3. Verizon's Calculation of True-up Amounts

Verizon indicates that it used a straightforward methodology to calculate the true-up. First, beginning March 13, 2003, all data were tracked by Verizon's billing and accounting systems in accordance with D.03-03-033, the 2003 Interim Order. All data gathered from that date through the effective date of D.06-03-025 were compiled and utilized in the true-up progress.

Verizon then eliminated consideration of CLECs for whom commercial agreements or other UNE or enterprise arrangements were in place during the true-up period; these carriers were subject to negotiated terms for which true-up is not appropriate. Carriers whose bankruptcy filings made them ineligible for true-up were similarly removed.

Verizon then indicates that it used three-month commercial paper rates for interest-calculation purposes in accordance with D.03-03-033, and then prepared CLEC-specific estimates in Excel format. Those estimates were served on each CLEC in conjunction with its filing.

Each of the steps set out in the general methodology also applied for switching, but one additional conversion was required for the more sophisticated task of reconciling D.06-03-025, Appendix A with the interim, billed tandem switching rates. This is because the prescribed UNE tandem switching rates contain different rate elements than those utilized in earlier Commission orders.

Specifically, the decision sets forth switching rates for tandem switching that contains:

(1) a set-up per message charge; and

(2) a holding time per minute of use (MOU) charge.

According to Verizon, earlier Commission rulings used a single per-MOU-based rate for tandem switching. For this reason, Verizon appropriately tracked MOUs and does not have call detail available to apply the ordered rate structure to historical data.

To arrive at an appropriate true-up, Verizon converted the switching rate structure of the decision into a per-MOU structure, assuming a 3.95 minute average call holding time to calculate a single per-MOU rate for tandem switching.

Appendix A

Tandem Switching		Divided by Average Hold Time
Set Up Per message	0.000217	/3.95	0.000055
Holding Time per MOU	0.000309		0.000309
			0.000364 per MOU

This per-MOU figure was then used to calculate the true-up.

Two parties submitted comments on Verizon's true-up proposal. Covad Communications Company (Covad) indicates that it has reviewed Verizon's proposed UNE true-up calculations, and after reviewing additional clarifying information, Covad does not object to the amount proposed by Verizon as the appropriate amount of monies owed Verizon as a result of implementing D.06-03-025.¹

In footnote 1 above, we cited Covad's concern expressed in mid-2006 that Verizon had not implemented the rates established by the Commission in a timely fashion. Since several months had passed since Covad made its filing and we had heard nothing further about this issue, we assumed that Verizon had updated its rates to reflect those we adopted in D.06-03-025. Three parties-CALTEL, XO Communications Services, Inc. (XO), and AT&T-all stated that the Commission's assumption is not correct. According to XO, Verizon should have no objection to the Commission's modifying the PD to require Verizon, to the extent it has not already done so, to implement D.06-03-025 (as clarified by D.07-10-033) and begin charging CLECs the UNE rates adopted therein. We agree and have added a conclusion of law and an ordering paragraph to this effect to ensure that there is no further delay on the part of Verizon in actually charging the prices ordered by the Commission.

In their comments on the Proposed Decision (PD), CALTEL, XO and AT&T each propose that the Commission adopt an order that addresses not only the true-up adjustment for interim rates that were in effective March 13, 2003 to March 14, 2006 but also for the retroactive rate adjustment for March 15, 2006 to March 1, 2008 (retroactive period) when Verizon began billing the final rates adopted in D.07-10-033. Verizon opposes the CLECs' proposal to merge the two billing adjustments because the two adjustments are different in scope and applicability. According to Verizon, any effort to combine them would significantly complicate the process and potentially delay completion. Verizon points out that the history of this phase of the proceeding relates solely to the interim period true-up adjustment.

