V. Discussion

A. Pricing Standard for DALIS

As a threshold matter, we address the dispute concerning the appropriate standard for the pricing of DALIS. The dispute focuses on whether DALIS should be priced based upon a TELRIC standard or whether the alternative "market based" standard proposed by SBC should be used, which corresponds to the rate for DA listing service that SBC affiliates charge in other jurisdictions.

In its UNE Remand Order, the FCC stated that the obligation of LECs to provide nondiscriminatory access to DALIS already existed in Section 251(b)(3) of the 1996 Act, although it declined to include DALIS in the definition of a UNE. The nondiscrimination standard prescribed by Section 251(b)(3) of the Telecommunications Act of 1996 requires that the DALIS prices charged by SBC must avoid granting preferential treatment in transactions with SBC's own operations in comparison to those of third party DA vendors. The prices that we set in today's order apply to SBC's DALIS tariff, but do not change whatever prices may otherwise apply in any existing interconnection agreement. To the extent differences thus may exist in DA prices that third party competitor's pay, such differences are not a source of anticompetitive pricing discrimination as identified in Section 251(b)(3). Thus, any differences between prices under the DALIS tariff and DA pricing provisions in currently effective interconnection agreements do not have a bearing upon the DALIS prices that we adopt herein in accordance with nondiscriminatory pricing standards.

We agree that a DALIS price based merely upon market forces could be nondiscriminatory if the market were truly competitive. SBC argues that the wholesale provisioning of DA listings in California is competitive, noting that companies such as WorldCom purchase SBC California's DA listings and sell them to other carriers on a wholesale basis. Although sources of directory listings are available to competitors apart from SBC, no showing has been made that such sources permit service equivalent in quality or comprehensiveness to DA listing services available through SBC. On the other hand, as we previously noted in D.01-09-054:

The FCC found that incumbents enjoy a competitive advantage with respect to the provision of directory assistance service as a result of their legacy as monopoly providers of local exchange service, and their "dominant position in the local exchange and exchange access markets."¹³

Given the dominant position that Pacific still continues to enjoy through its legacy as a former monopoly provider of local exchange service, as referenced in D.01-09-054, we find no basis to conclude that the market for the wholesale provision of DA listings has now become fully competitive. SBC provided no price data from alternative wholesale DA service providers within California nor any comparison of terms and conditions of such alternative services to demonstrate that California competitors' DA offerings equals that of SBC in quality. Instead, SBC merely applied prices that its affiliates charge outside of California, as approved by the FCC in the X2A Interconnection Agreements in SBC's 271 applications in the states of Missouri, Oklahoma, Kansas, Arkansas, and Texas. These interconnection agreements resulted from CLEC collaborative processes and were approved by each of the respective state commissions. We find no basis, however, to conclude that such prices from other jurisdictions represent competitive or nondiscriminatory prices for the provision of DALIS within the California market, or reasonably reflect the costs that SBC California incurs for acquiring and processing DA listings for its own use.

SBC may not use its market power to extract excessive DALIS prices at a level that would unfairly discriminate against competitors. In this respect, the Commission has previously stated in D.01-09-054:

Even if [Directory Assistance Listing] DAL is not a UNE, pricing of DAL is subject to strict nondiscrimination requirements under the Act and FCC orders. As the FCC recognized in its DAL Provisioning Order,¹⁴ this nondiscriminatory access requirement extends to pricing. In its order, the FCC recognized that ILECs continue to charge competing DA providers discriminatory and unreasonable rates for DAL. Although the FCC declined to support a specific pricing structure for DAL, it encouraged states to set their own rates consistent with the nondiscrimination and reasonable pricing requirements of Section 251(b)(3).¹⁵

Given that we find no basis to conclude that the California wholesale market for DALIS is fully competitive, we cannot simply assume the prices charged by SBC affiliates in other jurisdictions are a reasonable proxy of competitive market prices for DALIS in California. We find that the best proxy for nondiscriminatory pricing of DALIS is one that is based on forward-looking economic cost. As explained in the Declaration of Terry L. Murray,¹⁶ forward-looking economic cost establishes an economically meaningful benchmark for nondiscrimination that promotes fair competition, and prevents SBC from exerting market power from its legacy position as a former monopoly provider. Moreover, the best available measure of forward-looking economic cost is embodied in the TELRIC-based methodology which has been used for pricing UNEs.

