from Recurring Costs

Joint Applicants' Position

According to Joint Applicants, if the Commission finds that it must remove non-recurring costs from Pacific's total direct cost of UNEs, these same non-recurring costs were inappropriately included in Pacific's recurring costs as well. Joint Applicants claim that the source of the non-recurring costs is the 1994 Total Regulated Operating Expenses of $4.139 billion set forth in Pacific's 1997 Cost Study.¹⁶ Joint Applicants' explain that the 1994 Total Regulated Operating Expenses Figure contained in the 1997 cost filing is the only expense figure large enough to potentially include $583 million in non-recurring costs. They maintain that this $4.139 billion amount is precisely the same expense amount that figures into the expense portion of Pacific's recurring costs. The $4.139 billion expense figure is a building block of the $4.814 billion in total direct UNE costs adopted in D.99-11-050. (D.99-11-050, p. 72) Thus, if the Commission finds that there are non-recurring costs included in the $4.139 billion 1994 Total Regulated Operating Expenses, then it must conclude that these same non-recurring costs made their way into recurring charges.

For recurring costs, Joint Applicants suggest that if the Commission cannot commit the resources to reviewing all recurring costs with new data, it could implement a simple fix to the current recurring costs. This simple fix would involve calculating the average overstatement of recurring costs based on the $583 million in non-recurring costs originally included in Pacific's total direct UNE costs.¹⁷

Pacific's Response

Pacific disagrees with Joint Applicants' suggestion that UNE recurring charges also require adjustment based on the Remand Order. Pacific maintains that the recurring costs set in D.98-02-106 are final, were affirmed on rehearing, and the Remand Order has no bearing on them. Accordingly, Pacific argues that Joint Applicants may not circumvent the proper appeal procedure and challenge the recurring costs in this manner. In addition, Pacific rebuts Joint Applicants' claims regarding recurring costs by alluding to a subsequent cost study that specifically delineated recurring and non-recurring costs. (Pacific Reply Comments, 9/4/02, p. 9, n. 19) Pacific alleges that nonrecurring costs were excluded from the direct costs of individual UNEs that formed the basis of D.98-02-106.

Discussion

We find Joint Applicants' assertions quite compelling. If non-recurring costs were included in Pacific's estimate of total direct UNE costs, these same non-recurring costs had to have been included in all of Pacific's recurring costs that were established based on this same total direct UNE cost estimate.

Before turning to the substance of our reasoning, we disagree with Pacific that Joint Applicants are circumventing the proper appeal procedures and it is too late for Joint Applicants to challenge recurring UNE costs and request adjustments. The Remand Order specifically vacates and remands the Commission's "determination of Pacific's direct cost of providing UNEs (the denominator of the common cost markup), and any decision which relies on this determination..." (Remand Order, p. 38.)(emphasis added) The $4.814 direct cost of providing UNEs that is referred to by the Court is identical to the $4.814 figure used in D.98-02-106 to set recurring costs. By its own wording, the Remand Order directs that any decision relying on the direct cost of providing UNEs must be remedied. Therefore, the Commission must address the direct cost of providing UNEs used in D.98-02-106. Furthermore, Joint Applicants' claim arises from the Remand Order's finding of double recovery of non-recurring costs in the total direct UNE cost figure. Prior to the Court's finding, Joint Applicants had relied on the Commission's conclusion in D.99-11-050 that non-recurring costs were not double counted. Because the Remand Order overturned the Commission's earlier findings, it is not improper for Joint Applicants to raise a claim now about recurring costs.

More substantively, Pacific states that there was a "subsequent cost study" that formed the basis of the recurring costs set in D.98-02-106 and, therefore, the Commission should ignore Joint Applicants' assertions about the need to revise recurring charges. Pacific provides no citations or references to support its claims about a "subsequent cost study" and we cannot rely on these unsupported assertions. As we explain below, we find that the computations underlying Pacific's 1997 cost study that lead us to find double counting of non-recurring costs in the markup are exactly the same calculations that were used to develop the $4.814 billion in total direct UNE costs adopted in D.98-02-106 and later used to set recurring prices in D.99-11-050.

Overall, we find that since we have already concluded that the $4.814 direct cost of providing UNEs included $537.8 million in non-recurring costs, these non-recurring costs were also incorporated into the recurring costs adopted in D.98-02-106. Joint Applicants have shown that the $4.139 billion estimate of 1994 Total Regulated Operating Expenses is a component of Pacific's 1997 total direct UNE cost estimate of $4.83 billion. Joint Applicants' have also shown, and Pacific's court filings support, that the 1994 Total Regulated Operating Expenses Figure contained in the 1997 cost filing is the only expense figure large enough to potentially include over $500 million in non-recurring costs.¹⁸ The $4.83 billion originally estimated by Pacific was revised downward to $4.814 billion and used to calculate UNE costs in D.98-02-106. (D.99-11-050, p. 72). Pacific has already shown to the District Court and now to this Commission that the $4.83 billion included non-recurring costs and none of the downward revisions to that figure involved removal of non-recurring costs. Thus, recurring prices established using that same $4.139 billion in 1994 Total Regulated Operating Expenses also include the same $537.8 million original estimate of non-recurring costs.¹⁹ In other words, Pacific is double-recovering non-recurring costs because $537.8 million in non-recurring costs is included in recurring prices, while at the same time, Pacific is charging separate non-recurring prices based on the finding of $375 million in non-recurring costs in D.98-12-079. Based on the same logic that non-recurring costs must be removed from the $4.814 billion total direct cost of UNEs, we should remove any non-recurring costs in the recurring costs adopted based on the $4.814 billion.

To remedy this double recovery, Joint Applicants have proposed that the Commission review all of Pacific's recurring UNE costs, or in the alternative, implement a simplified fix to the current recurring costs. We opt for the simplified fix for the same reasons that we are making the simplified fix to the markup calculation. We do not believe that a complete review of all UNE recurring prices is a wise use of our resources at this time.

The simple fix proposed by Joint Applicants involves calculating the average overstatement in recurring costs caused by the inclusion of $537.8 million in the $4.139 in 1994 Total Regulated Operating Expenses. In other words, we should reduce the expense component of UNE recurring costs by the percent that expenses were overstated. When we divide $537.8 million by $4.139 billion, this yields 12.9% which rounds to 13%. Thus, operating expenses were overstated by 13% when recurring costs were adopted in D.98-02-106. To correct this 13% overstatement, we shall direct Pacific to submit it calculation of the reduction to the expense portion of the recurring costs of each of its UNEs. Pacific should submit its calculations, fully supported with workpapers and appropriate documentation, as a filing in this docket within 30 days of this order.