X. Comments on Proposed Decision

In accordance with Pub. Util. Code Section 311(d) and Rule 77.2 of the Rules of Practice and Procedure, the Commission mailed the proposed decision of the ALJ in the proceeding. Comments were filed by ______________, and reply comments were filed by ______________.

Findings of Fact

1. In D.95-12-016, the Commission adopted a set of Consensus Costing Principles that it has applied in TSLRIC and TELRIC cost proceedings.

2. Pursuant to federal regulations, the Commission must comply with the FCC's TELRIC methodology when setting UNE rates for SBC-CA.

3. The Commission established cost modeling criteria for this proceeding in a June 2002 Scoping Memo.

4. The SBC-CA models contain inputs based on the characteristics of SBC-CA's current network operations.

5. The SBC-CA model as presented does not allow the Commission to isolate and determine SBC-CA model inputs related to loop length assumptions, loop cabling inputs, structure sharing assumptions, and labor crew and installation time assumptions.

6. LoopCAT uses embedded cabling characteristics rather than cable-sizing conventions.

7. In its First Report and Order, the FCC rejected embedded cost approaches as not compliant with TELRIC.

8. It is not possible to extract individual inputs from the factors in the SBC-CA models.

9. While LoopCAT factors can be traced to SBC-CA internal accounting data, it is not possible to match this data to publicly-available cost data, such as ARMIS, or other public sources of information.

10. It is not possible to compare installation crew sizes in LoopCAT's factors to actual SBC-CA information or input assumptions in HM 5.3.

11. It is not possible to test the sensitivity of LoopCAT to differing forward-looking assumptions or network configurations without the ability to modify individual inputs.

12. LoopCAT approximates loop lengths for each distribution area assuming that all loops in that distribution area are one-half the "design point," which is defined by SBC-CA's loop planning guidelines as the longest loop that might be built in the next twenty years for existing or potential customer locations.

13. Approximately 100,000 loops in LoopCAT are longer than 18,000 feet.

14. Loops exceeding 18,000 feet will not work properly without additional equipment such as load coils, which are not modeled in LoopCAT.

15. The record does not contain information on SBC-CA's actual loop lengths to modify the design point distance to exclude potential loops.

16. LoopCAT assumes separate drops for each residence and equipment to terminate six lines for every residence.

17. The SBC-CA models calculate costs for 2-wire, DS-1, and DS-3 loops separately.

18. SBC-CA's SICAT module calculates switching costs based on SBC's average purchases over a five-year period (1998 through 2002) under its multi-state contracts with switch vendors.

19. SBC's SPICE model assumes that a forward-looking interoffice network would mirror SBC-CA's existing interoffice network.

20. SPICE does not produce a total investment figure, but instead calculates "node investment."

21. SPICE does not allow the user to segment demand for different interoffice services such as voice and high capacity services.

22. SPICE estimates costs using factors that incorporate structure sharing data, pole and conduit investment, and EF&I costs that are based on SBC-CA's historical network data.

23. It is not possible to extract individual input information from the factors used in SICAT in order to understand the underlying input, compare it to other public information, or test the effect of different input assumptions.

24. It is not possible to identify the demand level that the SPICE model is designed to serve.

25. The Commission cannot modify demand assumptions and factor inputs in SBC-CA's SPICE model.

26. The SBC-CA models use ACFs to convert investments into annual costs and expenses.

27. The expense factors in the SBC-CA models do not allow the Commission to isolate or understand individual input assumptions, compare and verify inputs to public information, or test differing assumptions.

28. In this proceeding, SBC-CA uses a different cost methodology than the prior OANAD proceeding.

29. SBC-CA did not reconcile shared and common costs from the prior OANAD with the direct UNE costs calculated through the ACF cost studies proposed in this proceeding.

30. SBC-CA relied on total expenses and investments when calculating its per unit expense factors, which means that its ACFs include expenses related to unregulated activities.

31. SBC-CA's ACFs include expenses related to transactions between SBC-CA and its affiliates.

32. SBC-CA's ACFs include expenses for Project Pronto incurred in 2001.

33. The TBO accrual is a liability for future retiree medical costs already earned by current and former employees.

34. SBC removed some TBO expenses from its ACF study, but states that the proper amount should have been greater than what it actually removed.

35. The record does not contain sufficient information allowing the Commission to modify SBC-CA's expense assumptions to remove potential shared and common costs, unregulated expenses, affiliate transaction costs, retiree costs, and Project Pronto costs.

36. SBC-CA incorporated inflation into its cost models through inflation factors for capital investments and operating expenses.

37. As a result of D.89-10-031, the Commission's New Regulatory Framework incorporates inflation and productivity adjustments.

38. BLS data shows telephone utility worker productivity has exceeded inflation from 1996 through 2000.

39. SBC-CA did not provide information related to actual installation times or material costs, except for DLC costs.

40. Many of the inputs to HM 5.3 can be modified, such as fill factors, plant mix, structure sharing, switching investment assumptions, and some labor installation times and crew sizes.

