Before the

FEDERAL COMMUNICATIONS COMMISSION

Washington, D.C. 20554

In the Matter of	)

)

Application by BellSouth Corporation,	)

BellSouth Telecommunications, Inc., and	)

BellSouth Long Distance, Inc., for	)	CC Docket No. 97-231

Provision of In-Region, InterLATA	)

Services in Louisiana	)

)

_______________________________________________________

EVALUATION OF THE

UNITED STATES DEPARTMENT OF JUSTICE

_______________________________________________________

Joel I. Klein	Lawrence R. Fullerton

Assistant Attorney General	Deputy Assistant Attorney General

Antitrust Division	Antitrust Division

Thomas G. Krattenmaker	Philip J. Weiser

Special Counsel for Policy and Regulatory Affairs	Senior Counsel

Antitrust Division	Antitrust Division

Communications with respect to this document should be addressed to:

Donald J. Russell

Chief

Carl Willner

W. Robert Majure	Luin Fitch

Assistant Chief	Frank G. Lamancusa

Economic Regulatory Section	Attorneys

Telecommunications Task Force

December 10, 1997

Table of Contents

Table of Contents	ii

Summary of Evaluation	iii

Introduction	1

I.	BellSouth Can Satisfy Section 271(c)(1) If the Commission Concludes That PCS Providers Are "Competing Providers of Telephone Exchange Service" Within the Meaning of Section 271(c)(1)(A)	4

II.	BellSouth Has Failed to Demonstrate That It Is Offering Access and Interconnection That Satisfy the Checklist Requirements	9

A.	BellSouth Has Not Demonstrated That It Is Providing Access to Network Elements in a Manner That Allows Requesting Carriers to Combine Them	10

B.	BellSouth's Wholesale Support Processes Are Deficient	16

III.	The Louisiana Market Is Not Fully and Irreversibly Open to Competition	20

A.	BellSouth Has Not Demonstrated That All of Its Current or Future Prices for Unbundled Elements and Resale of Certain Retail Services Will Permit Efficient Entry or Effective Competition	21

1.	Pricing of Unbundled Elements	21

2.	Pricing of Resold Services at Wholesale	29

B.	BellSouth Has Failed to Institute Performance Measurements Needed to Ensure Consistent Wholesale Performance	31

C.	BellSouth's "Public Interest" Arguments Do Not Justify Approval of This Application	33

IV.	Conclusion	36

Summary of Evaluation

BellSouth's application to provide in-region interLATA service in Louisiana should be denied.

Applications under section 271 should be granted only when the local markets in a state have been fully and irreversibly opened to competition. This standard seeks to ensure that the barriers to competition that Congress sought to eliminate in the 1996 Act have in fact been fully eliminated and that there are objective criteria to ensure that competing carriers will continue to have nondiscriminatory access to the facilities and services they will need from the incumbent BOC.

At this time, BellSouth faces no significant competition in local exchange services in Louisiana. Lacking this best evidence that the local market has been opened to competition, the Department cannot conclude that its competition standard is satisfied unless BellSouth shows that significant barriers are not impeding the growth of competition in Louisiana. BellSouth has not done so in this application.

BellSouth has failed to demonstrate that it offers access to unbundled network elements in a manner that allows requesting carriers to combine such elements in order to provide telecommunications service, as required by the 1996 Act. Furthermore, BellSouth has failed to demonstrate its ability to provide adequate, nondiscriminatory access to the operations support systems that will be critical to competitors' ability to obtain and use unbundled elements and resold services.

With respect to pricing of BellSouth's interconnection, unbundled network elements and resold services, the Louisiana Public Service Commission has now established permanent prices, and has, at least for the most part, done so in a manner consistent with the Department's competitive standard. However, in a few specific but significant areas, including geographic deaveraging and the pricing of collocation, BellSouth has failed to demonstrate that it offers prices for unbundled network elements in a manner that permits entry and effective competition by efficient competitors.

BellSouth also has failed to measure and report all of the indicators of wholesale performance that are needed to demonstrate that it is currently providing adequate access and interconnection and to ensure that acceptable levels of performance will continue after section 271 authority is granted.

Finally, in light of our determination that BellSouth's local markets have not been fully and irreversibly opened to competition, we conclude that the likely competitive benefits in markets for interLATA services do not justify approving this application. BellSouth's estimates of the magnitude of those benefits rest on unconvincing analytical and empirical assumptions, but more importantly, its analysis fails to give adequate consideration to the more substantial benefits from increased competition in local markets that will be gained by requiring that local markets be opened before allowing interLATA entry.

Before the

FEDERAL COMMUNICATIONS COMMISSION

Washington, D.C. 20554

In the Matter of	)

)

Application by BellSouth Corporation,	)

BellSouth Telecommunications, Inc., and	)

BellSouth Long Distance, Inc., for	)	CC Docket No. 97-231

Provision of In-Region, InterLATA	)

Services in Louisiana	)

)

_______________________________________________________

EVALUATION OF THE

UNITED STATES DEPARTMENT OF JUSTICE

_______________________________________________________

Introduction

The United States Department of Justice ("the Department"), pursuant to section 271(d)(2)(A) of the Telecommunications Act of 1996 ("1996 Act" or "Telecommunications Act"), submits this evaluation of the application filed by BellSouth Corporation, BellSouth Telecommunications, Inc., and BellSouth Long Distance, Inc. (collectively "BellSouth") on November 6, 1997, to provide in-region, interLATA telecommunications services in the state of Louisiana.

