VI. California Public Utilities Code Section 709.2
A. Background
California Public Utilities Code Section 709.2 (Section 709.2),371 enacted in 1994, requires the CPUC to make four essential determinations prior to "authorizing or directing competition" in the intrastate interLATA market. These determinations include: 1) that competitors have fair, nondiscriminatory access to exchanges; 2) that there is no anticompetitive behavior by the local exchange telephone corporation, including unfair use of subscriber contacts generated by the provision of local exchange telephone service; 3) that there is no improper cross-subsidization of interexchange telecommunications service; and 4) that there is "no substantial possibility of harm" to the competitive intrastate interexchange telecommunications markets. (§§ 709.2(c)(1)-(4).)
The complex relationship between §§ 709.2 and 271 merits discussion. Apart from the jurisdictional distinction, the key difference between the two code sections lies in the sector of the telecommunications market each one addresses. Section 271 approaches the accessibility of the local exchange market through satisfaction of the 14-point checklist. It also allows consideration of the public interest assessment of a BOC's entry into the long distance market. Section 709.2 addresses the health of the intrastate interLATA telecommunications, or IEC, market, and assesses the public interest from that perspective.
Signed into law two years before TA96, the language in § 709.2 borrows heavily from the Modified Final Judgment (MFJ),372 the federal decision that structurally separated AT&T. Because TA96 "replaced" the MFJ, the parties have vigorously debated the validity of applying competitive standards lifted from the MFJ in determining satisfaction of § 709.2 requirements. The competitors urge going back to various terms within the MFJ in order to understand the context of the words used. Pacific insists that § 709.2 can only be read in the shadow of § 271,373 although since the passage of Section 271 there has been no amendment of the state law.
Heretofore, the CPUC has addressed § 709.2 only to a limited extent. In 1998, in this docket, we indicated that our § 709.2 assessment would be performed in a separate phase. (D.98-12-069, mimeo. at 199.) While the parties in Pacific Bell Communications' (PB Com)374 1996 application for a certificate of public convenience and necessity375 to provide long distance invoked § 709.2, we made no findings of fact or conclusions of law regarding that section in D.99-02-013. Instead, we stated that we would make determinations regarding Pacific's compliance with § 709.2 in a separate forum. Finally, by ruling in March 2001, the Assigned Commissioner affirmed that § 709.2 would be addressed herein.
In May 2001, the Assigned Commissioner adopted a two-step process to focus the issues of the assessment phase. First, he directed Pacific to file "in support of its showing, copies of the particular documents, affidavits, statements, exhibits, etc. that it intends to rely upon to enable [the CPUC] to the make the four required determinations." (Assigned Commissioner's Ruling on the Motion Regarding Public Utilities Code Section 709.2 at 6 (May 4, 2001).) Then, he set a schedule for the other parties to submit their fully documented responsive cases.
In June, Pacific separately filed its Section 709.2 showing concurrent with the copy of its draft Section 271 application. Interested parties responded in August, and Pacific replied in September. The parties presented oral arguments on their § 709.2 submissions before the Assigned Commissioner and ALJ on December 3-5, 2001.
B. Summary of Positions
Pacific argues that § 709.2 was litigated in the PB Com proceeding, and was resolved in its favor. (§ 709.2 Showing, § I at 2-5.) It also asserts that the Section 271 record overall satisfies the requirements of the state law. And, any CPUC finding imposing conditions, other than those contained in the 14-point checklist, on Pacific's entry into the long distance market would be contrary to law and preempted. (Id., section II, A-D at 5-12; section III at 12-13.)
Some respondents insist that the CPUC did not determine Pacific's § 709.2 compliance in the PB Com case, noting the absence of associated findings of fact and/or conclusions of law. Others, citing the more than five-year old data on which the PB Com decision was based, contend Pacific's compliance under § 709.2 merits renewed analysis and nothing in the code section or D.99-02-013 precludes or prevents the CPUC from doing such. (AT&T Brief at 7-8; Comments of WorldCom at 4-5.)
Respondents also contend that TA96 neither subsumes nor preempts § 709.2 because § 271 does not address interexchange carriers, and § 253(b),376 261 (b),377 and 601(c)(1),378 of the Act permit the CPUC to carry out its state responsibilities under § 709.2. (Response of Pac-West and Working Assets Long Distance379 at 9; ORA Brief at 49-52; Comments of CCTA at 7-10; AT&T Brief at 7-8; and Comments of WorldCom at 5-11 (August 23, 2001).)
C. Open Access to Exchanges
1. Does the record support the determination that all competitors have fair, nondiscriminatory, and mutually open access to exchanges currently subject to the modified final judgment, including fair unbundling of exchange facilities, as prescribed in the Commission's Open Access and Network Architecture Development Proceeding (I.93-04-003380 and R.93-04-003)? (§ 709.2(c)(1))
Pacific states that the record before the CPUC establishing compliance with § 271 likewise supports a determination that it provides nondiscriminatory access to facilities, including unbundling as prescribed in the OANAD Proceeding. It maintains that it has put forth documents demonstrating that it has provided interconnection that is at least "equal in quality" to that provided to itself or to any subsidiary, on nondiscriminatory terms and conditions.381 (See Hopfinger Aff. ¶¶ 30-84; Deere Aff. ¶¶ 14-35.) Pacific also provides nondiscriminatory access to network elements, polls, ducts, conduits, local loop transmission, local transport, 911 and E911 services, directory assistance, and operator call completion. (See Hopfinger Aff. ¶¶ 85-106; Deere Aff. ¶¶ 36-156; Vandeloop Aff.; Young Declaration, Exhibit D; see generally Huston/Lawson Joint Aff. (OSS); Flynn Aff. (billing).) In addition, it provides nondiscriminatory access to white page directory listings, telephone numbers, telephone number portability, information necessary to provide dialing parity, databases, and associated signaling for call routing. (See Deere Aff. ¶¶ 157-185, 186-199; see generally Rogers Aff.; Mondon Number Admin. Aff.; Mondon LNP Aff.)
