4. The Appropriate Charge for Use of the High Frequency Portion of the Loop is $0

A. Parties' Positions

1. Rhythms' Links, Inc.'s (Rhythms) Position

Rhythms asserts that there should be no charge for the HFPL. According to Rhythms virtually all states except California have established a $0 price for the HFPL, having determined that a $0 price complies with pertinent FCC pricing rules and reflects sound economic and regulatory policy. A $0 price is both cost-based and nondiscriminatory. Furthermore, it reflects the pricing decision that Pacific and Verizon voluntarily made for their own Asymmetric Digital Subscriber Line (ADSL) services.

Pacific and Verizon incur no economic cost when the ILEC, or its affiliate, uses the HFPL to provide line-shared DSL services. In contrast, a positive price for the HFPL requires other competitors to incur a real and direct cost.

In the Line Sharing Order, the FCC set forth a simple prescription for establishing a price for line sharing:

We conclude that, in arbitrations and in setting interim prices, states may require that incumbent LECs charge no more to competitive LECs for access to shared local loops than the amount of loop costs the incumbent LEC allocated to ADSL services when it established its interstate retail rates for those services. This is a straightforward and practical approach for establishing rates consistent with the general pro-competitive purpose underlying the TELRIC principles. We find that establishing the TELRIC of the shared line in this manner does not violate the prohibition of section 51.505(d)(1) of our rules against considering embedded cost in the calculation of the forward looking economic cost of an unbundled network element.¹⁹

Rhythms points out that Pacific and Verizon in their federal ADSL cost studies did not assign any loop costs to their retail ADSL service. In its Federal filing Pacific stated that no additional loop cost was incurred by the provision of ADSL on an existing voice line, arguing that:

Several petitioners contend that Pacific must assign outside plant (local loop) costs to its ADSL service. But Commission rules impose no such requirement. FCC Rule 61.38 requires LECs to identify the direct cost to provide the proposed new service. Pacific proposes to transmit ADSL over loops already in service. Pacific already recovers the costs of those local loops under tariffs already approved by the Commission and state regulators. Loop costs therefore contribute nothing to the direct cost of ADSL service.²⁰

Verizon has made similar attestations. Verizon's predecessor GTE has stated:

[s]ince ADSL employs the existing loop for new applications, the costs of the loop are already recovered through existing rates.... ²¹

Rhythms asserts that Pacific and Verizon advocated a zero cost for use of the HFPL when there were no competitive issues involved. However, now that the ILECs are obligated to provide the HFPL unbundled network element (UNE) to other carriers, they have changed their position.

2. 4.1.2 TURN's Position

TURN lists three reasons why there should be a monthly recurring charge for the HFPL: 1) consistency with the outcome in the Interim Line Sharing Phase, 2) requirements of TA96 § 254(k); and 3) economically correct outcome.

According to TURN, the Commission has already spoken on the threshold question of whether there should be a monthly recurring charge for the HFPL. In its Interim Opinion, affirming the results of the May 20, 2000 Final Arbitrator's Report (FAR), the Commission rejected the proposed zero monthly rate for the HFPL and stated that "...a zero monthly rate is not in the public interest, convenience, and necessity, and we reject a zero monthly rate in the interim." (Interim Opinion, D.00-09-074, September 21, 2000 at 11.) TURN recommends that the Commission reaffirm the outcome reached in its Interim Opinion.

TURN asserts that a monthly recurring charge for the HFPL UNE is necessary to satisfy the requirements of Section 254(k) of TA 96. Section 254(k) reads as follows:

SUBSIDY OF COMPETITIVE SERVICES PROHIBITED.-A telecommunications carrier may not use services that are not competitive to subsidize services that are subject to competition. The Commission, with respect to interstate services, and the States, with respect to intrastate services, shall establish any necessary cost allocation rules, accounting safeguards, and guidelines to ensure that services included in the definition of universal service bear no more than a reasonable share of the joint and common costs of facilities used to provide those services.

