XIII. Toll-Free (8XX) and Business Toll Service

Pacific Bell provides inbound IntraLATA service to subscribers who establish a Toll-Free (8XX) number on a dedicated line, local business line, or local residential line. Calls are routed via the public switched network to the terminating access line(s) associated with the Toll-Free number at no charge to the calling party. For interLATA or interstate calls, a participating long distance carrier must provide inbound calls from outside the subscriber's intraLATA service area. Pacific Bell's subscriber pay for the incoming calls associated with that number.

In setting up the service, the subscriber selects a Toll-Free number using 800, 888, or 877 area codes, which are portable numbers. Optional features include a listing in AT&T's Directory Assistance 1-800-555-1212, priced at $5.50 a month for statewide service and $14.00 a month for nationwide service. Additionally, Pacific Bell offers Call Handling and Destination for a one time fee of $150.00 to route calls by time of day, day of week, location and call volume distribution.

To set up the area of service, subscribers can choose to receive calls from a single LATA, multiple LATA's, statewide or nationwide. Pacific Bell notifies those subscribers wanting to receive interLATA calls that its Toll-Free service cannot extend beyond the LATA boundary. Pacific Bell also notifies those subscribers that an IEC or CLEC can provide the long distance portion of their service, and that Pacific Bell will work with the customer's chosen carrier to coordinate the local and long distance service. If the customer wants two different carriers, Pacific Bell will offer to contact the selected IEC or CLEC with the customer on a three-way call to obtain their rates and coordinate the service. If the IEC or CLEC does not work with Pacific Bell and/or if they offer lower rates to the customer while on the three-way call, the subscriber may then elect to establish their intraLATA and interLATA Toll-Free service with the IEC and/or CLEC.

The business and residential Toll-Free products being offered by Pacific Bell include Custom 8 Business, Custom 8 Residential, Easy 8 Business, Easy 8 Residential, Interexchange Receiving Service via operator assisted or direct dialed, and, 800 service for the Full State, Half State, Metro Area, or Universal 800. The details of these products are listed in its Tariff Schedule Cal. P.U.C. No.A7, attached to the application.

Toll-Free (8XX) service was classified as a Category I service in 1989 and re-classified to Category II in 1994. Toll-Free service is currently classified as a Category II service.

Business Local Toll service consists of calls completed between two stations in different local service areas within a LATA. In Zone Usage Measurement (ZUM) areas these are calls exceeding 16 miles, and in non-ZUM areas these are calls exceeding 12 miles. Local toll is classified and rated as one of six types: Dial Station Service (direct dialed), Dial Calling Card Station Service (Calling Card), Coin Station Service, Coin Person Service, Operator Station Service, or Operator Person Service. Dial Station Service calls are generally completed without the assistance of an operator and are rated based on a mileage-band and time-of-day sensitive rate table. The other five types of calls are rated based on mileage-band and time-of-day sensitive rate tables along with service charges associated with each type of call. Calls are rated on a first minute and additional minute basis and are all rounded up to a full minute. Only the underlying usage rate tables are being addressed in this proceeding. The service charges associated with these products are being addressed in a separate application.

Pacific Bell also offers several optional calling plans as set forth in its Tariff Schedule Cal. P.U.C. No.A.6.5, attached to the application. These optional calling plans include Value Promise Direct Discounts, Value Promise Advantage 25, Value Promise Advantage 50, Value Promise Advantage 1000, Value Promise Plus Simplicity, and Value Promise Plus.

Business Local Toll service was classified as a Category I service in 1989, pursuant to D.89-10-031 and subsequently re-classified to Category II in 1994. Business Local Toll service is currently classified as a Category II service.

A. Toll-Free and Business Local Toll Service Proposal

Pacific Bell seeks authority to re-categorize its Toll-Free and Business Local Toll service from Category II to Category III and to continue treating these services as above-the-line services for ratemaking purposes. The details of Pacific Bell's proposed tariff changes were attached to the application as Exhibit A.