The competitors argue that Pacific has failed to satisfactorily open its exchange to competition. (AT&T Brief at 14-20; WorldCom Comments at 59-63; Pac-West/WA at 11-14.) They contend that separate OSS systems present an inherent inequality in the way that Pacific handles access to its exchanges in a competitive environment. (Pac-West/WA Response at 12.) They also insist that several currently open CPUC proceedings are essential to determining the openness of Pacific's network. Such proceedings include Collocation, Geographic Loop Deaveraging, Line Splitting and Line-Sharing, OSS Performance Incentives, and Revised UNE Pricing. Without the resolution of these proceedings any judgment about Pacific's satisfaction of the requirements of section 709.2 will be inadequate. (Pac-West/WA Response at 13-14.)
2. Discussion
In specifically analyzing this docket's sizeable record in the above § 271 chapters, we find that Pacific has demonstrated that it has provided substantially fair, nondiscriminatory, open access to exchanges, including fair unbundling of exchange facilities. While we understand parties' frustrations with the time that it has taken to resolve a number of the integral telecommunications proceedings, we have issued decisions on geographic deaveraging, performance incentives and revised UNE pricing382 within the last year. In addition, we have interim collocation rates in place; we have interim rates and terms on line splitting and line sharing,383 and a draft decision establishing permanent rates for line sharing384 is currently before the CPUC. Thus, we have sufficient data to determine the openness of Pacific's network. Overall, we find that all competitors generally have fair, nondiscriminatory, and mutually open access to exchanges385 and interexchange facilities, including fair unbundling of exchange facilities, as prescribed in the CPUC's OANAD proceeding.
D. No Anticompetitive Behavior
1. Does the record support the determination that there is no anticompetitive behavior by the local exchange telephone corporation, including unfair use of subscriber information or unfair use of customer contacts generated by the local exchange telephone corporation's provision of local exchange telephone service? (§ 709.2(c)(2))
Pacific maintains that the CPUC in the PB Com proceeding adopted specific conditions to address any of its alleged anticompetitive behavior,386 or concluded that proper safeguards were already in place. Moreover, TA96 was designed to prevent and detect such alleged behavior by BOCs and has been implemented by the FCC to that end. (Pacific Compliance Brief at 8.) In PB Com, the CPUC held that it would adopt the `guidelines of the FCC's CPNI Order387 in dealing with Pacific Bell's marketing of its own services and use of customer records' and that this was `fair both for purposes of the Telecommunications Act and California's Costa Bill.' (Id. at 9.)
TA96 has established structural and transactional requirements, operational independence, separate books and records, audits, and nondiscrimination safeguards to prevent anticompetitive behavior. And, Pacific asserts that it complies with these safeguards. (See generally Heinrichs Aff.; Yohe Aff.; Carrisalez Aff.) Finally, California's adopted performance measures and incentive plan will disclose, and allow competitors and the CPUC to correct any real performance problems, whether the result of anticompetitive conduct or otherwise. (See Johnson Aff. ¶¶ 7-8, 15-45,153-175.)
In response, the interested parties enumerate ongoing and recently past practices of Pacific and SBC that they characterize as anticompetitive. They also discuss putative Pacific plans for the future that cause them great concern. Several parties contend that Pacific has misused customer contact and CPNI data in the past, and plans to use inappropriate customer contact to sell its long distance affiliate's service. (AT&T Brief at 27-36 ; TCIXC at 2-3, 5-6; CISPA at 15-16; Pac-West/WA at 15, Selwyn Aff. ) Certain parties regard the deficiencies Pacific has not addressed in the CLEC forum as indicative of anticompetitive behavior. (Pac-West/WA at 15; AT&T Brief at 31.) Pac-West/WA alleges that Pacific unilaterally discontinued the CESAR system used by CLECs because of contractual misunderstandings. This discontinuation has disadvantaged the CLECs. It also condemns Pacific's joint marketing activities and structure. (Pac-West/WA at 15, 18, Sprague Aff.)
Pac-West/WA and AT&T urge the CPUC to consider recent and past behavior of Pacific's parent, SBC, in its assessment of Pacific pursuant to § 709.2(c)(2). They note that SBC and its affiliates have incurred more than $100 million in fines for failure to meet federal regulatory requirements. SBC material submitted in two 271 applications was investigated for misinformation by the FCC.388 According to the two competitors, SBC considers fines for failure to meet regulatory requirements a cost of business. (Pac-West/WA at 16-18; AT&T at 31, 33-36.) Pac-West/WA asserts that SBC has raised rates in states where it has gained long distance entry.
2. Discussion
Section 709.2(c)(2) directs us to determine that there is no evidence of anticompetitive behavior by Pacific. The parties have presented evidence of recent and past anticompetitive behavior by Pacific and its parent, SBC, in California and elsewhere in the nation. They have also presented evidence of current and past behavior by Pacific that can most appropriately be characterized as "aggressively competitive" rather than anticompetitive in fact.
