IV. Positions of the Parties

A. Initial Issues

SureWest Telephone and its broadband affiliate, SureWest TeleVideo, opposed eliminating non-cost-based elements from access charges prior to the Federal Communications Commission (FCC) completing its comprehensive review of access charges in Docket No.01-92. The SureWest affiliates agreed, however, that if this Commission were to eliminate the non-cost-based elements, then any reduction in access charge revenue needed to be accompanied by corresponding rate rebalancing.

Frontier and its affiliates5 stated that extending the Commission policy developed in Phase II of this proceeding to Frontier and its affiliates would have no effect because their access charges do not have non-cost-based elements. These carriers also supported waiting for the FCC to complete its review of access charges.

The small local exchange carriers 6 opposed eliminating non-cost-based elements from their access charges. In addition to recommending that this Commission await final action by the FCC, these carriers pointed out that revenue rebalancing would require them having rate increases ranging from 7% to 47%. These carriers also noted that the Commission's Phase II decision resolved the access charge issue for the majority of the California market, with the small LECs affecting only a "very small share of the total California long distance market."

AT&T and its competitive local exchange carrier affiliates - TCG Los Angeles, Inc., TCG San Diego, Inc., and TCG San Francisco, Inc. - supported extending the Commission's access charge policy to other incumbent and competitive local exchange carriers.

MCImetro Access Transmission Services (MCI Metro) agreed with the Commission's direction in eliminating non-cost-based elements in access charges for all local exchange carriers, and recommended that competitive local exchange carriers' access charges should be capped. The cap should be the access charge imposed by incumbent local exchange carrier in whose territory the competitive local carrier's switch is located.

Verizon West Coast Inc. stated that its access charges do not contain an element named "network interconnection charge or transport interconnection charge" and thus extending the policy of D.06-04-071 to Verizon West Coast, Inc., would have "no impact."

The California Association of Competitive Telephone Companies, (CALTEL) urged the Commission to continue to exclude competitive carriers from consideration in this proceeding. If, however, the Commission decided to impose controls on competitive carriers' intrastate access charges, then CALTEL's members would be "willing to be subject to a cap" on such charges, with six conditions: (1) the cap must be set at the incumbent carrier's access rate plus 10%, (2) maintain tariffing flexibility, (3) charge for equivalent incumbent services, (4) use small or mid-size incumbent rate, not just large, (5) allow rate rebalancing, and (6) allow a three-year implementation period. CALTEL also recommended an interim benchmark rate of $0.025 per minute for competitive carriers.

In reply comments, Light-Year Innovations recommended that any competitive carrier cap should be set based on the access charges of the small local exchange carriers. Light-Year contended that the levels of buying power, efficiencies, economies of scale, and other business expenses are likely to more closely mirror those of the small carriers rather than the large carriers. It proposed a cap of $0.04 to $0.07 per access minute.

MCI Metro agreed in principle with CALTEL's proposed cap but objected to several of the conditions. MCI Metro observed that CALTEL's requested charge of 10% above the corresponding incumbent local exchange carrier's rate was not supported by any rationale, and that it was at odds with the FCC's pricing policy. MCI Metro was also "puzzled" by CALTEL's request for rate rebalancing authority, because all competitive carriers have substantial pricing flexibility and change prices readily. Finally, MCI Metro objected to CALTEL's requested three-year phase in period as being unnecessary and inappropriate.

The Division of Ratepayers Advocates (DRA) opposed extending the intrastate access charge policy to the small local exchange carriers due to the likelihood of increased draws on the subsidy mechanism for high-cost small carriers.7 DRA supported capping the competitive carriers' access charges.

Qwest Communications Corporation urged the Commission to extend its access charges policy to the small and mid-sized carriers, and to cap the competitive carriers' charges.

Sprint Communications L.P. supported requiring the small and mid-sized carriers to remove non-cost-based elements from intrastate access charges. Sprint also supported the proposed cap for competitive carriers at the access charge for the incumbent carrier in whose territory the competitive carrier is operating, but opposed the proposed 10% adder. Sprint recommended that the Commission's next major reform for intercarrier compensation should be to create a compensation system with only one rate for the termination of all types of traffic. Sprint contended that pricing differentials between, for example, local and toll calls, wireline and wireless calls, are legacies of the historic system, and, if abandoned, would result in lower prices for consumers.

B. Further Issues

In the May 4, 2007, joint ruling, the parties were directed to comment on aligning the regulatory treatment of AT&T and Verizon with SureWest and Frontier, allowing the small carriers two rate case cycles to phase-out non-cost based elements in their access charges, and adopting the FCC's methodology for capping competitive local exchange carriers' intrastate access charges. The comments and reply comments submitted by the parties are summarized below.

DRA and The Utility Reform Network supported terminating the authorized surcharges for Verizon and AT&T, and any similar surcharges for SureWest and Frontier, on the date these carriers obtain basic residential service pricing flexibility. DRA cited D.06-12-039, where the Commission terminated a surcharge for undergrounding costs on the date AT&T obtains full pricing flexibility.

Verizon8 argued that competitive local exchange carriers' intrastate access rates are unreasonably high, and that some of these carriers are increasing these rates. Verizon recommended that the Commission move promptly to apply the FCC regime to cap these rates. Verizon also supported extending the surcharge methodology currently applicable to Verizon and AT&T to SureWest.

