IV. 2002 Nominations
A. DS-3 Loops
In A.02-03-002, XO requests reexamination of DS-3 loops. XO contends the DS-3 loop is vital to the ability of CLCs to compete against Pacific for midsize and large business customers in California, and it presents a comparison of DS-3 loop prices in the 13 states in which Pacific's parent company, SBC Communications, Inc. (SBC) operates. This comparison shows that Pacific's DS-3 UNE Loop prices are higher than the DS-3 loop price in every other SBC state.3 XO further notes that the Commission did not review or set DS-3 loop prices in the OANAD proceeding and Pacific has never demonstrated that its current DS-3 loop prices are cost-based or TELRIC compliant. XO points to statements by Pacific that DS-3 loop facilities are not point-to-point but instead a ring configuration and therefore do not have geographic cost sensitivities. In XO's view, these statements by Pacific support XO's claim that DS-3 rates in California should not remain higher than DS-3 rates in other SBC states. Finally, XO argues that correct pricing of DS-3 loops is vital to competition in California because there is frequently no substitute for Pacific's "last mile" facilities to customer premises and proper TELRIC pricing for the DS-3 loop is critical to ensuring that all competitors have an opportunity to compete.
Pacific states in response that rate comparisons with other states do not show what it costs Pacific to provide a DS-3 loop or whether these costs have changed. Joint Applicants point out that parties have previously requested review of DS-3 loops and these requests were denied in a July 11, 2001 ruling in the 2001 UNE Reexamination. Nevertheless, Joint Applicants express support for reconsideration of this ruling and a review of the DS-3 loop, as long as it is reviewed in addition to Transport and Signaling UNEs nominated by Joint Applicants.
We are persuaded to include an examination of the cost of DS-3 loops in the 2001/2002 UNE Reexamination primarily because the costs of this UNE were never examined in the prior OANAD proceeding using a forward-looking, TELRIC analysis. XO has made a compelling argument that the DS-3 loop is vital to competition because there is frequently no other means for a competitor to gain access to a customer's premises to provide high bandwidth services except through the use of a DS-3 loop. No party disputed this claim. In addition, XO suggests through its rate comparison with other SBC states that there would be value in conducting a forward-looking review of DS-3 loop costs for Pacific. Pacific's own statements that the DS-3 loop is not subject to geographic variation lend support to XO's argument that California DS-3 loop prices may be exorbitant. (See PHC Transcript, 6/3/02, at 253) While a comparison of DS-3 loop prices in California and other SBC states does not prove that California DS-3 loop costs have declined, we find it troubling that California prices appear out of line with other states, particularly given Pacific's statements that there is little geographic sensitivity in the cost of providing a DS-3 loop.
Therefore, we will reverse our statements in a prior ruling in this proceeding that we would not expand the scope of the case to include UNEs that were not considered in earlier cost studies. We find that given the competitive importance of the DS-3 loop and the fact that a cost-based rate for this UNE has never been set, now is the appropriate time to examine DS-3 loop costs. The parties also assure us that review of the DS-3 loop can be accomplished within the same time frame for our final review of loops and switching. Therefore, enlarging the scope to include the DS-3 loop will not unduly lengthen this case.
B. DS-3 Entrance Facility Without Equipment
In A.02-02-031, Telephone Connection requests review of the DS-3 entrance facility without equipment.4 According to Telephone Connection, this UNE can be reviewed along with a review of DS-3 loops, with little or no additional effort. Telephone Connection contends that the actual costs of the DS-3 entrance facility without equipment are more than 20% below the cost upon which the Commission based its pricing for this UNE in D.99-11-050, and that the pricing of this UNE is a critical factor in allowing smaller CLCs to successfully compete in the local market.