In a line sharing context, the loop is clearly a shared facility of both voice grade local exchange service and DSL service. And in a line-sharing context, the cost of a copper loop is a shared cost of both voice grade local exchange service (utilizing the low frequency portion of the loop), and Digital Subscriber Line (DSL) service (utilizing the high frequency portion of the loop). TURN states that the FAR in the Interim Line Sharing Phase, which was adopted by the Commission, cited the provisions of 254(k) as one justification for establishing a monthly recurring charge for the HFPL.

According to TURN, the second sentence in § 254(k) must be of concern in this proceeding. The loop is a shared cost of the HFPL UNE and local exchange service, which is the service comprising universal service. It is neither reasonable or lawful for local exchange service to bear the shared cost of the loop, while the HFPL UNE bears no portion of the shared cost. To avoid having universal service bear more than "a reasonable share of the joint and common costs of facilities used to provide both of these services," some portion of the shared costs must be allocated to the HFPL UNE.

TURN's third reason for adopting a monthly recurring charge for the HFPL UNE is that it is economically sound to do so. TURN, ORA, Pacific and Verizon all agree that the HFPL has value and a price should be set for its sale to other carriers.

TURN also urges that the Commission's determination on the threshold issue of whether a monthly recurring charge should be assessed for the HFPL UNE should also apply to line sharing over fiber-fed loops in a next-generation digital loop carrier (NGDLC) network architecture, such as Pacific's Project Pronto.

TURN proposes monthly recurring rates for the HFPL UNE of $2.0025 for Pacific and $2.3175 for Verizon. According to TURN, the first issue to be addressed is what cost information the Commission should rely on in setting a reasonable monthly recurring charge for the HFPL UNE. Pacific's loop cost studies are based on 1994 data, and the Commission is currently reexamining those costs in its UNE Reexamination Proceeding.²² Verizon presents a special problem because there are no approved cost studies for Verizon in California.

TURN's witness Dr. Roycroft used the FCC's Hybrid Cost Proxy Model (HCPM) that the FCC used to determine the cost of telephone loops for the purpose of calculating the amount of federal funding for universal telephone service provided to all ILECs, including Pacific and Verizon. The HCPM model yielded loop costs of $8.01 for Pacific and $9.27 for Verizon. According to TURN, the FCC's cost information provides a publicly available, reasonable, unbiased, and current basis for use in setting prices.

The second step, TURN states, is to determine a reasonable price for the HFPL UNE. Since the loop is a shared facility of DSL and other services--including local exchange service, vertical features, and toll service--the loop costs cannot be attributed to the production of any single service or product. TURN's witness Roycroft developed his recommended prices using an economic allocation tool known as the Shapley Value. The allocation that results is viewed by researchers to be fair and equitable. Also, the method ensures that the allocation components will always add up to the total cost associated with the shared facility. Also, the application of the Shapley Value is a very straightforward process that can easily be utilized in the future if prices need to be adjusted.

The Shapley Value method addresses the problem of recovering the cost of a shared facility by identifying possible groupings of service offerings that share facilities and assigning unbiased probabilities of each grouping utilizing the shared facility in all possible combinations with other services. According to TURN, the existence of these services was relied upon in TURN's effort to determine what portion of the shared loop costs should be borne by the new HFPL UNE product. TURN allocates the loop costs to four families of services: basic exchange service, toll/access, vertical services, and advanced services, and recommends setting rates at 25% of the total loop costs that result from application of the HCPM model, or $2.0025 for Pacific and $2.3175 for Verizon.

3. 4.1.3 ORA's Position

ORA concurs with the finding in the FAR in the Interim Line Sharing Phase that there cannot be an "allocation of zero common cost, zero cost of capital, and zero economic depreciation for the HFPL." (FAR at 65.) As ORA's witness Dr. Johnston stated in his testimony, it would be unreasonable for services that use the loop to escape contribution to collect the cost of the loop. New services over the loops should contribute their share of recovery to loop costs.

ORA asserts that the charge for use of the HFPL must be cost-based. As Johnston explained in his testimony, if the HFPL is not cost-based, it poses significant risks to ratepayers as new digital services replace analog. Thus, if the logic of the interim pricing is continued-that is, adding charges to the unbundled loop for new services such as HFPL instead of allocating use of the HFPL as a portion of the unbundled loop charge-the residual voice services-driven costs of the loop would remain unchanged and the new costs, ascribed to high-bandwidth services riding the copper, would be added to voice charges. Moreover, even as loop costs were going down for the ILEC, since digital services are more cost-effective than analog, the loop price would be going up.