As the Department has previously explained, in-region interLATA entry by a Bell Operating Company ("BOC") should be permitted only when the local markets in a state have been fully and irreversibly opened to competition. This standard seeks to ensure that the barriers to competition that Congress sought to eliminate in the 1996 Act have in fact been fully eliminated and that there are objective criteria to ensure that competing carriers will continue to have nondiscriminatory access to the facilities and services that they will need from the BOC.

In applying this standard, the Department will consider whether all three entry paths contemplated by the 1996 Act -- facilities-based entry involving construction of new networks, the use of unbundled elements of the BOC's network, and resale of the BOC's services -- are fully and irreversibly open to competitive entry to serve both business and residential consumers. To do so, the Department will look first to the extent of actual local competition as the best evidence that local markets are open. The degree to which such entry is broad-based will determine the weight the Department places on it as evidence. If broad-based commercial entry involving all three entry paths has not occurred, the Department will examine competitive conditions to see whether significant barriers continue to impede the growth of competition and whether benchmarks to prevent backsliding have been established. Wherever practical, this examination will focus on the history of actual commercial entry. The experience of competitors seeking to enter a market can provide highly probative evidence concerning barriers to entry, or the absence thereof. However, we do not regard competitors' small market shares, or even the absence of entry, standing alone, as conclusive evidence that a market remains closed to competition, or as a basis for denying an application under section 271. For a variety of reasons, potential competitors may not immediately seek to use all entry paths in all states, even if the barriers to doing so have been removed, and a BOC's entry into interLATA services should not be delayed because of the business strategies of its competitors.

At this time, BellSouth faces no significant competition in local exchange services in Louisiana. Lacking this best evidence that the local market has been opened to competition, the Department cannot conclude that our competition standard is satisfied unless BellSouth proves that significant barriers are not impeding the growth of competition in Louisiana. It has failed to do so in this application. BellSouth asserts that it has met the checklist and public interest requirements of section 271, but that assertion rests in large measure on BellSouth's view as to the nature of those requirements -- a view that is often at odds with the plain language of the statute and with the Commission's prior decisions, as well as the Department's competitive standard. While we believe that BellSouth has made important progress towards fulfilling its responsibilities under the Telecommunications Act to open its local markets to competition, the evidence available in the present application falls well short of demonstrating compliance with several critical prerequisites for approval. In particular:

BellSouth has failed to demonstrate that it offers access to unbundled network elements "in a manner that allows requesting carriers to combine such elements in order to provide . . . telecommunications service," as required by the 1996 Act, 47 U.S.C. § 251(c)(3).

BellSouth has failed to demonstrate its ability to provide adequate, nondiscriminatory access to the operations support systems that will be critical to competitors' ability to obtain and use unbundled elements and resold services. It has failed to measure and report all of the indicators of wholesale performance that are needed to demonstrate that it is currently providing adequate access and interconnection and to ensure that acceptable levels of performance will continue after section 271 authority is granted.

Although the Louisiana PSC has adopted an appropriate pricing methodology, BellSouth's prices do not always reflect the essential principles of that methodology, failing, for example, to provide for any transition to geographically deaveraged prices for unbundled network elements that would permit efficient competitors to enter the market and compete effectively.

We discuss each of these deficiencies below, after addressing the threshold question of BellSouth's eligibility to apply under either Track A or Track B.

I.	BellSouth Can Satisfy Section 271(c)(1) If the Commission Concludes That PCS Providers Are "Competing Providers of Telephone Exchange Service" Within the Meaning of Section 271(c)(1)(A)

Section 271(c)(1) of the 1996 Act requires the BOC seeking in-region, interLATA authority to meet the requirements of either subparagraph (A) ("Track A") or subparagraph (B) ("Track B"). BellSouth contends that this interLATA entry application satisfies Track A, which requires that the BOC be providing access and interconnection to its network for "one or more unaffiliated competing providers of telephone exchange service . . . to residential and business subscribers" offering service exclusively or predominantly over their own facilities. 47 U.S.C. § 271(c)(1)(A). To support this claim, BellSouth points to its interconnection agreements with several Personal Communications Service ("PCS") providers in Louisiana -- PrimeCo, Sprint Spectrum, and MereTel.

In order to accept BellSouth's argument that it has satisfied Track A, the Commission would have to find that these PCS providers are "competing providers of telephone exchange service" within the meaning of section 271(c)(1)(A). Although we examine, from an antitrust perspective, the factual record concerning the manner and extent to which these PCS providers could be said to be "competing" with BellSouth, we defer to the Commission's expert judgment in interpreting its own statute on the legal question of whether this is the correct standard for determining who is a "competing" provider of telephone exchange service.

