IV. Overview of Cost Models

In order to establish the forward-looking incremental cost of SBC-CA's UNEs, in compliance with the CCPs and TELRIC guidelines described above, SBC-CA and Joint Applicants each offered a separate cost model. The Commission has typically relied on cost models to estimate the costs to construct a forward-looking local exchange network. This allows the Commission to take a holistic view of the costs to construct a network as an integrated system, with all of the economies of scale and efficiencies derived from modeling an entire network's operations rather than a review of the cost of a piece of equipment in isolation.

A. HM 5.3

Joint Applicants offer the HAI Model, Version 5. 3 (HM 5.3), which they describe as a "bottom-up economic-engineering costing model" that models the local exchange network, assuming existing wire centers, and allows the user to change more than 2100 inputs and assumptions. (JA/Mercer Declaration (Decl.), 10/18/02, p. 12.) HM 5.3 begins with information provided by SBC-CA on the location of its business and residential customers, then constructs a network to serve the identified locations using granular information as to service demand, network component capacities and costs, and expenses. (Id., p. 12.) Through this process, HM 5.3 estimates the investments required for each component of the network, and the costs associated with the investments using what Joint Applicants contend are conservative assumptions regarding applicable costs. These costs include capital carrying costs, plant-specific costs, general support and overhead costs. HM 5.3 assigns these costs to UNEs according to the manner in which these UNEs use different network components, then determines a cost per unit for each UNE. In this manner, HM 5.3 calculates the forward-looking costs that SBC-CA would incur to provide "plain old telephone service" (POTS), as well as various narrowband, wideband, and broadband loops and broadband interoffice circuits. (Id., p. 11.)

JA contend that a key asset of HM 5.3 is that it deals with UNEs associated with all of the components of the local exchange network, and thereby recognizes the relationships and synergies between the different components of the network. (Id., p. 7.) JA contend that HM 5.3 is improved over HM 2.2.2 (evaluated in the prior OANAD proceeding) and HM 5.2a (used in the interim phase).

One of the key differences between HM 5.3 and earlier HM models is the customer location process. According to Joint Applicants, HM 5.3 models the cost of efficient outside plant based on existing customer locations. (JA/Murray Decl., 10/18/02, para. 51.) One of the inputs to HM 5.3 is a customer location database prepared by a third-party vendor, Taylor Nelson Sofres (TNS). TNS created the database by taking SBC-CA's current customer address information and "geocoding" the precise location of these customers by assigning each a longitude and latitude. Once geocoded, TNS grouped these current customers into logical serving areas, or "clusters." JA contends that through this geocoding and clustering process, HM 5.3 resolves earlier concerns over customer locations in previous HM versions. (JA/Mercer, 10/18/02, p. 9.) The Commission had been concerned that HM 2.2.2 did not fairly estimate costs in low-density areas. JA contends that HM 5.3 is improved over HM 2.2.2 because it identifies the location and size of population clusters, thereby deploying plant to the places where customers are located. (Id., p. 32.)

JA claim that HM 5.3 complies with the Commission's CCPs and the FCC's TELRIC costing standards in several ways. First, in compliance with CCP 3 and TELRIC, HM 5.3 models the total demand for network elements from both SBC-CA and other sources, including competitors that lease UNEs. According to JA, HM 5.3 captures all economies of scale and scope in the provisioning of retail services, UNEs, universal service, and interconnection services. (JA/Murray 10/18/02, para. 37.) HM 5.3 assumes a network that can accommodate both current and reasonably foreseeable demand by assuming a "substantial amount of `growth' spare available to serve future demand..." (JA, 10/18/02, p. 13.)

Second, JA state that HM 5.3 complies with TELRIC principles because it assumes the least-cost, most efficient technology that is available for purchase by SBC-CA. For example, HM 5.3 uses information from SBC-CA's actual vendor contracts to develop appropriate switching and cable price inputs.

