4. There Should be a Monthly Recurring Price for Use of the High Frequency Portion of the Loop

4.1. Parties' Positions

4.1.1. Rhythms' Links, Inc.'s (Rhythms) Position

Rhythms asserts that there should be no charge for the HFPL. According to Rhythms virtually all states except California have established a $0 price for the HFPL, having determined that a $0 price complies with pertinent FCC pricing rules and reflects sound economic and regulatory policy. A $0 price is both cost-based and nondiscriminatory. Furthermore, it reflects the pricing decision that Pacific and Verizon voluntarily made for their own Asymmetric Digital Subscriber Line (ADSL) services.

Pacific and Verizon incur no economic cost when the ILEC, or its affiliate, uses the HFPL to provide line-shared DSL services. In contrast, a positive price for the HFPL requires other competitors to incur a real and direct cost.

In the Line Sharing Order, the FCC set forth a simple prescription for establishing a price for line sharing:

We conclude that, in arbitrations and in setting interim prices, states may require that incumbent LECs charge no more to competitive LECs for access to shared local loops than the amount of loop costs the incumbent LEC allocated to ADSL services when it established its interstate retail rates for those services. This is a straightforward and practical approach for establishing rates consistent with the general pro-competitive purpose underlying the TELRIC principles. We find that establishing the TELRIC of the shared line in this manner does not violate the prohibition of section 51.505(d)(1) of our rules against considering embedded cost in the calculation of the forward looking economic cost of an unbundled network element.¹⁹

Rhythms points out that Pacific and Verizon in their federal ADSL cost studies did not assign any loop costs to their retail ADSL service. In its Federal filing Pacific stated that no additional loop cost was incurred by the provision of ADSL on an existing voice line, arguing that:

Several petitioners contend that Pacific must assign outside plant (local loop) costs to its ADSL service. But Commission rules impose no such requirement. FCC Rule 61.38 requires LECs to identify the direct cost to provide the proposed new service. Pacific proposes to transmit ADSL over loops already in service. Pacific already recovers the costs of those local loops under tariffs already approved by the Commission and state regulators. Loop costs therefore contribute nothing to the direct cost of ADSL service.²⁰

Verizon has made similar attestations. Verizon's predecessor GTE has stated:

[s]ince ADSL employs the existing loop for new applications, the costs of the loop are already recovered through existing rates.... ²¹

Rhythms asserts that Pacific and Verizon advocated a zero cost for use of the HFPL when there were no competitive issues involved. However, now that the ILECs are obligated to provide the HFPL unbundled network element (UNE) to other carriers, they have changed their position.

4.1.2 TURN's Position

TURN lists three reasons why there should be a monthly recurring charge for the HFPL: 1) consistency with the outcome in the Interim Line Sharing Phase, 2) requirements of TA96 § 254(k); and 3) economically correct outcome.

According to TURN, the Commission has already spoken on the threshold question of whether there should be a monthly recurring charge for the HFPL. In its Interim Opinion, affirming the results of the May 20, 2000 Final Arbitrator's Report (FAR), the Commission rejected the proposed zero monthly rate for the HFPL and stated that "...a zero monthly rate is not in the public interest, convenience, and necessity, and we reject a zero monthly rate in the interim." (Interim Opinion, D.00-09-074, September 21, 2000 at 11.) TURN recommends that the Commission reaffirm the outcome reached in its Interim Opinion.

TURN asserts that a monthly recurring charge for the HFPL UNE is necessary to satisfy the requirements of Section 254(k) of TA 96. Section 254(k) reads as follows:

SUBSIDY OF COMPETITIVE SERVICES PROHIBITED.-A telecommunications carrier may not use services that are not competitive to subsidize services that are subject to competition. The Commission, with respect to interstate services, and the States, with respect to intrastate services, shall establish any necessary cost allocation rules, accounting safeguards, and guidelines to ensure that services included in the definition of universal service bear no more than a reasonable share of the joint and common costs of facilities used to provide those services.