4. 4.1.4 Pacific's Position

Pacific's witness Dr. Fitzsimmons states, "The overriding principle for determining the portion of the shared loop cost to allocate for recovery by the price of the HFPL is that this allocation should allow for a competitive outcome to the greatest possible extent." (Fitzsimmons for Pacific, Opening Testimony at 16.) In a competitive market, a company would not give away a product, such as the HFPL, without expecting something in return. This principle is especially true when to do so would preclude the use of that asset by its owner, as is the case with the HFPL.

Pacific rebuts Rhythms' contention that the price for access to the HFPL should be zero, saying that Rhythms' price proposal would basically require Pacific to subsidize Rhythms' service offerings. According to Pacific, this subsidization is harmful to competition and is financially unfair to Pacific.

Rhythms refers to the following FCC statement to support its demand for a zero price for access to the HFPL:

States may require that incumbent LECs charge no more to competitive LECs for access to shared local loops than the amount of loop costs the incumbent LEC allocated to ADSL services when it established its interstate retail rates for those services.²³

Pacific points out that the FCC's language is permissive, not mandatory; it states what the Commission may do, not what it must do. According to Pacific, Rhythms misses the real point of the FCC's statement. The point the FCC was making is that whatever price is chosen for access to the HFPL, it should not place CLECs at a disadvantage compared to an ILEC's offering of DSL services. According to Pacific the crucial point is that Pacific will not be providing retail DSL service to end-users. ASI, a separate affiliate, provides retail DSL service. As applied to this case, the FCC's pricing suggestion means that the price CLECs pay for the HFPL should be the same as the price ASI pays for HFPL.

While Pacific's and TURN's economists agree that the HFPL and the low frequency portion of the loop are joint products, Rhythms characterizes the HFPL as an "enhancement" to the loop. Pacific's witness Dr. Fitzsimmons rebuts that characterization, saying "[f]or over 100 years, economists have recognized that multiple outputs created by the same process are joint products, and the costs of producing the outputs are joint costs." (Fitzsimmons for Pacific, Rebuttal Testimony at 6.) The high and low frequency ranges on a loop are produced in the same process of constructing that loop.

Pacific rebuts Rhythms argument that a positive price for the HFPL is a violation of the principles the Commission established in the New Regulatory Framework (NRF) proceeding. Rhythms attempts to argue that the HFPL is not an innovative new product that Pacific developed, but instead is a new profit center for Pacific. According to Pacific, Rhythms is mistaken. The HFPL is precisely the type of product to which NRF was intended to apply.

Pacific proposes that the Commission retain the $5.85 price for access to the HFPL that was adopted in the interim line sharing arbitration and take the opportunity to utilize these funds to help offset the shortfall in the cost of providing basic residential service.

Pacific states that in its Line Sharing Order, the FCC declared that one loop can actually comprise dedicated connections from a single customer to two different service providers-one providing the customer with voice service, and the other with data service. Either connection, on its own, requires the loop, and none of the loop costs on the shared line are attributable to only one of the two connections. Consequently, standard TELRIC methodology, which was designed for estimating direct costs, is not applicable to pricing access to the HFPL.

According to Pacific, the FCC and this Commission have offered some guidance on the appropriate means of allocating loop costs on a shared line. One of the most fundamental principles of costing recognized by this Commission is the concept of "cost causation." As described in the Commission's Consensus Costing Principles, "Principle No. 2: Cost causation is a key concept in incremental costing...The basic principle of cost causation is that only those costs that are caused by a cost object in the long run should be directly attributable to that cost object." (D.95-12-016, Appendix C.) As described above, the single copper loop can provide both a dedicated voice connection and a simultaneous dedicated data connection. Either connection, on its own, requires the loop, and on a shared line, the two dedicated connections jointly cause the cost of the loop. Consequently, pursuant to this Commission's Consensus Costing Principles, allocation of costs to both the high-and low-frequency portions of the loop is appropriate.

According to Pacific, consumers have several options available if they wish to obtain high-speed access to the Internet. They may purchase DSL service, or they may choose broadband wireless, cable or satellite technologies. This Commission needs to bear in mind what impact an artificially low price for access to the HFPL would have on the broadband market in general.