41. HM 5.3 uses a customer location database created by a third-party vendor, TNS, as an input.

42. The Commission staff could not modify HM 5.3 inputs related to labor costs in all areas.

43. The HM 5.3 interoffice transport module underestimates demand.

44. In defining TELRIC, the FCC has rejected modeling based on "ultimate demand" in favor of a reasonable amount of excess capacity to accommodate short term growth.

45. Loop lengths based on right-angle connections are longer than straight line connections because the two sides of a right triangle, when added together, are longer than its hypotenuse.

46. Neither LoopCAT nor HM 5.3 follows existing distribution routes or places all loop facilities in today's locations.

47. TELRIC does not mandate the use of existing outside plant routes.

48. The Supreme Court has rejected basing UNE costs on an incumbent carrier's historical costs.

49. SBC-CA provided actual DLC installation cost information that was lower than the DLC installation costs used in LoopCAT.

50. HM 5.3 uses SBC-CA customer location information to identify SBC-CA's current customer locations and cluster them into distribution areas.

51. The clustering algorithm used as an input to HM 5.3 imposed three engineering restrictions relating to maximum copper length, maximum lines served, and maximum distance between two points in the cluster.

52. SBC-CA ran its own clustering scenario with a maximum line size of 1,800 lines, although Commission staff was unable to run its own clustering scenarios.

53. The Commission staff could not fully replicate the preprocessing steps used in either HM 5.3 or the SBC-CA models.

54. LoopCAT assumes that SBC-CA's current customer groupings are forward-looking and efficient and does not regroup customers into different distribution areas.

55. TELRIC allows the reconstruction of the network using existing wire centers, but does not require a cost model to use actual outside plant routes because they may not represent the most efficient, forward-looking plant design.

56. HM 5.3 made simplifying assumptions about customers with the same address where it did not know the square footage "footprint" of a building.

57. HM 5.3 assumes all distribution areas can accommodate a CEV up to 6,451 lines, which is larger than the CEV size SBC-CA normally installs.

58. The Commission could not run a scenario with a lower assumption regarding the maximum lines per distribution area.

59. Equipment to serve 7,200 pairs in a distribution area is readily available.

60. LoopCAT assumes that distribution areas serve a maximum of 200 to 600 households based on guidelines that have been in place for approximately 25 years.

61. HM 5.3 uses many inputs that are based on expert judgments and relies on vendor quotes that are not always documented, but many of these inputs can be modified.

62. The SBC-CA models rely on judgments of engineers and unnamed subject matter experts for many inputs, such as design point assumptions, ACFs, SICAT, and SPICE inputs.

63. SBC-CA did not provide an assessment of new input values for many of the HM 5.3 inputs it criticized.

64. In many cases, it is not possible to make direct comparisons between HM 5.3 and SBC-CA model inputs.

65. It was not possible to change all of the labor rate assumptions in HM 5.3 because they were often embedded with material cost and other input assumptions.

66. Neither SICAT nor HM 5.3 models the characteristics of individual switches.

67. HM 5.3 does not model an interoffice network that can accommodate all of SBC-CA's current interoffice high capacity demand.

68. TELRIC requires the modeling of forward-looking costs attributable to UNEs, taking as a given the incumbent LEC's provision of other elements.

69. HM 5.3 allows the user to adjust inputs to model varying levels of spare capacity.

70. Both HM 5.3 and the SBC-CA models adjust investments to current cost before calculating E/I ratios.

71. Verizon has higher investments per line than SBC-CA.

72. ORA/TURN compared HM 5.3, the SBC-CA models and SynMod using a uniform platform of loop-related and general input values from SynMod.

73. HM 5.3 produced higher costs than SynMod when run with SynMod's default inputs.

74. JA changed eight categories of inputs to HM 5.3, which resulted in a significantly higher loop rate.

75. HM 5.3 can be modified to use different input and engineering assumptions, spare capacity can be increased and expense assumptions can be modified, but it is not possible to modify HM 5.3 with regard to certain labor inputs, the customer clustering process, and demand and assumptions in the interoffice transport module.

76. When HM 5.3 and the SBC-CA models are run with similar inputs to match Commission precedent, federal requirements, and additional rationale developed herein, the resulting cost results converge, with some rates converging to almost the same value.

77. Both HM 5.3 and LoopCAT assume uniform distribution of customers throughout the distribution area.

78. Both HM 5.3 and LoopCAT include a mixture of real and hypothetical assumptions.

79. HM 5.3 uses actual customer locations, but clusters these locations into reconfigured, or hypothetical, groupings.

80. LoopCAT uses some existing plant routes, particularly for feeder, but designs loop lengths based on estimates of hypothetical future customer locations.

81. HM 5.3 uses the TNS clustering database as an input, while LoopCAT uses SBC-CA's preprocessed cable records as an input, and the Commission is not able to adjust either of these inputs.

82. In 1999, the FCC reviewed telecommunications carriers' asset retirement patterns, plans, and current technological developments and trends.

83. The asset lives adopted by the FCC do not match the financial asset lives proposed as modeling inputs by SBC-CA.

84. Since 1994, several mergers and acquisitions have impacted the telecommunications industry including Pacific Telesis' merger with SBC, and SBC's subsequent merger with Ameritech.

