Decision 03-08-074 August 21, 2003

Before The Public Utilities Commission Of The State Of California

Rulemaking on the Commission's Own Motion to Govern Open Access to Bottleneck Services and Establish A Framework for Network Architecture Development of Dominant Carrier Networks.	Rulemaking 93-04-003 (Filed April 7, 1993)
Investigation on the Commission's Own Motion into Open Access and Network Architecture Development of Dominant Carrier Networks.	Investigation 93-04-002 (Filed April 7, 1993) (Verizon UNE Phase)

ORDER DENYING REHEARING OF DECISION 03-03-033

In this order, we deny the application for rehearing of Decision (D.) 03-03-033 filed by Verizon California Inc. ("Verizon"). In D.03-03-033 (hereinafter, the "Interim UNE Decision"), we adopted interim rates for certain unbundled network elements ("UNEs") that Verizon sells to competitive local exchange carriers ("CLECs").

I. BACKGROUND

In 1994, the California Legislature enacted Public Utilities Code section 709.5 (Stats. 1994, Ch. 1260, Sec. 3.), which opened all telecommunications markets under the Commission's jurisdiction to competition. The Commission was ordered to ensure that "whatever additional rules and regulations that may be necessary to achieve fair local exchange competition shall be in place no later than January 1, 1997." (Pub. Util. Code, § 709.5, subd. (c).) This included establishing rates for the basic network functions ("BNFs")¹ of Verizon and Pacific Bell Telephone Company ("Pacific").

In D.95-12-016, the Commission adopted the Total Service Long Run Incremental Cost ("TSLRIC") cost methodology for setting BNF rates.2 (See, Re Open Access to Bottleneck Services and a Framework for Network Architecture Development of Dominant Carrier Networks [D.95-12-016] (1995) 62 Cal.P.U.C.2d 575.) Pursuant to that decision, Verizon submitted cost studies using this methodology in December 1995 and January 1996. In D.96-08-021, the Commission found that Verizon's studies did not adequately conform to the TSLRIC principles adopted in D.95-12-016 and could "not reasonably be used to set prices for BNFs and services on [Verizon's] system." (Re Open Access to Bottleneck Services and a Framework for Network Architecture Development of Dominant Carrier Networks [D.96-08-021] (1996) 67 Cal.P.U.C.2d 221, 229.) However, in order to meet the requirement to have unbundled BNF rates in place by January 1, 1997, the Commission modified Verizon's cost studies, using certain aspects of Pacific's cost studies, to approximate conformance with the requirements of D.95-12-016. (Id. at pp. 258-263.) Verizon was ordered to file updated cost studies within one year. (Id. at p. 269.) In January 1997, the Commission issued D.97-01-022, which approved an interconnection agreement between AT&T and Verizon. The prices adopted in that decision reflected modifications to Verizon's cost studies as ordered in D.96-08-021 and would be in effect until new cost studies were submitted and permanent prices were set. The prices adopted in D.97-01-022 are referred to in this order as the "temporary rates."

In August 1996, the Federal Communications Commission ("FCC") issued rules implementing the local competition provisions of the 1996 Telecommunications Act ("1996 Act"). As part of those rules, states were directed to use the Total Element Long Run Incremental Cost ("TELRIC") methodology to determine the costs for UNEs.³ (See, 47 C.F.R. § 51.505.) In September 1997, Verizon filed a new cost study, based on the TELRIC methodology, to comply with D.96-08-021. However, due to a legal challenge of the TELRIC methodology and competing telecommunications priorities at the Commission, establishment of permanent UNE rates for Verizon was put on hold. Consequently, the temporary rates adopted in D.97-01-022 have not been updated and continue to serve as Verizon's rates for providing UNEs to CLECs.

On May 31, 2002, in response to a motion filed by Tri-M Communications Inc., the Assigned Commissioner and ALJ issued a ruling to resume the proceeding to set permanent UNE rates for Verizon. The ruling also noted that relief in the form of interim UNE prices was warranted, given the lengthy delay in the proceeding. (See Assigned Commissioner's and ALJ's Ruling Granting Motion of Tri-M Communications Inc. (TMC) to Intervene, Granting Motion of TMC in Part, and Scheduling Prehearing Conference, May 31, 2002, at pp. 4-5.) Three proposals were submitted. Verizon proposed that the interim rates be based on the temporary rates, adjusted by a trend analysis conducted by Verizon in Florida. (See Comments of Verizon California Inc. in Support of Interim Pricing Proposals, July 30, 2000.) AT&T Communications of California and WorldCom Inc. ("ATT/WorldCom") proposed that the interim rates be based on Pacific's interim rates set in D.02-05-042, adjusted by the FCC's Synthesis Model to reflect cost differences between the two companies. (See Proposal of AT&T Communications of California Inc. and WorldCom, Inc for Interim Unbundled Network Element Rates, July 30, 2002.) ATT/WorldCom and TURN (collectively, "Joint Commenters") subsequently submitted another proposal in response to an ALJ Ruling soliciting further comments. This proposal proposed interim rates based on UNE rates set for Verizon in New Jersey, adjusted by the FCC's Synthesis Model to reflect cost differences between New Jersey and California. (See Response of AT&T Communications of California Inc, WorldCom, Inc and The Utility Reform Network to Assigned Commissioner and Administrative Law Judge's Ruling Reversing Limitation on Interim Pricing Proposals and Soliciting Further Comments, September 9, 2002.)

On March 13, 2003, the Commission issued the Interim UNE Decision. The Interim UNE Decision adopted the Joint Commenters' proposal for setting interim rates for a subset of Verizon's UNEs.⁴ These interim rates would be subject to adjustment at the time permanent UNE rates were established. (D.03-03-033, at p. 72, OP 1.)

On April 16, 2003, Verizon filed a timely application for rehearing of the Interim UNE Decision and raises the following challenges: (1) the Commission's decision to base Verizon's interim UNE rates on New Jersey UNE rates is not supported by the evidentiary record and is arbitrary and capricious; (2) the Interim UNE Decision violates Verizon's due process rights; and (3) the rates established in the Interim UNE Decision are below Verizon's costs in California and confiscatory.⁵

AT&T Communications of California, MCI, the Office of Ratepayer Advocates and The Utility Reform Network, collectively, filed a timely response opposing Verizon's rehearing application. Covad Communications Company ("Covad") filed its response opposing the rehearing application one day late. Covad filed a motion to accept its late-filed response. This decision grants Covad's motion.