II. Background

A. Applications for Annual UNE Reexamination

In Decision (D.) 99-11-050, in the Commission's Rulemaking and Investigation to Govern Open Access to Bottleneck Services and Establish a Framework for Network Architecture Development of Dominant Carrier Networks (Rulemaking (R.) 93-04-003/Investigation (I.) 93-04-002, hereinafter "OANAD proceeding"), the Commission set prices for UNEs offered by Pacific. In this 1999 order, the Commission recognized that the Total Element Long Run Incremental (TELRIC) costs adopted by the Commission in 1998 (D.98-02-106) and used to set prices in D.99-11-050 were "based largely on data that has not been updated since 1994," and "there is evidence that some of these costs may be changing rapidly."²

Accordingly, the Commission established a process in D.99-11-050 that invited carriers with interconnection agreements with Pacific to annually nominate up to two UNEs for consideration of their costs by the Commission. The decision required that a party nominating a UNE for review must include a summary of evidence demonstrating a cost change of at least 20% (up or down) from the costs approved in D.98-02-106 for the UNE to be eligible for nomination.

In February 2001,³ the Commission received four separate requests to nominate UNEs for cost re-examination. The four requests and the UNEs for which cost review was initially sought were as follows:

· A.01-02-024, filed jointly by AT&T and WorldCom, requesting that the Commission re-examine the recurring costs and prices of unbundled local and tandem switching.

· A.01-02-034, filed by The Telephone Connection Local Services, LLC, (Telephone Connection) requesting that the Commission re-examine the recurring costs and prices of the DS-3 entrance facility without equipment.

· A.01-02-035, filed by Joint Applicants, requesting that the Commission re-examine the costs and prices of unbundled loops.

· A motion filed by Pacific in the above-captioned OANAD proceeding requesting that the Commission defer any re-examination of the costs and prices of UNEs until the United States Supreme Court has completed its consideration of the challenge to the Eighth Circuit's order on the FCC's TELRIC cost standards.⁴ In the alternative, Pacific recommends that if its motion to defer is denied, the Commission should re-examine the cost of the Expanded Interconnection Service Cross Connect (EISCC).

On March 28, the assigned Administrative Law Judge (ALJ) issued a ruling consolidating these applications with the OANAD proceeding for the limited purpose of taking comment on Pacific's motion to defer and on which, if any, UNEs should be re-examined pursuant to D.99-11-050.⁵

B. The Scoping Memo for the 2001 UNE Reexamination

On June 14, the Assigned Commissioner and ALJ issued a joint ruling (hereinafter, "Scoping Memo") denying Pacific's motion to defer the UNE Reexamination proceeding. The Scoping Memo agreed with the Joint Applicants and other parties that the Commission retained the independent state authority to review UNE costs and prices and disagreed with Pacific's assertion that, given the case pending at the Supreme Court, the Commission could no longer rely on TELRIC. Specifically, the Scoping Memo found that the stay of the Eighth Circuit's order had the effect of maintaining the status quo, which means that the FCC's TELRIC rules remain in effect. Further, the Scoping Memo stated that the Commission should move forward with its review of selected UNEs rather than await the outcome of federal litigation so that competitors would not have to pay prices for another year based on costs adopted in 1998.

The Scoping Memo stated that the summary of evidence presented by Joint Applicants led to a reasonable presumption that costs may have declined for unbundled switching and unbundled loops. Therefore, the Assigned Commissioner and ALJ found sufficient justification to accept the nominations of these two UNEs for review and initiate the UNE Reexamination proceeding.⁶ The Scoping Memo set a schedule for Pacific to file switching and loop cost studies on August 15 and stated that, in the interests of moving quickly on the cost re-examination, competing cost models filed by other parties would not be allowed.

C. The Issue of Competing Models

At a prehearing conference (PHC) on July 9, Joint Applicants urged that the Commission allow them to file a competing cost model. In a July 11 ruling, the Assigned Commissioner and ALJ reiterated that it was appropriate to limit the scope of the proceeding to review of Pacific's model as long as it met three criteria. Specifically, the July 11 ruling required that Pacific's cost models and cost studies must allow parties to:

· Reasonably understand how costs are derived for unbundled loops and switching,

· Generally replicate Pacific's calculations; and

· Propose changes in inputs and assumptions in order to modify the costs produced by these models.