Third, JA contend that HM 5.3 is a forward-looking approach in compliance with CCP 6 and TELRIC rules that models the lowest cost network configuration given SBC-CA's current wire centers because it uses SBC-CA's own customer location data in developing the most efficient network configuration to serve this demand. While JA admit that HM 5.3 does not use actual outside-plant routes as alluded to by CCP 6, they contend that the FCC's TELRIC rules, issued after the Commission's CCPs, do not require the use of actual plant routes and only constrain cost models to the use of existing wire center locations. (JA/Murray Decl., 3/12/03, pp. 14-15.)

Fourth, JA maintain that HM 5.3 uses inputs and assumptions that reflect long-run costs, as required by the CCPs and TELRIC, because it reflects "efficient choices that SBC-CA would make today, if it were to build its network from scratch, constrained only by its existing wire center locations." (JA, 10/18/02, p. 16) JA's witness Murray explains that HM 5.3 does not treat any of SBC-CA's existing facilities as fixed other than the location of existing wire centers. (JA/Murray, 10/18/02, p. 14.)

B. SBC-CA Models

SBC-CA proposes costs for the UNEs under review in this proceeding based on a cost study process that uses SBC-CA's actual network and current vendor prices as its foundation. (SBC-CA, 10/18/02, p. 2.) The SBC-CA Models are comprised of separate, stand-alone modules that derive UNE rates for loops, switching, and interoffice transport. According to SBC-CA, the investment and network characteristics that are modeled are based on the actual network in place and necessary to serve SBC-CA's customers, modified where needed to incorporate forward-looking technology. (SBC-CA/Sneed Decl., 10/18/02, p. 4.) SBC-CA then uses cost factors to convert investments into annual costs. These "annual cost factors" are based on the costs that SBC-CA actually incurs. (Id., p. 4.) SBC-CA asserts that its set of models "reflect where we really can put our network and the costs of that network, and they reflect the actual customer demands we have to be ready to serve." (SBC-CA, 10/18/02, p. 2.)

SBC-CA contends that it is appropriate to use certain actual, recent SBC-CA cost data as an indicator of forward-looking costs because this information reflects the rational decisions made by SBC-CA personnel to deploy an efficient network in California, suited to California's unique demographics and geography. (SBC-CA/Sneed, 10/18/02, p. 5.) SBC-CA maintains that the past decisions of the company reflect the decisions that SBC-CA would make going forward to run an efficient network over the long run. (SBC-CA, 3/12/03, p. 7.)

SBC-CA claims that its decision to model its actual network is a proper interpretation of TELRIC because in a long run analysis, all facilities and characteristics may be variable, but replacement or change is only assumed where it is shown efficient to do so. (Id., p. 8.) Furthermore, SBC-CA contends that because SBC-CA has been subject to both state and federal price cap regulation for many years, as well as increased competition, it has every incentive to act efficiently. SBC-CA states that:

To the extent that an existing network asset or characteristic represents the long run, efficient choice, retaining it is perfectly consistent with a TELRIC study and most closely complies with the Commission's [CCPs].

[SBC-CA] determined that the existing characteristics embodied in its cost studies meet that test and complied with the CCPs.... Thus, [SBC-CA's] studies are manifestly forward-looking and long run. (Id., pp. 8-9.) (Footnotes omitted.)

To counter claims that it has presented an embedded cost study, SBC-CA explains that its studies "use a network design that appropriately considers certain physical characteristics of SBC-CA's existing network, because those characteristics represent the most sensible measurement of the physical characteristics of a forward-looking network capable of serving current demand at existing customer locations and facility routes." (Id., p. 9, footnote omitted.) SBC-CA maintains that its studies reconstruct SBC-CA's entire network using forward-looking technology resulting in a "functional network" capable of providing UNEs. SBC-CA contends its approach is fully compliant with CCP 6, which requires that a cost analysis be based on the existing or planned location of switching and outside plant facilities. (Id., p. 11.)