Our record includes documents regarding a 1996 federal lawsuit that AT&T, MCI389 and Sprint brought against Pacific and its affiliates, seeking among other things "a preliminary injunction preventing Pacific's planned use of the long distance carriers' billing information in connection with the Pacific Bell Extras program.390" (Id. at 28-29.) On July 3, 1996, the U.S. District Court for the Northern District of California found for the interexchange carriers on three grounds391 and granted their preliminary injunction. The court's order was subsequently appealed to the U.S. Court of Appeals for the 9th Circuit, which remanded the case to the District Court for further hearing. The matter was settled prior to that hearing.
The record also includes statements recounting the December 2000 jury verdict in the CalTech International Telecom Corporation (CalTech International) proceeding,392 which found Pacific liable for unlawful monopolization of the local exchange telephone market in California under 15 U.S.C. § 2 and awarded money damages to CLEC CalTech International. The parties ultimately settled the case, and a judgment was not entered against Pacific.
Pacific replies that the competitors have collected a series of past occurrences, anecdotal complaints and disgruntled policy views to support their position. We find that the record contains more than that. Although eventually settled, the two federal court proceedings present findings of anticompetitive conduct. The case regarding AT&T, MCI and Sprint also involved the "unfair use of customer contacts generated... by the provision of local exchange telephone service." (Section 709.2(c)(2).) The CalTech International case found "unlawful monopolization," and was rendered less than two years ago. Still, even if we were to consider these two cases too remote for consideration, this record contains matters that we must weigh in their stead.
The parties have presented evidence of Pacific's joint marketing plans as well as future opportunities of which Pacific will take advantage to the detriment of its local and intrastate long distance competitors. Pacific's response to the joint marketing allegations and the substantiating evidence submitted is to state that its proposed marketing plan is consistent with § 272 of TA96. We are mindful that federal law does not proscribe Pacific jointly marketing PBLD's service to its inbound callers; and that joint marketing of incumbent long distance services is the tradeoff for Pacific to provide competitors access to its unbundled local network facilities at regulated rates. However, we differ from the FCC's view that permitting the incumbent to joint market its long distance affiliate's services to incoming callers is a harmless and nondiscriminating advantage. Specifically, we are mindful that unrestricted use of customer contacts could be unfair and jeopardize customer service. However, there are ways of addressing this issue through marketing rules and equal access disclosure.
Pacific's Tariff Rule 12 requires Pacific to resolve a customer's service request, indicate that the order is complete, seek permission to present marketing information on other services, and present marketing information only if the customer agrees.393 This rule also precludes Pacific from forcing customers to listen to marketing pitches or to be subject to CPNI release requests while they are placed on hold prior to reaching a customer service agent. This rule was specifically designed and recently enacted to protect customers from abusive marketing practices, such as one described by a CLEC witness. 394 Clearly, Tariff Rule 12 will apply to Pacific's joint marketing of long distance services, including long distance service packages. We clarify how Pacific must apply Tariff Rule 12 during a customer's PIC/LPIC selection when establishing a new phone line.395 Per Tariff Rule 12, Pacific must "first provide the service requested by the customer and describe options for purchasing any requested service beginning with the least expensive option" for each service - such as when establishing a new phone line, where the representative guides the customer through the selection of basic service type, installation of inside wire (if necessary), identifying the PIC/LPIC selection, assigning a telephone number, providing an installation date, and quoting the monthly recurring and non-recurring charges - prior to marketing of optional vertical services and packages including optional
services. Because establishing a new line is a customer service request, during the critical PIC/LPIC selection phase (as in the entire phase) Pacific is prohibited from marketing its optional or affiliate services unless specifically requested by the customer.
Pacific's entry into the long distance market does not absolve it of competitive equal access responsibilities when establishing a customers new service connection. Such responsibilities require that it market its affiliates interLATA services to an "inbound caller" subject to the condition that it "also inform [ ] such customers of their right to select the interLATA carrier of their choice"396 We clarify that Pacific must inform customers of their right to select an interLATA carrier of their choice prior to stating that they offer long-distance services. Specifically, we adopt the following language, "You have many companies to choose from to provide your long distance and local toll service including (Pacific Bell Long distance). If you like, I can read from a list of available carriers and provide their telephone numbers." We clarify that Pacific must also provide an opportunity for the customer to make their selection, thereby Pacific must follow the prior statement with the question, "who would you like as your long distance carrier and local toll carrier?" Further, Pacific must respect the selection of the customer should the customer select another long-distance service provider. If the customer requests or selects PBLD as the provider, Pacific, per Tariff Rule 12, must describe the calling plan with the lowest price - e.g., having the lowest monthly recurring cost. The Tariff Rule 12 requirement to distinguish customer service from marketing shall not be abrogated as a result of Pacific being granted 271 authority. Unless, specifically requested by the customer, Pacific's opportunity to market optional services and bundled service calling plans, per Tariff Rule 12 is prohibited until completing the entire customer service request. Further, we clarify that use of the term "long-distance" does not assume "local toll". This particular regulatory nuance will hopefully change as industry structures and regulatory practices catch up with popular notions of what constitutes long distance service. Until such time, Pacific must clearly receive a customer's agreement for long-distance service (PIC) and local toll (LPIC) before changing a PIC and LPIC.
In its written submissions and its oral presentations responding to the other allegations that it will wield its pivotal bottleneck role with increasing financial and market share self-interest, Pacific generally scoffed at the suggestions that it would ever do such things. Pacific rarely acknowledged the possibility that its future actions might be anything but proper. As noted above, its one concession to the pessimistic perspective was its counsel that anticompetitive behavior would be captured and sanctioned in accordance with the performance incentive plan. Pacific was silent as to the inference that we should take from the millions of dollars397 that SBC's affiliates have paid to the FCC for variously failing to meet the required performance obligations under the Ameritech Merger Conditions.