We recognize that DALIS is not recognized as a UNE under FCC rules. Nonetheless, nothing in the FCC rules preclude this Commission from exercising discretion to apply a TELRIC-based pricing approach for purposes other than UNE pricing, where appropriate. In this instance, we conclude that TELRIC-based pricing offers the best available means to satisfy the "nondiscriminatory" pricing standard required for DALIS.

TELRIC, as an example of a forward-looking economic cost model, provides the best approximation of cost that SBC actually incurs for DA listings to provide services to its own retail customers. The same level of cost should be applied in making DALIS available to competitors. TELRIC-based prices approximate the prices that a firm operating in a competitive market might be able to charge. This principle has been articulated by the FCC in implementing TELRIC-based pricing for UNEs. The FCC stated:

Adopting a pricing methodology based on forward-looking economic costs replicates, to the extent possible, the conditions of a competitive market. In addition, a forward-looking cost methodology reduces the ability of an incumbent LEC to engage in anti-competitive behavior. . . Because a pricing methodology based on forward-looking costs simulates the conditions in a competitive marketplace, it allows the requesting carrier to produce efficiently and to compete effectively, which should drive retail prices to their competitive levels.¹⁷

TELRIC pricing provides for a return on SBC's economic costs, as reflected in the 21% shared-and-common-cost markup currently set by the Commission. (See D.02-09-042 at 2.) SBC's June 6 cost study will be used as the starting point for discussion purposes. Joint Parties have alleged many improprieties with the cost study. Before we address those allegations, we will note that the June 6 study can be used to develop a TSLRIC-based price and a TELRIC-based price. No superior standard other than TELRIC that has been offered by any party as a basis for setting DALIS prices. DALIS prices shall therefore be based upon a TELRIC standard to promote a competitive pricing approach and to guard against an unlevel playing field in which the incumbent enjoys an unfair advantage by virtue of obtaining most directory listings "for free" as an artifact of its legacy role of LEC provider to most Californians.

B. Wholesale Assumptions Underlying TELRIC

Having determined that DALIS pricing shall be based upon a TELRIC standard, we next address the issue of what underlying assumptions should be applied. Parties are in dispute as to the proper basis for computing the TELRIC related to DALIS. SBC uses an approach characterized as "wholesale-only" in computing TELRIC under which SBC's entire retail operation and all related outputs are assumed not to exist. As such, SBC assumes that it could only offer DALIS by first purchasing listings from whatever entity theoretically would replace SBC California as the provider of retail basic exchange service.

SBC does not simply deduct retail costs from its TELRIC analysis, but adds a new layer of costs that it assumes would be incurred by a theoretical "wholesale-only" company provisioning DA listings independently from SBC retail operations. By assuming no retail operations exist, SBC excludes any economies of scope and scale that are available in provisioning DALIS as a result of its retail business. SBC assumes this theoretical wholesale company would have no access to SBC retail DA listings from its end-users, but would have to acquire and maintain all DA data independently. As a result, SBC assumes significantly higher costs for the theoretical company than the actual costs computed by SBC representing its actual operations.

In support of this approach, SBC relies upon language from a federal district court decision¹⁸ stating that:

"[T]he TELRIC methodology calculates forward looking cost to ILECs of providing UNEs in a hypothetical competitive market in which the ILEC is a wholesaler, leasing UNEs to CLECs. The ILEC's retail operations (selling telephone services to consumers) are therefore irrelevant to the TELRIC pricing method, and must be excluded."

