III. UNE Nominations

Having decided that we will not defer this year's UNE cost re-examination, we must choose which UNEs to address. We will discuss each of the UNEs nominated in turn.

A. Unbundled Switching

In A.01-02-024, AT&T and WorldCom (Joint Submitters) jointly request that the Commission reexamine the recurring costs of unbundled switching, both local and tandem. Joint Submitters contend that unbundled switching is a critical element deserving of review because its current price exceeds its forward-looking economic cost. This excessive price inhibits competitors from offering their own local exchange services within California. Joint Submitters include declarations that they claim demonstrate that the cost of unbundled switching has decreased by more than 20% compared to the cost data on which the Commission based current unbundled switching prices for Pacific. Joint Submitters point out that when the Commission adopted final UNE prices for unbundled switching in 1999, these prices were already five years old because they were based on cost studies that had first been prepared in 1995 using 1994 base year data. They further note that the Commission itself observed in D.99-11-050 the rapid decline of some of these costs, particularly switching.

As evidence to support their application, Joint Submitters provide declarations by Ms. Catherine Pitts and Ms. Terry Murray which state that switching investment costs, switch expenses, and "support investments" (such as general purpose computers) have all declined dramatically relative to the costs adopted in D.98-02-106. Declines in switch investments are attributed to (1) the steady decline in computer prices over the past decade, (2) the increase in Pacific's purchasing power as a result of mergers by Pacific Telesis with SBC Communications and SBC with Ameritech, and (3) the use of GR-303 or "Next Generation Digital Loop Carrier" (NGDLC) technology.

The declaration of Ms. Pitts indicates that the price for adding growth lines⁴ has fallen dramatically since 1996 and she cites testimony filed by carriers in other states supporting this view. Ms. Pitts states that this decrease alone could affect per line switch investment by 50%. She further states that switch investments are declining on a per minute of use basis based on a 40% growth in minutes of use from 1994 to 1999 which has led to a 28% decline in switching investment. Ms. Pitts also claims that additional cost reductions can be achieved if GR 303 or NGDLC technology is factored into the switching cost studies.

With regard to switching expenses, Joint Submitters claim that expenses which make up half or more of the cost of various UNEs have also declined by more than 20% since the 1994 base year data used in the prior cost studies. Ms. Murray shows that Pacific's 1999 booked expenses were 23% lower (on an expense per line basis) and 32% lower (on an expense per minute basis) than its 1994 booked expenses. Ms. Murray explains that the number of switches Pacific deploys has slightly decreased since 1994 while the number of lines served by those switches has increased 20% and the number of dialed minutes has grown 40%. She also cites an SBC claim that it anticipates switching-related cost savings from the deployment of packet switching technologies and from reductions in the total number of switches in the SBC network which will also lower maintenance expense. Further, Ms. Murray states that additional expense savings for switch maintenance and repair will result from Pacific's deployment of "best practices" with its merger partner, SBC Communications, Inc. Finally, Ms. Murray claims support investments have also declined by over 15% based on an analysis of general purpose computer investment accounts.

Several respondents to the ALJ's ruling support the review of switching including ORA, Z-Tel, CALTEL, Telephone Connection, and TURN. ORA argues that proper costing and pricing of switching is critically important to competition and end-user rates. ORA requests that the Commission grant interim relief and reduce the prices for switches by 20% until the re-examination is completed.

Z-Tel explains it is a CLC offering bundled services to residential customers through purchase of the combination of UNEs known as the "UNE Platform" or UNE-P. Z-Tel contends that the pricing of the UNE-P is crucial to its mass-market entry strategy and therefore, it recommends review of unbundled local switching and certain aspects of the shared transport network UNE. Z-Tel compares California's rates for these UNEs to the rates in other SBC states, such as Texas, and claims that aside from loop rates, UNE rates should be consistent across a BOC's footprint because forward looking costs of providing switching should not vary from state to state. Z-Tel claims that switching rates in California should be lower than rates in Texas because higher line density in California should lead to lower switching rates. Z-Tel also asks the Commission to review the terms and conditions under which Pacific offers shared transport to competitors because it claims that Pacific has placed artificial restrictions on competitive local carriers' (CLCs) use of shared transport UNEs which violate the nondiscrimination provisions of TA 96.

Pacific opposes the proposed review of unbundled switching. First, Pacific claims that Joint Submitters have gone beyond the two UNE limit established in D.99-11-050 by instead nominating two enormous UNE categories. According to Pacific, switching related UNEs incorporate over 51 separate elements and the unbundled loop UNEs include another seven elements. Pacific argues that given the Commission's workload and resource constraints, Joint Submitters' request is improper. Second, Pacific argues that Joint Submitters have not met the burden of demonstrating a 20% cost decline for switching related UNEs because they have merely claimed that a number of factors, when taken together, should produce a decrease of 20% in per-line switching investments. Pacific contends that this presumption is faulty. Further, Pacific claims that Applicants have ignored the "life cycle" approach for determining switch investment that the Commission adopted in D.98-02-106 by focussing solely on a single, deeply discounted switch price. Pacific rebuts the assertion that its mergers with SBC and Ameritech have led to large increases in purchasing power, and it also denies the claim that the GR303 technology will reduce the cost of Pacific's switch ports.

In response to the ALJ's March ruling, Joint Submitters note that in D.99-11-050, the Commission found unbundled loops, switch ports, and white pages listing to be "monopoly building blocks" (MBBs) since they are essential to the provision of local exchange service and since alternatives to them are only beginning to become available in the market. They claim that Pacific's current prices for two of these three MBBs are inflated relative to cost, which has driven competitors out of California. They provide a comparison of UNE prices and Pacific's retail rates to demonstrate what they consider a price squeeze on competitors. Joint Submitters also rebut Pacific's claim that the switching category involves 51 separate UNEs. In contrast, Joint Submitters argue that the FCC has defined unbundled switching as one category of UNE that includes line-side facilities, trunk-side facilities, and all features, functions, and capabilities of the switch. Joint Submitters contend the switching UNE has 51 "rate elements" which are essentially rate design features of the switching UNE and are not themselves separate UNEs. They further note that in other states, such as Illinois, switching is considered a single UNE and it would be ludicrous to arbitrarily label switching a single UNE in one state and 51 UNEs in California solely because of rate design differences.