Quite frankly, the voluminous record in this proceeding reveals several aspects of Pacific's behavior: some positive, some negative. However, the record does not support the finding that there is no possibility of anticompetitive behavior by Pacific Bell. Regulatory enforcement of our rules and oversight of Pacific's activities does provide a reasonable check on such possibilities.
E. No improper cross subsidization
1. Does the record support the determination there is no improper cross-subsidization of intrastate interexchange telecommunications service by requiring separate accounting records to allocate costs for the provision of intrastate interexchange telecommunications service and examining the methodology of allocating those costs? (§ 709.2(c)(3))
Pacific argues that the separate affiliate safeguards of TA96's Section 272, which were designed to prevent any cross-subsidization, are more comprehensive than the provisions of Section 709.2(c)(3). Section 709.2(c)(3) addresses the need to prevent "improper cross-subsidization" of intrastate long distance service by requiring "separate accounting records to allocate costs..." In addition to other safeguards not contained in the state law, § 272(b) specifically addresses separate accounting. It requires Pacific's long distance entity to maintain "books, records and accounts... which shall be separate from the books, records and accounts maintained by the Bell operating company of which it is an affiliate." Further, those books, records and accounts must be maintained in the manner prescribed by the FCC. (Pacific § 709.2 Compliance Brief at 9-10.)
Pacific points out that the FCC has issued its own comprehensive rules addressing the above requirements in the Accounting Safeguards Order.398 It also advises that TA96 imposes a joint federal/state audit requirements to ensure compliance with the accounting and structural safeguards and the FCC rules implementing safeguards, with the results reported to the FCC as well as the CPUC. The CPUC ordered, in the PB Com proceeding, a further audit to be conducted as part of the joint FCC audit or as a separate audit for compliance with the CPUC's affiliate transaction and cost accounting rules. (Id. at 11; Young Declaration Exhibit C at 55-56.) Pacific submits that these clearly satisfy the accounting requirements of § 709.2.
In its written and oral submissions, Pac-West/WA detailed confidential portions399 of PBLD/Pacific's proposed joint marketing plan in support of its position that Pacific is structuring its long distance affiliate to enable cross-subsidization.400 It presented putative training scripts and business plans designated for "Attorney Only" viewing. (Pac-West/WA at 19-24.) Pac-West/WA contends that, if implemented, Pacific's joint marketing schemes could lessen ratepayers' choices without their knowledge and keep long distance prices up. (Id. at 21.)
WorldCom accuses Pacific of price squeezing,401 particularly in its 800 query or "800 database Service" charges. It also claims that California's imputation standard is not sufficient to protect competition in the state. (WorldCom at 88-93.)
2. Discussion
Section 709.2(c)(3) requires us to determine that there is "no improper cross-subsidization of intrastate interexchange telecommunications service by requiring separate accounting records to allocate costs for the provision of intrastate interexchange telecommunications service and examining the methodology of allocating those costs." In the PB Com proceeding, we considered the record before us, including prevailing federal policy, over a period of close to three years.402 In short, the proceeding was anything but static. The proposed joint marketing by Pacific and PBLD of PBLD's long distance services was a controversial issue that we ultimately resolved in conformance with the FCC's CPNI and Non-Accounting Safeguards Orders.
At that time, we were persuaded that Pacific would need to compete aggressively in order to gain a hold in the long distance market. We were also willing to believe that joint marketing on inbound calls from Pacific customers struck an appropriate balance between the opening of the local market and the additional interconnection and unbundling requirements of TA96. Likewise in our decision, we acknowledged and followed the FCC's rationale in the CPNI Order403 that "this `total service approach' offers convenience for the customer while preventing use of CPNI in ways the customer would not expect." (1999 Cal. LEXIS 13, 67.)
Time and documentary evidence have better informed our views. Nationally, the RBOCs have proven themselves to be formidable entrants into the long distance market. SBC-LD currently serves over 2.8 million access lines in Texas, Kansas and Oklahoma, three states in its region where it has authority to offer interLATA services. It reached this amount one year after winning 271 approvals.404 Pac-West/WA declares that through its position as the incumbent, SBC-LD obtains marketing access to millions of potential interLATA customers at a cost that is far below either the cost to the RBOC to produce the joint marketing service, or the fair market value of that service.405
They assert that Pacific's proposed marketing agreements indicate that this strategy will be used in California. According to Pac-West/WA, the cross-subsidy will occur when Pacific is not properly compensated for its joint marketing services, to the economic detriment of the local ratepayers. In reply, Pacific does not focus on the costing elements of its proposed marketing scheme. Instead, it reiterates that its joint marketing agreement with PBLD is in accordance with TA96 and the CPUC's decisions.
We held oral arguments on § 709.2; but we did not have evidentiary hearings. While our examination of the documents submitted in this proceeding show a difference in the proposed joint marketing plans of the PB Com proceeding and the 2001 proposed joint marketing plans, the documents were not compared and analyzed through cross-examination. In 1996 and 1997, Pacific presented costing support for its joint marketing proposal that we found satisfied our affiliate transaction rules. We note that Pacific has stated that its current plans have not yet been thoroughly studied by its legal department. Pac-West/WA's costing discussion and comparison regarding the proposed joint marketing plan demonstrates cross-subsidization, may exist, and we find it very troubling.
