth. ,,
PLEASE SUMMARIZE YOUR TESTIMONY REGARDING THE
REGULATION OF Ip..ENABLED SERVICES.
The Commission should adopt the same "hands off" policy that has been so
successful in encouraging the development of Internet and other IP~based
applications, including VoIP. Concurrently, the Commission should reaffirm
its commitment to competitors, especially competitors that serve the VoIP
51 "The ultimate goal of the California Performance Review is to restructure, reorganize and
reform state government to make it more responsive to the needs of its citizens and business
community. Only by demonstrating through concrete action the responsiveness of state government
can the public s trust and confidence be regained." http:/!cpr.ca.gov/about/#cpr. The entire report can
be found on the Internet at http://www.report.cpr.ca.gov/. The quotation in the text above is from the
fourth volume of that report, at SO15, Voice Over Internet Protocol Statewide Network
Infrastructure.
52 See
, "
California Urged to Use Open Source, VoIP", clnet News.Com; August 13, 2004.
Gates , Di
Level 3 Communications, LLC
application community, that non~discriminatory, cost based, pro~competitive
access to the network infrastructure of the ILECs will be vigorously
promoted and enforced. Unless there is some specific need to regulate such
offerings, they should be allowed to thrive or fail based on the market
dynamics they face and create.
DOES THIS CONCLUDE YOUR TESTIMONY?
Yes, it does.
Gates , Di
Level 3 Communications, LLC
CERTIFICA TE OF SERVICE
I hereby certify that on the J1Paay of August, 2005, I caused to be served, via the methode s)
indicated below, true and correct copies of the foregoing document, upon:
Jean Jewell, Secretary
Idaho Public Utilities Commission
472 West Washington Street
O. Box 83720
Boise, ID 83720--0074
jjewell CfYpuc.state.id. us
Hand Delivered
S. Mail
Fax
Fed. Express
Email
Mary S. Hobson
STOEL RIVES LLP
101 S Capitol Boulevard
--
Suite 1900
Boise, ID 83702--5958
Telephone: (208) 389~9000
Facsimile: (208) 389--9040
mshobsonCfYstoel.com
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S. Mail
Fax
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Email
Thomas M. Dethlefs
Senior Attorney
Qwest Services Corporation
1801 California Street ~ 10th Floor
Denver, CO 80202
Telephone: (303) 383~6646
Facsimile: (303) 298--8197
Thomas. DethlefsCfYqwest. com
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S. Mail
Fax
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Email
Gates , Di
Level 3 Communications, LLC