As noted by Joint Parties, however, the court decision's discussion of TELRIC was presented in the context of how to calculate common costs and not how to calculate the direct costs of UNEs. By excluding retail-related cost items, such as marketing and billing, in the calculation of common costs, the TELRIC methodology, as discussed in the federal court decision, avoids double counting of common costs that are relevant on a wholesale basis. Yet, we find no sanction in the federal court decision to ignore the existence of the retail arm of SBC in determining the direct costs of DALIS. SBC's approach, however, does just that in applying its wholesale-only approach to direct DALIS costs. We find no basis in the court decision, or elsewhere, to ignore the economies of scale and scope of providing DALIS in determining the direct costs of TELRIC.

By creating a hypothetical construct of direct costs based on an assumption that SBC retail operations do not exist, SBC ignores economies of scale and scope associated with its actual combined operations. The ability to share the cost of obtaining directory listings between the retail local exchange operations and all other related lines of business constitutes one of the key economies of scope and scale enjoyed by SBC and its affiliates. These are the very sort of scale and scope economies that the FCC intended to capture in TELRIC-based pricing. As stated by the FCC in its First Report and Order, "[a]s a result of the availability to competitors of the incumbent LEC's unbundled elements at their economic cost, consumers will be able to reap the benefits of the incumbent LECs' economies of scale and scope, as well as the benefits of competition."¹⁹

By charging DALIS costs while ignoring the scale and scope economies enjoyed by SBC and its affiliates in the ability to share the cost of acquiring directory listings, SBC would deprive its competitors of nondiscriminatory pricing. This approach would artificially inflate TELRIC with costs that do not, in fact, exist. Therefore, we will not adopt SBC's proposed TELRIC estimate and instead will start with SBC's variable cost per listing.

C. Summary of Individual Cost Elements

Having determined that the TELRIC standard shall be applied by taking into account the scale and scope economies associated with Pacific's combined operations, we next consider the allegations of Joint Parties. Joint Parties raise the following six issues regarding SBC's cost study:

1. Data Acquisition Costs

2. Data Storage Costs

3. Labor Costs for Data Storage and Database Maintenance

4. Cost of Computer Processing Time

5. Number of DALIS Records Processed Per Month

6. Costs of Manually Processing Physical Tapes

The first issue, data acquisition costs, arises from the "wholesale-only" assumption which would require SBC to purchase listings for approximately $0.04 from other incumbents as well as its own database. This assumption is inconsistent with fact that SBC incurs no cost to obtain the listings of its own local exchange customers, and that CLECs currently give SBC listings data for their customers at no charge. It is unreasonable to adopt a data acquisition cost component for DALIS for nonexistent costs.

We agree that since DALIS customers can and do obtain directory assistance listings from incumbents other than SBC, loading such costs into the SBC DALIS results in a needless additional layer of costs. We shall therefore adopt the proposal of Joint Parties not to require DALIS customers to acquire non-SBC listings from SBC, but to make the acquisition of such listings optional.

As a practical matter, we can depart from SBC's TELRIC study and use its variable-cost estimate for update listings. This figure does not suffer from the problems cited above for data acquisition.

SBC computes data storage costs based on its subject matter experts' input concerning storage requirements of current SBC California listings, and included room for growth and other management, application development and upgrading, testing, and other support functions.

Joint Parties take issue with the SBC assument date storage costs, arguing that SBC does not take into account any economics of scale associated with a combined retail and wholesale operationk, nor economics of scope associated with offering multiple wholesale products. In this respect, SBC assumes costs would be incurred not only with a "wholesale only" operations, and also with a "DALIS only" operation.

