5. Discussion

5.1. Arbitrated Issue 1

Section 252(d) of the Federal Communications Act (the Act) and related FCC rules specify the principles and methods that Petitioners must use to establish transport and termination rates. The basic principle is set forth in FCC Rule 51.505(e), which specifies that an incumbent LEC must prove to the state commission that the rates for each element it offers [e.g., transport and termination] do not exceed the forward-looking economic cost per unit of providing the element, using a cost study that complies with the methodology set forth in this section and § 51.511.

To comply with this Rule, Petitioners were required to provide evidence that their proposed transport and termination rate of 2.25¢ per minute did not exceed their forward-looking economic costs. To provide this evidence, Petitioners created cost studies using an existing software program, HAI Model 5.3, designed to model such costs for CLECs. As inputs to this model, Petitioners used either its default values or other values that they argued more accurately represented their costs.

Respondents identified 15 cost-related issues and offered substantive evidence to show that Petitioners' cost studies and their proposed rate of 2.25¢ per minute failed to satisfy the FCC rules. Respondents argued that default values should be used to calculate costs only when more reasonable values, generally based on the specific system configurations and operating practices of each RLEC, were unavailable, and that Petitioners' cost studies should be re-run using such reasonable values.

With regard to the disputed cost issues, the arbitrator ordered Petitioners to re-run their cost studies using either (a) input values based on the specific system configurations and operating practices of each RLEC; (b) the HAI Model's default values in those cases where the Petitioners' proposed alternative values were not supported by adequate evidence or (c) reasonable input values in those cases where neither the HAI Model default values nor the Petitioners' proposed alternate values were reasonable. We affirm the arbitrator's decision to replace Petitioners' proposed input values with input values arrived at in the manner described.

Using the output values produced by the re-run cost studies, the FAR concluded that reasonable rates for transport and termination ranged from 1/10 of a cent to 1¢ per minute rather than the 2.25¢ per minute rate originally proposed by Petitioners.

The seven major cost issues identified by Respondents and their resolution in the FAR are as follows:

5.1.1. Sub-Issue 1-J: What is the usage-sensitive portion of end office switching?

Sub-Issue 1-J seeks to determine what portion of the cost of a switch is usage-sensitive and thus should be recoverable from interconnecting carriers as part of a termination rate. Petitioners proposed a 70% value for the usage-sensitive portion of switching. The FAR determined that a usage sensitive factor of 10% is appropriate.17 In reaching this decision the FAR noted that the FCC has held that "[f]or the purposes of setting rates under section 252(d)(2), only that portion of the forward-looking, economic cost of end-office switching that is recovered on a usage-sensitive basis constitutes an `additional cost' to be recovered through termination charges."18 Moreover, in a 2003 arbitration order, the Wireline Competition Bureau of the FCC determined that no portion of a modern switch - not even the "getting started" costs of switches - is usage sensitive.19

Although Petitioners took the position that 70% of the cost of modern switches is usage-sensitive (and thus can be included in their costs of termination), they offered no evidence in support of their position. Instead they relied on a default input from the FCC's 1999 Inputs Order, an order involving universal service rather than reciprocal compensation.20 The FAR found that this FCC Order was not relevant, noting that "Petitioners appear to be confusing the cost requirements for access charges and universal service subsidies with the cost support requirements for reciprocal compensation."21

Petitioners also relied on the Commission's SBC UNE Reexamination Order, D.04-09-063, to justify their claim that 70% of the cost of a modern digital switch is usage-sensitive. However, the SBC UNE Reexamination Order found that Pacific Bell could not price the local switching UNEs on a usage-sensitive basis, because the costs of modern digital switches are not usage-sensitive.22 With regard to reciprocal compensation, the Commission maintained the status quo "70/30 split," explaining that, "changes to reciprocal compensation rate structures are beyond the scope of this proceeding."23 Petitioners failed to present evidence on this issue and failed to challenge Respondents' evidence. Accordingly, we affirm the ruling in the FAR that only 10% of switch costs is usage-sensitive.

