COM/CXW/mnt ALTERNATE DRAFT

Agenda ID # 3524

(Alternate to Agenda ID # 3523)

Ratesetting

Decision PROPOSED ALTERNATE DECISION OF COMMISSIONER WOOD

(Mailed 5/3/04)

BEFORE THE PUBLIC UTILITIES COMMISSION OF THE STATE OF CALIFORNIA

Joint Application of AT&T Communications of California, Inc. (U 5002 C) and WorldCom, Inc. for the Commission to Reexamine the Recurring Costs and Prices of Unbundled Switching in Its First Annual Review of Unbundled Network Element Costs Pursuant to Ordering Paragraph 11 of D.99-11-050.	Application 01-02-024 (Filed February 21, 2001)
Application of AT&T Communications of California, Inc. (U 5002 C) and WorldCom, Inc. for the Commission to Reexamine the Recurring Costs and Prices of Unbundled Loops in Its First Annual Review of Unbundled Network Element Costs Pursuant to Ordering Paragraph 11 of D.99-11-050.	Application 01-02-035 (Filed February 28, 2001)
Application of The Telephone Connection Local Services, LLC (U 5522 C) for the Commission to Reexamine the Recurring Costs and Prices of the DS-3 Entrance Facility Without Equipment in Its Second Annual Review of Unbundled Network Element Costs Pursuant to Ordering Paragraph 11 of D.99-11-050.	Application 02-02-031 (Filed February 28, 2002)

Application of AT&T Communications of California, Inc. (U 5002 C) and WorldCom, Inc. for the Commission to Reexamine the Recurring Costs and Prices of Unbundled Interoffice Transmission Facilities and Signaling Networks and Call-Related Databases in Its Second Annual Review of Unbundled Network Element Costs Pursuant to Ordering Paragraph 11 of D.99-11-050.	Application 02-02-032 (Filed February 28, 2002)
Application of Pacific Bell Telephone Company (U 1001 C) for the Commission to Reexamine the Costs and Prices of the Expanded Interconnection Service Cross-Connect Network Element in the Second Annual Review of Unbundled Network Element Costs Pursuant to Ordering Paragraph 11 of D.99-11-050.	Application 02-02-034 (Filed February 28, 2002)
Application of XO California, Inc. (U 5553 C) for the Commission to Reexamine the Recurring Costs of DS1 and DS3 Unbundled Network Element Loops in Its Second Annual Review of Unbundled Network Element Costs Pursuant to Ordering Paragraph 11 of D.99-11-050.	Application 02-03-002 (Filed March 1, 2002)

