4.2.1.1 Monthly Recurring Price for Access to the Loop

Joint Petitioners, Covad, and New Edge assert that the rate for monthly access must be zero. They argue that adoption of $5.85 per month for Pacific, and $3.00 per month for GTE, in the interim is invalid, and must be rejected or modified. We are not convinced.

The FCC said regarding TELRIC and the local loop:

"We note that the TELRIC methodology that the Commission [FCC] adopted in the Local Competition First Report and Order does not directly address this issue [of pricing the loop over which line sharing is provided]." (FCC Line Sharing Order, ¶ 138.)

The FCC said that a state setting interim rates subject to later true-up adjustment may require the ILEC to charge no more to CLCs than the amount of loop costs the ILEC allocated to asymmetric digital subscriber line (ADSL) services when the ILEC established its interstate retail rates. (FCC Line Sharing Order, ¶ 139.) The FCC said this is a straightforward and practical approach for establishing rates consistent with the general pro-competitive purpose underlying TELRIC, without violating the FCC's prohibition against considering embedded costs in the calculation of the forward looking economic cost of a UNE. (FCC Line Sharing Order, ¶ 139; 47 C.F.R 51.505(d)(1).)

Parties do not dispute that Pacific and GTE allocated no costs to their ADSL services for their interstate retail rates. We agree with the reasons stated in the FAR, however, that this does not result in the TELRIC for use of the high frequency portion of the loop being zero, or the reasonable rate being zero.

First, the FCC's language is permissive, not mandatory. The FCC says using the same rate the ILECs' allocated to ADSL services is a straightforward and practical approach. We agree, but think other factors must also be considered. This is particularly true given that the FCC acknowledges that the FCC-adopted TELRIC methodology does not directly address the issue of pricing a line-shared loop. (FCC Line Sharing Order, ¶ 138.)

Second, the ILECs' allocations were for the purpose of setting price floors, or minimal charges that may be charged. Rates may be higher, and the issue here is not only costs, but rates.

Third, the Act requires that UNE rates be just, reasonable and nondiscriminatory. (47 U.S.C. 251(c)(3).) The Act further requires that determinations by state commissions of just and reasonable UNE rates shall be based on cost (without reference to rate-of-return), be nondiscriminatory, and may include a reasonable profit. (47 U.S.C. 252(d)(1).) Costs allocated by ILECs for ADSL service were direct costs. Direct costs include cost of capital, and depreciation. TELRIC includes forward-looking cost of capital, and economic depreciation. (47 C.F.R. 51.505(b).) This Commission has considered and adopted short run and long run avoided costs, marginal costs, and incremental costs in many industries for decades. Based on our expertise and long experience in this area, we conclude that it is presumptively unreasonable to find a just, reasonable, and nondiscriminatory interim rate subject to later true-up adjustment for use of the high frequency portion of the loop to be zero, taking into account forward-looking cost of capital and economic depreciation, including a reasonable profit. That is, a reasonable calculation taking into account the forward-looking cost of capital, economic depreciation, and a reasonable profit, is unlikely to be zero. We will true-up and adjust rates if we find otherwise in the final portion of the line sharing phase based on a more complete record.

Fourth, total costs include not only direct costs (e.g., cost of capital and depreciation), but also include an allocation of joint and common costs. TELRIC includes a reasonable allocation of forward-looking common costs. (47 C.F.R. 51.505(a).) This Commission has considered and adopted allocations of joint and common costs, including forward-looking common costs, in many industries for decades. Based on our expertise and long experience in this area, we conclude that it is presumptively unreasonable to find a just, reasonable, and nondiscriminatory interim rate subject to later true-up adjustment for access to the high frequency portion of the loop to be zero, taking into account a reasonable allocation of joint and common costs in the interim, including forward-looking common costs. We will true-up and adjust rates if we find otherwise in the final portion of the line sharing phase based on a more complete record.

Fifth, ILECs are now devoting billions of dollars to initiate broadband service capable of meeting all of their customers' needs not only for voice, but also data, and other products and services. Even if ILECs allocated no direct costs in years past when they established price floors for their ADSL retail services, this does not necessarily make zero a correct TELRIC calculation today for data transport over the local loop in the year 2000 and beyond. That is, it is not unreasonable that TELRIC for the loop calculated today based on a system designed to serve all of a customer's needs, including data as well as voice, might include some costs (e.g., capital, profit, economic depreciation, common, joint) for services other than voice. In fact, if transport of data is the future of telecommunications, it may be that xDSL services on the high frequency portion of the local loop cause all future loop costs, and voice services cause none. We agree with the result of the interim arbitration that we need not decide this now. At the same time, it would be unreasonable to find for purposes of the interim arbitration that zero cost is appropriate for, and no contribution is reasonable to, the local loop related to any TELRIC cost element, including, but not limited to, cost of capital, profit, economic depreciation, joint costs, and common costs.

Simply because an ILEC allocated no direct cost in a prior FCC filing does not make it so, either then or now. ILECs may have had a self-interest in allocating no direct cost in the past. Whether or not the allocation was challenged then, the allocation was not necessarily correct or reasonable. Further, simply because the allocation was once made does not necessarily make it correct or reasonable now.

We conclude that TELRIC for access to, and use of, the high frequency portion of the loop, for the purpose of establishing an interim rate subject to later true-up, is not zero. A reasonable determination of cost of capital, economic depreciation, common costs, joint costs, and contribution to profit, is unlikely to ever be zero. At least for the interim, subject to further consideration and true-up adjustment in the final portion of the line sharing phase of this proceeding, there is nothing about the interim arbitration that leads us to reject the arbitrated results, using the tests provided in the Act and our Rules.

Joint Petitioners assert that adoption of any rate other than zero is discriminatory against CLCs since ILECs assess no charge to themselves. To the contrary, Pacific will assess ASI the same rate that it assesses all CLCs.¹³ All revenues from Pacific's line sharing with CLCs will be tracked in a memorandum account, pending determination of final rates. Moreover, GTE will book revenues from GTE's ILEC xDSL sales to GTE's customers into the memorandum account ordered by the FAR. We will determine the proper treatment of the balances in the memoranda accounts in the final portion of the line sharing phase, ensuring, among other things, nondiscriminatory treatment between ILECs and CLCs.