In a line sharing context, the loop is clearly a shared facility of both voice grade local exchange service and DSL service. And in a line-sharing context, the cost of a copper loop is a shared cost of both voice grade local exchange service (utilizing the low frequency portion of the loop), and Digital Subscriber Line (DSL) service (utilizing the high frequency portion of the loop). TURN states that the FAR in the Interim Line Sharing Phase, which was adopted by the Commission, cited the provisions of 254(k) as one justification for establishing a monthly recurring charge for the HFPL.

According to TURN, the second sentence in § 254(k) must be of concern in this proceeding. The loop is a shared cost of the HFPL UNE and local exchange service, which is the service comprising universal service. It is neither reasonable or lawful for local exchange service to bear the shared cost of the loop, while the HFPL UNE bears no portion of the shared cost. To avoid having universal service bear more than "a reasonable share of the joint and common costs of facilities used to provide both of these services," some portion of the shared costs must be allocated to the HFPL UNE.

TURN's third reason for adopting a monthly recurring charge for the HFPL UNE is that it is economically sound to do so. TURN, ORA, Pacific and Verizon all agree that the HFPL has value and a price should be set for its sale to other carriers. TURN's witness Roycroft presented the following economic rationale for a monthly recurring charge:

· A zero price for the HFPL UNE is not cost-based and would be unreasonable:

When a local loop is deployed, it is necessary for the provision of a wide variety of services. The costs of the loop are not avoidable when any individual service is discontinued. Arguments that the incremental cost of the HFPL UNE is zero ignore the shared nature of loop input. By definition, a zero price is a non-cost based price.

· A zero price, in effect, assigns all of the benefits of the economies of scope derived from the shared use of the loop facility to the HFPL UNE and none to the other services that are provisioned via the loop:

If the price for the HFPL is zero, the firms utilizing this resource would be awarded all of the benefits of the expanded scope economies, and the consumers of other services that share the local loop would enjoy none of the benefits.

· A zero price for the HFPL UNE is not sustainable in a competitive market:

Economies of scope drive down the average total costs of a firm. A zero price for a product or service provided by a multi-product firm that enjoys economies of scope-such as the HFPL UNE-would not be sustainable in the competitive market, nor is it likely that a firm in a competitive market would attempt to price one product at zero and deny the benefits of its scope economies to the customers of its other jointly produced services.

· A nonzero price is consistent with encouraging deployment of, and competition in, advanced services.

TURN also urges that the Commission's determination on the threshold issue of whether a monthly recurring charge should be assessed for the HFPL UNE should also apply to line sharing over fiber-fed loops in a next-generation digital loop carrier (NGDLC) network architecture, such as Pacific's Project Pronto.

4.1.3 ORA's Position

ORA concurs with the finding in the FAR in the Interim Line Sharing Phase that there cannot be an "allocation of zero common cost, zero cost of capital, and zero economic depreciation for the HFPL." (FAR at 65.) As ORA's witness Dr. Johnston stated in his testimony, it would be unreasonable for services that use the loop to escape contribution to collect the cost of the loop. New services over the loops should contribute their share of recovery to loop costs.

ORA asserts that the charge for use of the HFPL must be cost-based. As Johnston explained in his testimony, if the HFPL is not cost-based, it poses significant risks to ratepayers as new digital services replace analog. Thus, if the logic of the interim pricing is continued-that is, adding charges to the unbundled loop for new services such as HFPL instead of allocating use of the HFPL as a portion of the unbundled loop charge-the residual voice services-driven costs of the loop would remain unchanged and the new costs, ascribed to high-bandwidth services riding the copper, would be added to voice charges. Moreover, even as loop costs were going down for the ILEC, since digital services are more cost-effective than analog, the loop price would be going up.

4.1.4 Pacific's Position

Pacific's witness Dr. Fitzsimmons states, "The overriding principle for determining the portion of the shared loop cost to allocate for recovery by the price of the HFPL is that this allocation should allow for a competitive outcome to the greatest possible extent." (Fitzsimmons for Pacific, Opening Testimony at 16.) In a competitive market, a company would not give away a product, such as the HFPL, without expecting something in return. This principle is especially true when to do so would preclude the use of that asset by its owner, as is the case with the HFPL.

