DR 98-221
                         BELL ATLANTIC
   Special Contract with McLane, Graf, Raulerson & Middleton
      Order Denying the Special Contract Without Prejudice
    Opening an Investigation to Determine Whether the Special
               Contract Covers Incremental Costs
                    O R D E R   N O.  23,108
                        January 21, 1999
            On December 22, 1998, New England Telephone and
     Telegraph Company d/b/a Bell Atlantic (Bell Atlantic or the
     Company) filed with the New Hampshire Public Utilities Commission
     (Commission), pursuant to RSA 378:18, a petition for approval of
     Special Contract No. 98-4 (Special Contract) to provide Centrex
     Service to McLane, Graf, Raulerson & Middleton, P.A. (McLane). 
     The proposed special contract, executed on October 28, 1998,
     provides Centrex line systems at locations in Manchester and
     Nashua comprised of analog and Integrated Services Digital
     Network (ISDN) lines.  Along with the special contract, Bell
     Atlantic filed a contract overview and cost study details in
     support of the filing.  
            Concurrently, Bell Atlantic filed a Motion for
     Protective Order, seeking to exempt portions of the Special
     Contract and supporting materials from public disclosure.  The
     Commission will rule on that motion separately. However, pursuant
     to N.H. Admin. Rules Puc 204.06, the identified portions will be
     kept confidential until the Commission rules on the motion. 
            Bell Atlantic's cost study avers that the special
     contract's proposed rates exceed the incremental costs of the
     services being provided, pursuant to the requirements of RSA
     378:18-b.  RSA 378:18 applies to special contracts in general and
     RSA 378:18-b applies specifically to special contracts offered by
     telephone utilities.  Those statutes state:
       378:18  Special Contracts for Service.
         Nothing herein shall prevent a public utility from making a
       contract for service at rates other than those fixed by its
       schedules of general application, if special circumstances
       exist which render such departure from the general schedules
       just and consistent with the public interest and, except as
       provided in RSA 378:18-b, the commission shall by order
       allow such contract to take effect.
         378:18-b Special Contracts; Telephone Utilities
         Any special contracts for telephone utilities providing
       telephone services shall be filed with the commission and
       shall become effective 30 days after filing, provided the
       rates are set not less than:
            I.  The incremental cost of the relevant service; 
            II.  Where the telephone utilities competitors    
            must purchase access from the telephone utility to 
            offer a competing service, the price of the lowest 
            cost form of access that competitors could        
            purchase to compete for customers with comparable 
            volumes of usage, plus the incremental cost of    
            related overhead.
            Staff review of the proposed special contract raises a
     strong question as to whether the proposed rates meet the
     requirement of RSA 378:18-b, a question which we believe must be
     fully argued before us by Bell Atlantic and Staff.  The question
     arises in the context of the current evolution of the
     telecommunications industry to a competitive industry after
     passage of the Telecommunications Act of 1996 (TAct).  Bell
     Atlantic's filing follows the incremental cost calculation
     methodology which we heretofore accepted as adequate, that is, a
     minimum amount of costs incurred in order to serve the specific
     special contract customer at a specific location.  However, as
     required by the FCC in implementing the TAct, the Commission must
     employ a Total Element Long Run Incremental Cost (TELRIC)
     methodology for calculating the costs of unbundled network
     elements (UNEs) that Bell Atlantic offers for sale to Competitive
     Local Exchange Carriers (CLECs).  
            It is Staff's opinion that relying upon an incremental
     cost methodology other than TELRIC may create unacceptable market
     barriers, in violation of the TAct, for CLECs attempting to
     compete against Bell Atlantic.  Specifically, the rates at which
     Bell Atlantic proposes to offer UNEs to CLECs are higher than the
     rates at which Bell Atlantic proposes to offer essentially the
     same services to the special contract customer, effectively
     precluding competition for that customer by CLECs.  The threshold
     question of which incremental cost methodology should be used
     when applying RSA 378:18-b must be resolved before this and
     future special contracts can be become effective.  We will issue
     an Order of Notice scheduling a full but expeditious proceeding
     in order to properly consider this question.  The scope of the
     proceeding will consider, inter alia, whether the public interest
     would be served by permitting Bell Atlantic to continue pricing
     special contracts based upon non-TELRIC costing principles, and
     whether and how residential and small business ratepayers may be
     protected from subsidizing special contracts customers.
            The language of RSA 378:18-b would have this Special
     Contract go into effect 30 days from filing if the conditions set
     forth therein are present. Because we are unable to determine at
     this juncture the appropriate "incremental cost" as that term is
     used in RSA 378:18-b, we will deny the Petition without
     prejudice.  Bell Atlantic may refile the petition after
     resolution of the question outlined above.  In addition, if the
     outcome of the separate investigation supports Bell Atlantic's
     position, we will consider making this Special Contract, refiled
     after such resolution, effective 30 days from December 22, 1998,
     the date of the original filing.
            Based upon the foregoing, it is hereby
            ORDERED, that Bell Atlantic's petition for approval of
     the Special Contract is hereby denied without prejudice; and it
            FURTHER ORDERED, that an Order of Notice shall be
     issued to resolve the question of what incremental costing
     methodology shall be used to analyze special contracts submitted
     pursuant to RSA 378:18-b.
            By order of the Public Utilities Commission of New
     Hampshire this twenty-first day of January, 1999.
           Douglas L. Patch       Susan S. Geiger     Nancy Brockway
               Chairman           Commissioner          Commissioner
     Attested by:
     Thomas B. Getz
     Executive Director and Secretary