The 1996 Act specifically provides that cellular services "shall not be considered to be telephone exchange services" for purposes of Track A, 47 U.S.C. § 271(c)(1)(A), but it does not specifically address the status of PCS under Track A. While the Commission has not yet determined the effect of this "cellular exclusion" on the status of PCS providers under Track A, this exclusion lends support to the claim that PCS should be considered "competing telephone exchange service" under Track A, following the statutory construction principle of "expressio unius est exclusio alterius."

The Commission has determined that Track A's "competing" requirement can be satisfied by providers that offer an "actual commercial alternative" to the BOC's telephone exchange service, but has not yet addressed whether the statutory requirements of Track A require an assessment of the technical and economic substitutability between competitors' and a BOC's services, and, if so, the degree of substitutability that is needed to establish that a provider is "competing." BellSouth argues that any commercially available provider of telephone exchange services can satisfy the Track A facilities-based competitor requirement, even if its services are only substitutable for BellSouth's to a relatively marginal degree. Specifically, BellSouth asserts that Track A's concept of "competing" requires only that a facilities based provider "'actually be in the market' and compete for customers in a geographic locale served by the BOC" and that "the 'price, features, and scope' of a competitor's service need not be comparable to those of the BOC's service." In the alternative, BellSouth argues that the PCS offerings in Louisiana would satisfy a Track A requirement of "economic comparability" to its own wireline service because at least some number of lower-use customers would switch from traditional wireline service to the available PCS offerings..	The House Commerce Committee explained that it did "not intend for cellular to qualify [under the precursor of Track A], since the Commission has not determined that cellular is a substitute for local telephone service." H. Rep. No. 104-204, at 77.

As the interpretation of section 271(c)(1)(A) falls within the Commission's discretion under Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984), we respectfully defer to the Commission's judgment on this question. The Commission is entitled to adopt any reasonable construction of this term in interpreting the Track A requirements for section 271 applications. To assist the Commission's decision, however, we offer our assessment that PCS and wireline service are not currently close substitutes in Louisiana from an antitrust perspective, but, given the issues of statutory construction presented here, take no position on the merits of whether an antitrust-like substitutability analysis is the most reasonable way to interpret "competing" as used in section 271(c)(1)(A).

From an economic perspective, the substitutability of products (or services) can be assessed on a wide array of evidence, including analyses of the technical characteristics of products and their uses; the manner in which products are marketed; the relative prices of the products; and analyses of the frequency and circumstances under which customers switch from one product to another. As the evidence in the record makes clear, PCS is substantially more expensive than wireline service for the great majority of consumers. In addition, PCS services are priced differently; PCS subscribers pay usage charges for outgoing calls (whereas wireline local services are often flat rated), and for in-coming calls (which are usually free with wireline service). In lieu of these basic economic considerations, we concur with the Commission's decision to refrain from treating PCS as a substitute -- at least in the antitrust sense -- for wireline service.

From a functional perspective, however, PCS is, as the Commission has previously determined, "comparable" to wireline telephone exchange service. In addition, it is likely that there is a limited degree of substitution between PCS and wireline service among a small proportion of customers. The extent to which these considerations are relevant to and balanced in interpreting the Track A facilities-based competitor requirement are matters that we leave to the Commission.

II.	BellSouth Has Failed to Demonstrate That It Is Offering Access and Interconnection That Satisfy the Checklist Requirements

Even if the Commission concludes that BellSouth satisfies the Track A facilities based competitor requirement, it should still deny this application. BellSouth has not demonstrated that it is offering access and interconnection that satisfy critical requirements of the competitive checklist or that it has fully and irreversibly opened Louisiana's markets to competition.

Under Track A, an applicant is required to show that each checklist item is available both as a legal matter and as a practical matter. A mere paper promise to provide a checklist item, or an invitation to negotiate, would not be a sufficient basis for the Commission to conclude that a BOC "is providing" all checklist items. Nor would such paper promises constitute an appropriate basis for the Department to conclude that the market had been fully opened to competition.

A.	BellSouth Has Not Demonstrated That It Is Providing Access to Network Elements in a Manner That Allows Requesting Carriers to Combine Them

Section 251(c)(3) requires incumbent LECs to provide unbundled network elements "in a manner that allows requesting carriers to combine such elements in order to provide ... telecommunications service." BellSouth has failed to show that it is offering or providing access to unbundled elements in accordance with this requirement. As we explained in our filing on BellSouth's application in South Carolina, interconnection agreements and an SGAT that fail to state adequately the terms and conditions under which a BOC will provide unbundled elements so that they may be combined do not satisfy section 251(c)(3). In light of the substantial competitive implications of this issue, we believe that a BOC should be required to (1) clearly articulate the manner in which it proposes to offer UNEs so that they may be combined, (2) demonstrate that its proposed method is reasonable and non-discriminatory; and (3) establish that it has the practical ability to process orders and provision unbundled elements that are to be combined by CLECs. In this application, BellSouth again fails to satisfy these requirements.