85. SBC-CA proposes a proxy group of seven companies that have changed substantially since 1998.

86. Both SBC-CA and JA use the CAPM and DCF methods to estimate cost of equity.

87. SBC-CA uses growth estimates from 1999 for its DCF analysis.

88. SBC-CA's interest rate adjustment to the market risk premium differs substantially from other measures of the market risk premium.

89. In prior cost of capital reviews, the Commission has adjusted cost of equity for interest rate changes after completing its CAPM review rather than incorporating interest rate changes into the CAPM model.

90. SBC-CA proposes a risk-free rate of 5.8% based on 1999 government bonds.

91. The CAPM computes a cost of equity for SBC-CA of 11.88% when it is run with a 7.5% market risk premium, a beta coefficient of .93, and a risk free rate of 4.9%.

92. The 12% cost of equity used to derive SBC-CA's cost of capital is slightly higher than the cost of equity adopted for California's energy utilities.

93. The Commission has generally excluded short-term debt when setting the cost of capital for utilities.

94. SBC-CA's proposed capital structure uses market values of equity and debt from 1998.

95. The firms in SBC-CA's proxy group have substantially increased their debt levels in recent years.

96. Ibbotson Associates has stated that a firm's target or optimal capital structure should be used in weighting the cost of equity and debt.

97. The capital structure proposed by JA, which mixes book and market values, comports with SBC-CA's target capital structure.

98. SBC-CA's engineering guidelines call for greater deployment of IDLC systems as the most economical method for providing telephone service.

99. IDLC loops can be unbundled at the DS-1 level, although operational issues involving, security and administrative concerns have yet to be fully resolved.

100. UDLC loops are required for circuits that cannot be provisioned over an IDLC system, such as ISDN, and burglar alarms.

101. At present, there are no stand-alone loops provisioned over IDLC anywhere in the U.S.

102. SBC-CA proposes a factor-based approach to estimate DLC installation costs in LoopCAT, based on the ratio of installation to material costs.

103. Cost data provided by SBC-CA shows actual DLC installation costs are lower than those estimated by the factors in LoopCAT.

104. SBC-CA incurs DLC installation costs above and beyond those included in its contract with Alcatel.

105. Actual DLC installation costs provided by SBC-CA are lower than the costs produced by DLC EF&I factors used in the SBC-CA models.

106. There is a wide disparity between the fill factors SBC-CA proposes in its models and those used in its TSLRIC studies for pricing flexibility.

107. HM 5.3 uses SBC-CA's temporary engineering guidelines to design cable sizes to provide 1.5 to 2 lines per living unit for residential customers.

108. A fill factor of 52% means that there is 48% spare capacity designed into the network.

109. SBC-CA engineering guidelines call for 2.25 lines per lot.

110. The FCC has criticized fill factors in the 40% range, and adopted fill factors in the 50-75% range.

111. The Commission adopted a fill factor higher than SBC-CA's actual fill in the prior OANAD decision.

112. The FCC has found that low density areas generally have lower fill levels, whereas LoopCAT models higher fill levels in low density areas.

113. In D.96-08-021, the Commission adopted a 76% fill factor for copper feeder rather than Pacific's (now SBC-CA) actual fill factor.

114. HM 5.3 models 4 fibers to each DLC site for redundancy, which results in a fiber fill rate of 79.6% that includes duplicate facilities. This approach is consistent with the approach used by the FCC in its universal service cost modeling.

115. SBC-CA proposes a 16.22% fiber feeder fill based on its actual utilization experience and the percentage of fiber strands that are actually in use.

116. SBC-CA's fiber feeder fill is less than half its copper distribution fill rate.

117. For the DLC common equipment fill factor, HM 5.3 incorporates a choice of DLC system sizes from 24 lines up to 8,064 lines. SBC-CA models four DLC sizes, which is less than the range of sizes SBC-CA actually deploys.

118. SBC-CA's DLC common equipment fill factor is based on its actual network operations and allows for ten years of spare capacity.

119. LoopCAT does not use the correct line capacity for a 6x16 CEV.

120. SBC-CA models a fill factor for the CEV structure and a fill factor for the DLC equipment housed in the CEV.

121. SBC-CA engineering guidelines stress minimization of spare DLC plug-in equipment.

122. Placement of DLC plug-in equipment involves travel time to the DLC site and the inability to manage DLC channels on a single pair basis.

123. HM 5.3 models an SAI equipment fill level based on 3.5 lines per living unit.

124. SBC-CA admits an error in developing the SAI fill factor in its model.

125. The SBC-CA models assume a linear relationship between maintenance costs and fill factors, so that maintenance costs rise at higher fill levels.

126. SBC-CA's analysis shows maintenance costs for copper distribution rise with fill levels above 50%.

127. The FCC's SynMod and SBC-CA's loop deployment guidelines assume sharing of structure by feeder and distribution cable.

128. HM 5.3 uses averages of ARMIS data from the last eleven years to develop plant mix assumptions.

129. The SBC-CA models assume forward-looking plant mix matches current plant mix.

130. Labor costs in HM 5.3 and the SBC-CA models involve inputs for hourly wage rates, crew sizes, and installation times.