Accordingly, we will require Pacific to carefully track the time its customer representatives spend marketing PBLD's services regardless of whether the marketing was successful or not, and to routinely re-examine and report this cost element in its affiliate transaction report each year. As our
confidence in non-structural safeguards has waned significantly over the past years, we will request Commission staff to audit Pacific's joint marketing arrangement with PBLD as part of its next schedule audit in compliance with Section 314.5 and 797.406 At a minimum, we would expect this audit would verify the creditability of Pacific's time records and resulting cost allocations to PBLD. We will require Pacific to pay for all costs associated with this audit (and allocate them appropriately to PBLD), including reimbursements to the Commission for any audit consultant fees incurred. Should the audit uncover cost allocation or other improprieties from the joint marketing arrangement between Pacific and PBLD, we will not hesitate to take the strongest action. As staffing permits, Commission staff may also seek to participate with the FCC on accounting safeguard audits covering joint marketing issues between Pacific and PBLD.407
The record before us simply does not support the finding that there is no possibility of improper cross-subsidization anywhere within Pacific's proposal to provide long distance telephone service within California. Rather, the record includes documents that purport to show compliant costing allocations as well as documents that purport to show inappropriate allocations and underlying methodology. As of this date, the mandated audits have not yet been performed. However, we do find that our requirements for separate accounting records and for the examination of the cost allocation methodology for the provision of intrastate interexchange telecommunications service, pursuant to our affiliate transaction and cost allocation rules and O.P. 8 and 18 of D.99-02-013,408 will be integral in preventing, identifying and eliminating improper cross-subsidization.
F. No Substantial Possibility of Harm From Pacific's Entry
1. Does the Record Support the Determination that there is No Substantial Possibility of Harm from Pacific's Entry into the Long Distance Market? (§ 709.2(c)(4))
Pacific asserts that the CPUC resolved this issue in the PB Com proceeding. In doing so, it addressed the initial claims of the competitors', granted PB Com's CPCN application subject to various conditions, and concluded that Pacific's entry into long distance markets was beneficial. (Pacific at 12.) Pacific states that the CPUC "found that 'before it authorizes intraLATA long distance' service, it had to determine 'that there is no substantial possibility of harm to competitive intrastate telephone markets.'409" (Id.; Young Declaration, Exhibit E at 1.) Pacific maintains that since the CPUC denied AT&T and WorldCom's applications for rehearing in the PB Com case, the competitors cannot relitigate the 709.2 issues here. Finally, Pacific notes that "[c]laims of harm to competition and/or competitors are generally raised at the FCC in connection with its public interest analysis of section 271 applications." (Id. at 11-12.)
AT&T maintains that Pacific's monopoly control of the local exchange market gives it the ability to harm interexchange competition. (AT&T at 21-27.) Moreover, access charges that are not cost-based, such as the Network Interconnection Charge, represent an anti-competitive price squeeze, if Pacific's long distance affiliate sets its in-region interexchange prices at or below its access prices and forces competitors to operate at a loss or face losing market share. (Id. at 22-23, 40-41; WorldCom at 27-30, 36-40.) SBC and Pacific have abused market power, in California and elsewhere, in the past and do so now. (Id. at 27-36.) These abuses include the 1996 "Pacific Bell Extras" program, described above, which inappropriately authorized Pacific to provide CPNI to its affiliates including its long distance company, thereby violating § 222(a) of TA96 as well as CPNI-related agreements between Pacific, AT&T, WorldCom and Sprint. The court enjoined Pacific for these actions.410 (Id. at 28-30.) In 2000, a California jury found against Pacific in an antitrust suit411 for violating 15 U.S.C. § 2.412 (Id. at 31.)
AT&T also argues that once interLATA equal access was implemented in California the intraLATA toll PIC (LPIC) disputes rose significantly. In response, the CPUC's Consumer Services Division (CSD) requested an audit of intraLATA LPIC disputes at Pacific's expense. (Id. at 30.)
AT&T alleges that Pacific limits competition by gating interconnection trunks by CLEC per day. It further insists that SBC has shut competition out of its advanced services markets. (Id. at 31-32.) Finally, it criticizes the pace at which Pacific has addressed the over 20 operational deficiencies reported by the CLECs during the April 2001 operational hearings. (Id., Attachment G.)
2. Discussion
Section 709.2(c)(4) requires us to determine that there is "no substantial possibility of harm to the competitive intrastate interexchange telecommunications markets." Pacific's primary position on § 709.2 has been to assert that the CPUC already reached the central issues in its PB Com case in 1999. Consequently, Pacific painstakingly examined and interpreted PB Com's record and decision, arguing in the alternative, that its § 271 showing equally satisfied its burden of proof under § 709.2. Still, Pacific was able to present neither findings, conclusions of law, nor ordering paragraphs to support its case. We find that, particularly with respect to § 709.2(c)(4), Pacific failed to show that there is no substantial possibility of harm to the competitive intrastate interexchange telecommunications market by its long distance entry in California.
The interexchange carriers argue that there is an inherent tension caused by the fact that Pacific will serve as a neutral PIC administrator after its long distance affiliate enters the intrastate interexchange telephone market. That tension is between Pacific's duty to administer PIC changes in a competitively neutral way and its interest in winning customers. During oral argument, AT&T's counsel stated: "This means that when Pacific enters the long-distance market, it has control of the customers' vital telecommunications records, and the interexchange carriers have to trust Pacific to not only execute the carrier switches in an unbiased manner, which is the PIC change, the resultant possibility of PIC disputes, but also exchange information in an unbiased manner also." (Section 709.2 Tr. at 152, ll. 4-10 (December 5, 2001).)
