V. Discussion

A. Pricing Standard for DALIS

As a threshold matter, we address the dispute concerning the appropriate standard for the pricing of DALIS. The dispute focuses on whether DALIS should be priced based upon a TELRIC standard or whether the alternative "market based" standard proposed by SBC should be used, which corresponds to the rate for DA listing service that SBC affiliates charge in other jurisdictions.

In its UNE Remand Order, the FCC stated that the obligation of LECs to provide nondiscriminatory access to DALIS already existed in Section 251(b)(3) of the 1996 Act, although it declined to include DALIS in the definition of a UNE. The nondiscrimination standard prescribed by Section 251(b)(3) of the Telecommunications Act of 1996 requires that the DALIS prices charged by SBC must avoid granting preferential treatment in transactions with SBC's own operations in comparison to those of third party DA vendors. The DALIS prices set in this order are focused on nondiscrimination in this context, that is, between the SBC, as the dominant ILEC provider of DA, and competing third party DA vendors. In setting DALIS prices in this context, therefore, we do not focus on potential differences in prices experienced among different competing DA vendors other than the ILEC. For example, some DA providers may pay prices based upon the terms of interconnection agreements with the ILEC that is set independently of the terms in the DALIS tariff. The prices that we set in today's order apply to SBC's DALIS tariff, but do not change whatever prices may otherwise apply in any existing interconnection agreement. To the extent differences thus may exist in DA prices that third party competitor's pay, such differences are not a source of anticompetitive pricing discrimination as identified in Section 251(b)(3). Thus, any differences between prices under the DALIS tariff and DA pricing provisions in currently effective interconnection agreements do not have a bearing upon the DALIS prices that we adopt herein in accordance with nondiscriminatory pricing standards.

We agree that a DALIS price based merely upon market forces could be nondiscriminatory if the market were truly competitive. SBC argues that the wholesale provisioning of DA listings in California is competitive, noting that companies such as WorldCom purchase SBC California's DA listings and sell them to other carriers on a wholesale basis. Although sources of directory listings are available to competitors apart from SBC, no showing has been made that such sources permit service equivalent in quality or comprehensiveness to DA listing services available through SBC. On the other hand, as we previously noted in D.01-09-054:

The FCC found that incumbents enjoy a competitive advantage with respect to the provision of directory assistance service as a result of their legacy as monopoly providers of local exchange service, and their "dominant position in the local exchange and exchange access markets."¹³

Given the dominant position that Pacific still continues to enjoy through its legacy as a former monopoly provider of local exchange service, as referenced in D.01-09-054, we find no basis to conclude that the market for the wholesale provision of DA listings has now become fully competitive. SBC provided no price data from alternative wholesale DA service providers within California nor any comparison of terms and conditions of such alternative services to demonstrate that California competitors' DA offerings equals that of SBC in quality. Instead, SBC merely applied prices that its affiliates charge outside of California, as approved by the FCC in the X2A Interconnection Agreements in SBC's 271 applications in the states of Missouri, Oklahoma, Kansas, Arkansas, and Texas. These interconnection agreements resulted from CLEC collaborative processes and were approved by each of the respective state commissions. We find no basis, however, to conclude that such prices from other jurisdictions represent competitive or nondiscriminatory prices for the provision of DALIS within the California market, or reasonably reflect the costs that SBC California incurs for acquiring and processing DA listings for its own use.

SBC may not use its market power to extract excessive DALIS prices at a level that would unfairly discriminate against competitors. In this respect, the Commission has previously stated in D.01-09-054:

Even if [Directory Assistance Listing] DAL is not a UNE, pricing of DAL is subject to strict nondiscrimination requirements under the Act and FCC orders. As the FCC recognized in its DAL Provisioning Order,¹⁴ this nondiscriminatory access requirement extends to pricing. In its order, the FCC recognized that ILECs continue to charge competing DA providers discriminatory and unreasonable rates for DAL. Although the FCC declined to support a specific pricing structure for DAL, it encouraged states to set their own rates consistent with the nondiscrimination and reasonable pricing requirements of Section 251(b)(3).¹⁵

Given that we find no basis to conclude that the California wholesale market for DALIS is fully competitive, we cannot simply assume the prices charged by SBC affiliates in other jurisdictions are a reasonable proxy of competitive market prices for DALIS in California. We find that the best proxy for nondiscriminatory pricing of DALIS is one that is based on forward-looking economic cost. As explained in the Declaration of Terry L. Murray,¹⁶

forward-looking economic cost establishes an economically meaningful benchmark for nondiscrimination that promotes fair competition, and prevents SBC from exerting market power from its legacy position as a former monopoly provider. Moreover, the best available measure of forward-looking economic cost is embodied in the TELRIC-based methodology which has been used for pricing UNEs.