OPINION ESTABLISHING REVISED UNBUNDLED NETWORK
ELEMENT RATES FOR PACIFIC BELL TELEPHONE COMPANY
DBA SBC CALIFORNIA

TABLE OF CONTENTS

Title Page

TABLE OF CONTENTS ii

OPINION ESTABLISHING REVISED UNBUNDLED NETWORK ELEMENT RATES FOR PACIFIC BELL TELEPHONE COMPANY DBA SBC CALIFORNIA 33

I. Summary 33

II. Background 77

A. 2001 UNE Nominations 88

B. 2002 UNE Nominations 99

III. Applicable Standards 1212

A. The Consensus Costing Principles 1212

B. The TELRIC Standard 1313

C. Supreme Court Review of TELRIC Standard 1414

D. Recent Updates to TELRIC 1515

E. Commission Cost Modeling Criteria 1515

F. Burden of Proof 1616

IV. Overview of Cost Models 1616

A. HM 5.3 1717

B. SBC-CA Models 1919

V. Both HM 5.3 and the SBC-CA Models Are Flawed 2121

A. Flaws in the SBC-CA Models 2626

1. LoopCAT Flaws 2828

a. Reliance on Embedded Network Data 2828

b. LoopCAT's Network Configuration 3535

c. Modeling of Multiple Dwelling Units 3939

d. The Linkage of Fill Factors and Maintenance Expenses 3939

e. Integration of Loop Studies 4040

2. SICAT Flaws 4141

3. Transport and High Capacity Loop Study Flaws 4242

4. Annual Cost Factors and Expenses 4646

a. Auditing and Modifying ACFs 4646

b. Shared and Common Costs 4848

c. Elimination of Other Expenses 5050

i. Non-regulated Expenses 5151

ii. Affiliate Transaction Expenses 5252

iii. Project Pronto Expenses 5353

iv. Transition Benefit Obligation (TBO) Expenses 5454

d. Inflation and Productivity 5656

5. Summary of SBC-CA Modeling Flaws 5858

B. Flaws in the HM 5.3 Model 5959

1. Engineering and Design Standards 6161

2. Loop Modeling and Customer Location 6868

a. Transparency of the Clustering Process 7070

b. Accuracy of Customer Locations 7272

c. Sensitivity to Clustering Changes 7676

d. Cluster Size 7777

e. Summary of Loop Modeling Criticism 8080

3. Expert Judgments 8181

4. Switching, Interoffice Demand, and Provisioning High Speed Services 8383

5. Spare Capacity 8787

6. Expenses 8888

7. Validation of HM 5.3 Results 8989

8. Summary of HM 5.3 Flaws 9494

C. Adherence to Commission Modeling Criteria 9494

D. UNE Rates Derived from the Results of Both Models 9696

1. Rates Based on Midpoint of the Range 9898

2. Description of "Endpoint" Model Runs 101101

VI. Modeling Inputs 106106

A. Asset Lives and Depreciation 106106

1. SBC-CA Proposal 106106

2. DOD/FEA and Joint Applicant's Proposal 108108

3. Discussion 111111

B. Cost of Capital 113113

1. SBC-CA Proposal 115115

2. Joint Applicants' Proposal 117117

3. Proposals of XO, Z-Tel and ORA/TURN 118118

4. Discussion 118118

a. Proxy Group 120120

b. Cost of Equity 121121

i. DCF Analysis 122122

ii. Market Risk Premium in CAPM 125125

iii. Risk Free Rate 129129

iv. Beta 130130

v. CAPM Summary and Resulting Cost of Equity 131131

c. Qualitative Risk Issues 132132

d. Cost of Debt 138138

e. Capital Structure 140140

f. Summary of Weighted Average Cost of Capital 143143

C. IDLC/UDLC 144144

1. Modeling Proposals 144144

2. Discussion 146146

D. DLC Costs 148148

1. JA Approach 148148

2. SBC-CA Approach 149149

3. Discussion 151151

E. Fill Factors in Loop Model 153153

1. Copper Distribution Fill 156156

a. JA Proposal 157157

b. SBC-CA Proposal 158158

c. Discussion 161161

2. Copper Feeder 163163

3. Fiber Feeder 164164

4. DLC Common Equipment 167167

5. DLC Plug-In Equipment 169169

6. SAI Equipment Fill 171171

7. Premise Termination Equipment 172172

8. Correlation of Fill Factors and Maintenance Costs 175175

F. Structure Sharing 178178

G. Plant Mix Assumptions 181181

H. Labor Cost Assumptions 182182

1. HM 5.3 182182

2. SBC-CA Models 183183

3. Discussion. 185185

I. Crossover Point 186186

J. Switching Inputs 188188

1. Switch Vendors 188188

2. Percentage of New, Growth and Replacement Lines 190190

3. Vertical Features Costs 193193

a. JA Position. 193193

b. SBC-CA Position 195195

c. Discussion. 195195

4. Rate Structure 198198

a. JA Position 199199

b. SBC-CA Position 203203

c. PacWest Position 206206

d. Discussion 207207

5. Switch Fill Factors 211211

VII. DS-3 Loop Rates 213213

VIII. Further UNE Reexamination Proceedings 214214

IX. Assignment of Proceeding 215215

X. Comments on Alternate Decision 215215

Findings of Fact 215215

Conclusions of Law 229229

ORDER 244244

Glossary of Acronyms 250250

(END OF APPENDIX D) 250250

APPENDIX A Adopted UNE Rates

APPENDIX B Comparison of Proposed and Adopted UNE Rates

APPENDIX C Switching Rates Based on Minute of Use

APPENDIX D Glossary of Acronyms

OPINION ESTABLISHING REVISED UNBUNDLED NETWORK
ELEMENT RATES FOR PACIFIC BELL TELEPHONE COMPANY
DBA SBC CALIFORNIA

I. Summary

This proceeding, known as the "UNE Reexamination," was initiated following formal requests by carriers interconnected with Pacific Bell Telephone Company d/b/a SBC California (hereinafter SBC-CA)¹ for the Commission to reexamine certain prices that SBC-CA charges competitors who purchase "unbundled network elements" (UNEs).² By purchasing UNEs, competitors are able to use portions of SBC-CA's network to offer competitive local exchange services.