5.1.2. Sub-Issue 1-I: What is the forward-looking common cost factor for switching?

Sub-issue 1-I seeks to determine the forward-looking common cost factor - or "markup" factor - to be used in calculating Petitioners' rates for termination and transport. FCC Rule 51.505(a)(2) specifies that an incumbent LEC's forward-looking economic costs for transport and termination may include the total element long-run incremental cost (TELRIC) of providing transport and termination, plus a "reasonable allocation of forward-looking common costs."24 This overhead component is generally referred to as `shared and common cost markup,' or simply `markup.' It is typically a percentage added to TELRIC to recover costs attributable to a group of Unbundled Network Elements (UNEs) but not specific to any one UNE, as well as costs that are common to all outputs offered by the firm.25 These common costs apply to executive, planning, legal, finance and other general and administrative functions. FCC Rule 51.505(e) specifies that an incumbent LEC "must prove . . . that the rates for each element it offers do not exceed the forward-looking economic cost per unit of providing the element." Rule 51.505(c) defines forward-looking common costs as those costs "efficiently incurred in providing a group of elements or services." Moreover, the FCC has ruled that Incumbent LECs "shall have the burden to provide the specific . . . magnitude of these forward-looking common costs."26

The arbitrator found that Petitioners used values derived from their embedded costs in place of their "forward-looking common costs" to determine markup rates and concluded that this approach was inconsistent with federal law: "Using the Federal Universal Service Support Cap to determine common cost factors is inappropriate because the cap includes embedded costs that may not be used in a forward looking analysis."27 Petitioners also failed to prove that the costs were "common" as required by FCC Rule 51.505(c)(1) which specifies that to be a common cost the function must be performed "in providing a group of elements or services . . . that cannot be attributed directly to individual elements or services." In the absence of evidence that the claimed common costs were efficiently incurred and common to all services, use of the HAI model's default value was appropriate.

5.1.3. Sub-Issue 1-G: What is the economic life for switching?

FCC Rule 51.505(b)(3) specifies that the depreciation rates used in calculating forward-looking economic costs of elements "shall be economic depreciation rates." Accordingly, once the FAR determined the cost to purchase and install a new switch, the FAR was also required to determine how long a new digital switch would remain in use in Petitioners' networks. The FAR adopted a 10-year switch life.28 This ruling is consistent with FCC requirements and was overwhelmingly supported by record evidence. Petitioners argued that the forward-looking economic life for new switches is five years. However, as the arbitrator noted, they failed to produce any evidence to support that argument "other than their cost witness's anecdotal statement that switch life must be revisited frequently."29 In contrast, Respondents' proposal for a 10-year economic life for switches was supported by extensive record evidence including: (i) 2004 CPUC Annual Reports from five of the Petitioners which showed remaining lives for their switches of 10 years or more; (ii) the FCC's Inputs Order which used a 16.17 year economic life for switching; and (iii) the Commission's UNE orders for SBC and Verizon which calculated economic lives for switches of those companies of 10 years and 12 years, respectively.30

5.1.4. Sub-Issue 1-B: What is the current cost to purchase and install digital switches?

Sub-issue 1-B involves determining Petitioners' costs to purchase and install new switches. Petitioners relied on the HAI Model to determine the costs of new switches, using input values approved in the FCC's 1999 Inputs Order. Respondents did not challenge use of these cost estimates so long as they were reduced to reflect prices "currently available." Specifically, Petitioners' expert Conwell testified that switch prices had "declined twelve percent (12%) from 1999 to 2005."31

Petitioners chose not to challenge this evidence, instead "elect[ing] to let [their cost] Model . . . speak for itself."32 Indeed, their cost witness readily admitted that "the cost of switching equipment has been declining over time."33

As the FAR correctly observed, the evidence that prices of digital switches have fallen 12% since 1999 "is unrebutted." (FAR at 7.) The FAR was therefore correct in ordering that switch investments in the Rural LECs' cost studies be reduced by that factor.

