X. Comments on Proposed Decision

In accordance with Pub. Util. Code § 311(d) and Rule 77.1 of the Rules of Practice and Procedure, the Commission mailed the proposed decision of the ALJ in the proceeding. Comments were filed by AT&T, California Association of Competitive Telecommunications Companies (CALTEL), MCI/WorldCom, Mpower Communications Corporation (Mpower), Navigator Telecommunications LLC (Navigator), ORA/TURN, SBC-CA, Vycera Communications Inc. (Vycera), and jointly by XO and Allegiance Telecom of California, Inc. (Allegiance).97 Reply comments were filed by AT&T, CWA, DOD/FEA, MCI/WorldCom, Mpower, ORA/TURN, SBC-CA, and XO/Allegiance.

The comments cover myriad technical details and suggest corrections to the Commission's UNE modeling. Detailed technical comments are addressed in the section of the order pertinent to the specific topic. In Section V.D, we list the specific corrections made to the Commission's model runs of both HM 5.3 and the SBC-CA models in response to comments. Where comments merely reargued earlier positions, they are not discussed.

In this section, we discuss the more general comments on a few major themes that are repeated throughout the parties' various comments. These themes are as follows:


· Selecting rates based on the midpoint of HM 5.3 and the SBC-CA models is arbitrary and capricious


· The Commission should use only HM 5.3 to set UNE rates


· The Commission should use only the SBC-CA models to set rates


· Corrections to the SBC-CA models were ignored


· The true-up of interim rates to permanent rates is too large and causes competitive harm


· The new rates create a price squeeze

We address these key comment issues briefly below. The revised proposed decision addressing these comments was mailed to the parties to allow them an additional opportunity to comment, based on the substantial changes from the original proposed decision.

Several parties dispute the Commission's initial plan to adopt UNE rates derived from the midpoint of the results of both models. MCI/WorldCom claims this approach is arbitrary and capricious because the record does not support rejection of HM 5.3 and fails to articulate a connection between the cost models' flaws and the decision to weight them on a 50/50 basis. MCI/WorldCom suggests the Commission use the HM 5.3 model entirely or give it more weight.

XO, Navigator, CALTEL, and Mpower join MCI/WorldCom in suggesting that the Commission should use HM 5.3 alone rather than adopt rates based on the midpoint. They suggest that using the midpoint is not justified if one model produces results that are too high. ORA/TURN maintain the Commission errs in setting rates using the LoopCAT model because it does not comply with TELRIC and the flaws in HM 5.3 pale in comparison to the fatal defects inherent in LoopCAT. The main criticism of HM 5.3 relates to a perceived flaw with the clustering process, which was demonstrated to have a negligible impact. HM 5.3 is TELRIC compliant and should be used, rather than the SBC-CA models, to set UNE rates.

SBC responds that the Commission's 50/50 weighting of HM 5.3 and the SBC-CA models is lawful. According to SBC-CA, the Commission can split the difference between competing options if the decision is rationally articulated and supported by record evidence. SBC-CA disputes comments that the flaws in the SBC-CA models are more serious than those found in HM 5.3

The comments alone do not convince us to abandon the approach of adopting rates based on the midpoint of both models. We agree with SBC-CA that adopting the midpoint of two models is a supportable outcome if rationally articulated and supported by the record. MCI/WorldCom, XO and Navigator imply the Proposed Decision applied no judgment to the models before "splitting the baby." In our view, the initial Proposed Decision exercised a great deal of judgment in reviewing the models' flaws, correcting them where possible, and selecting numerous modeling inputs.

Nevertheless, our own attempts to work with the SBC-CA models and correct the errors we made in the Proposed Decision's modeling runs now convince us that the SBC-CA models are not only flawed, but also fail our modeling criteria to such a significant extent that we cannot reasonably rely on them to set UNE rates. In other words, we would have maintained the approach of adopting the midpoint of model results, despite the comments, except for the fact that additional flaws and modeling difficulties arose with the SBC-CA models as we corrected our earlier runs. Our decision to abandon use of the SBC-CA models is discussed more fully in Section V.D.

MCI/WorldCom argues that the Proposed Decision errs in rejecting HM 5.3 because the record does not support the finding that HM 5.3 understates forward-looking costs. MCI/WorldCom states that the three primary flaws identified in HM 5.3 -- related to transport modeling, the customer location database, and labor rates - do not lead to understated rates as the PD suggests. Rather, MCI/WorldCom maintains that transport modeling and customer location issues would only lower rates if corrected. Further, MCI/WorldCom suggests labor costs can be modified through an outboard adjustment that it includes in its comments.

We disagree with MCI/WorldCom's comments that the record proves HM 5.3 does not underestimate rates. We have modified the decision to indicate that it is unclear of the effect on rates in HM 5.3 if the transport and customer location flaws we identified could be corrected. Further, we clarified the decision regarding the labor rates that we could not change in HM 5.3. Even though we do not adopt the outboard labor adjustments suggested by MCI/WorldCom, we analyzed the effect of speculative labor changes and found they were minimal and most likely counterbalanced by conservative inputs in other areas of the model.

ORA/TURN, Navigator, CALTEL and XO also urge the Commission to adopt HM 5.3 rather than adopting the midpoint of the two models. With regard to customer location flaws in HM 5.3, ORA/TURN states that "a perceived flaw that has been demonstrated to have a negligible impact on costs should not be sufficient grounds to reject the model." (ORA/TURN, 6/1/04, p. 6.) In the final decision, we have set rates based solely on HM 5.3, but not because the comments above urged us to do so. Rather, we select HM 5.3 because after correcting what we agree are errors in the Proposed Decision, we find the SBC-CA models fail our modeling criteria to such a significant extent that we cannot reasonably rely on them.