Pacific states that the Commission should also consider the pro-competitive effect that a $5.85 price for access to the HFPL has had-and will continue to have-on the DSL market. If CLECs have to purchase an entire loop from Pacific, they would pay $11.70. Currently with line sharing, CLECs can purchase just the high frequency portion of that loop at an even more substantial discount-50 percent off the current loop price-down to $5.85. According to Pacific, this clearly provides a significant incentive for CLECs to enter the residential market and offer attractive prices.

Pacific's witness Dr. Fitzsimmons asserts that setting the price for access to the HFPL at 50% of the price of the unbundled loop will make a reasonable contribution to joint loop costs. The $5.85 price has been in effect for several months, and during that time CLECs have purchased increasing volumes of line-shared loops. Pacific sees that that price is spurring deployment of advanced services.

Additionally, the HFPL is an appropriate source of contribution to the shortfall that currently exists in the provision of basic services. The Commission has in the past relied on Pacific's above-cost services to contribute to Pacific's losses incurred in the provision of basic service. The Commission's New Regulatory Framework (NRF) under which the Commission placed both Pacific and Verizon several years ago, does not guarantee Pacific price increases for basic service if it loses market share for those above-cost services. Instead, under NRF, Pacific's challenge is to increase its efficiency and introduce profitable new services.

5. 4.1.5 Verizon's Position

Verizon supports the Commission's determination in the interim phase of this proceeding that a zero price for the HFPL was not appropriate. The arbitrator considered and rejected the detailed testimony regarding why the price for the HFPL should be zero. The arguments for why the price should be zero that were rejected in the interim phase are essentially the same arguments presented in this permanent phase.

Verizon rebuts Rhythms' contention that a positive price provides an implicit subsidy toward other services. The basis of this argument is that such a price recovers no cost attributable to the HFPL. However, as Verizon contends, the price for the HFPL does recover real costs not directly related to other services. Moreover, the logical result of Rhythms' argument is that allowing CLECs to provide DSL service without contributing to common cost recovery would implicitly subsidize those DSL services.

Also, contrary to Rhythms' claims, Verizon asserts that a positive price does not unfairly discriminate against customers who subscribe to line-shared DSL services. All DSL providers would pay this price, including Verizon's separate data affiliate, Verizon Advanced Data Inc. (VADI). Rhythms is wrong when it argues that requiring VADI to pay its fair share of Verizon's common costs simply constitutes a shift of revenue from one pocket of the same corporate pants to another. Rhythms' analysis fails to recognize that all DSL providers face intense competition for high speed internet access customers from other sources, such as cable modem providers. Verizon is very aware that every charge imposed on VADI will increase VADI's costs to provide DSL services, affecting its ability to compete.

Verizon asserts that there are direct costs associated with providing the HFPL UNE. Only by investigating this cost as compared to the cost of unbundled POTS (Plain Old Telephone Service) loops can the appropriate cost-based HFPL share be determined. Until this matter is resolved in the costing phase, Verizon recommends that the interim rate of $3.00 per month be continued.

Verizon states that in the interim phase, the company had not identified any incremental loop costs caused by providing the HFPL over home-run copper loops,²⁴ and consequently did not propose a positive price for the HFPL. Since that time, Verizon has identified "embedded constraint" incremental costs associated with providing the HFPL over copper loops. Providing the HFPL over home-run copper loops will take place on Verizon's existing network, which has many copper loops that are 12-16 kft in length. In a forward-looking environment, those same loops may well be converted to hybrid fiber/copper loops. If Verizon is providing the HFPL on the existing all-copper loop, it cannot efficiently introduce fiber into this loop or convert that customer to a hybrid fiber/copper loop.

6. 4.1.6 Discussion

We begin our discussion of the proper price for the HFPL by stating that we are making a policy determination, not analyzing TELRIC cost studies or other scientific data to determine the HFPL price. We point to the assigned ALJ's Ruling of July 19, 2001, which denied Rhythms' motion to strike testimony filed by other parties. Rhythms asserted that TURN's witness Roycroft's testimony exceeded the defined scope of the HFPL pricing phase. According to Rhythms, the discussion at the May 2, 2001 PHC made it clear that such testimony was not to include cost studies reexamining the underlying loop rates, but was to be limited only to a discussion of whether any portion of the already existing UNE loop rate should be allocated to CLECs' use of the HFPL for DSL service.