Given the recent litigation relating to the requirement to provide UNEs in a manner that enables competitors to combine them, the Louisiana Public Service Commission ("LPSC") has yet to make any specific findings that BellSouth is providing unbundled network elements ("UNEs") in a manner that allows requesting carriers to combine them to provide telecommunications services. In its original SGAT and in its interconnection negotiations, prior to the decision in Iowa Utilities Board v. FCC, 120 F.3d 753 (8th Cir. 1997) ("Iowa Utilities Board"), BellSouth refused to provide UNEs at cost based prices or to allow them to be used to provide exchange access if the requesting carrier intended to combine them to provide an end user service that competed with a BellSouth service. Both in its initial decision, as well as its decision on rehearing (that vacated section 51.315(b) of the Commission's rules), Iowa Utilities Board v. FCC, No. 96-3321, Order On Petitions For Rehearing, 1997 WL 658718, at *2 (8th Cir. Oct. 14, 1997), the Eighth Circuit made clear that entrants were entitled to purchase UNEs and use them in combination to provide service. In fact, the Eighth Circuit justified its ruling that the incumbents need not combine UNEs for competitors on the ground that "the fact that the incumbent LECs object to this rule [on combining elements for CLECs] indicates to us that they would rather allow entrants access to their networks than have to rebundle the unbundled elements for them." Iowa Utilities Board, 120 F.3d at 813.

BellSouth did modify its Louisiana SGAT in light of this decision -- to include a provision stating that BellSouth must allow requesting carriers to gain access to network elements in order to combine them -- but it has yet to develop specific proposals as to how this might be accomplished. Accordingly, interested parties have not had an opportunity to comment on any such proposals and the LPSC made no findings concerning any such specific proposal. Similarly, the LPSC has not considered the soundness of what, if any, charges BellSouth intends to collect from CLECs as part of making UNEs available so that they may be combined.

After the Eighth Circuit ruled, the LPSC directed BellSouth to add the following provision to its SGAT:

Combining Network Elements. A requesting carrier is entitled to gain access to all of the unbundled elements that when combined by the requesting carrier are sufficient to enable the requesting carrier to provide telecommunication service. Requesting carriers will combine the unbundled network elements themselves.

In essence, this provision suffers from a similar lack of specificity to the provision that we found unsatisfactory in our South Carolina filing. Accordingly, the Department finds BellSouth's Louisiana SGAT provision on combining UNEs to be legally insufficient as well.

BellSouth states that it is open to negotiating at least some of the issues concerning the combining of UNEs. This is insufficient for a basic reason: outlining an undeveloped plan for enabling competitors to combine elements and offering to negotiate terms and conditions on a case-by-case basis do not commit BellSouth to any procedure -- let alone one that would be sufficient to satisfy section 251(c)(3) and the checklist standard.

While there is much that is unclear concerning the manner in which BellSouth proposes to provide unbundled elements, it does appear clear that BellSouth believes it may require CLECs to lease collocation space and deploy their own equipment for the purpose of combining unbundled loops, local switching, and other unbundled elements. At present, BellSouth has suggested that it may be willing to discuss other approaches, but has not made any binding commitment to enable a CLEC to combine UNEs in any other fashion. Thus, on the present record, given BellSouth's insistence on physical collocation -- or an unspecified solution to be devised later -- we cannot conclude that BellSouth is providing "just, reasonable, and nondiscriminatory" access to unbundled elements, as required by the checklist and section 251(c)(3).

CLECs have provided substantial evidence in this proceeding indicating that a collocation requirement would dramatically and unnecessarily increase the obstacles to combining elements, would decrease the quality of the service that new entrants are able to provide compared to the incumbent (increasing the risk of service outages), and would severely limit the number of customers that new entrants would be able to serve for the foreseeable future. Given the lack of specificity in the SGAT and the absence of any consideration by the LPSC of these issues, we are not in a position to assess these concerns. We do note that, given the presence of alternative approaches for permitting the recombination of network elements, two of which are outlined in an affidavit submitted by AT&T, any determination of which approaches are reasonable and non-discriminatory requires an assessment of the available alternatives. Neither BellSouth, nor the LPSC, has undertaken a serious examination of this question. Rather, BellSouth has merely asserted, but not demonstrated, that a requirement of collocation arrangements should be considered reasonable and non-discriminatory. In light of the cumbersomeness of this approach, the threat of service outages and the competitive disadvantages that such a requirement could impose on CLECs, we cannot conclude -- at least on the present record -- that BellSouth's offering of collocation satisfies its obligation under section 251(c)(3).

In order to show that it is "providing" unbundled elements, a BOC must also demonstrate that it has the practical ability to provide network elements in a manner that permits them to be combined. The BOCs' current networks were not designed to provide unbundled elements to others and it should not be assumed that they necessarily possess the capabilities to do so. To date, there has been no actual experience with the provision of network elements by BellSouth to CLECs attempting to combine them and the limited testing thus far does not appear to have tested the particular capabilities at issue here. In the absence of actual provisioning or satisfactory evidence of testing, BellSouth has not demonstrated that it has the practical ability to provide unbundled elements in a manner that will permit CLECs to combine them to provide telecommunications service.