B. Pacific Bell's Position

Pacific Bell contends that its analysis of the relevant market, the ability of competitors to enter and exit the Toll-Free and Business Local Toll service markets, demand elasticity, and supply elasticity substantiate its request that Toll-Free and Business Local Toll service markets should be re-classified from Category II to Category III. Pacific Bell asserts that these services are offered in fully competitive markets in which it has insignificant market power because it does not have the ability to price these services above a competitive level for a period of time.

1. Relevant Market

Pacific Bell identified the relevant market for its Toll-Free and Business Local Toll services to include all IECs and CLECs that offer both intraLATA and interLATA toll service that enables the IECs and CLECs to offer a one-stop solution. Examples of Toll-Free competition include AT&T's Megacom 800, Readyline 800, Advanced 800 and 800 Starter; MCI's Business Line 800, 800 VIP, 800 Guardian; Sprint's FONLine 800, Ultra 800 and Interactive 800. Secondary services to Pacific Bell's Toll-Free service included collect calls, calling card calls, remote call forwarding calls and Internet telephony calls. Alternatives to Pacific Bell's Business Local Toll service include 10XXX dialing, autodialers, wireless, dedicated lines services, and direct connections between locations.

2. Entry and Exit

Pacific Bell does not believe that there are barriers to enter or exit the Toll-Free or Business Local Toll relevant market because of the ease in which competitors can obtain certification as an IEC in California. Pacific Bell explained that a visit to the Commission's web site supports the ease of entry and exit with a 27-page list of IECs qualified to provide the relevant market services. Pacific Bell contends that many of these competitors can offer low, flat-rate intrastate service in California because the IECs can simply resell the services of any facilities-based carrier, whether from Pacific Bell or from another CLC. These IEC carriers do not need to build their own network to offer a competitive Toll-Free or Business Local Toll service.

3. Demand Elasticity

Based on a 1998 marketing study, Pacific Bell found that customer demand for its Toll-Free and Business Local Toll service decreased from the second quarter of 1995 to the fourth quarter of 1997, and that it has eroded even further by the first quarter of 1999. A 1998 marketing study for the same time period found an even larger decline in demand for Pacific Bell's combined inter- and intraLATA relevant market services.

Pacific Bell concluded that the usage decrease in its Toll-Free and Business Local Toll services and high elasticity of demand in the relevant market demonstrates that it does not have the ability to raise its price above competitive levels for its relevant market services. The following tabulation summarizes the results of both Pacific Bell's intraLATA and combined inter- and intraLATA usage studies it relied on to conclude that it has an insignificant share of market demand for its relevant market services.

	IntraLATA Toll 2nd Quarter 4th Quarter		Inter & IntraLATA Toll 2nd Quarter 4th Quarter
Service	1995	1997	1995	1997
800	23.8%	12.5%	6.3%	2.2%
Calling Card	32.4	21.8	7.3	5.8
Outbound	63.9	48.7	15.6	9.8
Overall	56.5	43.6	13.9	8.8

4. Supply Elasticity

Pacific Bell explained that IECs have been active in the relevant market since they were permitted to offer intraLATA Toll-Free service beginning in 1996. The number of IECs offering relevant market services is large because of their ability to combine intraLATA and interLATA services, thereby offering a bundled product in the relevant market while Pacific Bell is precluded from providing any interLATA service. Other sources of Toll-Free and Business Local Toll relevant market services are PBX and Key Telephone Systems programmed to route local toll calls to an IEC.

Pacific Bell identified three major Toll-Free and Business Local Toll service competitors, in addition to the 27 pages of certified IECs listed on the Commission's web site, to substantiate its argument that the supply elasticity of the relevant market is high. AT&T, MCI, and Sprint, its major competitors, enjoy the largest share of the relevant market based on a 1998 market study. The following tabulation summarizes the results of this market study.

Service	Pacific Bell	AT&T	MCI	Sprint	Other
800	12.5%	42.8%	22.2%	14.1%	8.4%
Calling Card	21.8	34.1	21.3	8.7	14.1
Outbound	48.7	22.4	15.6	6.4	6.9
Overall	43.6	24.6	16.4	7.1	8.3

Pacific Bell concluded that the high elasticity of supply in the relevant market demonstrates that it has an insignificant share of the Toll-Free and Business Local Toll service relevant market, and that it does not have the ability to raise its price above competitive levels for its relevant market services.

