3. The D.C. Circuit's USTA³ Decision Does Not Preclude this Commission from Setting Permanent Rates for the HFPL

3.1 Background

On May 24, 2002, after the Draft Decision (DD) in this proceeding was released for comments, the D.C. Circuit Court vacated and remanded the FCC's Line Sharing Order. In its review of the Line Sharing Order, the Court found that the FCC, in ordering unbundling of the HFPL to enable CLECs to provide DSL services, failed to consider the relevance of competition in broadband services coming from cable and, to a lesser extent, satellite.

The Court cited information from the FCC's series of § 706 reports⁴ that there is robust competition in the broadband market, and the market is dominated by cable modem service. As of the end of June 2001, cable companies had 54% of extant high-speed lines, almost double the 28% share of asymmetric DSL. In its pleadings before the Court, the FCC indicates that it focused solely on DSL because that is what "CLECs seek to offer when they request line sharing." The Court concludes that the FCC adopted the Line Sharing Order with indifference to petitioners' contentions about the state of competition in the market. Verizon filed a motion to suspend the comment period on the Draft Decision (DD) on May 24, 2002, the same day that the D.C. Circuit issued its opinion. Verizon stated that in light of that development, all parties to the docket needed an opportunity to carefully assess their respective positions. There was no time to conduct this assessment before comments were due on the DD. Therefore Verizon asked the Commission to suspend the current running of the comment period on the DD and not to put the DD on the Commission's meeting agenda until further notice. Verizon also filed a motion to shorten time to respond to May 28, 2002, the date set for filing comments on the DD. The assigned ALJ set a revised comment schedule on the DD, through an e-mail to parties on May 28, 2002. Opening comments were filed on June 7, 2002 and Reply Comments, on June 14, 2002. The ALJ allowed 30 pages for each filing to ensure that parties could adequately address both the DD and the D.C. Circuit's opinion.

3.2 Parties' Positions

Verizon and Pacific urge the Commission to hold in abeyance any further consideration of HFPL pricing. According to Pacific, when the D.C. Circuit's mandate issues, the FCC's rules classifying the HFPL as a UNE are null and void, and there will be no lawful basis for requiring Pacific to provide the HFPL to CLECs as a UNE, and no legal basis for setting a permanent price for the HFPL at this time.

Pacific asserts that since the FCC is charged in the first instance with implementing the provisions of §§ 251 and 252 of the Act, including the impairment requirement of § 251(d)(2), there is no state or federal law basis for the Commission to unbundle the HFPL or to price it as a UNE, until the FCC issues new unbundling rules in accordance with the dictates of USTA.

Pacific states that the Commission accepted as a given the FCC's classification of the HFPL as a UNE under the analysis performed by the FCC in its Line Sharing Order, and did not conduct any kind of impairment analysis of the HFPL.

Pacific points out that in light of USTA, FCC Chairman Michael Powell has indicated that the FCC will address the new issues raised by USTA in its reexamination of its unbundling rules and framework in the Triennial Review UNE Rulemaking. According to Pacific, when reexamining the issue of what network elements should be subject to unbundling, the FCC will have to adopt a more rigorous and narrow version of the impair test. The FCC will utilize that more rigorous version of the impair test to determine whether the HFPL should be unbundled at all.

Both Pacific and Verizon urge the Commission to preserve the status quo, pending FCC action to develop a revised "impair" test and issue new unbundling rules. In the interim, both ILECs indicate that they will meet their current line sharing obligations until the uncertainty surrounding the D.C. Circuit opinion is resolved.

The Coalition⁵ filed in opposition to Verizon's motion to suspend the comment period on the DD establishing permanent rates for the HFPL, and urged the Commission to issue an order setting permanent rates for the HFPL UNE. According to the Coalition, contrary to Verizon's assertion, the FCC's Line Sharing Order is not the sole source of Verizon's obligation to provide line sharing UNEs to CLECs. The Coalition points out that Verizon is under a continuing obligation until June 2003 under the merger conditions imposed by the FCC in the Bell Atlantic/GTE merger to provide line sharing to CLECs, until the date of any final and non-appealable judicial decision that determines that Bell Atlantic/GTE is not required to provide the line sharing UNE at cost-based rates. Moreover, the Coalition asserts that the FCC has stated unequivocally that "[w]hile we continue to evaluate the Court's opinion and consider all the Commission's options, in the meantime, the current state of affairs for access to network elements remains intact."⁶

The Coalition states that Verizon's Motion to Suspend is premature because the D.C. Circuit's Opinion cannot become effective until the D.C. Circuit issues its Mandate, which will not occur until after July 8, 2002. If parties to the Court's Judgment seek rehearing of the D.C. Circuit's Opinion, it would automatically stay the mandate until disposition of the petition or motion."⁷