In response, Pacific failed to offer any assurance that it would perform its LPIC role with any safeguards of neutrality or sensitivity to competitor concerns. Pacific's counsel replied to the competitors' call for a third-party PIC Administrator with the comment during oral argument that he was "... frankly confused about how a third-party PIC administrator would solve the problems that Mr. Deutsch described. I still have the same questions. Mr. Deutsch said that in the long run a third-party PIC administrator will cut down on PIC disputes and cut down on slamming allegations. That is where I really get lost because he talked about Pacific calling a customer when that customer leaves Pacific and goes to another carrier. We are going to continue to do that even with a third-party PIC administrator." (Id. at 175, ll. 13-15; 176, ll. 7-13.) The limited CSD audit indicates that there were problems with a significant percentage of Pacific's reporting of intraLATA LPIC disputes after we approved intraLATA competition. 413 Pacific denies that there were problems.
There is no allegation, nor evidence that in the competitive intraLATA marketplace Pacific failed to switch an LPIC as requested by a competitive carrier. We trust Pacific will administer PIC assignments presented by its competitors in the same manner as it has for LPICs, just as we trust CLECs to administer their PIC and LPIC assignments requested by their competitors.
However, we are concerned about certain PIC administration related issues raised by AT&T. There is a reasonable question as to the appropriateness of relying on Pacific to determine a PIC/LPIC dispute, and to assess a slamming switching fee onto competing interexchange carriers.414 Further, it is reasonable to question the appropriateness of the Commission's enforcement staff continued reliance on Pacific's PIC dispute reports.415 We find that absent competitively neutral and nondiscriminatory PIC dispute reporting and administration there is a possibility that the interstate interexchange market will be harmed through increasing carrier conflicts.
The significant advantage afforded Pacific's long distance affiliate by Pacific's ability to market its affiliate's service to several million incoming customer service calls per year from its existing local service customers will unquestionably affect the other interexchange carriers. No other interLATA competitor in California has any similar massive opportunity to address incoming calls from potential interLATA customers. PBLD's potentially swift dominance of the intrastate interexchange telephone market could detrimentally impact competition in that sector. However, PBLD's gains will to some extent be moderated by interexchange carrier entry into the local telephone market.
Overall, the interested parties are pragmatic in their proposals regarding what the CPUC should do if it is not able to affirmatively render the determinations required pursuant to § 709.2. Contrary to expectations, they do not all urge us to defy our findings pursuant to § 271 in favor of our § 709.2 findings. Instead, they acknowledge that in reading § 709.2 in conjunction with § 271, we should look to ways in which we can align our state public interest findings with our federal technical assessment.
Our findings under § 709.2 reflect the considerations that California law requires us to weigh and balance. While Pacific largely satisfies the technical requirements of § 271, in accordance with § 709.2, we cannot state unequivocally that we find Pacific's imminent entry into the long distance market in California will primarily enhance the public interest. Local telephone competition in California exists in the technical and quantitative data; but it has yet to find its way into the residences of the majority of California's ratepayers. Only time and regulatory vigilance will determine if it ever arrives. We expect that the public interest will be positively served in California by the addition of another experienced, formidable competitor in the intrastate interexchange market. At the same time, we foresee the harm to the public interest if actual competition in California maintains its current anemic pace, and Pacific gains intrastate long distance dominance to match its local influence.
The interested parties do not ask us to bar Pacific's entry into the intrastate interexchange market. Instead, they ask us to apply conditions that they contend will counter the potential harm that Pacific poses to the interLATA market. First, they urge us to seriously consider the complete structural separation of Pacific into two parts416 and the divestiture of Pacific Wholesale. They contend that this is most likely to result in increased competition in both California's local and interLATA telecommunications markets. They also report that a recent Senate bill includes an RBOC structural separation proposal,417 and structural separation investigations are taking place in a dozen states.
During oral argument, the interested parties acknowledged that structural separation would be neither swift nor inexpensive. Consequently, they propose that the CPUC take a gradual and phased approach starting with a feasibility study that would set forth the costs of the structural separation plan. At present, we have Pacific's out of hand dismissal of the proposal, but no responsive substantiating data. Therefore, we find that the preparation of such a study would be reasonable, and direct Pacific to file six months from the effective date of this decision a report or study detailing the costs of separating Pacific into two parts and divesting the segment covering wholesale network operations. Interested parties shall have an opportunity to review the study or report and comment on it. Following our review of the study and comments, we shall advise whether structural separation appears feasible or not, and we shall determine whether to hold evidentiary hearings on the study.
The interested parties also propose that we investigate the costs and feasibility of selecting a competitively neutral third-party PIC administrator. Again, the interested parties acknowledge that the appointment of a neutral third-party administrator is not an immediate step that the CPUC can or should take.418 Like the structural separation plan, the issue of the neutral third-party administrator requires analysis, discussion, and a strategy. As stated above, Pacific's dismissive rejection of the interested parties' proposals lacked not only supporting data but also any willingness to address the parties' concerns or perceptions.
Moreover, we are mindful that at one time the RBOC was the presumed administrator for numbering. With time, this presumption changed. A neutral third-party administrator may be necessary in the new environment. Accordingly, we find that it is reasonable to investigate the costs and feasibility of selecting a competitively neutral third-party PIC administrator. We direct the Telecommunications Division staff under the supervision of its Director to prepare for consideration on the CPUC's meeting agenda, an Order Instituting Investigation to examine the efficacy, feasibility, structural implementation, and selection criteria for selecting a competitively neutral third-party PIC administrator for California, no later than five months from the effective date of this order.