In ruling on Rhythms' motion to strike, the assigned ALJ concluded as follows:

Rhythms has taken much too narrow a view of the scope of the HFPL proceeding. While other parties agree that this is a policy issue, they are not precluded from submitting cost data which serves as the basis for their policy positions.

We reiterate that we are making a policy decision on the proper charge for the HFPL, based on the record evidence presented in this proceeding. We do not purport to base our adopted rate on a detailed cost study for the HFPL.

As a starting point, we need to examine the language in the FCC's Line Sharing Order. Both Rhythms and Pacific have cited paragraph 139 from the order to support their position. A careful reading of that paragraph shows that Pacific's interpretation is correct. The FCC's language is permissive when it indicates that states "may" require that ILECs charge no more than the amount of loop costs allocated to ADSL services when the ILECs established their interstate retail rates for the service.

In addition, in paragraph 139, the FCC limits its statement to apply to "arbitrations and in setting interim prices." The FCC is silent on the setting of permanent HFPL prices, which is what we are doing in this proceeding. However, while the FCC's language in ¶ 139 is permissive, the FCC's rules clearly allow states to set a rate of $0 for the HFPL. And as Rhythms points out, a number of states have adopted a $0 rate for the HFPL UNE.

Also, we find the FCC's argument that the ILECs are currently recovering the full cost of the loop-including the HFPL portion-a compelling reason to set the HFPL rate at $0. In paragraph 140 of its Line Sharing Order, the FCC states:

We find it reasonable to presume that the costs attributed by LECs in the interstate tariff filings to the high-frequency portion of the loop cover the incremental costs of providing xDSL on a loop already in use for voice services. Under the price cap rules for new access services, the recurring charges for such services may not be set below the direct costs of providing the service, which are comparable to incremental costs. The rates the incumbent LECs set for their special access xDSL services should cover those costs. The incumbent LECs filed their cost support for their own special access DSL services before we issued the notice giving rise to this Order compelling line sharing, and they have defended their cost support when challenged in petitions to reject or suspend their tariff filings. Since the incremental loop cost of the high-frequency portion of the loop should be similar to the incremental loop cost of the incumbent LEC's xDSL special access service, this approach should result in the recovery of the incremental loop cost of the high-frequency portion of the loop.²⁵

Both Pacific and Verizon asserted in their filings at the FCC when they filed for authority to offer ADSL service that they were recovering the full cost of the loop from existing services. In its June 26, 1998 reply filing at the FCC, Pacific asserts as follows:

Several petitioners contend that Pacific must assign outside plant (local loop) costs to its ADSL service. But Commission rules impose no such requirement. FCC Rule 61.38 requires LECs to identify the direct cost to provide the proposed new service. Pacific proposes to transmit ADSL over loops already in service. Pacific already recovers the costs of those local loops under tariffs already approved by the Commission and state regulators. Loop costs therefore contribute nothing to the direct cost of ADSL service.²⁶

Pacific made a similar statement in responding to protests to its filing at this Commission of an intrastate ADSL tariff:

Protestants fail to come to grips with the fact that Pacific Bell's retail end users already pay the Commission-approved and FCC approved prices that recover the cost of the copper loop over which the ADSL service is placed.²⁷

Verizon has made similar attestations. Verizon's predecessor GTE has stated:

[s]ince ADSL employs the existing loop for new applications, the costs of the loop are already recovered through existing rates.... ²⁸

The ILECs have stated to both this Commission and the FCC that they recover the cost of the loop through tariffed services. They made that statement at a time when it was to their benefit not to allocate any costs to the high frequency portion of the loop, and there were no competitors using those line-shared loops. We do not find convincing their more recent assertions that they do not recover the costs of the loop from their tariffed services. Further, since the ILECs recover the cost of the loop from tariffed services, we are justified in setting a $0 rate for the HFPL.

