4.2.1.3 True-Down

Covad claims that the purpose of the FCC Line Sharing Order is to allow rapid, competitive entry into the line sharing market by CLCs. Covad asserts that the FAR-adopted interim rates fail to accomplish this purpose. The FAR is wrongly based, according to Covad, on the assumption that no harm results from setting incorrect interim prices as long as they are adjusted later. Rather, Covad alleges that competitive entry will be adversely affected, if not precluded, by setting inflated interim rates. Covad says that interim rates should be set at zero, with CLCs paying a "true-up" once final prices are set, rather than CLCs' incurring the financial burden of paying inflated prices subject to a "true-down" adjustment later. We are not convinced.

The FCC Line Sharing Order seeks to create competition between CLCs and ILECs, but does not give preference to any competitor. The FAR reaches the same balance. For the reasons stated here and discussed in the FAR, adopted interim rates reach the proper balance, and are just, reasonable, and nondiscriminatory.

Covad claims competitive entry will be adversely affected, if not precluded, by the adopted interim rates. No CLC, however, presents any evidence in support. That is, there is no evidence regarding the price elasticity response of CLC customers to different prices CLCs might set for xDSL service, and the resulting effect on CLCs. There is no evidence on the profit margins of CLCs. There is no evidence of the effect on prices to xDSL customers, or CLC profits, of any range of interim rates that might be set. Other than Covad's assertion, there is no evidence that CLC entry will be hindered or precluded by the interim rates established here. On the other hand, the adopted interim rates are a substantial reduction from the cost of an unbundled loop. This is very likely to spur deployment of advanced services by all carriers.

New Edge contends that the adopted interim monthly rates of $5.85 and $3.00, rather than zero, for access to the high frequency portion of Pacific's and GTE's loops, respectively, result in a significant barrier to entry for CLCs not faced by ILECs. New Edge says ILECs will enjoy a windfall (since ILEC's costs are zero, not $5.85 and $3.00, according to New Edge), along with the opportunity to price-squeeze their competitors out of the market. To the contrary, the FAR orders ILECs to maintain a memorandum account tracking revenues from the monthly recurring rates for access to the high frequency portion of the loop, as well as revenues from any rates which contribute to joint and common costs. If later found just and reasonable, the entire balance will be returned to voice customer ratepayers of the ILECs. This means ILECs will neither enjoy a windfall, nor any opportunity to price-squeeze their competitors.

New Edge contends there are significant costs of entry for new CLCs, and time is of the essence. New Edge, however, neither presents any estimates of entry costs, nor any evidence regarding how a rate of $3.00 to $5.85 adversely affects entry costs or CLC xDSL sales. There is no credible evidence that the price elasticity effect in the range of prices ILECs and CLCs may set for xDSL services will have any material or significant effect on entry costs, or sales in the interim period. Nor is there any evidence that the interim rates established here create any significant barrier to entry.

Finally, Pacific asserts that in the later portion of this line sharing phase it will show Pacific's cost for loop conditioning is substantially more than the adopted interim rate of $18.55. Pacific also says it will show that Pacific incurs significant costs to provide CLCs with loop make-up information not included in the adopted interim OSS rate. Pacific further claims that the 50% reduction to semi-mechanized and manual order rates prevents Pacific from recovering its legitimate costs for processing these orders. GTE raises similar concerns with the level of interim rates. Thus, it is far from certain that the adopted interim rates will only result in a "true down." We affirm the rates adopted in the FAR, which satisfy requirements for these rates, and reach the proper balance for rates in the interim.