The resolution of the issues relating the combining of elements will be very important to promoting efficient competitive entry. In certain cases, the most economically efficient means for CLECs to serve a large segment of customers in the foreseeable future may be through the use of combinations of unbundled elements, whether a CLEC uses only combinations of elements purchased from incumbent LECs, or uses such elements in conjunction with network elements of its own. If appropriate means can be found to ensure that elements are provided in a manner that allows CLECs to combine them without unnecessary obstacles and overly cumbersome procedures, alternative providers of local services may be able to serve many consumers using unbundled elements. Conversely, if unbundled elements are provided in a manner that requires CLECs to incur large costs to combine them, many customers -- especially residential ones -- may lack a facilities-based alternative to the BOC for a considerably longer period of time.

B.	BellSouth's Wholesale Support Processes Are Deficient

Efficient and effective wholesale support processes– the manual and electronic processes, including access to OSS functions, that provide competing carriers with meaningful access to resale services, unbundled elements, and other items required by section 251 and the checklist of section 271– are critical to opening local markets to meaningful competition. As we made clear in our South Carolina evaluation and reaffirm here, BellSouth has not yet demonstrated that its wholesale support processes are sufficient to meet the checklist and to ensure that its local markets are fully and irreversibly open to competition.

The Department's analysis of wholesale support processes flows, not simply from statutory requirements, but most fundamentally from our recognition that these processes are critical to facilitating competition. Inadequate processes will prevent competitors from providing the level of quality and timeliness that customers rightly expect from telecommunications providers, and faced with such shortcomings, customers will hold the competing carrier– not the delinquent incumbent– responsible for the failure. Because of this risk, competitors are unlikely to undertake entry on a significant scale when incumbents are offering only a paper commitment to provide the necessary support processes at some future point rather than adequate and reliable support processes. Accordingly, to have meaningful competition and "to ensure that a new entrant's decision to enter the local exchange market in a particular state is based on the new entrant's business considerations, rather than the availability or unavailability of particular OSS functions," Michigan Order ¶ 133, it is essential that the necessary wholesale support processes be in place, available on a non-discriminatory basis, and scalable to meet reasonably foreseeable future demand.

BellSouth places great weight upon the findings of the LPSC that its OSS satisfy the checklist. We find the LPSC's determination to be unpersuasive for several reasons. First, the LPSC's determination was not based upon the Commission's approach for assessing checklist compliance. Second, the LPSC did not articulate the analysis it performed in assessing OSS compliance, so that it is difficult to ascertain the basis for its conclusion on OSS or its reasons for rejecting the recommended decision of the Chief Administrative Law Judge (ALJ) that did discuss OSS issues at length and found significant deficiencies. Third, it appears that the LPSC's recommendation was premised, at least in large part, on a technical demonstration held on August 13 as opposed to a more thorough assessment of performance parity and operational readiness through internal testing evidence, carrier-to-carrier testing, and performance indicators reflective of actual use. Finally, BellSouth's OSS are operated on a regional, rather than a state- by-state, basis, and other state commissions in BellSouth's region have concluded that the same systems approved by the LPSC were insufficient.

Putting aside BellSouth's legal arguments and efforts to explain away the concerns articulated in the Department's South Carolina filing, it remains clear that BellSouth has failed to satisfy the Department's three essential requirements for an acceptable wholesale support system, as we made clear in our South Carolina Evaluation and reaffirm here. First, BellSouth has not instituted performance measures that will enable it to demonstrate -- through objective criteria -- that it can provide wholesale performance at parity with its own retail performance where such a comparison can be made, and a meaningful opportunity to compete, where no retail counterpart is available. As we have stressed, proper performance measurement is an essential aspect of providing effective support systems, and although BellSouth has taken important steps in this regard, it has yet to institute the necessary range of measures to demonstrate that it has provided satisfactory support processes. Second, as explained in our South Carolina filing, BellSouth has failed to implement support systems that provide CLECs with access to the basic functionalities at parity with its own systems. BellSouth has attempted to explain away a number of the Department's concerns, but, in the short period of time since its initial filing, it has failed to make the changes necessary to provide such access. Finally, the Department remains unconvinced that the important BellSouth systems have been "stress tested" to establish their operational readiness -- i.e., that the systems can be relied on when used at foreseeable levels of demand.

III.	The Louisiana Market Is Not Fully and Irreversibly Open to Competition

The 1996 Act requires the Commission to consult with the Attorney General on all applications under section 271, and authorizes the Attorney General to provide an evaluation of such applications "using any standard the Attorney General considers appropriate." The 1996 Act does not limit the Department's evaluation to any of the specific findings that the Commission is required to make, under section 271(d)(3), before approving an application. Indeed, it does not limit the evaluation to those findings, collectively, though of course the evaluation may be relevant to any or all of those findings. In any event, the Commission is required to accord "substantial weight" to the Department's evaluation. 47 U.S.C. § 271(d)(2)(A).

As we have explained previously, significant commercial entry can give rise to the inference that a market has been opened to competition. At this time, however, BellSouth faces no significant competition in local exchange services in Louisiana. Thus, despite the apparent interest in entering Louisiana by a significant number of competitors, there is no reason to presume that the market is fully and irreversibly open to competition. Therefore, we must examine competitive conditions more carefully to see whether any significant barriers continue to impede the growth of competition in Louisiana.

