VII. Non-recurring Prices

Parties' Positions

In D.98-12-079, the Commission adopted forward-looking "nonrecurring costs" for Pacific and GTEC, which means the Commission determined the costs for initial fees that CLCs pay Pacific and Verizon to order and provision the use of network facilities. Later, in D.99-11-050, the Commission used these costs to establish nonrecurring prices for Pacific, but the Commission has not yet adopted nonrecurring prices for Verizon.

The parties agree that the nonrecurring costs adopted for GTEC in D.98-12-079 should now be converted into nonrecurring prices. To do this, Verizon proposes that the Commission add a 22% markup to its nonrecurring costs. Next, Verizon explains that nonrecurring costs were established using Pacific's nonrecurring products and services. Therefore, Verizon has "mapped" the adopted nonrecurring costs to the corresponding Verizon products and services using Verizon's existing rate structure. Verizon claims it would be unreasonable to require Verizon to change its numerous operations support systems (OSS) and billing systems to accommodate different rate structures, particularly when CLCs rarely order many of the nonrecurring rate elements for which costs were set in D.98-12-079. Verizon also opposes any changes to its operating and billing systems for interim rates. Verizon claims that changes to its rate structure would require significant amounts of time and money, and could take up to one year to implement. Verizon claims the Commission cannot force it to implement a different rate structure until after a full and fair permanent proceeding.

Finally, Verizon states that in its nonrecurring pricing proposal, it calculated service order costs by weighting semi-mechanized and fully mechanized charges⁴⁴ by Verizon's current flow-through percents based on its recent experience in processing UNE orders. (Collins Declaration, 7/30/02, para. 17.)

Joint Commenters oppose Verizon's proposals with regard to nonrecurring pricing, and claim Verizon's proposals suffer from two fatal flaws. First, Joint Commenters oppose the 22% markup Verizon requests as excessive. Second, Joint Commenters claim that Verizon's proposed nonrecurring prices exceed TELRIC-based prices because Verizon has improperly reconfigured the Commission-adopted nonrecurring costs into a rate structure that reflects Verizon's embedded levels of manual order processing. This may force competitors to compensate Verizon for costs that Verizon may never incur. While Joint Commenters agree that Verizon may not have precisely the same name for its UNE products as Pacific, the basic UNEs are the same between companies and Verizon should be required to set nonrecurring prices that reflect the costs adopted by the Commission. Joint Commenters contend that Verizon's proposals undermine the cost basis of the nonrecurring costs adopted in D.98-12-079.

Specifically, Joint Commenters allege that Verizon has combined dissimilar nonrecurring costs for different UNE options and types of orders into nonrecurring prices that are as much as 300% higher than the nonrecurring prices approved for Pacific. Verizon's proposal would force competitors to pay for functions that they do not require and orders that they do not submit. For example, Verizon's proposal eliminates the distinction that the Commission adopted between the cost of mechanized and semi-mechanized orders by forcing competitors to pay the higher semi-mechanized order costs. Joint Commenters maintain that Verizon's proposal contradicts Commission precedent that required the nonrecurring charge to be governed by the type of system the competitor uses to place its order, rather than by the type of system of the ILEC. (Joint Commenters, 8/20/02, p. 15, citing D.99-11-050, mimeo, pps. 158-159.)

Joint Commenters maintain that Verizon local exchange companies in other states have rate structures that closely parallel the rate structure of Pacific and there is no valid reason for Verizon's proposal in California to depart so substantially from this Commission's adopted rate structure for Pacific, and the structure Verizon uses in other jurisdictions. (Id., p. 15.) Joint Commenters note that the effect of Verizon's "mapping" of nonrecurring costs into the nonrecurring prices it proposes is that competitors would be forced to pay Verizon four times as much as they would pay Pacific for the same nonrecurring service.⁴⁵ Joint Commenters contend that this is contrary to the Commission's use of the same model in D.98-12-079 to adopt nearly identical nonrecurring costs for Pacific and GTEC. (Turner Declaration, 8/20/02, para. 10.)

Joint Commenters claim that Verizon has been on notice since December 1998 that it would need to adapt its billing systems to accommodate separate costs for mechanized, semi-mechanized, and manual service orders, as well as separate costs for initial versus additional orders. Joint Commenters ask that the Commission require Verizon to implement nonrecurring prices that mirror the structure of the costs that have been in place since 1998. If Verizon can prove this is not feasible at this time, it should be required to credit competitors for the difference between Verizon's current proposed rates and final rates that reflect the proper, Commission-adopted cost structure.