Pacific rebuts Rhythms' contention that the price for access to the HFPL should be zero, saying that Rhythms' price proposal would basically require Pacific to subsidize Rhythms' service offerings. According to Pacific, this subsidization is harmful to competition and is financially unfair to Pacific.

Rhythms refers to the following FCC statement to support its demand for a zero price for access to the HFPL:

States may require that incumbent LECs charge no more to competitive LECs for access to shared local loops than the amount of loop costs the incumbent LEC allocated to ADSL services when it established its interstate retail rates for those services.²²

Pacific points out that the FCC's language is permissive, not mandatory; it states what the Commission may do, not what it must do. According to Pacific, Rhythms misses the real point of the FCC's statement. The point the FCC was making is that whatever price is chosen for access to the HFPL, it should not place CLECs at a disadvantage compared to an ILEC's offering of DSL services. According to Pacific the crucial point is that Pacific will not be providing retail DSL service to end-users. Retail DSL service is provided by ASI, a separate affiliate. As applied to this case, the FCC's pricing suggestion means that the price CLECs pay for the HFPL should be the same as the price ASI pays for HFPL.

While Pacific's and TURN's economists agree that the HFPL and the low frequency portion of the loop are joint products, Rhythms characterizes the HFPL as an "enhancement" to the loop. Pacific's witness Dr. Fitzsimmons rebuts that characterization, saying "[f]or over 100 years, economists have recognized that multiple outputs created by the same process are joint products, and the costs of producing the outputs are joint costs." (Fitzsimmons for Pacific, Rebuttal Testimony at 6.) The high and low frequency ranges on a loop are produced in the same process of constructing that loop.

Pacific rebuts Rhythms argument that a positive price for the HFPL is a violation of the principles the Commission established in the New Regulatory Framework (NRF) proceeding. Rhythms attempts to argue that the HFPL is not an innovative new product that Pacific developed, but instead is a new profit center for Pacific. According to Pacific, Rhythms is mistaken. The HFPL is precisely the type of product to which NRF was intended to apply.

4.1.5 Verizon's Position

Verizon supports the Commission's determination in the interim phase of this proceeding that a zero price for the HFPL was not appropriate. The arbitrator considered and rejected the detailed testimony regarding why the price for the HFPL should be zero. The arguments for why the price should be zero that were rejected in the interim phase are essentially the same arguments presented in this permanent phase.

Verizon rebuts Rhythms' contention that a positive price provides an implicit subsidy toward other services. The basis of this argument is that such a price recovers no cost attributable to the HFPL. However, as Verizon contends, the price for the HFPL does recover real costs not directly related to other services. Moreover, the logical result of Rhythms' argument is that allowing CLECs to provide DSL service without contributing to common cost recovery would implicitly subsidize those DSL services.

Also, contrary to Rhythms' claims, Verizon asserts that a positive price does not unfairly discriminate against customers who subscribe to line-shared DSL services. All DSL providers would pay this price, including Verizon's separate data affiliate, Verizon Advanced Data Inc. (VADI). Rhythms is wrong when it argues that requiring VADI to pay its fair share of Verizon's common costs simply constitutes a shift of revenue from one pocket of the same corporate pants to another. Rhythms' analysis fails to recognize that all DSL providers face intense competition for high speed internet access customers from other sources, such as cable modem providers. Verizon is very aware that every charge imposed on VADI will increase VADI's costs to provide DSL services, affecting its ability to compete.

4.1.6 Discussion

As a starting point, we need to examine the language in the FCC's Line Sharing Order. Both Rhythms and Pacific have cited paragraph 139 from the order to support their position. A careful reading of that paragraph shows that Pacific's interpretation is correct. The FCC's language is permissive when it indicates that states "may" require that ILECs charge no more than the amount of loop costs allocated to ADSL services when the ILECs established their interstate retail rates for the service.