We recognize that DALIS is not recognized as a UNE under FCC rules. Nonetheless, nothing in the FCC rules preclude this Commission from exercising discretion to apply a TELRIC-based pricing approach for purposes other than UNE pricing, where appropriate. In this instance, we conclude that TELRIC-based pricing offers the best available means to satisfy the "nondiscriminatory" pricing standard required for DALIS.

TELRIC provides the best approximation of cost that SBC actually incurs for DA listings to provide services to its own retail customers. The same level of cost should be applied in making DALIS available to competitors. TELRIC-based prices approximate the prices that a firm operating in a competitive market might be able to charge. This principle has been articulated by the FCC in implementing TELRIC-based pricing for UNEs. The FCC stated:

Adopting a pricing methodology based on forward-looking economic costs replicates, to the extent possible, the conditions of a competitive market. In addition, a forward-looking cost methodology reduces the ability of an incumbent LEC to engage in anti-competitive behavior. . . Because a pricing methodology based on forward-looking costs simulates the conditions in a competitive marketplace, it allows the requesting carrier to produce efficiently and to compete effectively, which should drive retail prices to their competitive levels.¹⁷

TELRIC pricing provides for a return on SBC's economic costs, as reflected in the 21% shared-and-common-cost markup currently set by the Commission. (See D.02-09-042 at 2.) To the extent that SBC's proposed DALIS prices would yield a return significantly in excess of what a competitive market would support, such prices are not indicative of a competitive market. Rather, such prices reflect surplus economic rents that can only be extracted where a market is not truly competitive. We conclude that the markup proposed by Joint Parties is reasonable since it is based upon what we have previously authorized under TELRIC pricing, and thus neither overcompensates nor undercompensates SBC.

No superior standard other than TELRIC that has been offered by any party as a basis for setting DALIS prices. DALIS prices shall therefore be based upon a TELRIC standard to promote a competitive pricing approach and to guard against an unlevel playing field in which the incumbent enjoys an unfair advantage by virtue of obtaining most directory listings "for free" as an artifact of its legacy role of LEC provider to most Californians.

B. Wholesale Assumptions Underlying TELRIC

Having determined that DALIS pricing shall be based upon a TELRIC standard, we next address the issue of what underlying assumptions should be applied. Parties are in dispute as to the proper basis for computing the TELRIC related to DALIS. SBC uses an approach characterized as "wholesale-only" in computing TELRIC under which SBC's entire retail operation and all related outputs are assumed not to exist. As such, SBC assumes that it could only offer DALIS by first purchasing listings from whatever entity theoretically would replace SBC California as the provider of retail basic exchange service.

SBC does not simply deduct retail costs from its TELRIC analysis, but adds a new layer of costs that it assumes would be incurred by a theoretical "wholesale-only" company provisioning DA listings independently from SBC retail operations. By assuming no retail operations exist, SBC excludes any economies of scope and scale that are available in provisioning DALIS as a result of its retail business. SBC assumes this theoretical wholesale company would have no access to SBC retail DA listings from its end-users, but would have to acquire and maintain all DA data independently. As a result, SBC assumes significantly higher costs for the theoretical company than the actual costs computed by SBC representing its actual operations.

In support of this approach, SBC relies upon language from a federal district court decision¹⁸ stating that:

"[T]he TELRIC methodology calculates forward looking cost to ILECs of providing UNEs in a hypothetical competitive market in which the ILEC is a wholesaler, leasing UNEs to CLECs. The ILEC's retail operations (selling telephone services to consumers) are therefore irrelevant to the TELRIC pricing method, and must be excluded."

