III. Interim Rates are Warranted

Before we examine the parties' three proposals for interim rates, we affirm the May 31 ruling of the Assigned Commissioner and ALJ that concluded interim relief is warranted for Verizon. We agree that it is abundantly clear that interim rates are necessary for Verizon's UNEs. The current rates that Verizon charges for its UNEs were not set using a TELRIC-based, forward-looking cost methodology. Rather, they are the product of a TSLRIC cost study that was filed in late 1995 and early 1996, rejected by the Commission in D.96-08-021 as not adequately conforming to forward-looking costing principles, and then modified by the Commission in order to have UNE rates in effect for Verizon by the beginning of 1997. (D.96-08-021, mimeo., p. 70 and p. 92.)

In late 1996, the Commission was faced with a deadline of January 1, 1997 for the opening of local exchange competition in California. (See Pub. Util. Code § 709.5.) The Commission also had before it several arbitrations over interconnection agreements between ILECs and CLCs, including an arbitration between GTEC and AT&T. Thus, the Commission found the need to have rates for GTEC's unbundled services in place by the first quarter of 1997. Faced with this deadline, the Commission ordered "specific but broad ranging adjustments to GTEC's studies to approximate conformance with the Consensus Costing Principles." (D.96-08-021, mimeo., p. 70.) (Emphasis added.) At the same time, the Commission ordered GTEC to file new, forward-looking cost studies within one year, that is, by September 1997. (Id.) Subsequently, in GTEC's arbitration with AT&T, the Commission adopted GTEC's TSLRIC rates, as modified by D.96-08-021. (See D.97-01-022.) These rates have avoided scrutiny or alteration ever since. Given the Commission's obvious intent to review new cost studies for GTEC in 1997, the Commission intended at the time that any rates emanating from D.96-08-021 would apply only on an interim basis until replaced by new cost studies. It is fair to say the Commission never imagined that the rates it adopted based on "approximate" conformance with costing principles, and ultimately based on a flawed TSLRIC cost study, would still be in place over five years later. The time has come to update these rates to reflect the most recent forward-looking cost information available for Verizon.

We certainly wish that the intervening events, which have kept the Commission from conducting a proper review of GTEC's 1997 cost filing, had not occurred. Without dwelling on these various policy priorities and resource constraints, and without assigning blame to any particular source, it should suffice to say we have not had the ability to conduct a thorough review of GTEC's 1997 cost filing and the numerous objections to it. In the intervening years since GTEC's 1997 cost filing, we have adopted TELRIC-based UNE prices for Pacific and we have even found sufficient preliminary evidence to adjust some of Pacific's UNE prices downward, on an interim basis, given undisputed evidence of cost declines for loop and switching inputs.

In contrast to current rates for Pacific that are based on TELRIC cost studies, Verizon's rates are clearly based on TSLRIC cost studies filed in late 1995 and early 1996, which are based on data from the 1994 and 1995 time period. Joint Commenters contend that the same cost declines for loop and switching equipment, which were relied on in D.02-05-042 to update Pacific's UNE rates, also impact Verizon's UNE costs. Verizon does not dispute that loop and switching equipment costs have declined. We agree with Joint Commenters that it is reasonable to assume that these recent equipment cost declines would impact Verizon's forward-looking UNE rates in the same manner that Pacific's forward-looking costs were impacted. Verizon's current rates are based on cost studies from the same vintage as Pacific's original rates that we found sufficient justification to update in D.02-05-042, and indeed, the cost studies supporting Verizon's current rates were based on aspects of Pacific's original cost studies. Therefore, because we have found sufficient justification to adjust Pacific's TELRIC prices on an interim basis, it is reasonable to adopt interim UNE prices for Verizon as well.