Telephone Connection claims that the price for this UNE was never set properly in prior Commission orders because Pacific neglected to submit costs for this UNE in its 1997 TELRIC cost study. To price this UNE, the Commission had to back out costs of equipment from the TELRIC for a DS-3 entrance facility with equipment, even though the Commission had already determined that the costs shown in the study for the DS-3 entrance facility with equipment were "excessive." (See D.99-11-050, mimeo, at 105.) Telephone Connection compares DS-3 loop prices in California and Texas, noting that DS-3 loops in California are priced between 176% and 90% above Texas urban and rural DS-3 loops respectively. Telephone Connection also notes Pacific's assertions that DS-3 facilities are not subject to geographic cost sensitivities. Based on this rationale, Telephone Connection states that the current price of the DS-3 entrance facility without equipment greatly exceeds its cost and should be reviewed.
Pacific expressed no opinion on whether this UNE should be reviewed although it did note that comparisons to other states do not indicate whether Pacific's costs have changed.
We will accept this UNE for review because we have agreed to review the forward looking cost of DS-3 loops, and it makes sense to review the cost of the DS-3 entrance facility without equipment in conjunction with a review of DS-3 loops. The Commission noted in D.99-11-050 that the underlying costs used to set a price for this UNE were not reliable. Further, the parties agree that if we are already looking at DS-3 loops, there is little additional work to review this UNE. (See PHC Transcript. at 217.) Since we have already decided to review the DS-3 loop, it is appropriate to review the DS-3 entrance facility without equipment at the same time.
C. Transport, Signaling, and Shared and Common Costs
In A.02-02-032, Joint Applicants request review of unbundled Interoffice Transmission Facilities (transport) and Signaling Networks and Call-Related Databases (signaling) because they contend it is virtually certain that the costs of both transport and signaling have decreased by 20% or more from those adopted in the prior OANAD. To support this claim, Joint Applicants state that Pacific's transport and signaling prices rely significantly on Pacific's cost studies for loops and switching because a majority of the costs for shared transport were taken from Pacific's end-office and tandem switching cost studies. Joint Applicants also contend that many of the same factors that convinced the Commission to review loop and switching costs in the 2001 Reexamination apply to transport and signaling as well. For example, Joint Applicants contend that transport and signaling costs have declined due to economies of scale and density that have lowered unit investments and unit expenses, decreases in key components such as Synchronous Optical Network (SONET) electronic equipment, and other technological changes. Joint Applicants maintain that transport and signaling should be reviewed together because they share the same fiber cables, support structure, and electronics systems at the end-office and because the Commission adopted the same UNE prices for dedicated transport and SS7 signaling links in D.99-11-050.
Joint Applicants also resurrect their request from the 2001 UNE Reexamination that the Commission reconsider the shared and common cost mark-up of 19% adopted in D.99-11-050. In their PHC statement, Joint Applicants essentially expand their nominations of transport and signaling to now request that Commission convert the 2002 UNE Reexamination into a general reexamination of all of Pacific's UNEs and the 19% shared and common cost mark-up.
TURN/ORA support the nomination of transport and signaling because all types of customers would benefit from reexamination of these UNEs. TURN/ORA also support review of the 19% mark-up, noting that California has one of the highest shared and common cost mark-ups in the country.
Pacific opposes review of transport and signaling for several reasons, including the argument that the nomination actually involves nine UNEs rather than two. Pacific also contends that several aspects of signaling are not UNEs, that costs for several of these elements were not examined in the original OANAD cost studies, and that Joint Applicants have not provided sufficient cost support for their contention that volume growth and increased scale economies have driven costs down.
We have serious concerns that expanding the proceeding to include transport and signaling might delay a decision on final prices for loops and switching. While there may be some commonality between review of loops and switching and review of transport and signaling, such as sharing of certain facilities and electronics, we are concerned that any gains from these commonalities will be more than outweighed by the time taken to resolve disputes over modeling, engineering, and myriad technical assumptions involving transport and signaling. Several parties have asked that we not consolidate the 2001 and 2002 UNE Reexaminations if delay were to result. To enlarge the scope of the original 2001 UNE Reexamination as Joint Applicants now request would certainly risk such a delay. We are concerned that any synergy between a study of loops and switching and a study of transport and signaling is exaggerated and is likely to be more than offset by disputes over network engineering and electronics. We therefore decline to review Transport and Signaling as nominated by Joint Applicants. For the same reasons, we decline Joint Applicants' invitation to review all the UNEs priced in D.99-11-050. Because we are concerned that adding transport and signaling might delay the conclusion of the 2001 UNE Reexamination, we will not entertain reviewing all of Pacific's UNEs at this time, particularly when we have yet to resolve which cost model will be used for the reexamination of loops and switching alone.