5. Cost Support and Ceiling Rate

Cost support for the rate elements Pacific Bell seeks to move from Category II to Category III were submitted as part of its application and in its testimony. Upon Pacific Bell's request and without any opposition from interested parties, the cost data was placed under seal pursuant to Pub. Util. Code § 453 and General Order 66-C.

Toll-Free and Business Local Toll service costs were based on Pacific Bell's OANAD Phase II cost studies, as approved in D.96-08-021. Because approval of the proposed OANAD price floor methodology was pending in the OANAD proceeding at the time these consolidated proceedings were being addressed, Pacific Bell used the IRD methodology set forth in D.94-09-065 to identify the Business Local Toll price floors for its re-categorization request.

Pacific Bell had originally requested that its Toll-Free and Business Local Toll service ceiling rates remain at the maximum price being charged at the time its application was filed. However, because some of its ceiling rates were lowered in a recent universal service re-balancing decision, Pacific Bell modified its ceiling rate request to set its Toll-Free and Business Local Toll services to its currently effective rates once these services were moved to Category III.

C. Interested Parties' Position

AT&T, MCI WorldCom, and CCTA opposed Pacific Bell's Category III request for Toll-Free and Business Local Toll services on the basis that Pacific Bell maintains a monopoly over access lines and local switching. That is, Pacific Bell has the only network with loops connecting every customer to switches that can direct calls anywhere on the public switched network. AT&T, MCI WorldCom, and CCTA recognized that Pacific Bell may have only a 12.5% market share of intraLATA toll service. However, they contend that Pacific Bell has the ability to use its almost 100% market share over the switched access service to harm both customers and the competitive process in California by pricing its switched access above cost to produce subsidies to hold down the price of local service. In addition, they contend that Pacific Bell receives a return regardless of whether it is successful in competing for toll free customers because it is compensated for lost toll free business through access rates that are priced above cost.

AT&T, MCI WorldCom, and CCTA concluded that even though Pacific Bell's Toll-Free and Business Local Toll market shares have fallen dramatically, Pacific Bell has failed to recognize that it continues to enjoy competitive advantages. These competitive advantages include incomplete intraLATA pre-subscription, uncertainty over the CLECs' ability to avoid Pacific Bell's access charges, ability to be made whole for certain Toll-Free and Business Local Toll price reductions, maintaining current margins on switched access rates which raise competitors' costs, and non-use of Category II pricing flexibility.

D. ORA's Position

ORA took no position on Pacific Bell's request to re-categorize Toll-Free intraLATA service. However, ORA opposed re-categorization of Business Local Toll service on the basis that intraLATA toll competition has not evolved to a level where Pacific Bell's Business Local Toll service can be found to be fully competitive. ORA's opposition was based on its belief that Pacific Bell failed to demonstrate that it has insignificant market power, and failed to verify the market share data used in the marketing study which showed Pacific Bell losing its overall Business Local Toll service market share.

If Pacific Bell's re-categorization request is approved, ORA recommend that Pacific Bell should be required to separately show the tariff pricing and price floor support for Business Local Toll contracts. Pacific Bell should also continue to comply with the Commission's imputation rules to set price floors for Business Local Toll service, and to continue classifying such service above-the-line for ratemaking purposes.

E. Market Power Discussion

Pacific Bell is precluded from providing interLATA Toll and Toll-Free services until Pacific Bell has met the Section 271 checklist and related requirements. To demonstrate its insignificant market power in the broader market, Pacific Bell provided testimony which compared its market share of intraLATA toll calls to the broader overall market that included interLATA services offered by IECs and CLECs.

Defining the relevant market is crucial to a reasonable market power analysis of buyers and sellers whose purchase and production decisions establish the price at which the product or service is sold. Including services that Pacific Bell is precluded from offering tends to bias the market power analysis toward a finding of insignificant market power. Because Pacific Bell is precluded from offering interLATA services, its analysis of a broader market is not a factor in assessing the degree of Pacific Bell's market power in this proceeding, and therefore, should not be accorded any weight in this proceeding.