The Coalition asserts that the Commission has authority under FCC Rule 51.317 and the California Public Utilities (PU) Code to require line sharing and to set an HFPL rate in California. This authority is independent of the FCC's Line Sharing Order. FCC Rule 51.317 and the UNE Remand Order authorize this Commission to unbundle the ILECs' networks beyond the FCC's minimum list of UNEs upon an independent finding that such unbundling meets the "necessary and impaired" standard.⁸

According to the Coalition, reviewing courts have repeatedly upheld this broad interpretation of the independent unbundling and ratemaking authority of state commissions. At the highest level, the U.S. Supreme Court reviewed and implicitly approved independent state authority pursuant to Rule 51.317. In AT&T Corp. v. Iowa Utilities Bd., the Supreme Court noted that "[I]f a requesting carrier wants access to additional elements, it may petition the state commission, which can make other elements available on a case-by-case basis."⁹

In addition, the Coalition points to P. U. Code § 709.7 which directs the Commission to "expeditiously examine" line sharing and, if appropriate, adopt unbundling requirements for ILECs, even if the FCC did not issue an order for line-shared loops.

The Coalition asserts that they demonstrated in their opening and reply briefs that CLECs are impaired without access to the line sharing UNE under all ten factors set forth in FCC Rule 51.317(b)(2)-(3). If, however, the Commission decides that it needs additional facts to enter an independent finding that CLECs are impaired without access to the HFPL UNE, the Commission should order a limited reopening of this proceeding for the purpose of admitting evidence on the expanded impair standard enunciated by the D.C. Circuit's Opinion.

The Coalition stresses the need for continuation of line sharing during any limited remand of the line sharing issues. CLECs currently provide DSL-based service on line-shared loops to more than one million customers in California. Disconnection of those circuits would be an economic and regulatory nightmare. The Coalition urges the Commission to use its general regulatory authority to require Pacific and Verizon to continue providing line sharing during the pendancy of the limited remand.

In addition, the Coalition indicates that other states have exercised authority to establish additional UNEs. The Minnesota PUC used its authority to order unbundling of line sharing before the FCC did.¹⁰ The Coalition also cited instances where the Texas PUC has exercised its authority to order unbundling of additional UNEs. The Texas PUC determined that local switching should be available to CLECs on an unbundled basis without restriction, as should operator service and directory assistance.¹¹

3.3 Discussion

First, we examine the status of the D.C. Circuit's Opinion. On July 8, 2002 the FCC and other parties sought rehearing of the panel's May 24, 2002 decision. Pursuant to Rule 41(d)(1) of the Federal Rules of Appellate Procedure, the filing of a timely petition for rehearing automatically stays the issuance of the court's mandate until the court disposes of the petition. As a result, the court's order does not take effect until the mandate issues, and no further stay is granted.

According to Pacific and Verizon, there is no legal justification for requiring the ILECs to provide the HFPL to CLECs as a UNE, and correspondingly no lawful basis for setting a permanent UNE-based price for the HFPL until the FCC issues a new "impair" test and new unbundling rules. According to the ILECs, those new FCC unbundling provisions will determine whether the ILECs can be legally required to unbundle the HFPL in the future. We find Pacific's assertions that the HFPL is no longer classified as a UNE or subject to UNE pricing rules to be premature, in light of the fact that the line sharing order is still in effect.

Until the court's order takes effect, the FCC's line sharing order is not vacated, and continues to apply as a matter of law. As a practical matter, however, SBC has committed to complying with the order until the FCC reconsiders its rules and issues a further order. For its part, Verizon is bound by the line sharing order pursuant to a merger agreement which requires Verizon to comply with all FCC orders until there is a final, non-appealable judicial determination. Accordingly, until the FCC issues a further order which becomes final, for the foreseeable future the incumbent LECs will continue to offer line sharing as a UNE. And since line sharing is a UNE, states have the authority to adjust the rates for that UNE. This is similar to the situation states encountered following the Eighth Circuit's opinion in Iowa Utilities Board v. FCC in which the Court concluded that the FCC lacks jurisdiction to issue its pricing rules, and vacated the FCC's pricing rules, and put the TELRIC methodology that states had followed in question. In the interim period until the U.S. Supreme Court reversed the Eighth Circuit,¹² the states continued to use the TELRIC methodology to price UNEs.

At issue here then is whether the CPUC may set a permanent rate for this UNE. We believe that it can, pursuant to AT&T Corp. v. Iowa Utils Board, 525 U.S. 366 (2000). In that case, the Supreme Court made clear that the Act maintains the states' authority to prescribe specific rates for UNEs so long as the rates comport with the federal pricing methodology. (525 U.S. at 384.)