A.	BellSouth Has Not Demonstrated That All of Its Current or Future Prices for Unbundled Elements and Resale of Certain Retail Services Will Permit Efficient Entry or Effective Competition

1.	Pricing of Unbundled Elements

Competition through the use of unbundled network elements will be seriously constrained, and may even be impossible, if those elements are not available at appropriate prices. In evaluating pricing arrangements as part of its competitive assessment, the Department will ask whether a BOC has demonstrated that its current prices are, and future prices will be, supported by a reasoned application of a procompetitive pricing methodology.

In our South Carolina filing, we explained that a procompetitive pricing methodology is a necessary precondition to a fully and irreversibly opened local market. Our evaluation of a state's wholesale pricing structure does not require any particular methodology, but rather, insists on a reasoned application of a pro-competitive one. We expect that in most cases, a BOC will be able to demonstrate this by relying on a reasoned pricing decision by a state commission. However, if a state commission has not explained its critical decisions, or has explained them in terms that are inconsistent with procompetitive pricing principles, the Department will require further evidence that prices are consistent with its open-market standard.

In Louisiana, BellSouth's pricing for unbundled elements is in most respects consistent with the Department's focus on pro-competitive pricing principles. Significantly, BellSouth's permanent prices for interconnection, unbundled elements and transport and termination, recently approved by the LPSC, were developed from a study by the LPSC's staff consultant according to the TSLRIC/LRIC ratemaking requirements that the LPSC adopted after the Telecommunications Act was passed, as well as the TSLRIC principles of the Michigan PSC. The Department is satisfied that this methodology embodies the basic concepts of forward- looking cost-based pricing, and is consistent with the Department's competitive standard.

Despite the pro-competitive methodology adopted by the LPSC, the lack of any plan for a geographic deaveraging of local loop prices over time or any adequate showing of cost-based prices for collocation preclude us from determining that the pricing structure in Louisiana will facilitate efficient and effective competitive entry. In another area -- the pricing of vertical features associated with unbundled switching -- we are not satisfied on the current record that BellSouth's pricing is consistent with our open-market standard, but we do not preclude the possibility that BellSouth might be able to justify its pricing under that standard with additional evidence.

Geographic Deaveraging. As we noted in our South Carolina filing, we would expect the cost of unbundled network elements -- particularly, local loops -- to vary across different geographic areas within the state, and thus, would expect states to adopt some mechanism for geographically deaveraging prices, now or in the future. The LPSC, however, has not offered any justification for refusing to adopt geographically deaveraged prices. Various potential local competitors advocated geographic deaveraging of unbundled elements, while both BellSouth and the LPSC's staff consultant proposed averaged statewide rates. Because the LPSC's ALJ concluded that geographic deaveraging was necessary for an accurate cost determination, she recommended that the LPSC reject the use of statewide averaged rates and adopt instead geographic deaveraging based on broad "density" zones, proposing that the LPSC reserve a final decision on an appropriate method of geographic deaveraging while continuing to use statewide averaged rates on an interim basis. The LPSC failed to adopt any phased-in program of geographic deaveraging -- without any analysis or explanation -- in favor of a permanent statewide averaged UNE rate structure.

The lack of any plan for geographic deaveraging, particularly in loop prices, will have a significant effect on local entry in Louisiana using unbundled elements, and could affect the viability of such competition for some types of customers. Experience from all other states that have established deaveraged prices, as well as from general nationwide studies, indicates that there are considerable variations in loop costs between urban and rural areas, and there is certainly no evidence in this record that would suggest otherwise for Louisiana. BellSouth has not argued that there are no differences in loop costs across geographic areas, but has defended the lack of deaveraging on the ground that deaveraging would increase the incentives of competitors to focus their offerings on more densely populated areas.

As the 1996 Act makes quite clear, there must be a transition to an efficient, sustainable, and equitable competitive environment, whereby unbundled element prices will eventually be geographically deaveraged to reflect differences in costs, and subsidies to support universal service will be provided explicitly and in a competitively-neutral manner. To be sure, this transition will requires the reform of universal service support, as called for by section 254(f) of the 1996 Act, to replace the implicit subsidization in present retail rates for local service and to permit appropriate adjustments to a state's rate structure. Thus, while we do not believe that geographic deaveraging must necessarily take place immediately, before section 271 authority can be granted, it must at least be clear that it will be accomplished over some transition period. However, when there has been no measure of geographic deaveraging of loop prices, and there is no reasonable transition plan to implement such deaveraging in the future, we cannot conclude that a market is or will be open to efficient competition using unbundled elements.

Collocation. BellSouth offers no prices at all in Louisiana for one of the significant components of physical collocation -- space preparation -- leaving the determination of such prices to negotiation on a case-by-case basis. For other components, such as space construction, BellSouth also intends to impose charges that have not been adequately demonstrated to be cost- based. Because physical collocation is an important component of providing interconnection and access to unbundled network elements under section 251(c)(6), the absence of reasonable and predictable prices for collocation threatens to act as a formidable barrier to entry.