Next we examine the issue of the need to be consistent with the outcomes in our ILS decision. In Ordering Paragraph 2(a) in that decision, we made it clear that the line sharing proceeding would remain open to determine "final prices, including the issues of double recovery of loop costs and disposition of balances in memoranda accounts." In other words, we anticipated that final prices could differ from those adopted on an interim basis, and we are not constrained by the outcomes we adopted in the interim phase of this proceeding. We have developed a more robust record in this proceeding than is generally possible in the expedited arbitration process, which will allow us to set permanent rates. While we may endorse some or all of our earlier rulings in D.00-09-074, we are not required to do so.

TURN has raised the issue of the need to satisfy the requirements of §254(k) of TA96, and we need to address TURN's concerns relating to the second sentence of that section. Shared and common costs are fixed relative to a specific TELRIC-based denominator. In other words, shared and common costs of a UNE loop do not vary with the addition of new UNE features or uses. Accordingly, there are no "additional" joint and common costs that "voice customers" are paying and "DSL customers" are avoiding.

In its Reply Comments on the RDD, WorldCom states that even a $0 HFPL would not create an improper subsidy from local exchange service to DSL. According to WorldCom, the definition of a subsidy is a price set below the economic cost of providing a service-quantified as incremental cost. As discussed above, the weight of the evidence in the record of this proceeding conclusively demonstrates that the incremental cost of using the HFPL is $0. Thus, setting the HFPL charge at $0 cannot be a subsidy because use of the HFPL generates $0 incremental costs.

Further, WorldCom asserts that the HFPL is not a joint product with analog voice service, and thus causes no loop-related costs. The FCC explicitly noted that line sharing is not available to provide DSL-based service to a person who does not subscribe to basic exchange service, and that a different UNE, the loop element, has already been defined to fulfill that purpose. Because the stand-alone loop element is already available to service customers not subscribing to basic exchange service from the incumbent, it is implausible to suggest that line sharing could be defined as anything but an adjunct, or an enhancement, to basic exchange service. Regarding these two arrangements (basic exchange and line sharing) as joint products would only be correct if they were equally available on a stand-alone basis, which they are not -- HFPL service is only available when the end user customer already subscribes to voice grade or dedicated loop service -- where no end use customer subscribes to a voice grade or dedicated loop service, HFPL service is not available. We concur with WorldCom's reasoning on this issue and conclude that a $0 price for the HFPL does not violate § 254(k).

Pacific proposes a rate of $5.85 for the HFPL, and suggests that that amount will assist Pacific in making up some of the shortfall associated with providing residential basic exchange service.²⁹ In this case we are pricing the HFPL as a UNE and must follow the FCC's rules for pricing UNEs. CFR Rule 51.505(d) lists the factors that may not be considered in calculation of the forward-looking economic cost of a network element. Subsection (4) reads as follows:

Revenues to subsidize other services. Revenues to subsidize other services include revenues associated with elements or telecommunications service offerings other than the element for which a rate is being established.

We find that Pacific's proposal to collect $5.85 or 50% of our adopted loop rate violates Rule 51.505(d)(4), which bars states from setting UNE rates which include revenues to subsidize other services, which is precisely what Pacific is proposing. While the Commission in the past has relied on above-cost services to subsidize below-cost services, that sort of cross-subsidization is not appropriate in the pricing of UNEs.

Nor do we agree with Pacific's argument that the CLECs are lucky to pay only $5.85, because if they have to purchase the entire loop, they would pay $11.70. This argument is spurious because CLECs who utilize the HFPL are competing with Pacific's separate affiliate ASI, which supplies service over line-shared loops. It is not economically feasible for a competitor to pay $11.70, and then attempt to compete against ASI with its lower line shared loop cost.

Next we examine Verizon's proposal that the current $3.00 HFPL rate that was adopted in the Interim phase be continued until final pricing. Verizon has the mistaken impression that this phase of the PLS proceeding is scheduled to address only the policy issue of whether there should be a positive price for the HFPL, not what that price should be. Verizon is mistaken. This phase of the PLS proceeding is scheduled to set a permanent price for the HFPL, to replace the interim rates adopted in the Interim Line Sharing phase in D.00-09-074. At the PHC on May 2, 2001 in the PLS proceeding, Rhythms counsel indicated that this phase is to determine "on a permanent basis what the monthly loop recurring price should be, if any, for the HFPL."³⁰ The assigned ALJ cited this section from the transcript in her July 19, 2001 Ruling denying Rhythms' motion to strike certain testimony filed by other parties. This phase of the PLS proceeding will set the permanent HFPL rate; that issue is not scheduled to be addressed further in the costing phase of this proceeding.

