IV. Discussion
A. Negotiated Portions of the Agreement
Section 252(e)(2)(A) of the Act provides that we may only reject an agreement (or portions thereof) adopted by negotiation if we find that the agreement (or portions thereof) discriminates against a telecommunications carrier not a party to the agreement or is inconsistent with the public interest, convenience and necessity. No party or member of the public alleges that any negotiated portion of the agreement should be rejected. We find nothing in any negotiated portion of the agreement which results in discrimination against a telecommunications carrier not a party to the agreement, nor which is inconsistent with the public interest, convenience and necessity.
B. Arbitrated Portions of the Agreement
Section 252(e)(2)(B) of the Act, and our Rule 4.2.3; provide that we may only reject an agreement (or any portion thereof) adopted by arbitration if we find that the agreement does not meet any one of following three criteria. The agreement (or any portion thereof) does not meet: (1) the requirements of Section 251 of the Act; (2) the regulations prescribed by the Federal Communications Commission (FCC) pursuant to Section 251; or (3) the standards set forth in Section 252(d) of the Act.2
Parties continue to believe that their position on each item should be adopted. Covad argues that the outcome of the first two arbitrated issues must be rejected. These issues are forward-looking economic costs and UNE recurring and nonrecurring charges. Roseville argues that the outcome of the third arbitrated issue, collocation recurring and nonrecurring charges must be rejected. A discussion of whether these arbitrated issues meet the tests in the Act and Resolution ALJ-178 and whether these arbitrated issues should be approved follows.
1. Issue 1 - Forward-Looking Economic
Costs
Covad argues that Roseville's cost study must be rejected because it fails to meet the requirements of Section 251 of the Act as implemented by the FCC forward-looking economic cost-based pricing methodology set forth in 47 C.F.R. §§ 51.5053 and 51.511. 4
The Act established two criteria for pricing charges. That criteria require prices to be based on the forward-looking cost (determined without reference to a rate-of-return or other rate-based proceeding) of providing the network element and that it be nondiscriminatory.5 The principles to govern the development of nondiscriminatory, forward-looking cost studies for the basic network functions of local exchange companies were adopted by this Commission in Decision (D.) 95-12-016.6 That decision required Pacific Bell (Pacific) to use specific principles to produce forward-looking studies known as Total Service Long Run Incremental Cost (TSLRIC) studies. That decision also found that TSLRIC studies for comparable Pacific wire centers may be a good proxy for the TSLRIC of mid-size local exchange companies, such as Roseville. Subsequently, by D.98-02-106, the Commission adopted a TELRIC study as a standard for determining UNE costs.
Neither party disputes that the agreement should be based on forward-looking economic costs. The dispute lies in whether the agreement being proposed by Roseville is based on a TELRIC study. Roseville estimated that it would need two years of time and an investment of more that $2 million, which equates to a cost of over $15 for each of its 130,000 access lines, to conduct and complete its own micro-detailed bottoms-up TELRIC study. Hence, it did not perform such a TELRIC study. It instead, used Pacific's Commission approved system-wide TELRIC study7 as a basis to establish its own charges.
Roseville adjusted Pacific's charges by a factor of 2.19 to obtain comparable charges in recognition that there are differences between Roseville and Pacific's economies of scale, relative purchasing power, and environmental and geographic conditions. This existence of differences in economies of scale, relative purchasing power, and environmental and geographical conditions can be verified by a simple comparison of the monthly access line charges between Roseville and Pacific. Roseville's $18.90 monthly residential rate is $8.21 higher than Pacific's $10.69 monthly residential rate. Similarly, Roseville's $25.90 monthly business rate is $16.10 higher than Pacific's $9.80 monthly business rate.
Roseville's TELRIC adjustment factor was derived from a comparison between Pacific and Roseville's 1998 average cost per access line which reflects the direct relationship between the two companies historical and forward-looking costs. As asserted by Roseville, an adjustment to these charges must be made if reasonable charges are to be produced that reflect the differences between Roseville and Pacific's service territory and operations. Absent such an adjustment, the Pacific TELRIC study is incomplete as it pertains to Roseville.