States may also prescribe line sharing as a UNE pursuant to independent state authority. Under 47 C.F.R. § 51.317, the FCC expressly gave the states discretion to require an incumbent LEC in a given market to adopt additional UNEs to further the pro-competitive goals of the Act. Section 251(d)(3) of the Act itself expressly directs the FCC not to preclude the enforcement of any regulation, order, or policy of a state commission that supplements or complements federal rules.¹³ Congress further provided in sections 261(b) & (c) that states could impose requirements "necessary to further competition in the provision of telephone exchange service or exchange access" so long as the such requirements are not inconsistent with the Act or the FCC's regulations implementing it. See also MCI Telecommunications Corp. v. U.S. West Communications, 204 F.3d 1262, 1265 (9th Cir.), cert denied, 531 U.S. 1001 (2000) (citing section 261(c) for state authority to impose additional requirements consistent with the Act and that further competition); In re Petition of Verizon New England, 2002 Vt. LEXIS 12 (Vt. Supreme Court, Feb. 22, 2002) (same). In short, both the FCC and Congress envisioned that the states, pursuant to state law, could adopt regulations, orders and policies independent of the Act, so long as such regulations, orders, and policies are not inconsistent with or do not otherwise substantially prevent implementation of the requirements of the Act.

The Coalition appended comments filed by this Commission at the FCC in its proceeding to review unbundling obligations of ILECs, and we take official notice of those comments. This Commission is on record at the FCC that it should continue to require the ILEC to provide access to the HFPL to enable line sharing.¹⁴ We based our position, at least in part, on the following information about the broadband service market in California:

In addition, more California customers are served by Pacific Bell/SBC's DSL service than by competing cable modem services, and SBC's market share is growing. Currently, in California, there are 735,677 ADSL lines and 609,174 cable lines provided by both ILECs and CLECs. The vast majority of the ADSL lines are provided by Pacific Bell/SBC.¹⁵ And significantly, 11 million Californians, or one-third of all Californians, live in cities where DSL service is the only choice for broadband service.¹⁶

In the CPUC's Comments, we concluded that alternative technologies to an ILEC's broadband service are not ubiquitously available. Broadband cable service is limited to areas where the cable plant has been upgraded, but due to the high cost of upgrades, service is provided only in suburban residential communities with some spotty coverage in downtown areas.¹⁷

Based on our analysis of the broadband market in California, and consistent with USTA v. FCC, we can reasonably conclude that in California wholesale markets, line sharing is the only viable option for a CLEC who seeks to compete with the incumbent LEC in providing DSL service at retail. This is because, under current FCC regulations, a CLEC has no right of access to the high-speed transmission component of cable modem service, the functional equivalent of DSL service. Accordingly, we conclude that a CLEC cannot compete effectively in the broadband market unless the CLEC has access to line sharing. Therefore, line sharing should continue to be offered as a UNE.

In light of the above, given the absence of a mandate in USTA v. FCC, the continued effectiveness of sections 251(d)(3), 261(b) & (c), and 47 C.F.R. § 51.317, and the incumbent LECs' commitment to continue offering line sharing as a UNE until the FCC issues a further order, the CPUC may properly adjust line sharing rates, using the FCC's pricing methodology, at this time.¹⁸

In California, § 709.7 of the P.U. Code is a clear indication of state policy that directs the CPUC to promote line sharing. In 1999 when that section was added to the P.U. Code, the technical feasibility of line sharing was in question, unlike today when CLECs are providing broadband service to one million Californians in line sharing arrangements with the ILECs. In 1999, the FCC was still evaluating line sharing, and had not yet issued a final order. The Legislature ordered the Commission to participate in the FCC's proceeding, and indicated that if the FCC did not act before January 1, 2000:

...the Public Utilities Commission shall expeditiously examine the technical, operational, economic, and policy implications of interconnection as described in subdivision (b) and, if the Public Utilities Commission determines it to be appropriate, adopt rules to require incumbent local exchange carriers in this state to permit competitive local exchange carriers to provide high bandwidth data services over telephone lines with voice services provided by incumbent local exchange carriers. (P U Code § 709.7(c).)

Unless it is demonstrated that such policy is inconsistent with, or substantially prevents implementation of the requirements of the 1996 Act, the CPUC regulations promoting line sharing shall be enforced. In enacting § 709.7, the Legislature made it clear that CLECs should have access to line shared loops, and this Commission has an obligation to follow the legislative dictate to ensure that that HFPL is available to CLECs.

The ILECs would have us put this proceeding on hold, pending the outcome of the D.C. Circuit decision. We are not willing to do that. Parties and the Commission have invested significant time and effort in developing this record to enable us to adopt permanent prices for the HFPL, and to resolve some outstanding issues from the line sharing arbitration proceeding. Consistent with §§ 261(b) and (c) of the Act, and given the state's independent authority under Pub. Util. Code § 709.7 and that section's mandate, we have the authority to require line sharing and to set permanent rates for the line-sharing UNE. We exert that authority here and order that ILECs will continue to offer the line sharing UNE, and we adopt permanent prices for the HFPL in California.