The July 11 ruling discussed the importance of Pacific's model replicating prior OANAD results and left open the question of whether to allow the introduction of competing cost models if Pacific's filing failed to satisfy the criteria. In addition, the ruling required Pacific to provide Joint Applicants and any other requesting party with an advance electronic copy of the cost model or studies that Pacific would use as the starting point for its August 15^th cost filing. Pacific provided this advance "starting point" to the parties on July 26.

The ALJ held a technical workshop on August 9 to have Pacific explain its "starting point" model and how it met the three criteria set forth in the July 11 ruling, and to allow staff and other parties to ask questions about the model. Following the workshop, comments were filed by Joint Applicants, TURN, and ORA and reply comments were filed by Pacific. In general, the comments criticized Pacific's "starting point" as not meeting the three criteria cost model because it was not an actual cost model, but merely a set of adjustments to the outputs of the models used to develops costs and prices in prior OANAD decisions.⁷ Joint Applicants and other parties stated that several of the prior models are no longer available and it is not possible to re-run them with new inputs.

In its reply, Pacific did not dispute that its filing involves adjustments to the outputs of the prior OANAD model and that it is not possible to provide the previously adopted model with new inputs. Nevertheless, Pacific defended its "starting point" and updated loop and switching cost studies filed August 15 as meeting the three criteria from the July 11 ruling. Pacific maintains that its starting point "maps back to the OANAD results" and that it provided source references that tie back to the data originally filed in OANAD. (Pacific's Workshop Comments, 8/23/01, p. 3.) Pacific contends that its filings allow parties to understand how costs in the update were derived from OANAD adopted outputs and to replicate Pacific's updated numbers. Pacific also maintains that parties can vary assumptions by "trac[ing] back through the OANAD data to reflect a change in cost." (Id., p. 9.)⁸

D. Motion for Interim Relief

On August 20, Joint Applicants filed a Motion for Interim Relief, asking the Assigned Commissioner and ALJ to order Pacific to offer UNE prices for unbundled switching and unbundled loops at interim rates as set forth in the motion. Specifically, Joint Applicants propose an interim reduction of 36% in Pacific's UNE loop rates based, in part, on estimates of Pacific's forward-looking costs using the HAI model. For unbundled switching UNE rates, Joint Applicants proposed that Pacific set rates equivalent to either of two rate proposals made by Pacific's affiliate, SBC-Ameritech, in Illinois. If adopted, the Illinois switching rates would amount to essentially a 70% reduction from current local switching rates. Joint Applicants again support this request using the HAI model as well as the FCC's Synthesis Model.

Joint Applicants justify the need for an immediate rate reduction by citing delays caused by alleged inadequacies in Pacific's starting point and August 15 cost filing and the need for the Commission to consider competing cost studies. Joint Applicants claim Pacific is charging inflated UNE prices that cause irreparable harm to competitive carriers. Finally, Joint Applicants ask that the interim rates be subject to "true-down" ⁹ as a sanction against Pacific for alleged misleading statements regarding its cost studies and delays in the proceeding.

Responses to the motion for interim relief were filed by Pacific, ORA, TURN, and Tri-M Communications (Tri-M). Pacific opposes the motion stating that 1) Joint Applicants have not justified the need for interim relief because they have not shown a need for emergency action by the Commission; 2) any grant of interim relief without a hearing or adequate opportunity to develop the required evidence would violate Pacific's due process rights; 3) the Commission cannot rely on the HAI Model for interim rates because it allegedly violates the Telecommunications Act requirement that UNE prices be based on cost; and 4) the proposal for a "true-down" violates state and federal law. The other parties all filed comments in support of the motion, and Joint Applicants filed a reply to Pacific Bell's response.

On September 13, the ALJ held a prehearing conference regarding the motion for interim relief.

On September 28, the Assigned Commissioner and ALJ issued a joint ruling stating a desire to consider interim relief, but requiring additional filings from parties on the exact amount and the nature of the interim relief proposals. The September 28 ruling stated that interim relief appeared justified because Pacific's August 15 cost filing did not meet the three criteria established in the July 11 ruling.

⁵ Comments were filed on April 20 by Joint Applicants, the California Association of Competitive Telecommunications Companies (CALTEL), Communications Workers of America District 9 (CWA), Office of Ratepayer Advocates (ORA), Pacific, The Utility Reform Network (TURN), Telephone Connection, and Z-Tel Communications, Inc. (Z-Tel).