Finally, the interested parties' offer several proposals to counter the significant advantage that PBLD will have as a result of its joint marketing arrangements with Pacific. First, they call on the CPUC "to order Pacific to establish a separate sales force to handle Pacific Bell long-distance service sales." (Id. at 145, l. 28 -146, ll. 1-2.) WA notes "[s]ubtle messages, slight suggestions of possible complications or delay due to the use of competitor services, access to CPNI that is not available to competitors, and similar obvious possibilities of abuse are of the nature that the regulatory process will be unlikely to monitor or control." (Id. at 146, ll. 22-27.) Second, as a more moderate solution, the interested parties suggest that Pacific be required to establish a separate telephone number for end-users to call on their own if they want Pacific's long distance affiliate's services. With a separate number, the consumer is in control and not potentially coerced into changing interexchange carriers. In fact, he or she could call any interexchange carrier. The interested parties envision script-only changes under this option, which avoids subjecting customers who call in seeking unrelated customer service to unwanted marketing efforts. Third, they encourage us to permit Pacific representatives to "offer to provide a warm transfer, an on-the-same-call transfer, to an interexchange carrier of the end-user's choice. Either Pacific Bell Long Distance or any other interexchange carrier who is willing to participate can pay the same cost." (Id. at 146, ll.18-24.)
Pacific insists that federal law permits its joint marketing. Yet, it offers no other defense of the substantial marketing advantage that it has over the interexchange carriers. We note that the PB Com Decision specifically "permits the Pacific Bell representative to directly market the affiliate's Long Distance service and, with the verbal consent of the customer, to access the customer's Proprietary records."419 The PB Com Decision preceded recent Tariff Rule 12 revisions which impact how and when Pacific can market its affiliate services. We reject proposals to establish a separate sales force to market Pacific's long distance service on outgoing calls and on incoming calls to Pacific Bell. The Telecom Act identified a tradeoff in opening all markets to competition - where incumbents would open their network facilities to competitors at regulated rates in trade for the ability of the incumbent to joint market its long distance services. Further, we find that the Tariff Rule 12 marketing restraints applicable to Pacific and its long distance affiliate's joint marketing, and the requirement for Pacific to track and report its marketing of long distance service, and for staff to initiate an audit of Pacific's affiliate transaction marketing costs are sufficient to protect customers from unwanted and abusive marketing, and to prevent harm to California's intrastate interexchange telecommunications market due to cross-subsidy. The Commission will closely monitor Pacific's marketing activities and will use its statutory authority if Pacific fails compliance.
371 Also referred to as the "Costa Bill," AB 3720.
372 United States v. AT&T, 552 F. Supp. 131, 227 (D.D.C. 1982) (MFJ Decision), aff'd mem., 460 U.S. 1001 (1983).
373 Pacific Bell Brief on Section 709.2 at 2-5; Young Declaration generally.
374 PB COM's name was eventually changed to SBC Long Distance.
375 Application of Pacific Bell Communications for a Certificate of Public Convenience and Necessity to Provide InterLATA, IntraLATA and Local Exchange Telecommunications Services Within the State of California, A.96-03-007, D.99-02-013, 1999 Cal. PUC LEXIS 13 (February 4, 1999).
376 Section 253(b): "Nothing in this section shall affect the ability of a State to impose, on a competitively neutral basis and consistent with § 254, requirements necessary to preserve and advance universal service, protect the public safety and welfare, ensure the continued quality of telecommunications services, and safeguard the rights of consumers."
377 Section 261(b): "Nothing in this part shall be construed to prohibit any State commission from enforcing regulations prescribed prior to the date of enactment of the Telecommunications Act of 1996, or from prescribing regulations after such date of enactment, in fulfilling the requirements of this part, if such regulations are not inconsistent with the provisions of this part."
378 Section 601(c)(1) states: "This Act and the amendments made by this Act shall not be construed to modify, impair, or supersede Federal, State or local law unless expressly so provided in such Act or amendments."
379 The Pac-West/Working Assets Long Distance response is cited as Pac-West/WA throughout this section.
380 The actual docket number is I.93-04-002.
381 47 U.S.C. §§ 271(c)(2)(B)(i), 251(c)(2), 252(d)(1).
382 With the full cooperation of the parties, we intend to move forward on permanent UNE prices as expeditiously as we can schedule it.
383 Pursuant to D.00-09-074.
384 The draft adopts permanent UNE rates for the High Frequency Portion of the Loop for both Pacific and Verizon California Inc.
385 Section 709.2(c)(1) specifies exchanges "currently subject to the modified final judgment." Such exchanges are now subject to TA96.
386 "[A]lleged misuse of market power in local exchange markets or long distance markets, alleged price squeezes, discrimination in providing services, and alleged cross subsidies." (Pacific's Section 709.2 Compliance Brief at 8.)
387 Customers' Proprietary Network Information
388 We take official notice that on May 28, 2002, the FCC entered into a Consent Decree with SBC resolving two FCC investigations concerning inaccurate information SBC submitted to the FCC in affidavits supporting two separate section 271 applications to provide long distance service in Missouri, Oklahoma and Kansas. SBC agreed to pay $3.6 million to the U.S. Treasury under the decree. (See FCC 02-153 (May 22, 2002).)
389 Prior to its merger with WorldCom.
390 As described by AT&T, the program "awarded 'points' to customers for every dollar billed by Pacific, including long distance services provided by AT&T and other interexchange carriers. Before the customer could receive points, however, Pacific required the customer to complete an 'enrollment ' form. Buried at the bottom of the form, in tiny print, was language that purportedly 'authorized' Pacific to use 'any and all' information from the customer's telephone bill for any purpose it wanted, and further authorized Pacific to provide information to any of its affiliates, including its long distance affiliate, Pacific Bell Communications. There were no restrictions on how Pacific and its affiliates could use the information." (AT&T's Opposition to Pacific's Section 709.2 Showing at 28.)