131. Labor cost inputs in HM 5.3 involve expert judgment and vendor quotes.

132. In D.96-08-021, the Commission adopted an economic crossover point of 12,000 feet.

133. Loops longer than 12,000 feet are not consistently capable of supporting many services and loops longer than 18,000 feet present compatibility problems for UNEs.

134. SICAT switching investments are based on contracts with Lucent and Nortel, while HM 5.3 models investments based on Siemens switch prices.

135. At present, SBC-CA does not deploy Siemens switches in its California network.

136. The Siemens switch modeled in HM 5.3 with SONET based optical interface capabilities is not currently available in North America.

137. In D.98-12-016, the Commission rejected the assumption that 90% of lines could be purchased at the new line price.

138. Vertical feature hardware costs are included as part of the per-line cost for new switch lines.

139. SBC-CA's feature cost study does not incorporate memory and processor costs, or costs for feature software for usage above caps in the switching contracts.

140. SBC-CA data shows that average processor utilization is well below 100%.

141. SBC-CA's switch contracts charge a flat price per line for a given CCS, or usage per line, level.

142. Current statewide average CCS levels are well below the minimum CCS quantity provisioned under the switching contracts.

143. SBC-CA's switching costs per line do not change as long as usage does not rise above the maximum CCS levels in the switch contracts.

144. Other states that have adopted a flat, per port rate structure for switching have retained usage-sensitive rates for reciprocal compensation purposes.

145. The SBC-CA models use switch fill levels from the current network.

146. Digital fill levels on the current network are low because digital technology is newly deployed.

147. The SBC-CA models calculate DS-3 loop costs on a deaveraged basis.

148. In D.99-11-050, the Commission established a process for the annual review of UNE rates.

Conclusions of Law

1. Both HM 5.3 and the SBC-CA models do not allow the Commission sufficient flexibility to modify inputs and test various outcomes.

2. Both HM 5.3 and the SBC-CA models are flawed because the Commission is unable to modify key structural elements of either model.

3. The Commission can run both models with many common inputs and use the results to create a range within which we can adopt reasonable UNE rates for SBC-CA.

4. The Commission cannot rely on either the HM 5.3 or SBC-CA models alone because of the flaws in both models that we cannot correct.

5. HM inputs are at the low end of what we consider reasonable.

6. The results of HM 5.3 generally set the lower boundary for our rate zone.

7. The results of the SBC-CA models generally over-estimate forward-looking UNE costs and therefore set the upper boundary for our rate zone because we could not modify all inputs to the desired levels.

8. The fact that widely discrepant rates from the SBC-CA and HM 5.3 models converge when the models are run with common inputs provides support for basing rates on the midpoint of the range created by the two model runs.

9. The midpoint of the two model runs reasonably mitigates the flaws in both models.

10. The Commission should set UNE rates for SBC-CA based on the midpoint of the range created by running HM 5.3 and the SBC-CA models with our chosen inputs, as set forth in Appendix A.

11. SBC-CA has not proven that its existing cabling inventory, which reflects incremental network growth over many years, is optimal and forward-looking.

12. SBC-CA's models do not comply with TELRIC because they estimate the cost to rebuild the network SBC-CA has in place today, with some changes for forward-looking technology, but not necessarily with the lowest cost network configuration.

13. The fact that SBC-CA has operated under incentive regulation for over ten years does not prove that its models are forward-looking, particularly when individual modeling inputs, such as labor installation times, crew sizes, material prices and structure sharing, cannot be determined or modified to test differing assumptions.

14. Because LoopCAT relies on embedded cable characteristics that cannot be modified, the model contradicts FCC guidance that TELRIC should assume reconstruction of the least-cost network configuration.

15. It is not reasonable to rely on historical accounting information used in SBC-CA's factors without the ability to understand the assumptions underlying the cost information, compare it to public information, or test differing assumptions.

16. LoopCAT's use of the design point to calculate loop lengths results in a network configuration that is not least cost or forward-looking because: a) it is based on twenty year growth forecasts which exceed what we consider "reasonably foreseeable short term growth," as described by the FCC, b) some loop lengths exceed the 18,000 foot limit, and c) the Commission cannot modify SBC's preprocessor calculations of the design point to limit it to existing loop lengths.

17. LoopCAT inflates loop costs by not modeling multiple dwelling units, but instead assuming that each residence requires a separate drop and termination equipment for six lines.

18. The SBC-CA models overstate loop costs by not integrating cost studies for the various loop types and thereby ignoring that these services share much of the same network infrastructure.

19. Issues raised by parties regarding SBC-CA's SICAT model can be addressed by changing SICAT input assumptions.

20. SICAT is not irreparably flawed because it incorporates some non-California switching information based on SBC's multi-state switch vendor contracts.

21. The SPICE model is flawed because the Commission cannot determine the level of demand that it is designed to serve or the total investment it models, and cannot modify its demand assumptions to check the model's sensitivity.

22. The factors used throughout the SBC-CA models are flawed because they cannot be disaggregated to extract individual inputs, compare them to other public information, or modify them to test the effect of differing assumptions.