The relevant market for Pacific Bell's Toll-Free and Business Local Toll service encompasses those types of calls, or services, placed between two stations within a local service area. There is no dispute that these relevant market services are offered by Pacific Bell, IECs and CLECs. Hence, the degree of Pacific Bell's market power should be based on the relationship of its Toll-Free and Business Local Toll service market to the total Pacific Bell, IEC, and CLEC Toll-Free and Business Local Toll market.

A standard for the placement of services into Category III was established in 1989. That standard is for the LEC to establish that it has or is expected to have insignificant market power in providing the service in each market it intends to serve.³¹ Consistent with this standard, an analysis of ease of entry and exit should be based on the services being considered for reclassification to Category III.

Although Pacific Bell believes that the ease of entry and exit criteria has been met, the interested parties do not. Pacific Bell based its belief on the Commission's IEC streamlined certification process, the Commission's 27-page web site list of certificated IECs, and the low start-up cost needed for IECs to offer resold relevant market services from any facilities-based carrier, whether it be Pacific Bell or any other CLEC. The interested parties contend that Pacific Bell retains a monopoly over access lines and local switching which limits entry and exit.

Pacific Bell may have substantial control over access lines and local switching, as alleged by the interested parties, and addressed in our Centrex market power discussion. However, access lines and local switching are not the relevant services, nor are they the components of the relevant services being considered for Category III treatment in this proceeding. Acceptance of the interested parties' argument would stifle telecommunications competition and preclude the establishment and continuance of fully competitive Category III services because most, if not all, telecommunications services require a connection to either access lines or local switching.

Given that Pacific Bell's access lines and local switching are not components of, and are not in direct competition with, the proposed Category III Toll-Free or Business Local Toll services, they should not be a factor in deciding whether Toll-Free and Business Local Toll services should be moved to Category III. The interested parties' arguments regarding access lines and local switching are rejected.

We agree with Pacific Bell that its analysis of the streamlined certification process, the number of IECs, and the low start-up cost, all demonstrate the ease of entry and exit for Toll-Free and Business Local Toll services.

We now turn to whether the market for these services is competitive.

Concerning the demand and supply elasticity of Toll-Free and Business Local Toll services, Pacific Bell has demonstrated through the results of its market studies, as acknowledged by some of its major competitors, that competitors have been successful in entering the relevant market and that it has been losing market share since 1995. Although ORA was not able to validate the results of these market share studies, AT&T's witness confirmed that the market study results were reasonable. Hence, we conclude that Pacific Bell's market share in each of these businesses has declined since 1995, when intraLATA toll competition was introduced.

The issue now turns to whether this decline in market share provides Pacific Bell with the ability to unilaterally raise prices for these services above a competitive level for a period of time.

AT&T, MCI WorldCom, and CCTA contend that Pacific Bell continues to enjoy an unearned competitive advantage from the days when Pacific Bell was the only supplier of Toll-Free and Business Local Toll services. The arguments regarding the competitive advantages applicable to access charges and rates have already been addressed and need not be addressed further. The interested parties also contend that a competitive advantage exists because of the lack of intraLATA pre-subscription and the ability to be made whole for Toll-Free and Business Local Toll price reductions. At the same time it should be noted that although Pacific Bell is subject to price floors and ceilings, AT&T, MCI, Sprint and other competitors are not.

With the issuance of D.99-04-071 on April 22, 1999, Pacific Bell implemented intraLATA pre-subscription and began providing its customers the ability to use alternative IECs for intraLATA toll without dialing extra digits. Even prior to pre-subscription, business customers had the ability to program their PBX's and key systems to route Business Local Toll calls to IECs automatically. Hence, this perceived benefit is no longer a valid argument.

Interested parties believe that Pacific Bell has the ability to be made whole for Toll-Free and Business Local Toll price reductions. Previously, Pacific Bell was insulated from the negative financial impacts that other carriers experience when reducing intraLATA toll prices through rate re-balancing. However, that was not always the case and it is not expected to be the case in the future. Within the last year, Pacific Bell reduced its Flat Rate Plus for Business, Value Promise Plus and Advantage 25 calling plan rates without any offsetting revenues. Pacific Bell has also indicated that additional calling plans will be established with further reduction in its prices without any rate re-balancing. In addition, price floors adopted in D.99-11-050 provide for a forward-looking cost TSLRIC methodology that excludes subsidies.