As noted by Joint Parties, however, the court decision's discussion of TELRIC was presented in the context of how to calculate common costs and not how to calculate the direct costs of UNEs. By excluding retail-related cost items, such as marketing and billing, in the calculation of common costs, the TELRIC methodology, as discussed in the federal court decision, avoids double counting of common costs that are relevant on a wholesale basis. Yet, we find no sanction in the federal court decision to ignore the existence of the retail arm of SBC in determining the direct costs of DALIS. SBC's approach, however, does just that in applying its wholesale-only approach to direct DALIS costs. We find no basis in the court decision, or elsewhere, to ignore the economies of scale and scope of providing DALIS in determining the direct costs of TELRIC.

By creating a hypothetical construct of direct costs based on an assumption that SBC retail operations do not exist, SBC ignores economies of scale and scope associated with its actual combined operations. The ability to share the cost of obtaining directory listings between the retail local exchange operations and all other related lines of business constitutes one of the key economies of scope and scale enjoyed by SBC and its affiliates. These are the very sort of scale and scope economies that the FCC intended to capture in TELRIC-based pricing. As stated by the FCC in its First Report and Order, "[a]s a result of the availability to competitors of the incumbent LEC's unbundled elements at their economic cost, consumers will be able to reap the benefits of the incumbent LECs' economies of scale and scope, as well as the benefits of competition."¹⁹

By charging DALIS costs while ignoring the scale and scope economies enjoyed by SBC and its affiliates in the ability to share the cost of acquiring directory listings, SBC would deprive its competitors of nondiscriminatory pricing. This approach would artificially inflate TELRIC with costs that do not, in fact, exist.

C. Review of Individual Cost Elements

Having determined that the TELRIC standard shall be applied by taking into account the scale and scope economies associated with Pacific's combined operations, we next consider the DALIS cost elements identified by Pacific on an individual basis.

1. Data Acquisition Costs

The DALIS price proposed by SBC does not distinguish the cost of listings it acquires from other incumbents versus those that it obtains from its own subscribers. In its assumed "wholesale-only" environment, SBC assumes that the total number of DA listings initially required would mirror the total number of listings held by SBC, and that ongoing update acquisition would mirror the number of updated listings per month received by SBC. SBC's claimed "data acquisition" costs under its "wholesale-only" assumption are based on a "weighted average" cost per record for an initial load and for additional listings multiplied by total listings from both SBC-retail LEC operations and nonaffiliated ILECs. SBC assumes that the weighted-average cost of acquiring all of these records (including those of SBC) equals the weighted average cost that it currently pays other incumbents to purchase their listing records.

The Joint Parties claim that SBC's DALIS cost is overstated in this regard in that it lumps together listings that SBC acquires from other incumbents together with those that it enters from its own database. Joint parties argue that this weighted average cost is unreasonably high because it is dominated by the $0.04 cost per listing paid to Verizon. The vast majority of records that SBC acquires comes from Verizon. Joint parties argue that the Verizon payments are not a realistic proxy for the acquisition cost of SBC's own listings or those provided free of charge by CLECs. The Joint Parties propose that wholesale DALIS customers be given the option of either paying or declining a separate per-listing charge for those listings.

We find no reasonable basis to assume an acquisition cost of nearly $0.04 for SBC to acquire its own listings or listings provided for free by CLECs. This assumption is inconsistent with fact that SBC incurs no cost to obtain the listings of its own local exchange customers, and that CLECs currently give SBC listings data for their customers at no charge. It is unreasonable to adopt a data acquisition cost component for DALIS for nonexistent costs.

We agree that since DALIS customers can and do obtain directory assistance listings from incumbents other than SBC, loading such costs into the SBC DALIS results in a needless additional layer of costs. We shall therefore adopt the proposal of Joint Parties not to require DALIS customers to acquire non-SBC listings from SBC, but to make the acquisition of such listings optional.

2. Data Storage Costs

SBC computes data storage costs based on its subject matter experts' input concerning storage requirements of current SBC California listings, and included room for growth and other required database functionality. SBC also included labor requirements for management, application development and upgrading, testing, and other support functions.

Joint Parties take issue with the SBC assumed data storage costs, arguing that SBC does not take into account any economies of scale associated with a combined retail and wholesale operation, nor economies of scope associated with offering multiple wholesale products. In this respect, SBC assumes costs would be incurred not only with a "wholesale-only" operation, and also with a "DALIS-only" operation.