23. SBC-CA's ACFs may contain some portion of shared and common costs, because SBC-CA uses a different costing methodology than the prior OANAD and did not analyze whether ACFs it now proposes include expenses previously categorized as shared and common costs.

24. Based on the current record, the Commission cannot adjust SBC-CA's ACFs to remove potential double-counting of shared and common costs.

25. It is not reasonable for SBC-CA to include expenses for its unregulated businesses, such as inside wire maintenance and billing services, or for services SBC-CA performed on behalf of its affiliates when calculating expenses related to UNE operations.

26. While some Project Pronto expenses likely benefit UNE operations, it is not reasonable to allocate all Project Pronto expenses to UNE operations as SBC-CA has done.

27. SBC-CA has not met its burden of proving that all of its Project Pronto expenses are forward-looking and appropriately allocated to UNEs.

28. SBC-CA's ACFs should not include the TBO accrual because it is not a current operations cost.

29. It is not possible, given the current record, to isolate and remove expenses for non-regulated operations, affiliate transactions, Project Pronto, and the TBO from the SBC-CA models.

30. The SBC-CA models do not include adequate productivity adjustments simply by modeling equipment using the newest technology or using 2001 expense information.

31. The SBC-CA models should not include inflation adjustments without a corresponding productivity adjustment.

32. Many criticisms of HM 5.3 can be addressed by input modifications.

33. The clustering assumptions in HM 5.3 are no worse than the loop input assumptions in the SBC-CA models. Both HM 5.3 and LoopCAT involve aspects of loop modeling that the Commission was unable to modify to its satisfaction.

34. HM 5.3 accounts for a reasonable level of growth in network demand and sizes the network to provide appropriate service quality.

35. Even though HM 5.3's use of right-angle routing is not based on SBC-CA's actual outside plant routes, it realistically reflects that networks cannot always follow straight line routes and it most likely increases costs in the model by using a longer route than if customers were connected by straight lines.

36. The fact that SBC-CA actual costs may be higher than the costs produced by HM 5.3 does not prove that HM 5.3 is flawed.

37. HM 5.3 is more reasonable and forward looking than LoopCAT with regard to loop design because it is based on actual customer locations and designs plants based on the realities of where customers are grouped today.

38. HM 5.3 reasonably reconstructs SBC-CA's network within TELRIC guidelines and given existing wire center locations, even if the HM 5.3 network does not follow existing outside plant routes.

39. When HM 5.3 is re-run with clusters limited in size to 1800 lines per cluster, the results demonstrate the tradeoff between feeder and distribution costs.

40. It is reasonable for a forward-looking network configuration to size distribution areas larger than SBC-CA has sized them in the past.

41. It is unreasonable to assume that all distribution areas could accommodate a CEV to serve 6,451 lines.

42. The customer location and loop modeling assumptions in HM 5.3 are no more a "black box" than SBC-CA's preprocessor and input modeling assumptions related to the loop length design point.

43. It is not reasonable to abandon HM 5.3 simply because of disputes over "expert judgment" inputs when these inputs can be modified.

44. Because it is not possible to change all labor rate assumptions in HM 5.3, the model likely underestimates UNE costs and should be used as a lower boundary when setting UNE rates.

45. HM 5.3 and SICAT have taken a similar modeling approach that does not analyze the characteristics of individual switches.

46. Because we cannot identify the demand level that SPICE is designed to serve, we are unable to place SPICE demand input assumptions into the HM 5.3 interoffice model.

47. Because it is unclear whether HM 5.3 incorporates optical interface equipment, HM 5.3 might not allow the provisioning of the high capacity services SBC-CA provides today.

48. Because HM 5.3 appears insensitive to demand changes, it is unclear how it derives its SONET ring structure to set interoffice transport rates.

49. The HM 5.3 interoffice transport module is flawed because it underestimates demand, may not incorporate optical interface equipment, and is insensitive to demand changes.

50. HM 5.3's demand assumptions incorporate a reasonable level of growth, whereas LoopCAT unreasonably models loops to serve ultimate demand.

51. The use of E/I ratios in HM 5.3 is reasonable, if adjusted to remove comparisons to Verizon expense levels.

52. It is reasonable to use recent data from SBC-CA's ARMIS expense information to estimate forward-looking expenses with the HM 5.3 model.

53. SBC-CA has not shown that its current costs are forward-looking, and it would be unreasonable to reject HM 5.3 merely because its results are lower than SBC-CA current costs.

54. HM 5.3 is not structurally biased to produce low results because when it is run with other inputs, it produces higher cost results.

55. Both HM 5.3 and the SBC-CA models fail the Commission's cost modeling criteria, as set forth in the scoping memo of this proceeding because neither allows us to reasonably understand all inputs or modify inputs and assumptions in all areas.

56. The Commission should not rely solely on the results of either HM 5.3 or the SBC-CA models, but should use the results of both models to create a zone within which to adopt new UNE rates.

57. If all of the labor inputs in HM 5.3 could be modified, the results of HM 5.3 would be higher than the Commission's runs. Therefore, HM 5.3 generally provides a lower boundary for UNE ratesetting.

58. If loop configuration, structure sharing inputs, and the linkage of fill factors and expenses could be modified in the SBC-CA models, its results would be lower than the Commission's runs.