Verizon indicates that in the costing phase, it intends to propose a rate of $7.32 based on what it terms its "embedded constraint" theory. Since this represents Verizon's proposal for a permanent HFPL rate, we will examine Verizon's proposal here. As Rhythms and ORA point out, Verizon's proposal to recover the costs of retaining its home-run copper network to provide HFPL to customers since it cannot efficiently introduce fiber into a loop or convert that customer to a hybrid fiber/copper loop, violates the FCC's rules on factors that may not be considered in pricing unbundled network elements. CFR Rule 51.505(d) (1) reads as follows:

Embedded costs. Embedded costs are the costs that the incumbent LEC incurred in the past and that are recovered in the incumbent LEC's books of accounts.

Verizon's investment in its copper network clearly fits in this category of embedded costs that cannot be considered in setting a price for UNEs. Verizon's embedded constraint theory violates CFR 51.505(d)(1). We reject Verizon's proposal for setting a permanent HFPL rate of $7.32.

TURN proposes an allocation of 25% based on the Shapley Value, based on the theory that four major services utilize the loop: basic exchange service, toll/access, vertical services, and the HFPL. Rhythms criticizes TURN's allocation saying that there are many other services that utilize the loop, including 911, 800 and 976 services, directory assistance and operator services. We concur with Rhythms that other services also use the loop, and are troubled that the Shapley Value is arbitrary in allocating the same percentage to the four uses of the loop that TURN identifies. TURN's proposal is inconsistent with application of the Shapley Values as their proposal results in misallocated prices to the purported four services that exceed shared loop costs. Further, TURN's refund proposal does not correct the fact that prices would exceed the cost of the loop and therefore create an uneconomic and arbitrary pricing signal to the market.

We believe that the correct outcome is to have a $0 price for access to the HFPL because HFPL is additive, having no specific cost. A rate of $0 also addresses the issue of potential discrimination that parties raised in their comments on the DD. In its comments on the RDD, AT&T states that the provision of high-speed data services is an ever-increasing part of the total package of services that competitors, and now ILECs, will provide end users. With integration of the ILECs' data affiliates, it is important for the Commission to consider safeguards against anticompetitive behavior on the part of Pacific and Verizon. A $0 rate ensures that ILECs and CLECs have a level playing field if/when the ILEC's data affiliate is reabsorbed into the ILEC's operations. Otherwise, the unaffiliated CLEC would have to pay for the HFPL, and the ILEC itself would not.

TURN urges that the Commission's determination on the threshold issue of whether a monthly recurring charge should be assessed for the HFPL UNE should also apply to line sharing over fiber-fed loops in a Next Generation Digital Loop Carrier (NGDLC) network architecture. We believe that it should. This determination is in accordance with an ALJ Ruling issued July 17, 2001, which includes the following statement:

The ALJ also indicated at the PHC [Prehearing Conference] that this first sub-phase would also include testimony regarding the policy question of whether there should be a monthly recurring price for fiber-fed DLC loops. At the same time, the ALJ further indicated that the pricing question of how much that price (if any) would be reserved to the second sub-phase (non-costing and NGDLC interim pricing phase). (ALJ Ruling at 4.)

This ruling makes it clear that the policy issue of whether there should be a charge associated with the HFPL UNE over fiber-fed loops is within the scope of this proceeding. Whereas the incremental costs associated with HFPL are related to CLEC investments in electronics that extend the capacity of existing copper facilities to provide advanced services, loop capacity over NGDLC fiber facilities are related to ILEC investments to provision advanced services to customers beyond that which a pure copper facility could provide -- where the cooper loops exceed 12 thousand feet from the central office. Without prejudicing any future decisions we may make regarding unbundling of NGDLC loops, we confirm that there should be a positive price for the monthly recurring access to fiber-fed DLC loops.