Joint Parties also take issue with SBC's data storage costs to the extent they are predicated on the cost of mid-range computers. SBC admits this would not be the least-cost choice for a company that uses computers for tasks other than processing DALIS data. SBC admits that even the mid-range computers assumed in its TELRIC study would not be required full-time for DALIS processing, but could also support other operations with the spare capacity. WorldCom presented the Declaration of Jason Knapp addressing why SBC's data storage assumptions, such as its estimate of the computing resources required to process the assumed volume of records and related costs, are overstated. Joint Parties argue that even assuming a wholesale-only operation, SBC would still necessarily use mainframe computers for other tasks, such as maintaining loop inventory, and that assigning 100% of the computer capacity to DALIS would thus be unrealistic. Terry Murray, in her Declaration, recommends that the Commission exclude all of the costs identified in SBC's study for "data storage."

As noted in the Declaration of Ms. Murray, SBC already recovers the cost of its retail DA operations from retail customers. Assignment of the same cost to a hypothetical "TELRIC" on a "wholesale only" basis would constitute double recovery of costs. As noted above, we reject the premise that hypothetical additional costs should be recovered from DALIS customers based on the premise of a "wholesale-only" operation without access to the scale and scope economies of the retail operation. Thus, we shall adopt the recommendation of the Joint Parties to exclude the "data storage" costs from the TELRIC allowance.

3. Labor Cost for Data Storage
and Database Maintenance

SBC assumes that two dozen full-time employees would be required to manage computer processing and updating for a wholesale-only DALIS offering.

Joint Parties offered the Declaration of Jason Knapp, Software Applications Developer for MCI, to challenge SBC's assumptions regarding the number of employees required for data storage and maintenance as reflected in SBC's cost study. Knapp states that he is "suspicious" of the number of employees assumed for data storage and maintenance in view of his experience with SBC working only with one SBC employee on all DA-database related issues. Moreover, Knapp states that the SBC employee assumptions seem suspect because it reflects twice the number of employees to administer one-tenth the amount of data that MCI maintains. Joint Parties argue that the description of the personnel as being "on-call" suggests that they would not be fully occupied with day-to-day provision of DALIS.

Joint Parties argue that SBC assumes excessive and inefficient work effort associated with DALIS. WorldCom witness Knapp identifies only four instances in all of 2002 during which he contacted SBC customer service representative concerning issues with DALIS and estimates that the total time spent during those contacts was approximately 8 hours. Joint Parties argue that the lack of specificity in SBC's estimates of work effort makes it difficult for parties to verify or contest the reasonableness of the assumptions. Joint Parties recommend a 25% downward adjustment to SBC's estimated labor costs for customer support, which it represents as a conservative disallowance in relation to the amount implied by witness Knapp's testimony.

We agree with the Joint Parties that the labor costs assumed by SBC appear excessive in the context of the experience presented by WorldCom witness Knapp. The lack of available data make it difficult to determine a precise labor allowance for DALIS purposes. In the absence of a better record, however, we find the Joint Parties' recommendation provides an acceptable alternative. The proposed 25% downward adjustment, as proposed by Joint Parties, appears to be conservative in light of WorldCom's experience. Accordingly, we shall adopt the 25% downward adjustment to SBC's estimated labor costs for customer support.

4. Cost of Computer Processing Time

SBC reflects a cost of computer processing time valued at $500 per hour based on citation to an "AT&T Bill Collection" study completed in the late 1980s. The Joint Parties argue that the cost of computers, particularly as a function of processing time, has plunged since the 1980s. Joint Parties argue that the price that WorldCom pays its vendors should capture the drop in the costs of current computer equipment relative to SBC's $500 figure. Joint parties, based on the testimony of Ms. Murray, recommend replacing the $500 per-hour with a $100 per-hour cost assumption for computer processing time. WorldCom witness Caputo also provided testimony concerning comparable mainframe computer processing time that it can obtain from its own vendors.

Based on the declarations of Ms. Murray and Mr. Caputo, we agree that reliance on a cost source for computer processing time using 1980s technology results in an outdated cost assumption. As Caputo indicates, carriers and DA providers have largely automated both the initial load and daily update process in recent years as computer equipment and electronic storage have become cheaper and computer data bases have become more sophisticated. It is reasonable that these economies be reflected in the price of DALIS charged to competitors. Accordingly, we reject the $500 per hour figure offered by SBC on the basis that it reflects outdated technology. The alternative computer processing cost of $100 per-hour proposed by Joint Parties represents the use of more contemporary technology that reflects a more relevant measure of DALIS-related computer processing time compared to the figure assumed by SBC. We shall thus adopt the $100 per-hour cost of computer processing time for DALIS costing and pricing purposes.