Joint Parties also take issue with SBC's date storage costs to the extent they are predicated on the cost of mid-range computers. SBC admits this would not be the least cost choice for a company that uses computers for tasks other than processing DALIS data. SBC admits that even the mid-range computers assumed in its TELRIC study would not be require full time for DALIS processing, but could also support other operations with the spare capacity. WorldCom presented the Declaration of Jason Knapp addressing why SBC's data storage assumptions, such as its estimate of the computing resources required to process the assumed volume of records and related costs, are overstated. Joint Parties argue that even assuming a wholesale only operation, SBC would still necessarily use mainframe computers for other tasks, such as maintaining loop inventory, and that assigning 100% of the computer capacity to DALIS would thus be unrealistic. Terry Murray, in her Declaration, recommends that the Commission excluded all of the costs identified in SBC's study for "data storage."

Joint Parties have concerns with SBC's estimate of data storage costs. While we agree with the Joint Parties that SBC errs in assigning 100% of the costs to DALIS, we do not agree with the Joint Parties that the DALIS service should be assigned zero data storage costs.

SBC assumes that two dozen full-time employees would be required to manage computer processing and updating for a wholesale-only DALIS offering.

Joint Parties offered the Declaration of Jason Knapp, Software Applications Developer for MCI, to challenge SBC's assumptions regarding the number of employees required for data storage and maintenance as reflected in SBC's cost study. Knapp states that he is "suspicious" of the number of employees assumed for data storage and maintenance in view of his experience with SBC working only with one SBC employee on all DA-database related issues. Moreover, Knapp states that the SBC employee assumptions seem suspect because it reflects twice the number of employees to administer one-tenth the amount of data that MCI maintains. Joint Parties argue that the description of the personnel as being "on-call" suggests that they would not be fully occupied with day-to-day provision of DALIS.

Joint Parties argue that the lack of specificity in SBC's estimates of work effort makes it difficult for parties to verify or contest the reasonableness of the assumptions. Joint Parties recommend a 25% downward adjustment to SBC's estimated labor costs for customer support, which it represents as a conservative disallowance in relation to the amount implied by witness Knapp's testimony.

We find that the Joint Parties raise a legitimate concern with that the labor costs assumed by SBC. The lack of available data make it difficult to determine a precise labor allowance for DALIS purposes. As is the case with data storage costs, we find that the most reasonable number is one that rests between SBC's estimate and Joint Parties' adjustment.SBC reflects a cost of computer processing time valued at $500 per hour based on citation to an "AT&T Bill Collection" study completed in the late 1980s. The Joint Parties argue that the cost of computers, particularly as a function of processing time, has plunged since the 1980s. Joint Parties argue that the price that WorldCom pays its vendors should capture the drop in the costs of current computer equipment relative to SBC's $500 figure. Joint parties, based on the testimony of Ms. Murray, recommend replacing the $500 per-hour with a $100 per-hour cost assumption for computer processing time. WorldCom witness Caputo also provided testimony concerning comparable mainframe computer processing time that it can obtain from its own vendors.

Based on the declarations of Ms. Murray and Mr. Caputo, we agree that reliance on a cost source for computer processing time using 1980s technology results in an outdated cost assumption. As Caputo indicates, carriers and DA providers have largely automated both the initial load and daily update process in recent years as computer equipment and electronic storage have become cheaper and computer data bases have become more sophisticated. It is reasonable that these economies be reflected in the price of DALIS charged to competitors. Accordingly, we reject the $500 per hour figure offered by SBC on the basis that it reflects outdated technology. However, we do not accept the alternative computer processing cost of $100 per-hour proposed by Joint Parties because we are not convinced that this accurately estimates the cost of computer processing. Joint Parties did not carry the burden of proof to support the $100 per hour figure.

SBC developed its study assuming 3.6 million total DALIS update records per month based on the average total monthly listings provided to the seven "current" DALIS customers (excluding one customer that was no longer obtaining DALIS from SBC California at the time of the cost study) during three of the 10 months preceding the study. SBC excluded the other seven months of data on the basis that months were presumed to be "atypical" and may have represented initial loadings of the customers in question.