In this decision, the Commission adopts updated and final rates for the following UNEs: loops (including deaveraged rates for 2-wire, DS-1 and DS-3 loops), switching, dedicated transport, signaling system 7 (SS7) links, and the DS-3 entrance facility without equipment.³ The newly adopted rates for the most frequently discussed UNEs are:

Table 1

Adopted UNE Rates

UNE	Adopted Rate4
Average 2-wire Loop	$13.26
Average DS-1 Loop	$46.94
Average DS-3 Loop	$439.14
2-wire port	$2.77
UNE-Platform5	$17.38

The rates in today's order replace interim rates for loops and switching that were set in Decision (D.) 02-05-042.⁶ The rates in today's order for other UNEs, namely dedicated transport, SS7 links, and the DS-3 entrance facility without equipment, replace rates originally adopted in D.99-11-050.

In adopting today's rates, the Commission considered two divergent cost models offered by the parties to this proceeding. SBC-CA proposed updated UNE rates based on a series of cost models that it has developed for use in the 13 states in which its parent corporation, SBC, operates. AT&T Communications of California, Inc. (AT&T) and WorldCom, Inc. (WorldCom) (hereinafter referred to as "Joint Applicants" or "JA") proposed updated UNE rates based on the latest version of the HAI Model, known as HM 5.3. The proposals of the parties differed greatly from each other and from the interim UNE rates currently in place as seen in the table below.⁷

Table 2

Comparison of Proposals

UNE	SBC-CA Proposal	JA Proposal	Interim Rate8
Average 2-wire Loop	$23.86	$5.24	$9.82
2-wire Port	$3.13	$1.28	$0.83
Switching Usage	$3.34	$1.57	$3.28
UNE-P	$30.33	$8.09	$13.93

After careful review of the competing cost models filed by SBC-CA and JA, the Commission finds that it cannot rely on either model alone to set UNE rates because of flaws in both models. The principal flaws with SBC-CA's models are that they rely too heavily on SBC-CA's embedded network configuration and costs and that we are not able to modify many of its inputs to overcome this flaw. The principal flaws with HM 5.3 are that we did not agree with certain of its input assumptions, particularly those related to clustering of customers into distribution areas, certain labor inputs, and the interoffice transport network. We were unable to modify these particular input assumptions.

It was not possible, given the time constraints and the resources required by this proceeding, to fix all of the flaws identified in either model. Because both models were flawed, we could not rely on either model by itself to establish UNE rates. To the extent possible, the Commission has modified both models to run with common inputs. As we modified these models and their inputs to resolve the many disputes and to bring the models in line with Commission precedent, federal requirements, and additional rationale we develop herein, we found that the resulting cost outputs of the models converged. In a few cases, the results converged to the point of becoming nearly the same. The degree of this convergence provides us additional confidence that the rates we adopt today are valid results, given our charge in this proceeding.

Based on our observation that the divergent model results converged as we corrected them, we determine that reasonable UNE rates lie within the zone created by the two models' results. The Commission adopts the midpoint of this range for the final UNE rate.

Some of the key modeling inputs used for the Commission's model runs include a 9.9% cost of capital, asset lives based on those adopted by the Federal Communications Commission (FCC), and a 51.6% copper distribution fill factor. The Commission's model runs include several inputs and assumptions proposed by SBC-CA, including plant mix, labor rates, Lucent and Nortel switch vendor assumptions, and a 12,000-foot crossover point. Furthermore, today's order adopts a flat-rate structure for the switching UNE wherein all switching costs are incorporated into one flat monthly port price, as proposed by JA.

As set forth in D.02-05-042, SBC-CA must adjust, or "true up" the interim rates it charged for its UNEs to the new rates adopted in this order. In other words, SBC-CA must calculate whether the previous interim rates were higher or lower than these newly adopted rates, and whether it has over or under-collected the appropriate revenues for any UNEs it sold at interim rates.

Finally, this order modifies the annual nomination process originally established in D.99-11-050 to suspend further review of SBC-CA's UNEs until February 2007.