59. If expense levels in the SBC-CA models could be modified to remove expenses related to affiliates, unregulated ventures, the TBO, and Project Pronto, its results would be lower than the Commission's runs. Therefore, the SBC-CA Models generally provide a ceiling for UNE ratesetting.

60. Given the convergence of model results when both models are run with common inputs, it is reasonable to choose the midpoint of the range resulting from our runs of HM 5.3 and the SBC-CA models as the adopted rate for SBC-CA's UNEs.

61. It is unreasonable to rely on either the HM 5.3 clustering process or SBC-CA's preprocessed loop records because they contain inputs that we are unable to modify.

62. Asset lives for financial purposes are conservative and may overstate expenses to protect investors.

63. The asset lives proposed by SBC-CA do not match SBC-CA's actual experience, in part because of technologies such as DSL that use copper cable to provide broadband services.

64. The economic asset lives proposed by DOD/FEA based on an analysis by the FCC are reasonable to use as inputs for our TELRIC cost modeling.

65. The cost of capital originally adopted for SBC-CA in 1994 should be revised because financial conditions today are vastly different than they were at that time.

66. It is reasonable to use the proxy group of three companies proposed by JA to analyze the cost of equity, debt, and capital structure for our cost of capital analysis.

67. SBC-CA's growth estimates used in its DCF analysis are outdated and not reasonable, and its updated growth estimates in the "b x r approach" are excessive.

68. JA's three stage DCF analysis, based on more current growth rates than SBC-CA's analysis, is more reasonable than assuming all telecommunications firms will grow continuously at a faster rate than the whole economy.

69. SBC-CA's analysis using a market risk premium of 7.5% is reasonable.

70. SBC-CA's interest rate adjustment to the market risk premium is not reasonable because of updated assumptions regarding interest rate effects on equity premiums.

71. A market risk premium of 7.5%, based on Ibbotson Associates study of equity premiums from 1926 to 2001, is reasonable to use in our CAPM analysis.

72. It is more reasonable to base a risk-free rate on 30-year bonds, rather than 10-year bonds, to match the longer investment horizon in our market risk premium figure.

73. A risk free rate of 4.92% is more reasonable than SBC-CA's outdated risk free rate.

74. We should adopt SBC-CA's updated beta coefficient of .93 because it is based on recent data for the same proxy group that we use for our other cost of capital inputs.

75. It is reasonable to round the CAPM cost of equity from 11.88% to 12% to reflect that interest rates are at historic lows and to minimize the regulatory lag inherent to cost of capital adjustments.

76. When setting the cost of equity, we should give more weight to the CAPM results than the DCF model because DCF relies heavily on widely disparate growth forecasts for telecommunications firms.

77. A 12% cost of equity is reasonable because it is within the range of the DCF results obtained by SBC-CA and JA.

78. It is reasonable to determine a cost of capital by looking at the returns investors require in capital markets.

79. It is reasonable to assume that capital markets have already figured the relative risk of UNEs into the equity returns they require for SBC's stock.

80. SBC-CA's UNE business is subject to regulatory risk regarding the accuracy of UNE prices, but little competitive risk given the low level of facilities-based competition.

81. SBC-CA has not proven that UNEs are more risky than SBC-CA's other businesses.

82. SBC-CA's cost of capital should equate to, but not be greater than, the cost of capital for SBC as a whole.

83. The cost of equity for energy utilities is of little relevance to our analysis of SBC-CA's cost of capital because of differing capital structure, financial conditions, and regulatory policies.

84. The Commissions' cost of capital analysis should incorporate long-term debt costs that match UNE asset lives, and are less volatile than short-term debt costs.

85. It is reasonable to assume a long-term debt cost of 7.12% for our analysis.

86. A capital structure based on 50% market values and 50% book values is less sensitive to changes in market conditions than a capital structure based entirely on market values.

87. A capital structure is not forward-looking if it is based on market values from 1998.

88. It is reasonable to base a capital structure on a firm's target capital structure, which includes a mix of market and book values..

89. IDLC is the forward-looking technology choice for network design.

90. The Commission should assume a mix of 75% IDLC and 25% UDLC in its model runs because IDLC is the forward-looking technology. Some UDLC should be modeled to allow carriers to provision certain services such as ISDN and burglar alarms, and stand-alone loops to CLCs.

91. It is reasonable to incorporate DLC installation costs above and beyond those listed in the Alcatel contract in our TELRIC model runs.

92. SBC-CA could not reasonably explain how LoopCAT's DLC installation factor was derived.

93. SBC-CA has not shown that its DLC installation cost factor is reasonable and forward-looking because it is greater than actual cost information it provided.

94. The Commission's model runs should incorporate SBC-CA's actual DLC installation costs of $22,814 for RTs and $49,569 for CEVs, rather than LoopCAT's factors or the estimates proposed by JA.

95. Fill factors derived purely from current network operations are not automatically forward-looking.

96. Fill factors should reflect accurate projections of investment to accommodate growth and a reasonable estimate of demand.

97. A fill factor for copper distribution of 51.6% provides an adequate level of spare capacity to accommodate a reasonable projection of future demand, and is therefore, reasonable.