In summary, the evidence provided in this proceeding leads us to conclude that the market for Toll-Free and Business Local Toll services is easy to enter and exit and that both a high supply and demand elasticity exist in the California market. The evidence also shows that other providers have the ability to defeat any attempted price increase for these services and that customers would find this competitive supply to be an acceptable substitute service.

F. Price Discussion

ORA took exception to the Business Local Toll service price floors calculated by Pacific Bell under the adopted D.94-09-065 IRD price floor methodology because of the then pending OANAD proceeding addressing a new price floor methodology proposed by Pacific Bell. ORA's exception to Pacific Bell's method of calculating price floors was resolved with issuance of the OANAD pricing order, D.99-11-050, which adopted a revised price floor formula. Specifically, that decision grandfathered existing price floors until new price floors could be established pursuant to the price floor formula adopted by that decision.

Pacific Bell has not requested any change in the ceiling rates for its Toll-Free and Business Local Toll services which it seeks to be moved to Category III. Hence, the currently effective ceiling rates for these services should continue in effect.

G. Above-the-Line Discussion

Pacific Bell requested that its Toll-Free and Business Local Toll services being moved to Category III should continue to be given above-the-line treatment for ratemaking purposes. There was no objection to this proposal. Hence, consistent with the above-the-line treatment being authorized for the Category III components of Centrex service, Toll-Free and Business Local Toll services being moved to Category III should continue to receive above-the-line treatment for ratemaking purposes.

H. Reporting Requirements

Although ORA recommended that Pacific Bell should be required to separately identify tariff pricing and price floor supports for its business toll contracts, it did not identify how or to whom such information should be provided. Pacific Bell confirmed that it would, as in the past, provide tariff pricing and price floor supports for its business toll contract to the Commission upon request. However, it objects to providing such information to its competitors because such information contains confidential price data, and if revealed, would place it at an unfair business disadvantage.

No party has provided any reason to impose new reporting requirements for business toll contracts. Pacific Bell should continue to provide its tariff pricing and price floor support to the Commission upon request. To the extent that Pacific Bell is requested to provide tariff pricing and price floor support for its toll contract by non-Commission staff, Pacific Bell may seek relief under General Order 66-C for confidential treatment, as exercised in this proceeding for pricing data.

ORA also recommended that Pacific Bell be required to comply with the Commission's price floor imputation requirements, as set forth in the Commission's March 24, 1993 Resolution T-15139. ORA contends that Pacific Bell should be required to submit the necessary cost support to show that its rates and charges for Business Local Toll are at or above the authorized price floors. In support of its request, ORA referred to page 4 of that resolution in its brief stating that Pacific Bell's compliance with the imputation requirement may be audited at any time by the Commission's Advisory and Compliance Division (CACD). Subsequent to the issuance of that resolution, CACD was restructured into several new Divisions. Responsibilities for Telecommunication matters were transferred to the new Consumer Services Division and to the Telecommunications Division.

Pacific Bell testified that it would continue to adhere to the Commission's price floor imputation rules for setting prices. Hence, to the extent that the Consumer Services Division or Telecommunications Division wants to audit Pacific Bell's compliance with the imputation requirement they may do so. ORA has requested that Pacific Bell comply with the imputation resolution and Pacific Bell has confirmed its compliance. There is no proposed change to the imputation requirement before us. Therefore, there is no need to address this matter further.

Pacific Bell should continue to conform to the Commission's current reporting requirements.

I. Conclusion

Pacific Bell should be authorized to reclassify its Toll-Free and Business Local Toll services from Category II to Category III, as requested in its application. The currently effective ceiling rates for Pacific Bell's Toll-Free and Business Local Toll services being reclassified to Category III should continue in effect. Further, the re-categorized Toll-Free and Business Local Toll services should continue to be treated as above-the-line items for ratemaking purposes.