The LPSC's ALJ concluded that BellSouth's rates for collocation should be subject to the same forward-looking cost standards applicable to pricing of interconnection and unbundled network elements generally, and proposed to use a collocation cost model offered by potential competitors. The LPSC's staff consultant did not reject this model, but simply stated that she did not have time to analyze it, and therefore used BellSouth's cost assumptions with limited modifications of the final prices for other across-the-board corrections. The LPSC, however, did not discuss collocation at all in its final pricing decision, but simply rejected the ALJ's recommendations and allowed BellSouth's handling of physical collocation space preparation on an individual case basis, as well as its proposed construction and other charges, to stand.

Although we understand that there may be instances in which it would be justifiable to postpone addressing certain issues, as a rule we believe that it is far preferable for a BOC to have prices and other relevant terms of service in place when it applies, rather than to defer the establishment of such terms for future negotiations following its interLATA entry, when its incentives to delay local competitive entry would be heightened. On the current record, BellSouth has not shown that it could not provide greater specificity in advance as to how it will charge for physical collocation space. Because its failure to commit itself to certain pricing principles raises significant competitive concerns -- i.e., raising the possibility of unreasonable prices and drawn out negotiations that have the effect of precluding competitive entry -- we cannot conclude that the pricing structure for collocation will permit efficient entry so as to fully and irreversibly open the local market.

Vertical Switching Features. The issue of pricing for vertical switching features received considerable attention from both the consultant and the ALJ. However, BellSouth's study on this issue was submitted at a late stage in the state pricing docket, as BellSouth had initially resisted providing vertical features as unbundled elements. The consultant rejected some of BellSouth's cost assumptions, but still priced vertical switching features as a separate element in addition to the switch port charge of $2.20, recommending a charge of $8.28 for all vertical features that was approved by the LPSC. Our concern with the pricing of vertical services does not go merely to whether a charge for vertical features should be imposed separately or bundled with the switch port charge, but also to the costs associated with purchasing them. The ALJ proposed not to adopt any permanent rate for vertical switching features, but to conduct further proceedings on this issue, in light of the limited opportunity the consultant had to analyze BellSouth's cost data, while using the consultant's recommended rate on an interim basis. The LPSC rejected this recommendation without explanation, adopting the recommended rate as permanent without conducting further proceedings. In light of the ALJ's and the LPSC consultant's suggestions that this issue would have benefited from a greater opportunity for analysis and discovery, possibly leading to a significantly different recommendation, we question whether the LPSC's procompetitive pricing principles were applied in a reasoned fashion as to vertical services.

2.	Pricing of Resold Services at Wholesale

The 1996 Act requires that all retail services be made available for resale at a wholesale discount. 47 U.S.C. § 251(c)(4). Specifically, it provides that states must set the wholesale discount based on an "avoided" cost methodology, using "retail rates charged to subscribers" and "excluding the portion thereof attributable to any marketing, billing, collection and other costs that will be avoided by the local exchange carrier." 47 U.S.C. §252(d)(3). In assessing whether a procompetitive pricing structure is in place in a particular state, the Department will assess not only the pricing of UNEs, but also whether competitors have access to resold services at a procompetitive, i.e., "avoided cost" discount, and under reasonable terms and conditions.

In setting BellSouth's general resale discount in Louisiana at 20.72%, the state commission has commendably explained its methodology and application of the "avoided cost" concept, identified relevant issues posed by the determination of avoided costs, and shown how it applied its methodology based on BellSouth's cost data to arrive at the discount. In so doing, the LPSC relied on a detailed independent analysis by its own staff consultant that distinguished wholesale from retail functions, reflecting the "opportunity to avoid" cost methodology rather than whether BellSouth chose to continue to incur retail costs. The Department is satisfied that the process that the LPSC has followed to set this general discount, and the result it has reached, are consistent with the Department's competitive standard.

B.	BellSouth Has Failed to Institute Performance Measurements Needed to Ensure Consistent Wholesale Performance

A conclusion that a market has been "fully and irreversibly opened to competition" requires both a demonstration that the competitive conditions currently in place will foster efficient competition, as well as assurances that those conditions will remain in place after a section 271 application has been granted. In terms of wholesale performance– where a BOC's systems will be critical to enabling its competitors to succeed in the marketplace– an appropriate means of "benchmarking" performance is needed. As we have explained previously, we examine whether a BOC has established (1) performance measures and reporting requirements so that wholesale performance can be measured; (2) performance standards – i.e., commitments made by the BOC to meet specified levels of performance (preferably backed up by liquidated damages clauses); and (3) performance benchmarks – i.e., a track record of performance. These steps will permit an assessment of current performance and will enable competitors and regulators to more effectively address any post-entry "backsliding" from prior performance through contractual, regulatory, or antitrust remedies.