In response, Verizon disagrees that D.98-12-079 "implied" a rate structure that "Verizon has refused to implement." Verizon states the Commission clearly left the issue of how nonrecurring costs should be recovered to the subsequent pricing phase.

Discussion

First, we adopt a 22% markup to nonrecurring costs as already discussed in Section V. We want to make clear that in applying this markup to Verizon's nonrecurring costs, and making the other modifications to Verizon's proposal described below, this establishes nonrecurring prices for Verizon. In contrast to the interim recurring UNE rates for certain loops, switch elements, and ports set in the remainder of this order, these nonrecurring prices are not interim and not subject to true-up. If, in the permanent phase of this case to follow, we adopt a different shared and common cost markup, we will adjust Verizon's nonrecurring prices at that time on a going-forward basis. It is not the Commission's intent to revisit Verizon's nonrecurring costs and prices in the permanent phase of this case.

Second, we must resolve the discrete disputes over various aspects of Verizon's "mapping" of its nonrecurring costs into prices. We will address each disputed item separately below. With regard to these disputed items, Verizon generally argues that it should not be required to make costly and time-consuming changes to its order processing system for "interim rates." We have already explained that the nonrecurring prices we adopt today are not interim. When the Commission adopted nonrecurring costs for GTEC in D.98-12-079, it gave no indication that it intended to revisit these costs when reviewing new cost studies for Verizon's recurring UNE costs.

1. Blending of Mechanized and Semi-Mechanized Costs

In D.98-12-079, the Commission identified three categories of costs for ordering UNEs - namely manual, semi-mechanized, and mechanized. (D.98-12-079, mimeo., p. 27.) In setting costs for each of these categories, the Commission assumed a certain percentage of orders would "fall-out" due to processing errors and need to be manually examined. For example, the Commission assumed that 4% of mechanized orders would "fall-out." Thus, the cost of processing 4% of mechanized orders manually was built into the adopted mechanized order costs. The Commission also found that mechanized service order charges should apply when the CLC submits its order through a mechanized interface. (D.99-11-050 at 158-159.)

Verizon admits that it developed its nonrecurring service order prices by weighting the semi-mechanized and fully mechanized charges using current fall-out percentages shown by Verizon's recent, or "embedded," order processing experience. (Collins Declaration, 7/30/02, para. 17.) Joint Commenters oppose this method because it ignores the fall-out percentages adopted by the Commission in D.98-12-079. In that order, the Commission rejected Verizon's embedded fall-out rates and adopted forward-looking fall-out rates instead. According to Joint Commenters, Verizon's method of weighting semi-mechanized and fully mechanized charges using fall-out rates from its current experience violates the intent of the forward-looking fall-out rates adopted in D.98-12-079. They also maintain that Verizon's approach double-counts the costs of those orders that fall-out because those costs are already reflected in the rates.

Verizon defends its approach as reasonable because it says it cannot determine at the time a CLC order is received whether the order will require manual processing. According to Verizon, it uses a single order-processing interface which cannot distinguish between mechanized and semi-mechanized service orders when they are received.

We agree with Joint Commenters that Verizon's combination of mechanized and semi-mechanized costs into one initial order charge defeats the Commission's intent in identifying separate costs and forward-looking fall-out rates for the three order types found in D.98-12-079. Verizon wants to charge all CLCs the same rate whether the CLCs order is mechanized or semi-mechanized which means that CLCs placing a mechanized order will pay the higher semi-mechanized cost. This is unreasonable, as is Verizon's attempt to charge embedded rather than forward-looking fall-out rates adopted in D.98-12-079. Verizon needs to configure its order processing system to identify the three categories-mechanized, semi-mechanized, and manual- so that it can charge CLCs based on the order type they use. We are not persuaded by Verizon's objections as to the cost and time involved to change its order processing system because Verizon has been on notice since December 1998 when the three order types were adopted, or, at the latest since November 1999 when the Commission adopted prices for Pacific mirroring these three categories, that it would likely need to charge CLCs based on order type.

2. Initial and Additional Order Charges

Verizon's nonrecurring charge proposal combines the costs for initial orders and additional orders⁴⁶ based on a weighted average of the cost to process the average order size. Verizon does not establish separate charges for initial orders and additional orders.