We are willing, however, to consider a more limited approach to the Joint Applicants' nomination. At the June 3, 2002 PHC, Pacific itself noted that there is some overlap between costs for DS-1 and DS-3 loops and Dedicated Transport. (PHC Transcript, 6/3/02, p. 215-216.) Given that we have already decided to review DS-1 and DS-3 loops in the 2001/2002 UNE Reexamination, we should take advantage of this generally acknowledged overlap and review the costs of Dedicated Transport at the same time that we review DS-1 and DS-3 loops. All parties admit that there are some synergies in review of these costs, and we do not believe this will cause undue delay. We also note that the Commission applied Dedicated Transport prices to SS7 Links in D.99-11-050. (D.99-11-050, mimeo at 107 and footnote 95.) If new prices are adopted for Dedicated Transport in this proceeding, we should uphold the determinations made in D.99-11-050 and apply any new prices for Dedicated Transport to SS7 Links here as well, unless parties can justify a reason for not doing so. Therefore, we will revise the scope of this case to include a review of costs and prices for Dedicated Transport (voice grade, DS-1 and DS-3) and SS7 Links (voice grade and DS-1).
With regard to the nomination of the 19% mark-up, we have twice ruled that this proceeding will not include a review of shared and common costs. Joint Applicants have presented no new arguments as to why we should ignore Ordering Paragraph 12 of D.99-11-050 that specifically prohibited review of shared and common costs in the limited UNE Reexamination proceeding. We note that a petition to modify this language in D.99-11-050 is pending before the Commission. If the Commission should decide to modify its prior limitation on review of shared and common costs, we can revise the scope of this proceeding accordingly.
D. EISCC
Pacific nominated the EISCC for review in A.02-02-034 based on its claims that the cost of providing the EISCC has increased by more than 20% over prior cost studies. The EISCC is the connection between Pacific's network and a CLC's collocation arrangement within a Pacific central office building. In a declaration attached to the motion, Pacific's witness Mr. Pearsons explains that the cost of the EISCC is heavily dependent upon utilization level or "fill factor." Mr. Pearsons states that recent data indicate that this utilization level was greatly overstated in the prior cost study, and therefore, a cost re-examination is justified.
Joint Applicants oppose the nomination of the EISCC, stating that it is not an unbundled network element but merely an interconnection facility that should be reconsidered in the collocation phase of the Commission's OANAD proceeding. Further, they argue that review of transport and signaling will have a greater impact on competition and that if prices for transport and signaling are properly set at cost based levels, utilization levels for the EISCC will likely rise to the levels modeled previously. Joint Applicants also argue that EISCC costs should be based on forward looking, long-run utilization levels rather than current data on utilization. XO opposes review of the EISCC for the same reasons.
We will deny Pacific's request to review the EISCC. We will not address Joint Applicants' assertions that the EISCC is not a UNE or that it should be reviewed in the collocation proceeding because we are not persuaded to review the cost of the EISCC. Pacific's justification for review of the EISCC is based solely on utilization levels, and we are unwilling to review it on this basis alone, particularly at a time when utilization may be depressed due to the need to revise other UNE costs. We agree that forward looking, long-run utilization should be employed to determine the cost of the EISCC and current utilization levels are not compelling evidence alone that forward-looking usage levels have changed. When we denied review of the EISCC a year ago, we stated that changes to loop and switching UNE costs could self-correct the low utilization levels found by Pacific. (See 6/14/01 Ruling, p. 22.) Interim prices for loops and switching have only recently gone into effect so it would be premature to assume current utilization is an accurate predictor of forward looking utilization levels. Therefore, we decline to review the EISCC at this time.
3 Exhibit A of A.02-02-003 indicates DS-3 Loop prices in California are 56% to 240% higher than prices in other SBC states.
4 Telephone Connection states that this UNE is essentially the same as a DS-3 loop, but without multiplexing/de-multiplexing equipment.