As described in our South Carolina Evaluation, at 45-48, BellSouth has failed to "provide[] sufficient performance measures in its evaluation to make a determination of parity or adequacy in the provision of resale or UNE products and services to CLECs." Friduss South Carolina Aff. ¶ 78. BellSouth responds that several measurements the Department listed were "included in the South Carolina filing, yet overlooked." The Department did not overlook that data. The Department's Evaluation and the Friduss Affidavit make clear that they were focusing on BellSouth's permanent performance measures, and the Department found– and confirmed in discussions with BellSouth– that BellSouth had not included these measurements as part of its permanent measurements. As the Department has repeatedly stated, one important purpose of performance measurements is to detect backsliding and thus facilitate meaningful post-entry oversight that ensures that the market opening is irreversible. Data such as BellSouth provided are important for evaluating BellSouth's support processes and determining whether they operate in a nondiscriminatory manner at the present time, but that present data cannot detect backsliding in the future. Future data is, of course, required for that purpose, and this necessitates an ongoing commitment to provide these performance measures.

In its current application, BellSouth has added some permanent performance measures, but major deficiencies remain. Given BellSouth's lack of performance measures in a number of crucial areas, we still are unable to determine whether BellSouth has established enforceable performance standards for these areas or a track record, or benchmark, of wholesale performance.	As is true with our analysis of wholesale support generally, our insistence on performance benchmarks does not require any particular level of use in Louisiana. Appropriate benchmarks may be established through commercial performance elsewhere in the BellSouth region. In the event that a BOC is not able to set a benchmark through actual use – though we doubt that any region will not have some actual competitive entry – the Department would consider other means of ensuring adequate performance, including enforceable performance standards and other means of demonstrating wholesale capability, i.e., carrier-to-carrier testing, independent auditing, or internal testing. In this case, however, BellSouth has not yet instituted the necessary performance measures, adopted enforceable performance standards, or demonstrated a satisfactory performance benchmark (through actual use or otherwise). Thus, given our inability to conclude that the necessary protections against backsliding are in place, we cannot conclude that the market has been fully and irreversibly opened to competition.

C.	BellSouth's "Public Interest" Arguments Do Not Justify Approval of This Application

BellSouth erroneously contends, as it did in South Carolina, that the benefits of allowing its entry now into the interLATA market in Louisiana warrant approval of this application under the "public interest" standard. BellSouth and its economic experts significantly overvalue the benefits of the BOC's long distance entry now, and virtually ignore the benefits to be gained from opening BellSouth's local markets, as explained in the Supplemental Affidavit of Marius Schwartz. Primarily, BellSouth and its experts reiterate here the mistaken or unsupported claims they made in South Carolina and that Prof. Schwartz has already refuted. To the extent they have offered any additional arguments in response to Prof. Schwartz, they have failed to present any credible evidence that would affect the validity of his conclusions. Indeed, only one of BellSouth's economic experts, Prof. Hausman, has even attempted to respond to Prof. Schwartz's Supplemental Affidavit in any detail. His criticisms, which are addressed in detail in Appendix A to this Evaluation, are mistaken on a variety of grounds or simply unclear, and for all of the reasons discussed in Appendix A, the Commission should reject Prof. Hausman's arguments. In short, the Department adheres to its position that the "fully and irreversibly opened to competition" standard, as explained by Prof. Schwartz, continues to represent the best reconciliation of the competing benefits and risks associated with local and long distance markets in the section 271 entry process.

As explained in our South Carolina filing and in the Schwartz Supplemental Affidavit, the Department's analysis and that of Prof. Schwartz, in contrast to that of Prof. Hausman and BellSouth, give full consideration to competitive effects in both the interLATA and the local markets. Accordingly, for the reasons explained in Prof. Schwartz's supplemental affidavit, the Department's entry standard, far from delaying competition, promotes it, more than would dependence on post-interLATA entry enforcement to compel the BOCs to open their local markets. In short, our view is that as soon as, but not before, the preconditions of the 1996 Act are met and a BOC is willing and able to provide -- at appropriate prices -- what competitors require for entry at various scales of operation, using interconnected separate facilities, unbundled elements, and resale, section 271 authority should be granted. Because BellSouth has not made this necessary showing, it would not be in the public interest to grant its section 271 application for Louisiana.

IV.	Conclusion

BellSouth has not taken all measures needed to ensure that local markets in Louisiana are fully and irreversibly open to competition, both because it has not satisfied the requirements of the competitive checklist as discussed in part II of this Evaluation, and for the additional reasons discussed in part III of this Evaluation. Therefore, BellSouth's application for in-region interLATA entry in Louisiana under section 271 of the Telecommunications Act should be denied.

Respectfully submitted,

Joel I. Klein	Donald J. Russell

Assistant Attorney General	Chief

Antitrust Division

Lawrence R. Fullerton

Deputy Assistant Attorney General

Antitrust Division

Thomas G. Krattenmaker

Special Counsel for Policy and

Regulatory Affairs

Antitrust Division

Philip J. Weiser

Senior Counsel

Antitrust Division

December 10, 1997

Carl Willner

Luin Fitch

Frank G. Lamancusa

Attorneys

Telecommunications Task Force

W. Robert Majure

Assistant Chief

Economic Regulatory Section

Antitrust Division

U.S. Department of Justice

1401 H Street, N.W., Suite 8000

Washington, DC 20530

(202) 514-5621