391 1) A breach of the billing agreements; 2) "a violation of section 222(a) of the Communications Act of 1934, as amended by the 1996 Act, which requires every telecommunications carrier to protect the confidentiality of proprietary information of other telecommunications carriers"; and 3) a misappropriation of trade secrets in the form of proprietary billing databases. (Id.)
392 Case No. 97-2105-CAL.
393 Pacific Tariff A.2 2.1, Rule 12, effective May 2002, adopted in Decision No. 01-09-058, The Utility Consumers' Action Network vs. Pacific Bell.
394 Pac-West/WA Brief at 21; Selwyn Affidavit ¶¶ 54-55.
395 Tariff Rule 12 requires Pacific to "first provide the service requested by the customer and describe options for purchasing any requested service beginning with the least expensive option".
396 11 FCC Rcd. At 22046. P 292. In its South Carolina Order, the Commission concluded that a BOC may market its long-distance affiliate's service during inbound calls as long as it also "offers to read, in random order, the names and, if requested, the telephone numbers of all available interexchange carriers." South Carolina Order, 13 FCC Rcd at 671-72, P239.
397 AT&T reported in August 2001 that SBC had thus far paid $23 million in penalties. (AT&T Opposition to Pacific's § 709.2 Showing at 35.)
398 In the Matter of Implementation of the Telecommunications Act of 1996; Accounting Safeguards Under the Telecommunications Act of 1996, Report and Order, 11 FCC Rcd. 17539 (1996).
399 Relevant sections of the pleadings, affidavits, and transcript have been sealed.
400 Pac-West also offers the plans in support of its position that Pacific's entry into the long distance will substantially harm the competitive intrastate long distance market.
401 The parties argued that the prevailing switching and loop UNE prices further contributed to the price squeeze that Pacific exerted.
402 Pacific applied for the certificate and evidentiary hearings were held in 1996; the record was reopened in 1997 to receive supplemental evidence; proposed and alternate decisions were issued and withdrawn in 1997; the record was again reopened and further briefing was entertained in 1998; and the decision was issued in 1999.
403 Under the FCC rules, before ILEC representatives may refer to customer proprietary records to market the long distance affiliate's service, they must ask the customer for permission to do so. Customer authorization may be granted orally, in writing, or electronically. In order to ensure that customers are informed of their statutory rights before granting approval, carriers are further required to provide a one-time notice of customers' CPNI rights prior to any solicitation for approval. (CPNI Order ¶¶ 53-57.)
404 "SBC Communications, Investor Briefing No. 226, 7 (July 25, 2001)."
405 Pac-West/WA states that new customer acquisition costs are commonly known in the industry to range from $300-$500. It documents that Pacific's proposed plans show that PBLD will pay Pacific approximately $3.54 per sale to consumer and nothing for sales attempts. (Stephen C. Gunn Affidavit at 17.)
406 Section 314.5 directs the Commission to audit the books and records of corporations under its jurisdiction every three years, whereas Section 797 directs the Commission to audit affiliate transactions of those corporations.
407 The Commission stated in D.99-02-033, "Section 272(d) of the Telecommunications Act requires that a Bell affiliate like PB Com Shall obtain and pay for a joint federal/state audit every two years conducted by an independent auditor to determine whether such company has complied with the accounting and structural safeguards required by the Act, and to report the results of that audit both to the FCC and this Commission." (Application of PB Com for a Certificate of Public Convenience and Necessity to Provide InterLATA, IntraLATA and Local Exchange Telecommunications Services Within the State of California, p.55.)
408 O.P. 8 states, "[t]he authority granted today is conditioned upon a periodic audit to be conducted, at SBCS expense, under auspices of the Commission's Office of Ratepayer Advocates (ORA) of SBCS's compliance with the Commission's affiliate transaction rules and cost allocation rules. The ORA is directed to consult with the Federal Communications Commission (FCC) Common Carrier Bureau to coordinate the audit with the joint FCC/state audit to be conducted by the Common Carrier Bureau."
O.P. 18 states, "SBCS shall keep its books and records in accordance with the Uniform System of Accounts specified in Title 47, Code of Federal Regulations, Part 32."
409 Citing Finding No. 14, D.99-02-013, mimeo. at 63.
410 This matter was settled out of court.
411 Case Number 97-2105-CAL.
412 The parties also settled this case.
413 Complaint case C.99-12-029, and counter claim C. 00-02-027, allege slamming between AT&T and Pacific. The draft decision finds error with some PIC disputes and orders a thorough audit.
414 Pacific Bell Tariff, CAL PUC 175-T, 6th Revised Sheet, 595-D.
415 The Commission, in D.00-03-020 established complaint reporting rules for billing telephone companies, and limited service provider change requests to be submitted within 90 days after the customer's authorization. The Commission requires billing telephone companies to report PIC disputes of all carriers for which it bills including its affiliates.
416 Wholesale network operations (Pacific Wholesale) and retail marketing service provision (Pacific Retail).
417 Telecommunications Fair Competition Enforcement Act of 2001, S. 1364, 107th Congress. (Pac-West/WA at 28.)
418 Although Pac-West/WA press for the independent third-party PIC administrator to be "established and operational prior to the commencement of retail long-distance services," we find such a schedule to be impractical and unreasonable. (Section 709.2 Tr. at 145, ll. 3-5.)
419 PB Com, p. 52.
