II. BACKGROUND

On January 7, 2000, Covad filed a petition for arbitration, pursuant to Section 252(b) of the Telecom Act and Rule 3 of the Commission's Resolution ALJ -178. At issue was the determination of Roseville's forward-looking economic costs in order to calculate the recurring and nonrecurring prices for UNE access and for collocation. Only the UNE access prices are now in contention.

In D.00-06-080, the Commission accepted Roseville's proposed UNE prices. They were computed pursuant to Roseville's cost study which was an adaptation of a "total element long-run incremental cost" (TELRIC) methodology, as set forth in FCC regulations implementing the Telecom Act.¹ Roseville first compared the annual expense per access (loop) line of Roseville and Pacific Bell. This calculation included customer operations, corporate operations, operating taxes, and rates of return. It resulted in a finding that Roseville's expenses per access (loop) line were 2.19 times higher than Pacific Bell's. The 2.19 factor was then used as a multiplier against Pacific Bell's final UNE prices approved in D.99-11-050 (at Appendices A and B) to arrive at Roseville's UNE prices. The Commission accepted this methodology after considering Roseville's testimony that it would take approximately two years and $2 million to complete and apply a full cost study like the one developed for determining the final UNE prices for Pacific Bell. (D.00-06-080, slip op., at 7.)

Covad claims that Roseville's "shortcut" methodology is not lawful because the resulting UNE prices do not represent the specific costs of Roseville's individual network elements as required by statutory provisions of the Telecom Act, particularly as those provisions were recently interpreted in Iowa Utilities Board et al. v. FCC ("Iowa Utilities Board II"), 219 F.3d 744 (8^th Cir. July 18, 2000.) Covad also contends that Roseville's cost study reflects embedded and retail costs, as well as rates of return, all of which may not be factored into a TELRIC methodology pursuant to the FCC's regulation at 47 CFR §51.505 (d). (Covad Application for Rehearing, at 2-3.) In addition, Covad has testified that the resulting Roseville charge of $25.62 per month for a 2-wire local loop, as set forth in D.00-06-080, bars Covad from competing in the provision of DSL services in Roseville's market, its principal interest in this proceeding. (Covad Application for Rehearing, at 2; also, Testimony for Covad, Exhibit 1, at 3:2-5.)

During the course of the proceeding, Covad had proposed that the local loop prices adopted for Pacific Bell in D.99-11-050 should be used as the proxy for Roseville's local loops. (E.g., Exhibit 1, at 15:4-16; 20:19-21 to 21:1-4; 24:13-20.) Pacific Bell's monthly charge for a 2-wire local loop was set at $11.70. Covad also argued that the Commission should consider using as a proxy the deaveraged local loop prices derived from the final prices adopted in D.99-11-050. Pacific Bell had offered the deaveraged prices in a letter dated February 16, 2000 to carriers requesting connection with its local loop as of May 1, 2000. (See, Exhibit 8 and Final Arbitrator's Report in the present Docket A.00-01-012, at 8.)

Roseville timely filed a response to Covad's rehearing application. Roseville argues that its cost study was "legally adequate" and that an "historical cost relationship to the forward-looking costs of one carrier is an accurate predictor of forward-looking costs for the second carrier." (Response of Roseville, August 8, 2000, at 3.) It opposed the proposition that Pacific Bell's UNE prices, without adjustment, reflect Roseville's costs. (Id., at 7.) Roseville also argues that contrary to Covad's claim regarding barriers to competition, there are other advance service providers in Roseville's territory, Nextlink, Teligent and Pacific Bell Local Services. (Id., at 7.)

Both Covad and Roseville are correct where they argue that the law requires the UNE prices be based specifically on Roseville's forward-looking incremental costs for each UNE. (Roseville's Response to Application for rehearing, at 7; Covad Application for Rehearing, at 1.) However, neither Roseville nor Covad has proposed UNE prices that we can adopt as final prices that meet the statutory and regulatory requirements for specific pricing. We therefore grant rehearing in order to reset prices that we shall clarify are interim, not final prices as may have been implied in D.00-06-080. For that purpose, the Commission adopts Pacific Bell's final UNE prices, as approved in D.99-11-050, as the proxy for Roseville's interim UNE prices, which shall be subject to true up, with interest, upon the approval of final prices. However, with respect to the UNE of principal interest to Covad, the local loop, we shall adopt the Zone 2 deaveraged local loop price of $13.51, as offered by Pacific Bell in the February 16, 2000 letter referred to by Covad, and as subsequently approved in the arbitration of the Pacific Bell/AT&T Communications of California (AT&T) interconnection agreement in D.00-08-011.