5. Number of DALIS Records
Processed Per Month

SBC developed its study assuming 3.6 million total DALIS update records per month based on the average total monthly listings provided to the seven "current" DALIS customers (excluding one customer that was no longer obtaining DALIS from SBC California at the time of the cost study) during three of the 10 months preceding the study. SBC excluded the other seven months of data on the basis that months were presumed to be "atypical" and may have represented initial loadings of the customers in question.

The Joint Parties argue that SBC incorporates inconsistent assumptions concerning the number of DALIS records that it provides each month. In the portion of its study showing costs based on its currently configured system, SBC indicates that about 514,000 DALIS records are provided per month to each DALIS customer. Yet, in the portion of its study based on the wholesale-only hypothetical operations, SBC assumes about 1.3 million updated records would be required to keep the DALIS product current.

An accurate figure for the number of DALIS records processed per month is important in determining the correct cost per listing. Because SBC divides an estimate of its total monthly recurring DALIS costs by an estimated total monthly update listings provided, variations in the latter figure will impact the per-listing cost. Yet, SBC has not provided a convincing rationale for its assumption of the number of monthly listings processed. As noted by the Joint Parties, SBC fails to explain why the seven "current" DALIS customers receive, on average, less than half of the total number of DALIS listings necessary to keep the database up to date. The Joint Parties argue that SBC may actually provide far more update listings than its average sample for non-randomly selected months shows. WorldCom witness Knapp explains that WorldCom processed an average of 1.3 million daily update listings each month from SBC.

We shall adopt the Joint Parties' recommendation that an average figure of 1.3 million update listings per month for each DALIS customer be used for developing the recurring cost per listing. This figure corresponds closely to the number that SBC's subject matter expert indicated as being necessary to maintain an up-to-date database.²⁰ We shall adopt this assumption for DALIS costing and pricing purposes.

6. Costs of Manually Processing Physical Tapes

SBC includes the cost of manually processing physical tapes for each and every DALIS customer, yet DALIS customers can also obtain the data electronically an many choose to do so. Joint Parties request the Commission to require SBC to eliminate the tape preparation costs from its basic per-listing charge for DALIS. If SBC continues to offer physical tapes as an alternative delivery mechanism, then Joint Parties ask that it be reflected as a separate optional service option. Only those customers that choose the tape delivery option would pay the corresponding rate element.

We find the Joint Parties' recommendation for a separate pricing provision for physical tape processing to be reasonable and shall adopt it. Customers that choose to obtain DALIS data electronically should not have to pay for tape preparation costs that SBC will not incur on their behalf. We shall direct SBC to reflect physical tape delivery as an optional alternative to direct electronic delivery in its tariff. We shall therefore adopt the cost and price for physical tape delivery as set forth in the Joint Parties' recommendation.

D. Conclusion

Based upon the findings, conclusions, and analysis discussed above, we conclude that the DALIS pricing sponsored by the Joint Parties represents a more reasonable proposal than that offered by SBC. Accordingly, we adopt the TELRIC-based costs and prices proposed by the Joint Parties, and direct SBC to file DALIS tariffs implementing the revised pricing structure. The adopted prices thus are as follows:

TELRIC-based

Rate Element: Units Cost Price (@

21% shared
& common

cost mark-up)

Recurring (Update Listing Files) Per Listing $0.00072 $0.00087

Optional Tape Delivery Per Tape $13.32 $16.12

Non-Recurring (Base File) Per Order $2,954.37 $3,574.79

As mentioned previously, the DALIS prices that have been in effect up until now have been permitted only on a provisional basis. As prescribed in D.98-01-022, SBC shall be required to perform a true up of past DALIS charges to adjust them in light of the DALIS charges we approve in the instant order. As part of its tariff Advice Letter filing, SBC shall be required to reflect the appropriate provision to reflect the true up in accordance with D.98-01-022.

¹⁵ See D.01-09-054 at 7, re: arbitrated Interconnection Agreement between Pacific Bell Telephone Company and MCImetro Access Transmission Services, L.L.C.