In addition, in paragraph 139, the FCC limits its statement to apply to "arbitrations and in setting interim prices." The FCC is silent on the setting of permanent HFPL prices, which is what we are doing in this proceeding. We conclude that the FCC's Line Sharing Order does not require the states, in setting permanent HFPL rates, to rely on the loop costs allocated to ADSL services in ILECs' interstate filings with the FCC. We find that we have the authority, under the FCC's rules, to set our HFPL rates at either a zero-rate or at a rate other than zero.

In their comments on the DD, the Coalition asserts that the FCC's holding that HFPL UNE rates should equal the ILEC's cost allocation for its ADSL retail rate is not merely permissive, as the DD indicates. According to the Coalition, the FCC later "clarified" its intent in the Access Charge Order.²³ We do not agree. In the Access Charge Order, the FCC is addressing an entirely different issue, and merely makes a brief, although seemingly inaccurate, reference back to its Line Sharing Order. We will rely on the clear language of the Line Sharing Order itself; paragraph 139 of the order was not subject to the D.C. Circuit's review in USTA.

Next we examine the issue of the need to be consistent with the outcomes in our ILS decision. In Ordering Paragraph 2(a) in that decision, we made it clear that the line sharing proceeding would remain open to determine "final prices, including the issues of double recovery of loop costs and disposition of balances in memoranda accounts." In other words, we anticipated that final prices could differ from those adopted on an interim basis, and we are not constrained by the outcomes we adopted in the interim phase of this proceeding. We have developed a more robust record in this proceeding than is generally possible in the expedited arbitration process, which will allow us to set permanent rates. While we may endorse some or all of our earlier rulings in D.00-09-074, we are not required to do so.

TURN has raised the issue of the need to satisfy the requirements of § 254(k) of TA96, and we concur with TURN's concerns relating to the second sentence of that section. Under the requirements of TA96, basic exchange service, which is clearly included in the definition of universal service, should bear "no more than a reasonable share of the joint and common costs of facilities used to provide those services." In a line sharing context, the loop is a joint cost because it is used to provide both voice and data services. These costs are distinct from the common costs recovered in the 19% mark-up applied to all UNEs by the Commission. Both voice service and the DSL UNE use the same piece of copper and must pay a reasonable share of joint costs of the loop, pursuant to Section 254(k). The HFPL does not fall within the definition of universal service, so if the voice portion of the loop is absorbing all of the joint and common costs of the facilities used to provide the HFPL, we are in violation of § 254(k).

We believe that the economically correct outcome is to have a positive price for access to the HFPL. An ILEC should not have to subsidize a competitor's operation by providing a valuable asset at no charge, and it is clear that the HFPL is indeed a valuable asset for a CLEC, since it enables the CLEC to offer broadband service.

Also, it does not make sense for a telecommunications company to give away the high-frequency spectrum UNE. The norm in a competitive market is that a product or service or productive asset that is in limited supply and has a positive demand should have a positive price. While some may question whether the DSL market is competitive at the present time, that is certainly the Commission's goal.

TURN urges that the Commission's determination on the threshold issue of whether a monthly recurring charge should be assessed for the HFPL UNE should also apply to line sharing over fiber-fed loops in a Next Generation Digital Loop Carrier (NGDLC) network architecture. We believe that it should. This determination is in accordance with an ALJ Ruling issued July 17, 2001, which includes the following statement:

The ALJ also indicated at the PHC [Prehearing Conference] that this first sub-phase would also include testimony regarding the policy question of whether there should be a monthly recurring price for fiber-fed DLC loops. At the same time, the ALJ further indicated that the pricing question of how much that price (if any) should be would be reserved to the second sub-phase (non-costing and NGDLC interim pricing phase). (ALJ Ruling at 4.)

This ruling makes it clear that the policy issue of whether there should be a charge associated with the HFPL UNE over fiber-fed loops is within the scope of this proceeding. Without prejudicing any future decisions we may make regarding unbundling of NGDLC loops, we confirm that there should be a positive price for the monthly recurring access to fiber-fed DLC loops. What that price should be will be determined in the upcoming phase of this proceeding.