98. It is reasonable to use a higher fill factor for copper distribution than our prior OANAD decisions given FCC guidance in recent orders, and given trends in network usage that have reduced line growth projections.

99. SBC-CA has not reconciled its standard guidelines that call for more than 2 lines per household with current line growth estimates or its temporary guidelines calling for less than 2 lines per household.

100. The fact that SBC-CA's fill factors may remain constant over time does not prove that these fill levels are optimal.

101. SBC-CA has not met its burden of proving that its current distribution fill factor is a reasonable proxy for forward-looking utilization.

102. It is reasonable to continue to use the 76% copper feeder fill factor adopted in the prior OANAD proceeding.

103. A 79.6% fiber feeder fill rate is reasonable because it is similar to the approach used by the FCC in its modeling and it provides full redundancy and spare for growth.

104. A fiber feeder fill rate of 16.22% is not forward looking because it incorporates 80% spare capacity and it contradicts SBC-CA's statements that optimal fill rates for feeder plant are higher than for distribution.

105. SBC-CA's DLC equipment fill factor is not reasonable because it has understated the capacity of the 6 x 16 CEV, and it has double-counted DLC equipment fill factors by modeling a fill factor for both the CEV structure and the equipment in the structure.

106. A 70% fill factor for DLC common equipment is reasonable because it allows for 10 years of growth and acknowledges that CEV sizes may not perfectly match real world conditions.

107. SBC-CA's fill factor for DLC plug-in equipment is not adequately supported given its current guidelines to minimize spare equipment.

108. A DLC plug-in equipment fill factor of 75% is reasonable given inventory management and other operational constraints.

109. It is reasonable to use an SAI fill factor of 67.8% given the admitted errors in SBC-CA's fill factor.

110. HM 5.3 undersizes premise termination equipment by modeling only 2 pairs per residence, which leaves no room for a third line.

111. SBC-CA overestimates premise termination equipment by modeling equipment for 6 line terminations at each residence, which is greater than forward-looking estimations of lines per residence and ignores the economies of serving multiple dwelling units.

112. Neither HM 5.3 nor the SBC-CA models determine appropriate NID sizes based on multiple dwelling units and it is unclear how to modify the premise termination fill factors without modifying the underlying assumptions in each model.

113. SBC-CA's linkage of fill factors and maintenance expenses is not reasonable because it has only analyzed the effect of fill levels on one aspect of loop costs rather than total loop costs.

114. SBC-CA has not shown a linkage between higher fill levels and higher maintenance for feeder, DLC equipment, or switching equipment.

115. The linkage of fill factors and maintenance expenses is not reasonable because SBC-CA has not shown the linkage applies to anything other than copper cable with distribution fills above 50%.

116. The structure sharing percentages between utilities assumed in HM 5.3 are not reasonably supported.

117. The structure sharing percentages in the SBC-CA models are not reasonable because they cannot be identified.

118. It is reasonable to use the structure sharing percentages adopted by the FCC in its Synthesis Model.

119. It is reasonable to assume 55% sharing of feeder and distribution facilities given findings of the FCC on this subject and SBC-CA's own guidelines.

120. It is reasonable to adopt SBC-CA's plant mix assumptions for our model runs rather than assumptions based on ARMIS data dating back eleven years.

121. It is more reasonable to use actual SBC hourly wage rates than expert judgment, whenever possible.

122. HM 5.3 underestimates crew sizes in certain circumstances, such as cable placing and splicing.

123. The labor loading adjustments suggested by JA's witness Flappan are not reasonable because they are based on nationwide information for companies that are not reasonably similar to SBC-CA.

124. It is not clear whether loops longer than 12,000 feet can provide other elements as required by TELRIC.

125. The Commission should model a crossover point of 12,000 feet.

126. It is more reasonable to model Lucent and Nortel switches in SBC-CA's network because Siemens switches may not provide all the functions and capabilities provided by the switches currently deployed in SBC-CA's network.

127. JA propose unreasonable assumptions regarding the percentage of lines that can be purchased at the new line discount price.

128. It is reasonable to assume that 40% of lines are purchased at the new line price and 60% of lines at the growth line price to recognize that a carrier would not be able to buy all the switch investment it needs at the new line price currently applicable to SBC-CA.

129. SBC-CA has not adequately supported its "other replacement costs" that it models with switching investments. These should be removed from Commission model runs because they appear to relate to SBC-CA's embedded switching network.

130. It is reasonable to include upgrade costs in our switching investment modeling.

131. Feature hardware and software costs that are incurred through per line, per switch, or buyout charges should be modeled in the monthly port price.

132. SBC-CA's feature cost study double counts feature hardware costs that are already included in the per line switching price.

133. Costs to upgrade the switch memory and processor are included in switch upgrade costs as part of the per line switching investment.

134. It is unreasonable to assume SBC-CA will exceed the capacity limitations in its switch vendor contracts because switches are provisioned based on a 10-year forecast of capacity requirements and average utilization is below the minimum switch capacity that is provisioned under the contracts.

135. UNE Switch pricing should be a flat price per line because SBC-CA switching costs do not change as long as usage does not rise above the maximum CCS level in the switching contract.