Given that the relationship between the forward-looking costs of two telephone companies can be identified, it is appropriate to apply that relationship to an identified TELRIC study to determine the TELRIC of the second company. This pricing methodology leads to results that are consistent with the FCC's nondiscriminatory, forward-looking economic cost requirements and complies with Commission decisions relating to the development of forward-looking cost studies.
2. Issue 2 - UNE Recurring and Nonrecurring
Charges
Covad argues that the adoption of Roseville's proposed UNE8 recurring and nonrecurring charges does not comply with the directive of the Act which requires rates, terms, and conditions to be just, reasonable, and nondiscriminatory;9 and, which requires prices to be cost-based and nondiscriminatory.10 This is because Covad contends that Roseville's cost study fails to satisfy the FCC's specific forward-looking economic cost methodology set forth in § 51.505 and § 51.511. Hence, Covad contends that Roseville's UNE charges must default to the UNE charges of Pacific as provided for by § 51.513.
Having already concluded that the charges being proposed by Roseville are based on a TELRIC study that reflect Roseville's forward-looking costs, the issue is whether Roseville's proposed UNE recurring and nonrecurring charges are appropriate for this agreement.
As explained in the Final Arbitrator's Report, Roseville's factor-adjusted TELRIC study results effectively compares the differences between Roseville's and Pacific's forward-looking cost of providing service. Roseville utilized this approach because of the direct correlation between the costs that these carriers incur, the forward-looking costs the same two carriers will incur, and the constant overall relationship between comparable activities on a forward-looking basis.
Roseville's proposed forward-looking UNE charges adopted in the Final Arbitrator's Report are just, reasonable, and nondiscriminatory. We affirm the result of the arbitration on UNE charges.
3. Issue 3 - Collocation Recurring and
Nonrecurring Charges
Roseville argues that the adoption of Pacific's system-wide collocation11 recurring and nonrecurring charges as a proxy for Roseville's collocation recurring and nonrecurring charges in the Final Arbitrator's Report does not comply with the Act. This is because Roseville contends that the adopted collocation recurring and nonrecurring charges are not based on its own forward-looking cost.
Unlike UNEs being impacted by a majority of primary rate elements, collocation is impacted by only two primary rate elements. These rate elements are land and building investment and labor. The investment element is a function of cost for the central office building and associated land. The labor element is a function of central office plant operating and testing costs.
Although Roseville based its proposed collocation charges on a TELRIC study, its application of a factor to compensate it for increased differences between it and Pacific's collocation operations substantially overstate Roseville's forward-looking collocation cost. This is because Roseville could not substantiate that real estate values in its service area are substantially higher than the real estate values in Pacific's service territory. In addition, Roseville acknowledged that its labor rates are comparable to Pacific's labor rates in the surrounding area and lower than Pacific's labor rates in urban areas. Hence, it is not appropriate to set Roseville's collocation charges at a rate substantially higher than at Pacific's system-wide collocation average. To do so would conflict with the directive of the Act that requires such charges to be just, reasonable, and nondiscriminatory.12
Roseville's proposal to adopt its factor-adjusted TELRIC proposed collocation charges does not reasonably reflect the difference between Roseville's and Pacific's collocation operations. We affirm the results of the arbitration on collocation charges.
2 Section 251 sets forth the interconnection standards, while Section 252(d) identifies pricing standards. 3 In general, forward-looking economic cost equals the sum of the Total Element Long-Run Incremental Cost (TELRIC) and a reasonable allocation of forward-looking common costs. 4 The forward-looking economic cost per unit of an element equals the forward-looking economic cost of the element divided by a reasonable projection of the sum of the total number of units of the element that the incumbent local exchange carrier (LEC) is likely to provide to requesting telecommunications carriers. It also includes the total number of units of the element that the incumbent local exchange carrier is likely to use in offering its own services, during a reasonable measuring period. 5 See 47 C.F.R. § 51.505. 6 62 CPUC2d 575 (1995). 7 D.99-11-050 (1999). 8 UNEs enable a competitive local exchange carrier to gain access to a local exchange company's loop from a central office to a specific customer premise location without being required to build a duplicative loop. 9 47 U.S.C. § 251(c)(2), (3), and (6). 10 47 U.S.C. §252(d)(1). 11 Collocation is the actual placement of a competitive local carrier's equipment in a Roseville central office. 12 47 U.S.C. §252(d)(1).