Joint Commenters recommend separate charges for initial and additional orders. They argue that combining these charges as Verizon proposes harms CLCs that target residential customers with only one line or switch port because they will pay for additional orders with every initial order even though they are not likely to place additional orders. Verizon counters that separate charges are not required and any harm is minimal because Verizon assumes only 23% to 28% of loop orders will include an additional order.

We find that Verizon should separate its charges for initial orders and additional orders. Verizon's proposal to combine these charges means that CLCs that rarely or never send in additional orders are forced to pay the costs of additional orders as if they are actually made 23% to 28% of the time. For CLCs that often send in additional orders, i.e., more frequently than 23% to 28% of the time, they benefit and do not have to pay the full costs of their additional orders. This does not comport with cost causation principles. Further, we prefer to keep nonrecurring charges for Pacific and Verizon somewhat similar to avoid large disparities in the conditions facing competitors in the markets of these two ILECs. We established separate initial and additional order charges for Pacific in D.99-11-050, so we will require Verizon to do the same. Therefore, we will require Verizon to establish separate initial and additional order charges.

3. Connect and Disconnect Charges

In D.98-12-079, the Commission adopted four main categories of costs, which are Connect, Disconnect, Change, and Record. Verizon claims it does not have these four categories in its billing system. Therefore, it proposes to combine Connect, Disconnect, and Record costs into a single nonrecurring charge. Joint Commenters contend this is inappropriate. First, the Commission explicitly set distinct connect and disconnect charges for Pacific, and stated there is no justification for assuming that every connect order should be combined with a disconnect order. Second, if CLCs are required to pay disconnect charges up front, this is an interest free loan to Verizon and leads to CLCs paying costs that exceed the costs borne by Verizon.

Verizon responds that it is reasonable and customary to recover disconnection costs at the time of the initial service order because it does this in both Massachusetts and Colorado. Further, Verizon contends that combining these charges is the only way to ensure that disconnect costs will be recovered, particularly with so many CLCs going out of business.

As we stated above, we prefer to keep nonrecurring charges for Pacific and Verizon somewhat similar. We established separate connect and disconnect charges for Pacific in D.99-11-050, so we will require Verizon to do the same. We agree with Joint Commenters that allowing Verizon to collect disconnect charges in advance amounts to an interest free loan and places an extra burden on CLCs that Verizon does not bear itself.

4. Record Costs

Verizon proposes to include the costs for a Record Order⁴⁷ in its Initial Order Charge. Joint Commenters object to Verizon's proposal to sum Connect, Disconnect and Record nonrecurring costs together because that assumes every order for a UNE will require a record change. Rather, Joint Commenters allege that Record Orders do not occur in a one-to-one relationship to every Connect order that is placed. They contend Verizon's proposal is inconsistent with the cost structure ordered by this Commission and they note that Verizon offers separate record charges in other states such as New York.

Verizon claims that it is reasonable to recover the costs of making changes to existing customer records through the initial order charge because this is common practice in other states. Verizon contends that a separate charge will dissuade CLCs from keeping their records accurate. Verizon acknowledges the criticism that it assumes each order will involve a Record Order and proposes to modify its proposal to reflect that only 10% of initial orders will require a record change at some future point.

Consistent with our findings regarding separate charges for initial and additional orders, we find that Verizon should charge separately for any Record Orders because this better comports with cost causation principles. Only those CLCs that actually make record changes should pay for them. We do not agree with the proposal that every CLC will pay a charge as if it makes a record change 10% of the time because this penalizes those CLCs that make fewer changes, and benefits those CLCs that make more. We are not worried that a separate charge will dissuade CLCs from keeping their records accurate because we believe it is in the CLCs own best interest as a business to have accurate records. Verizon should not concern itself with designing a rate structure to ensure CLCs have accurate records.

5. Change Order and Subsequent Order Charges

Verizon proposes to "map" Pacific's Change Order to Verizon's Subsequent Order. Joint Commenters do not agree that these two order types are analogous. Verizon contends that its Subsequent Order covers the same activities as those covered by Pacific's Change Order, namely circuit design changes, line feature changes, switch feature changes, and central office connection changes.

Joint Commenters objections do not have merit because they are unable to identify a specific problem with Verizon's proposal. Therefore, we find that Verizon's proposal in this regard is appropriate.