136. A flat per port price for switching usage is consistent with TELRIC guidance that rate structures should reflect the manner in which costs are incurred.

137. The flat per port switching rates adopted in this order should not apply in the context of reciprocal compensation between carriers because changes to reciprocal compensation rate structures are beyond the scope of this proceeding. The usage sensitive rates shown in Appendix C can be used for reciprocal compensation purposes.

138. It is not reasonable for SBC-CA to apply a low digital fill factor when it contends its customer base is declining.

139. SBC-CA has not shown why analog and digital switch fill rates should differ so drastically.

140. Switching equipment is highly modular and can be expanded in less than a year, so it is reasonable to use higher fill rates for switching equipment.

141. It is reasonable to apply an 82% fill factor to analog and digital lines in the models.

142. It is reasonable to adopt deaveraged DS-3 loop rates because the models can calculate costs to support this result.

143. The Commission should suspend further reexamination of UNE prices until February 2007 to provide wholesale pricing stability in the local exchange market.

ORDER

IT IS ORDERED that:

1. The recurring prices for unbundled network elements (UNEs) offered by Pacific Bell Telephone Company d/b/a SBC California (SBC-CA) that are set forth in Appendices A and C to this decision satisfy the requirements of Section 251(c)(2), 251(c)(3), and 252(d)(1) of the Telecommunications Act of 1996 and are hereby adopted.

2. Pursuant to Commission Resolution ALJ-181 (adopted October 5, 2000), SBC-CA shall prepare amendments to all interconnection agreements between itself and other carriers. Such amendments shall substitute the recurring UNE prices set forth in Appendices A and C for the UNE prices set forth in such interconnection agreements. Such amendments shall be filed with the Commission's Telecommunications Division, pursuant to the advice letter process set forth in Rules 6.1 and 6.2 of Resolution ALJ-181, within 30 days after the effective date of this order. The amendments do not require a signature of the carriers involved as long as the amendments are limited to substituting the UNE rates adopted in today's order. Unless protested, such amendments shall become effective 30 days after filing. The flat per port switching rates adopted in this order shall not apply in the context of reciprocal compensation between carriers. The rates shown in Appendix C shall be used for reciprocal compensation purposes.

3. The UNE prices adopted in this order shall be effective on the date this order is effective. SBC-CA shall make all billing adjustments necessary to ensure that this effective date is accurately reflected in bills applicable to these UNEs. SBC-CA shall have 60 days from the date of this order to complete the billing program changes necessary to reflect in bills the recurring prices for UNEs adopted in this order. Upon completion of said billing program changes, SBC-CA shall notify the Director of the Telecommunications Division in writing that all of the necessary billing program changes have been completed.

4. Within 90 days of the effective date of this order, SBC-CA shall calculate any billing adjustments owed to or by interconnecting carriers based on the implementation of the rates in this order and ensure these adjustments are reflected in its bills for recurring UNE prices.

5. The annual nomination procedure set forth in Ordering Paragraph 11 of Decision (D.) 99-11-050 is suspended until 2007. SBC-CA or carriers with which SBC-CA has interconnection agreements, may file nominations of UNEs for review, as described in D.99-11-050, between February 1 and March 1, 2007.

6. Application (A.) 01-02-024, A.02-02-035, A.02-02-031, A.02-02-032, A.02-02-034, and A.02-03-003 are closed.

This order is effective today.

Dated _____________________, at San Francisco, California.

Appendix D

Glossary of Acronyms

ACF Annual cost factor

ARMIS Automated Reporting Management Information System

BLS Bureau of Labor Statistics (U.S. Dept. of Labor)

CAPM Capital asset pricing model

CCPs Consensus Costing Principles

CCS Centi-call second

CEV Controlled environmental vault

CLC Competitive local exchange carrier

DA Distribution area

DCF Discounted cash flow

DLC Digital loop carrier

DSL Digital subscriber line

EF&I Engineer, furnish and install

FCC Federal Communications Commission

HM 5.3 HAI Model, Version 5.3

IDLC Integrated digital loop carrier

ILEC Incumbent local exchange carrier

IOF Interoffice facilities

LEIS Loop engineering information system database

LoopCat Loop Cost Analysis Tool

MDU Multiple dwelling unit

MST minimum spanning tree

NID Network interface device

NPRM Notice of Proposed Rulemaking

OANAD Commission Rulemaking 94-04-003 regarding "Open Access and Network Architecture Development"

POTS Plain old telephone service

RBOC regional bell operating company

ROE return on equity

RT Remote terminal

SAI Serving area interface

SICAT Switching Cost Analysis Tool

SONET Synchronous optical network

SPICE SBC's Program for Interoffice and Circuit Equipment

SS7 Signaling System 7

SynMod FCC's Synthesis Model

TBO Transitional benefit obligation

TELRIC Total element long run incremental cost methodology

TSLRIC Total service long run incremental cost methodology

TNS Taylor Nelson Sofres

TRO FCC's Triennial Review Order

UDLC Universal digital loop carrier

UNE Unbundled network element

UNE-P Unbundled network element platform

(END OF APPENDIX D)

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