AT&T and its affiliated competitive local carriers - AT&T Communications of California, Inc., TCG Los Angeles, Inc., and TCG San Diego - also supported adopting the FCC methodology for capping competitive local exchange carriers' intrastate access rates, with no extended transition period. AT&T also pointed out that the FCC interstate access charge methodology limits carriers to charging only for functions actually provided, not for other related services not used by the purchasing carrier. AT&T and its affiliates contended that carriers subject to the Uniform Regulatory Framework should be able to use their approved surcharge until pricing flexibility is implemented, and then these carriers should be able to choose the means, if any, used to recover lost revenues caused by reducing intrastate access charges.

SureWest sought the same revenue recovery methodology as approved for Verizon and AT&T, but implemented through its own rate design methodology. SureWest also objected to a lengthy phase-in period for competitive local exchange carriers to reduce intrastate access charges. SureWest contended that this would allow those carriers to have a competitive advantage over other carriers that have been forced to reduce these rates and increase local exchange rates.

Telscape Communications contended that capping competitive local exchange carriers' intrastate access charges at the rate charged by the incumbent local exchange carrier operating in the area would prevent competitive carriers from recovering fair and reasonable compensation because the competitive carriers have much higher cost structures than the large incumbent carriers. Telscape supported incremental steps to move any access charges that are beyond a zone of reasonableness gradually down to reasonable levels. Telscape pointed out that the FCC has existing rules that prohibit much of the supposed access charge abuse being carried out by competitive local carriers, and that across-the-board rate caps are not justified.

CALTEL opposed capping competitive local carriers' rates but, should the Commission decide to impose a cap, the intrastate access charges of a mid-sized carrier would be more appropriate than an incumbent local exchange carrier. CALTEL also supported a three-year step-down period, as was adopted by the FCC when it capped interstate access rates, and opposed the 30-day "flash cut" in the proposed decision. CALTEL indicated that a transition period was the single most important issue for its members.

A coalition of competitive carriers9 argued that no evidence supported a determination that incumbent carriers' intrastate access charges were a reasonable cost proxy for competitive carriers'. These carriers also argued that the competitive carriers lack market power.

Cox California Telecom, L.L.C., dba Cox Communications and Time Warner California LP (Cox Communications) contended that the record did not support reducing competitive local exchange carriers' rates to that of the incumbent exchange carriers because there is no evidence that the competitive carriers' rates are too high or that the incumbents are cost-based. Should the Commission elect to do so, however, Cox Communications proposed the following components of a cap:

In reply comments, Cox Communications agreed with CALTEL's proposed initial cap price of $0.025 with 180 days to implement, and a final cap, after three years, equivalent to SureWest's rate of $0.017670.

Paetec Communications, Inc. stated that no evidence supports the conclusion that competitive carriers' costs to provide intrastate access services are equivalent to the costs incurred by incumbent carriers. Paetec opposed any rate cap, but, if the Commission adopts a cap, it should be phased in over at least a two-year period.

Sprint Communications Company urged the Commission to control intrastate access rates because access service can only be obtained from the end-user customer's local exchange provider. As there is no possibility for a competitive alternative, the Commission must control these prices. Sprint explained that the intrastate access charges imposed by competitive carriers were approximately 66% higher than similar services provided by incumbent carriers. Sprint stated that the New York Public Service Commission resolved this by adopting a "mirror rule" which limited access charges to that of the largest carrier in the market. In this way, all carriers pay each other the same price to terminate each other's traffic. Sprint concluded that the competitive carriers' excessive intrastate access charges were "anti-competitive and anti-consumer market distortions."

Intermetro Communications, Inc., stated that it has experienced first-hand abusive practices by a competitive carrier to obtain unwarranted intrastate access fees, and cited to its subsequent lawsuits. Intermetro offered evidence showing that some competitive carriers' intrastate access charges were over twice that of the incumbent carriers, and concluded that the record supported capping competitive carriers' intrastate access rates at the rates charged by incumbent carriers. Intermetro also asked this Commission to include a requirement, adopted by the FCC, that carriers charge only for services performed. Intermetro explained that some competitive carriers offer only "blended" access rates, which include all switched access functions, which are not needed or performed for all traffic. Finally, Intermetro opposed a lengthy transition period.

Qwest also noted that some competitive local exchange carriers' intrastate access charges are up to three times that of incumbent local exchange carriers, and that numerous states have adopted the FCC's methodology.

The small interexchange carriers commented that they preferred to implement an access charge decrease over three rate cycles, rather than two as suggested in the May 4, 2007 ruling, but did not describe any insurmountable practical issues caused by using two rate case cycles.

5 Citizens Telecommunications Company of the Golden State dba Frontier Communications Company of the Golden State, Citizens Communications Company of Tuolumne dba Frontier Telecommunications Company of Tuolumne, Electric Lightwave, Inc., and Frontier Communications of America.

6 Calaveras Telephone Company, Cal-Ore Telephone Company, Ducor Telephone Company, Global Valley Network (Evans Telephone Company), Foresthill Telephone Company, Happy Valley Telephone Company, Hornitos Telephone Company, Kerman Telephone Company, Pinnacles Telephone Company, Ponderosa Telephone Company, Sierra Telephone Company, Inc., Siskiyou Telephone Company, Volcano Telephone Company, and Winterhaven Telephone Company.

7 This fund is called California High Cost Fund A (CHCF-A) and it distributes amounts collected from a surcharge on all intrastate telephone service in California. In order to receive a subsidy from CHCF-A, among other requirements, the carrier must raise its basic service rate to 150% of urban rates.

8 Verizon California Inc., Verizon West Coast, Inc., MCI Metro Access Transmission Services, LLC, and MCI Communications Services.

9 Navigator Telecommunications, LLC, Eschelon Telecom, Inc., and Advanced Telecom.

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