The Joint Parties argue that SBC incorporates inconsistent assumptions concerning the number of DALIS records that it provides each month. In the portion of its study showing costs based on its currently configured system, SBC indicates that about 514,000 DALIS records are provided per month to each DALIS customer. Yet, in the portion of its study based on the wholesale-only hypothetical operations, SBC assumes about 1.3 million updated records would be required to keep the DALIS product current.

An accurate figure for the number of DALIS records processed per month is important in determining the correct cost per listing. Because SBC divides an estimate of its total monthly recurring DALIS costs by an estimated total monthly update listings provided, variations in the latter figure will impact the per-listing cost. Yet, SBC has not provided a convincing rationale for its assumption of the number of monthly listings processed. As noted by the Joint Parties, SBC fails to explain why the seven "current" DALIS customers receive, on average, less than half of the total number of DALIS listings necessary to keep the database up to date. The Joint Parties argue that SBC may actually provide far more update listings than its average sample for non-randomly selected months shows. WorldCom witness Knapp explains that WorldCom processed an average of 1.3 million daily update listings each month from SBC.

Joint Parties question SBC's estimate of total listings per month on theoretical grounds, primarily by using Worldcom's number of updated listings per month. Joint Parties did not provide data from any other DALIS customer. Therefore, SBC's estimate, which is based upon three months of actual data in 2001, may indeed by accurate. A possible explanation is that Worldcom may draw more updated listings than the other DALIS customers. Again, we believe that a reasonable estimate of the number of monthly listings resides between the estimates of SBC and Joint Parties.

SBC includes the cost of manually processing physical tapes for each and every DALIS customer, yet DALIS customers can also obtain the data electronically an many choose to do so. Joint Parties request the Commission to require SBC to eliminate the tape preparation costs from its basic per-listing charge for DALIS. If SBC continues to offer physical tapes as an alternative delivery mechanism, then Joint Parties ask that it be reflected as a separate optional service option. Only those customers that choose the tape delivery option would pay the corresponding rate element.

We find the Joint Parties' recommendation for a separate pricing provision for physical tape processing to be reasonable and shall adopt it. Customers that choose to obtain DALIS data electronically should not have to pay for tape preparation costs that SBC will not incur on their behalf. We shall direct SBC to reflect physical tape delivery as an optional alternative to direct electronic delivery in its tariff. SBC presented no evidence to refute the cost of physical tape delivery as proposed in the Joint Parties' testimony. We shall therefore adopt the cost and price for physical tape delivery as set forth in the Joint Parties' recommendation.

D. Conclusion

Based upon the findings, conclusions, and analysis discussed above, we conclude that the DALIS pricing must be cost based. In our determination of a reasonable price for a DALIS update listing we consider the following as the most relevant factors: SBC's estimate of variable cost; the Joint Parties valid criticism of SBC's calculation of data acquisition costs, data storage costs, labor costs, and computer processing costs; and other costs to SBC's variable costs including shared and common costs. We specifically reject SBC's wholesale assumptions underlying TELRIC.

We find that after considering all the factors listed above that SBC's previously offered rate of $0.0059 per listing is coincidently in the range of reasonableness. Therefore, we will set the updated listing price at $0.0059. The costs for initial listings, or base files, were compiled on a per base file basis. However, SBC proposes to continue charging for those listings on a per listing basis. We will set the base file price at a nominal rate of $0.0010 per initial listing. Finally, we order that there be a separate charge for Optional Tape Delivery. As the Joint Parties have proposed, we set the price at $16.12 per tape.

As mentioned previously, the DALIS prices that have been in effect up until now have been permitted only on a provisional basis. As prescribed in D.98-01-022, SBC shall be required to perform a true up of past DALIS charges to adjust them in light of the DALIS charges we approve in the instant order. As part of its tariff Advice Letter filing, SBC shall be required to reflect the appropriate provision to reflect the true up in accordance with D.98-01-022.

¹⁵ See D.01-09-054 at 7, re: arbitrated Interconnection Agreement between Pacific Bell Telephone Company and MCImetro Access Transmission Services, L.L.C.