In contrast, the retroactive period adjustment encompasses a different, broader group of UNE product sets that may involve a different group of CLECs. Carriers may be billed for their different product sets in different bills or in multiple bill cycles, pursuant to the terms of their ICAs, so there may be no single bill on which to combine or net both adjustments as the CLECs propose. Verizon indicates that it has already initiated efforts to issue mechanized adjustments for the retroactive period by June 2008 as a normal course of doing business. We agree with Verizon that it would complicate matters to combine the true-up adjustments for interim rates with the retroactive rate adjustment. However, we are concerned that Verizon complete the retroactive rate adjustment process in an expeditious fashion. In order to see that Verizon stays on track to complete the process by June, we will order that the retroactive rate adjustments be completed by June 30, 2008.

A second CLEC, Telscape Communications, Inc. (Telscape) filed comments on Verizon's true-up proposal. Telscape asserts that true-ups of unbundled basic two-wire loop charges should be based on an apples-to-apples comparison of the new rates and the rates that were paid by CLECs. Before D.06-03-025, Verizon's interim rates for basic two-wire loops were differentiated into two geographic zones, whereas, by contrast, D.06-03-025 adopts four new geographic pricing zones.

Telscape suggests that this could result in overly-hard true-up obligations for CLECs. Telscape gives the example that if it had a very small number of customers in areas that are now considered to be Zone 2 or Zone 3, it could result in over $1 million in true-up liability if the loops that Telscape leased from Verizon were re-rated at the new prices on a zone-by-zone basis. Telscape states that this unfair result would not occur if true-up amounts were calculated using the same two geographic pricing zones that applied when the loops were leased. Therefore, Telscape proposes to calculate the true-up using the same two geographic pricing zones that applied when the loops were leased.

On June 28, 2006, Telscape filed an errata to its true-up proposal saying that Telscape made a serious error in calculating its potential true-up obligation stemming from adoption of new UNE prices for Verizon. Telscape failed to account for the refunding of usage-based local switching charges and excess loop charges. With the correction of this error, it appears that Telscape would have no true-up obligation, and would actually be entitled to a net refund from Verizon. Notwithstanding that error, Telscape asserts that there continues to be a substantial mismatch between the new four-zone geographic deaveraging scheme and the old two-zone scheme and urges the Commission to adopt its proposal that the rates be trued-up against two zones.

We concur with Verizon that Telscape was aware that the prices were interim and subject to potential true-up. Moreover, Telscape made its business decisions based on the best information available at the time: UNE loop prices established by the Commission specifically for the purpose of enabling CLECs to offer competitive choices to end users in Verizon territory. CLECs were aware that prices were going to need to be trued-up, and they were also aware that the Federal Communications Commission's (FCC) rules required that loop prices were to be geographically deaveraged into at least three zones. Therefore, Telscape had no expectation that this Commission would adopt only two geographic zones and, indeed, we adopted prices for loops, which are deaveraged into four zones, which is in compliance with the FCC's dictate.

We reject Telscape's request. The true-up must be against the actual rates and rate structure adopted by the Commission. In any event, Telscape acknowledges that it has no true-up obligation even if its proposal is rejected. Instead, Telscape would be entitled to a refund from Verizon. No other party raised this issue, or any other issues relating to Verizon's calculation of the true-up amounts. Also, Verizon presents convincing evidence that it needed to adjust the adopted rate for tandem switching in order to true-up the rates, and no party objected to Verizon's modification of tandem switching rates. In conclusion, we find that the true-up calculations submitted by Verizon should be approved.

¹ While Covad did not dispute the true-up amounts, it expressed concern about Verizon's implementation of all rates established in D.06-03-025 and requests the Commission's assistance in assuring that Verizon timely and simultaneously implement all rates established in that order. Covad indicates that the Commission's decision actually reduced certain DS1 loop rates and also revised zones, so that many of Covad's loops are now moved to Zone 1. Those rates were effective March 15, 2006, but as of the date of Covad's filing (July 28, 2006), Verizon had not implemented the rates established by the Commission. Several months have passed since Covad made its filing, and since we have heard nothing further about this issue, we assume that Verizon has updated its rates to reflect those we adopted in D.06-03-025.