6. Summary of Nonrecurring Charges

Verizon shall make the following changes to the nonrecurring charge proposal it filed on July 30:

· Verizon should configure its order processing system in order to charge separate rates depending on whether the CLC employs a mechanized, semi-mechanized, or manual system to place its order.

· Verizon should separate its charges for initial and additional orders so that CLCs only pay for additional orders when they make them.

· Verizon should not collect disconnect charges in advance, as it proposes, because this is a requirement placed on CLCs that Verizon does not bear itself.

· Verizon should charge separately for Record Orders so that only those CLCs that actually make record changes pay the charge.

· Verizon should add a markup of 22% to its nonrecurring charges, once the changes above are made.

Before we can adopt final nonrecurring charges, we need to review Verizon's compliance with the changes ordered above. Therefore, within 20 days from the effective date of this order, Verizon shall file and serve a compliance filing containing a revised list of its nonrecurring charges and parties will have 14 days to comment on this filing. Verizon's compliance filing with revised nonrecurring charges shall go into effect 75 days after the effective date of this decision, unless the assigned ALJ issues a ruling suspending the effective date of these nonrecurring charges because of issues raised by Verizon's compliance filing. If Verizon's proposed nonrecurring charges are suspended, the existing nonrecurring charges shall remain in effect, subject to refund from the 75^th day after the effective date of today's order, until any issues with nonrecurring charges are resolved through further Commission action.

In comments on the Draft Decision, Verizon requests that the Commission reject the Draft Decision's proposals regarding nonrecurring charges and not require Verizon to modify the rate structure for its nonrecurring charges at this time because it will take Verizon nine to twelve months to complete the recommended changes. Verizon contends that it cannot create separate rate elements for mechanized and semi-mechanized service orders, as required in the Draft Decision, because it cannot distinguish between these service order types. Essentially, Verizon states that nonrecurring charges should be reviewed again in the permanent phase.

Joint Commenters oppose these requests, noting that unless the Draft Decision is adopted, Verizon will succeed in delaying adoption of nonrecurring prices. Telscape Communications Inc (Telscape) comments that the Draft Decision should be revised to make nonrecurring charges effective as of the date of the decision. Unless this change is made, Telscape believes that Verizon will unreasonably delay compliance with the decision.

We are not persuaded by Verizon to make any changes to this section of the order. Verizon merely reargues its previous positions and does not establish any factual or legal errors in the order. As already noted, Verizon has had ample time to configure its order processing to comport with the three categories of costs adopted in D.98-12-079. Nevertheless, Verizon has proceeded with a different order processing system that does not identify these separate categories. It would be unfortunate to delay establishing charges for each type of order simply because Verizon has not yet implemented a system to match the costs this Commission adopted in 1998. Instead, we will direct Verizon to reconfigure its order processing to accommodate the three categories of order charges-mechanized, semi-mechanized, and manual.

We agree with Telscape that it would be ideal to have Verizon's nonrecurring charges effective with this decision. This approach is problematic, however, because it requires the Commission to adopt rates before knowing the effects of the changes ordered herein. Rather than the approach proposed by Telscape, we have modified the order to provide that Verizon's compliance filing with revised nonrecurring charges shall go into effect 75 days after the effective date of this decision, unless the assigned ALJ issues suspends this effective date.

⁴⁴ "Semi-mechanized" service order charges recover the costs for orders that flow-through the process mechanically, orders that "fall-out" due to a problem, and orders that were never designed to flow-through. The semi-mechanized charge is weighted by the proportion of time that Verizon experiences fall-out during the ordering process. The mechanized charge is weighted by the proportion of time that UNE service orders flow through without any manual intervention. (Collins Declaration, 7/30/02, para. 17.) ⁴⁵ Joint Commenters claim that a mechanized order for a UNE loop and cross-connection would cost $18.88 if ordered from Pacific, and $75.26 if ordered from Verizon. Similarly, a mechanized UNE-P order from Pacific would cost $26.86, and the same order from Verizon would cost $112.94. (Id., p. 16.) ⁴⁶ An "additional order" is an order for an additional line that is transmitted to Verizon through the same local service request used to order the first line. (Verizon Reply Comments, 9/20/02, p. 19.) ⁴⁷ A "Record Order" occurs when a CLC requests to make a change to its existing customers' records. (Verizon Reply Comments, 9/20/02, p. 18.)