V. Scope of Consolidated 2001 and 2002 UNE Cost Reexamination

The scope for the 2001 UNE Reexamination was originally set forth in the initial scoping memo on July 14, 2001. Given today's consolidation of the 2001 Reexamination with the 2002 Reexamination, the scope of the consolidated case involves the items set forth on page 23 of the June 14, 2001 ruling and scoping memo as well as the following additional issue pertaining to the accepted nominations for the 2002 UNE Reexamination:

What is the best current estimate of the forward-looking economic cost of DS-3 loops, the DS-3 entrance facility without equipment,

Dedicated Transport, and SS7 Links, and what prices, or rates, should be set for these elements?

In addition, we will now address several other matters that impact the scope of the proceeding.

A. Changes to Key Inputs and Assumptions

Pacific requests that in order to keep this 2001/2002 UNE Reexamination limited in scope, certain inputs and assumptions from prior OANAD cost models and studies should not be considered in this phase. Specifically, Pacific asks that the Commission specify that cost filings in the UNE reexamination should not modify depreciation rates, utilization ("fill") factors, cost of money, and the copper-fiber cross-over point from levels adopted in prior OANAD decisions. Pacific contends that allowing parties to revisit these issues will expand the scope of this proceeding beyond the Commission's original intent. In the alternative, Pacific suggests that if these values are open to review, it will submit what it believes are correct values for these various inputs and assumptions.

In response, Joint Applicants state that due to changes in demand and technology, it would not be forward looking to freeze fill factors and the copper-fiber cross-over. Indeed, Joint Applicants point out that Pacific itself has indicated these factors may be wrong. According to Joint Applicants, it would be unwise for the Commission to freeze inputs that the parties both agree are wrong. The Department of Defense/Federal Executive Agencies (DOD/FEA)⁵ also contend that if parties are not allowed to adjust these four inputs in their cost filings, the Commission will not truly be examining the current forward-looking costs of Pacific's UNEs. TURN, ORA, and XO echoed these same arguments.

We will allow parties to submit cost filings that modify the four inputs and assumptions noted by Pacific, namely depreciation, cost of money, fill factor and the copper-fiber cross-over point. While we agree with Pacific that these values were complex and hard fought in prior OANAD proceedings, we also agree that it might be arbitrary to hold these particular inputs at prior levels while considering changes to other inputs, including placement of remote terminals. We find it makes sense to reconsider the cost of money given the time that has elapsed since we adopted a level in D.96-08-021,⁶ and we are willing to consider changes to depreciation lives, fill factors, and the copper-fiber cross-over point if a party can show a significant event in the industry or technology that justifies a change.

Our default presumption will be that these four items should remain at the levels adopted in our prior orders. A party suggesting a change will have the burden of proving why a change should be made. Any party presenting a cost filing should present it in such a way that these four items can easily be modified to the currently adopted levels.

B. Cost Model Criteria

In our July 11, 2001 ruling in the 2001 Reexamination, we required that Pacific's cost models and cost studies must allow parties to 1) reasonably understand how costs are derived; 2) generally replicate Pacific's calculations; and 3) propose changes in inputs and assumptions in order to modify the costs produced. The Commission applied these criteria in D.02-05-042 when evaluating Pacific's initial cost filing and the Joint Applicants' cost filing accompanying their motion for interim relief.

TURN/ORA ask for expansion of the second criterion to require replication of calculations contained in any cost filings, not just replication of Pacific's filings. Because we have expanded the scope of this case to allow the introduction of competing cost models, it makes sense to expand the application of the second criterion in this way and we note this below.

Joint Applicants suggest additional criteria regarding the availability of all underlying data and the capability to examine and modify critical assumptions and engineering principles in cost models and studies. We think these are generally reasonable requirements for any cost filings and will include them in our criteria with a few minor edits.

In summary, we shall modify the criteria we set forth in our July 11, 2001 ruling to now state that any cost models or cost studies filed in this proceeding must allow parties to:

1) Reasonably understand how costs are derived by:

a. Providing access to all interested parties of the model and all underlying data, formulae, computations, software, engineering assumptions, and outputs; and

b. Allowing interested parties to examine and modify the critical assumptions and engineering principles.

2) Generally replicate the cost model or cost study calculations; and

3) Propose changes in inputs and assumptions in order to modify the costs produced.

C. Deaveraging Requirements

Joint Applicants request that we require cost filings to deaverage UNEs "in a manner that is consistent with any update of the Commission's calculation of universal service support funding via the CHCF-B." (Joint Applicants' PHC Statement, 5/29/02, p. 8-9.) It appears that Joint Applicants seek deaveraging of costs at the census block group level as opposed to the wire center level that was used to develop the three geographic deaveraging zones adopted in D.02-02-047.

We will not request or require deaveraging to the census block group in this proceeding because we do not believe this is the proper forum for addressing consistency between the geographic deaveraging methodology and universal service funding. Further, we believe this requirement would broaden and unduly delay this proceeding. Therefore, we will only require that cost filings are structured to allow deaveraging of unbundled loops to the wire center level, with the goal of adopting deaveraged loop rates for a limited number of geographic zones. In D.02-02-047, the Commission approved a settlement adopting three geographic zones for unbundled loop UNE rates. Parties may suggest a deviation from these three zones if they believe they can justify a different number of zones, but our default position will be to deaverage the same unbundled loops into the same three zones adopted in D.02-02-047, unless parties can justify changes to this approach.

D. ISDN/xDSL Capable Loops

At the June 3, 2002 PHC, counsel for Covad Communications Company inquired about the status of review of ISDN/xDSL capable loops. To address any confusion on whether the 2001 UNE reexamination includes ISDN/xDSL capable loops, we direct parties to Section VI of our ruling of September 28, 2001 where we stated that Pacific was not required to file additional cost studies for ISDN/xDSL loops, but any changes made to voice grade UNE loops in the 2001 UNE Reexamination proceeding would be applied in setting the price of ISDN/xDSL capable loops.

⁵ DOD/FEA intervened in the 2001 UNE Reexamination, filed initial testimony, and appeared at the June 3, 2002 PHC.

⁶ See D.96-08-021, Conclusion of Law 18.