II. FACTS/BACKGROUND
On March 20, 2006, the Commission issued D.06-03-025, which established permanent unbundled network element ("UNE") rates for Verizon California, Inc. ("Verizon") and price floors for Verizon.1 The rates adopted in the Decision replace interim rates adopted in D.03-03-033, and revised in D.05-01-057.
In the Decision, we established final UNE rates for Verizon, one of California's two largest incumbent local phone companies.2 The Decision set prices that Verizon charges competitors who lease specified portions of their network. The rates in D.06-03-025 replace Verizon's interim rates for loops and switching established earlier in D.03-03-033, and later modified in D.05-01-057.3 Those interim rates were subject to true-up4 once the permanent rates have been established. The Decision also replaced the rates for other UNEs originally adopted when the Commission approved an interconnection agreement between AT&T Communications of California, Inc. ("AT&T") and GTE California in D.97-01-022.5 (D.06-03-025, p. 3.)
In adopting the permanent UNE rates, the Commission evaluated two cost models. The first model was proposed by Verizon (known as "VzCost"). The second model was jointly proposed by AT&T and MCI (formerly known as WorldCom) (collectively, "Joint Commenter's" or "JC") that included UNE rates based on the latest version of the HAI Model, known as "HM 5.3." The two proposals differed greatly from each other.
After careful review of the competing cost models, we found that although both models contain flaws, the Verizon model is not forward-looking because it attempts to replicate Verizon's embedded network configuration and fails to efficiently size and deploy current technology. With regard to the HM 5.3 model, we found that the method it uses to model Verizon's network is reasonable.6
The Commission ultimately used the HM 5.3 model to set Verizon's UNE rates. We chose the model it believed most accurately reflects an efficient, forward-looking network. We also found that most of the inputs and assumptions in HM 5.3 can be modified. Thus, the Decision modified many inputs and assumptions in HM 5.3 and then used the modified model run to set Verizon's UNE rates.7
On April 19, 2006, Verizon filed a timely application for rehearing of D.06-03-025. In its rehearing application, Verizon raises the following challenges: (1) the Decision's use of book value to determine Verizon's cost of capital is contrary to TELRIC standards and unsupported by the record; (2) the adopted DS-1 and DS-3 rates do not reflect Verizon's costs and are significantly lower than the rates adopted for SBC California; (3) the Commission's requirement that Verizon true-up the interim rates adopted in D.03-03-033 to the permanent rates adopted in the Decision constitutes retroactive ratemaking and is prohibited under both the Telecommunications Act of 1996 and Public Utilities Code section 728.
On May 4, 2006, a response to the rehearing application was filed by Cbeyond Communications, LLC, Covad Communications Company, the Division of Ratepayer Advocates, DMR Communications, Inc., MPower Communications Corp., Navigator Telecommunications, LLC, and XO Communications Services, Inc. (collectively, "Joint Respondents").
We have reviewed each and every allegation raised in the rehearing application. We are of the opinion that no legal error has been established, and thus, Verizon's application for rehearing of D.06-03-025 shall be denied. However, we will modify the Decision to expand on the evidence supporting the capital structure we adopted, and to correct a clerical error, as set forth below. Accordingly, rehearing of D.06-03-025, as modified, is denied.
1 FCC rules require state public utilities commissions to establish rates based on a cost methodology called Total Element Long Run Incremental Cost ("TELRIC"). (See Implementation of the Local Competition Provisions in the Telecommunications Act of 1996, First Report and Order ("Local Competition Order") (FCC rel. Aug. 8, 1996) 11 F.C.C.R. 15,499 pp. 674-90.) Under TELRIC, UNE rates are not set based on an incumbent local exchange carrier's ("ILEC's") actual costs in building and maintaining its network. Rather, UNE rates are calculated according to what it would cost today to build and operate an efficient network that can provide the same services as the ILEC's existing network. This way, competitive local exchange carriers ("CLECs") can determine whether to invest in their own facilities or lease the ILEC's facilities. The TELRIC cost of an element "should be measured based on the use of the most efficient telecommunications technology currently available and the lowest cost network configuration, given the existing location of the incumbent LEC's [("local exchange carrier's")] wire centers." 47 C.F.R. section 51.505(b)(1). TELRIC rates must also be based on the forward looking cost of capital and on economic depreciation rates. (47 C.F.R. section 51.505(b)(2)-(3).)
2 The "Verizon UNE Phase" of Open Access Network Architecture Development ("OANAD").
3 In D.05-01-057, the CPUC revised the interim rates for certain elements based on new information available. D.05-01-057 retained the true-up provision in D.03-03-033. (See Opinion Modifying Decision 03-03-033 to Adjust Interim Unbundled Network Elements Rates [D.05-01-057] (2005) ___ Cal.P.U.C.3d ___; Interim Opinion Establishing Interim Rates for Network Elements of Verizon California, Modifying Interim Price Floor Formula Adopted in Decision 99-12-018, and Adopting Nonrecurring Prices [D.03-03-033] (2003) ___ Cal.P.U.C. ___.)
4 A "true-up" is a determination by the Commission which adjusts the interim rates, either up or down, as of the earlier effective date of the interim rate order, so that the adjusted interim rates equal the permanent rates as set later in the permanent rate proceeding.
5 Re AT&T Communications of California, Inc. [D.97-01-022] (1997) 70 Cal.P.U.C.2d 609.)
6 D.06-03-025, p. 4.
7 See D.06-03-025, p. 4.
