V. Discussion

Fair competition in the long distance market is a long-standing goal of this Commission. Ensuring fair competition requires that intrastate access charges closely follow actual costs. In D.06-04-071, we determined that AT&T's and Verizon's rate elements were not consistent with this requirement, and we eliminated the non-cost-based component of access charges. We also allowed AT&T and Verizon to impose offsetting rate increases to maintain revenue neutrality.¹⁰

As described below, we will extend the policy established in D.06-04-071 to mid-sized, small, and competitive local exchange carriers but tailor the specific implementation requirements to fit the unique characteristics of each carrier group. We will also reflect the regulatory changes adopted in the Uniform Regulatory Framework by making most significant changes effective on January 1, 2009.

A. Mid-Size Carriers - SureWest and Frontier

Frontier states that such an extension of policy is moot as regards to its intrastate access charges because those charges do not include any non-cost-based elements, but has agreed to reduce its intrastate access charges an amount equivalent to SureWest's TIC ($0.00909). The policy we adopt in today's decision will apply to both mid-sized local exchange carriers.

Both carriers are included in the Uniform Regulatory Framework and have pricing flexibility for all services other than basic residential service, which is subject to a rate freeze scheduled to be lifted on January 1, 2009.

As noted above, when we ordered AT&T and Verizon to reduce their access charges, we also authorized these carriers to impose a surcharge to recover these "lost revenues." SureWest and Frontier, could also be eligible for a similar surcharge. As explained below, however, any such surcharge would expire on January 1, 2009. We will make the reductions necessary in SureWest's and Frontier's intrastate access rates effective January 1, 2009; consequently, no interim surcharge will be necessary. Until January 1, 2009, SureWest's and Frontier's intrastate access rates are capped at the current levels.

In its comments, SureWest explained that while Frontier's intrastate access rates do not have an explicit non-cost based element, such as a NIC or TIC, "non-cost based expenses remain embedded in its access charges as they were never separated into an individual access charge element." To remedy this, SureWest requested that the Commission reduce Frontier's access charges in an amount equivalent to SureWest's reduction. As noted above, Frontier has agreed to reflect this reduction.

B. Small Local Exchange Carriers

Data filed by the small local exchange carriers show that non-cost-based intrastate access charge rate elements are responsible for substantial portions of certain carriers' revenue requirements. Abruptly altering this long-standing arrangement could lead to sharp rate changes and customer confusion or dissatisfaction. No party, however, has presented a convincing rationale for exempting these carriers from the otherwise applicable policy against non-cost-based elements in intrastate access charges.

We will, therefore, extend our policy to the small local exchange carriers but will move these carriers towards compliance with our policy through gradual rate changes.

The small local exchange carriers shall include in their next regularly scheduled rate case filing a long-term plan for fully implementing our policy requiring intrastate access charges to be based on cost, as well as a proposed first step towards such implementation.¹¹ The long-term plan shall extend for no more than two rate case cycles to allow these carriers to phase in our policy.¹²

The small local exchange carriers are not currently included in Uniform Regulatory Framework. Should any such carrier become regulated under the Uniform Regulatory Framework, then our access charges policy as set forth above for SureWest and Frontier should be implemented concurrently as well.

C. Competitive Local Exchange Carriers

The record shows allegations of competitive carriers imposing excessive intrastate access charges, and that the purchasing carriers are unable to seek alternatives to terminating the call traffic. When confronted with similar allegations with interstate access charges, the FCC adopted a rule that all carriers must charge the rate of the competing incumbent carrier. Many parties support a similar rule for California intrastate access charges, but many competitive carriers have raised substantial practical issues with this approach.

We will, therefore, adopt CALTEL's recommendation for a cap of $0.025,¹³ effective April 1, 2008, for the competitive carriers to originate or terminate intrastate access. This modest cap will ensure that these carriers' intrastate access charges are closer in line with other carriers.¹⁴ Carriers with current intrastate access charges in excess of $0.025 shall file and serve an advice letter¹⁵ within 30 days of the effective date of this decision adjusting their intrastate access charges to conform to the April 1, 2008, cap.

Effective January 1, 2009, competitive carrier's intrastate access charges shall be capped at the higher of AT&T's or Verizon's intrastate access charges, plus 10%, with each rate element provided also capped at the higher of AT&T's or Verizon's comparable intrastate access charge rate element, plus 10%. This 2009 cap is also based on CALTEL's recommendation. Advice letters implementing this rate cap shall be filed and served no later than November 3, 2008.

Existing contracts between carriers that specify intrastate access charges are not affected by this decision. Carriers may voluntarily contract with each other to pay intrastate access charges different from those adopted in today's decision.

The Commission may authorize intrastate access charges higher than these caps upon a showing, supported by a detailed cost-of-service study, that a competitive carrier's actual costs exceed the caps adopted in today's decision.

¹⁰ Our decision permitting AT&T and Verizon to impose offsetting rate increases was issued prior to the Uniform Regulatory Framework decision. Consequently, those regulatory changes were not reflected in our treatment of AT&T's and Verizon's rate changes after January 1, 2009, when the freeze on basic residential rates is expected to be lifted. In today's decision, we align our treatment of AT&T's and Verizon's surcharge with that of SureWest and Frontier; namely, the surcharge authorization shall expire on January 1, 2009, or when the basic residential rate freeze is lifted.

¹¹ Any carrier that does not have a scheduled general rate case filing shall file a long-term plan no later than three years after the effective date of this order.

¹² If feasible, any small carriers currently in the rate case process may supplement their rate case filing to include the required long-term plan.

¹³ In today's decision, all access rates are per minute of use.

¹⁴ When filing advice letters to set switched access rates, carriers must include an electronic spreadsheet demonstrating that their composite switched access rate, and its elements, is consistent with these caps.

¹⁵ In D.06-08-030 the Commission modified the advice letter process for many services but not for wholesale service. Pending further modifications, the incumbent carriers shall submit applications and competitive carriers shall file advice letters consistent with pre-D.06-08-030 procedures to change intrastate access rates.