5.1.5. Sub-Issue 1-O: What percentage of interoffice cable costs are attributable to transport versus other uses (loop concentrators, leased fibers, etc.)?

To the extent that a Petitioner's interoffice cable routes are used for purposes other than transporting traffic subject to reciprocal compensation, FCC Rule 51.511 requires that those other purposes (e.g., loop concentrators, fibers leased to third parties and others) be assigned a proportionate share of the interoffice cable costs. Otherwise, carriers sending traffic to a Petitioner will be paying for costs that have nothing to do with the transport of that traffic. Sub-issue 1-O determines how costs of interoffice cable should be shared among users of the cable.

Petitioners claimed that the Commission should rely on the HAI Model to develop the cost of transport cable, using input values approved in the FCC's Inputs Order. Their cost witness, however, admitted that the HAI Model did not allocate any cable costs to other uses of the cable (non-Section 251(b) traffic).34 At the same time, Petitioners provided, in their responses to data requests, clear evidence that the fibers in their interoffice cables are shared among multiple uses. The failure to apportion cable costs among all users to the cable is prohibited by FCC Rule 51.511(a), which specifies that the forward-looking economic cost per unit of an element equals the forward-looking economic cost of the element "divided by a reasonable projection of the sum of the total number of units of the element that the incumbent LEC is likely to provide to requesting telecommunications carriers and the total number of units of the element that the incumbent LEC is likely to use in offering its own services, during a reasonable planning period." Given Petitioners' admission that their cost studies did not allocate cable costs among the various users of the cable, plus evidence that they actually share cable fibers among multiple uses, the FAR was correct in requiring Petitioners' cost studies to be rerun with cable costs allocated as required by the FCC Rule.

5.1.6. Sub-Issue 1-L: What is the total length of interoffice cables?

Interoffice cable length is the cumulative length of cable routes connecting a Petitioner's switches (or wire centers) to each other and to the meet point with Pacific Bell Telephone Company dba AT&T California. All other things equal, the longer the cable distances assumed in the cost study, the higher the transport costs. Sub-issue 1-L determines whether Petitioners' cost studies have used cable distances consistent with FCC requirements and their actual serving areas. Petitioners argued that the Commission should rely on the HAI Model to develop and cost this component of a forward-looking network, again using the input values approved in the FCC's Inputs Order. Respondents demonstrated that Petitioners' cost studies overstated cable distances in three different ways in contravention of federal regulation. First, Petitioners' cost expert admitted that for certain Petitioners, the HAI Model calculated "more interoffice mileage than their existing network."35 FCC Rule 51.505(b)(1) requires that Petitioners' cost studies use "the lowest cost network configuration, given the existing location of the incumbent LEC's wire centers." By definition, no cable distance longer than the total distance of any Petitioner's current interoffice network can be "lowest cost." Second, the record is uncontroverted that the HAI Model overstates the distances to Petitioners' respective meet points with AT&T California. Specifically the HAI Model assumes every Petitioner will construct (or lease) redundant interconnection facilities the entire distance to an AT&T California wire center, even though all Petitioners currently interconnect with AT&T California at mid-span meets and do not have redundant facilities. Third, Petitioners overstated the cost of microwave facility replacement by assuming in their cost studies that they would replace all existing microwave facilities with fiber cable.36 We affirm the FAR's determination that the Rural LECs' cost studies should be re-run to include: (1) actual cable distances between wire centers, (2) actual cable distances to meet points with AT&T California, and (3) actual microwave costs of those companies employing microwave transport.

5.1.7. Sub-Issue 1-P: What is the appropriate utilization level for interoffice transport?

Once interoffice cable costs and transmission equipment costs for the interoffice transport system are computed, these costs are divided by the quantity of interoffice circuits (expressed as DS0 equivalents) to compute forward-looking economic costs per DS0 equivalent. These amounts then are divided by the minutes of use per trunk (where a trunk used for voice traffic requires one DS0) to arrive at common transport costs per minute of use. Sub-issue 1-P determines the total number of DS0 equivalents to be used in each Petitioner's cost study. If the number of DS0 equivalents is underestimated, then the common transport costs will be overstated.

Petitioners argued that the Commission should rely on assumptions in the HAI Model to develop this component of a forward-looking network even though the model underestimated current demand and reflected low utilization. The FAR disagreed, concluding that:

Petitioners have made no representation that HAI 5.3 accurately models transport and transmission costs of the various networks. It is incumbent on Petitioners to demonstrate that their network is forward-looking and efficient. Merely relying on the results of the model run does not accomplish that showing.37

Thus, the FAR was correct to require Petitioners to re-run their cost studies using demand for DS0 equivalents sufficient to yield a 66% utilization level.

5.2. Arbitrated Issue 2

Put simply, this issue comes down to the question of whether a different result should be reached in those cases where an RLEC and a wireless carrier exchanging intra-MTA traffic interconnect indirectly via an IXC from those cases in which they interconnect directly. The issue is material to this arbitration because the bulk of intra-MTA traffic exchanged between RLECs and wireless carriers is exchanged via IXCs. Both Petitioners and Respondents cite FCC Rule 51.701(b) in support of their positions. Petitioners draw our attention to 51.701(b)(2) which defines telecommunications traffic to include "traffic between a LEC and a CMRS provider." Respondents point to the exception created by 51.701(b)(1) for "traffic exchanged between a LEC and a telecommunications carrier other than a CMRS provider..." Petitioners argue that traffic exchanged between an RLEC and an IXC is not traffic "exchanged between a LEC and a CMRS provider" and therefore is not subject to the reciprocal compensation requirements imposed on all LECs by Section 251(b)(5) of the Communications Act. Respondents argue that if the FCC had intended to create an exemption from the reciprocal compensation scheme for calls between a wireless carrier and a LEC that are routed through an IXC it could easily have done so, as is shown by the exemption created for traffic between LECs and non-CMRS providers.

The arbitrator agrees with Respondents. In doing so, he follows the lead of every federal court that has considered this issue. To interpret the Rule otherwise would create a lopsided situation in which the RLECs would receive reciprocal compensation from the wireless carriers for all the wireless-originated calls they terminate but pay no compensation to the wireless carriers, since all the wireless-bound calls originated by the RLECs are initially handed off to IXCs.

5.3. Arbitrated Issue 4

The parties agree that the originating carrier is responsible for transit charges up to a point. They disagree as to the location of that point. The RLECs argue that the originating carrier is responsible for transit charges to the point of intersection between the originating carrier and the IXC. Wireless carriers argue that the originating carrier is responsible for transit charges from the point of origin to the point of termination. We agree with the FAR that Section 51.703(b) of the Federal Communications Act establishes the principle that transit charges between the point of origin and the point of termination are the responsibility of the originating carrier. This result is consistent with the decision of the FCC in its TSR Wireless decision38 and the decisions of all Federal courts that have considered the issue.39

This is a decision under the state arbitration provisions of the federal Telecommunications Act of 1996. Pursuant to Rule 14.6(c)(5) of the Commission's Rules of Practice and Procedure, the public review and comment period for the proposed decision is waived/reduced.

1. On February 13, 2008, the parties filed conforming Agreements for Commission approval. On the same date, the parties also filed statements regarding whether or not the Agreements should be approved by the Commission.

2. The parties negotiated the Agreements in their entirety except for the portions presented for arbitration.

3. No party or member of the public alleges that any negotiated portion of the Agreements is not in compliance with Section 252(e)(2)(A) of the Act.

4. No negotiated portion of the Agreements results in discrimination against a telecommunications carrier not a party to an Agreement, or is inconsistent with the public interest, convenience and necessity.

5. In their February 13th statements, the RLECs contend that the arbitrated outcomes on three issues do not comply with the Act of the FCC's implementing rules.

6. The Act requires the Commission to approve or reject an arbitrated interconnection agreement within 30 days after the agreement is filed.

7. The parties have agreed in writing that the time for a Commission decision under the Act may be extended to May 1, 2008.

1. Nothing about the result of this arbitration is inconsistent with governing federal law.

2. No arbitrated portion of any Agreement fails to meet the requirements of Section 251 of the Act, including FCC regulations pursuant to Section 251, or the standards of Sections 252(d)(2) of the Act.

3. No provision of any Agreement conflicts with state law or other requirements of the Commission.

4. Arbitrated Issue 1 was correctly decided by the FAR.

5. Arbitrated Issue 2 was correctly decided by the FAR.

6. Arbitrated Issue 4 was correctly decided by the FAR.

7. The Agreements should be approved.

ORDER

IT IS ORDERED that:

1. Pursuant to the Telecommunications Act of 1996 and Resolution ALJ-181, the Interconnection Agreements between AT&T Mobility, T-Mobile and the 11 rural local exchange carriers named in the heading to this decision filed February 13, 2008 are approved.

2. Application (A.) 06-02-028, A.06-02-029, A.06-02-030, A.06-02-031, A.06-02-032, A.06-02-033, A.06-02-034, A.06-02-035, A.06-02-036, A.06-02-037, A.06-02-038, A.06-02-040 are closed.

This order is effective today.

Dated January 29, 2009, at San Francisco, California.

17 FAR, p. 13.

18 Local Competition Order, 11 FCC Rcd 15499, 16024-25 ¶ 1057 (1996) (emphasis added).

19 Virginia Arbitration Cost Order, 18 FCC Rcd 17722, 17903 ¶ 463, 17912-13 ¶¶ 488-89, 17872 n. 933, 17876 n.1016, 17877 ¶ 391 (2003) (Wireline Competition Bureau).

20 USF Inputs Order, 14 FCC Rcd 20156 (1999).

21 FAR, p. 13.

22 D.04-09-063, p. 241.

23 D.04-09-063, p. 291 (Conclusion of Law 138) (emphasis added).

24 FCC Rule 51.505(c) (1) provides that forward-looking common costs are "economic costs efficiently incurred in providing a group of elements or services (which may include all elements or services provided by the incumbent LEC) that cannot be attributed directly to individual elements or services." See also, Local Competition Order, 11 FCC Rcd at 16025 ¶ 1058 ("Rates for termination established pursuant to a TELRIC-based methodology may recover a reasonable allocation of common costs").

25 Verizon UNE Reexamination Order, D.06-03-025, pp. 113-114.

26 Local Competition Order, 11 FCC Rcd at 15852 ¶ 695.

27 FAR, p. 11.

28 Ibid., p. 9.

29 Id.

30 SBC UNE Reexamination Order, D.04-09-063, mimeo at 134 and 283
(Conclusion of Law 68); Verizon UNE Order, D.06-03-025, mimeo at 59, 61 and 151 (Conclusion of Law 21).

31 Testimony of L. Craig Conwell (Conwell Direct), pp. 23-24.

32 Rebuttal Testimony of Chad Duvall (Duvall Rebuttal), p. 2.

33 Testimony of Chad Duvall (Duvall Direct, p. 11.

34 Hearing Transcript p, 82, lines 2-8.

35 Duval Rebuttal, p. 9, lines 3-4.

36 Conwell Direct, p. 61, n. 38.

37 FAR, p. 18.

38 "Section 51.703(b), when read in conjunction with Section 51.701(b)(2) requires LECs to deliver, without charge, traffic CMRS providers anywhere within the MTA in which the call originated." 16 FCC Rcd at 11184 ¶ 31.

39 See, e.g., Atlas Telephone v. Oklahoma Corporation Commission, 400 F.3d 1256, 1266 (10 Cir. 2005); Mountain Communications v. FCC, 355 F.3d 644 (D. C. Cir. 2004); MCIMetro v. Bell South, 3522 F.3d 872 (4th Cir. 2003); Southwestern Bell v. Texas Public Utilities Commission, 348 F.3d 482 (5th Cir. 2003).

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