SBC-CA presents several arguments in its comments that its models should be used exclusively to set UNE rates rather than HM 5.3. First, SBC-CA argues that the Proposed Decision relies on a legally impermissible interpretation of TELRIC that prohibits consideration of SBC-CA's actual costs, requires a hypothetical network that is instantly built, and prohibits modeling based on ultimate demand. We find that SBC-CA, for the most part, reiterates its earlier arguments on these topics and we will not repeat our discussion here. Nevertheless, we note that the modeling runs supporting the UNE rates adopted in this decision do use SBC-CA's actual costs or suggested modeling inputs in several areas. Further, we have described how SBC-CA's models, for the most part, merely calculate the costs to build the network it has in place today rather than the costs of a reconstructed network.

Second, SBC-CA argues that the Proposed Decision erroneously concluded that the SBC-CA models could not be modified in several areas, including expenses and cost factors, the design point, and cabling inventories. We address these suggested corrections in the body of the decision. In short, we found that most of the changes suggested by SBC-CA could not reasonably be made, such as to the design point and cabling inventory. In the few areas where we agreed with SBC-CA and attempted to make changes to cost factors and expenses in the SBC-CA models, the result was our finding the SBC-CA models fail our modeling criteria to such a significant extent that we cannot reasonably rely on them.

Third, SBC-CA comments that customer location and clustering problems in HM 5.3 outweigh problems in the SBC-CA models. We disagree, particularly given our experience as described in Section V.D when we attempted to modify the SBC-CA models. SBC-CA again reargues its objections to the HM 5.3 customer location process which are addressed at length in Section V.B.2 of this decision.

MCI/WorldCom, SBC-CA, ORA/TURN, and XO claim that the Commission ignored suggestions to correct various portions of the SBC-CA models, and may have never even reviewed the parties' original filings explaining these corrections. Specifically, parties ask the Commission to reconsider corrections in areas such as the modeling of multiple dwelling units, factor models, expenses related to shared and common costs, affiliate transactions, and unregulated businesses.

We address these comments in the body of the decision. The decision explains that the suggested corrections, or "restatements," were reviewed but they were lengthy, unclear and often unsupported, and disputed. These restatements of the SBC-CA models could not be accepted without substantial further review that was not reasonable to undertake. Instead, the Commission's analysis focused on what it considered key flaws and modeling inputs rather than all of the areas outlined by the parties. In a few limited areas, we did attempt to apply these additional corrections, particularly with regard to expenses in the SBC-CA models. Ultimately, these suggested changes to the SBC-CA models became moot when we abandoned use of the SBC-CA models to set UNE rates.

MCI/WorldCom and SBC-CA also suggest modifications to various labor calculations in HM 5.3 to remedy understatements in labor rates. Both parties suggest "outboard calculations" to approximate the higher labor rates used in the SBC-CA models, which the Commission found were difficult to transport into HM 5.3. As discussed in Section V.B.3, we find these adjustments unreasonably speculative and untimely and will not make them.

CALTEL, Vycera, Navigator, and Mpower all comment that because the rates in the Proposed Decision are substantially higher than the interim rates adopted in D.02-05-042 and D.02-09-052, the size of the adjustment, or true-up, resulting from SBC-CA's new permanent UNE rates will hurt the level of competition in California's local exchange telephone market and drive CLCs into bankruptcy. These parties urge the Commission to consider the effects of the true-up in limiting consumer choice by driving competitors out of the market and to take steps to mitigate these negative effects.

For example, Mpower suggests limiting the amount of any back payments owed to SBC-CA to the prior OANAD rates set in D.99-11-050, rather than the lower interim rates adopted in D.02-05-042. ORA/TURN suggest the Commission should offer CLCs the option of a phased true-up payment plan to even out the cash flow consequences of an unexpected increase in UNE rates. They also suggest that interest accrual on amounts CLCs owe to SBC-CA should cease with the effective date of a decision ordering final UNE prices. (ORA/TURN, 6/7/04, p. 9.)

We note that the size of the true-up in this decision differs dramatically from the true-up that might have occurred had the Proposed Decision been adopted unchanged. Nevertheless, even though the true-up now appears to be significantly less than it might have been, we are persuaded that further proceedings are necessary to consider true-up effects. We have modified the decision to stay the effectiveness of the payment of any true-up resulting from these new permanent UNE rates, pending a review of the size of the actual true-up and the outcome of further proceedings to consider the necessity of mitigation for any true-up payments. Therefore, although the rates in this order will go into effect immediately on a prospective basis, payments to implement the true-up of interim rates will only occur following further Commission action.

Mpower contends that the proposed rate increases for UNE loops push costs for CLCs who purchase loops well above the price CLCs can competitively charge for their service, creating a price squeeze and hindering CLCs ability to compete with SBC-CA. Mpower notes that JA raised price squeeze issues and the Proposed Decision fails to include a thorough analysis of this subject.

SBC-CA responds that UNEs must be set at TELRIC rates and any consideration of CLC profitability or an alleged price squeeze in setting a TELRIC price is legal error.

We agree with SBC-CA that this decision is not the proper place to consider price squeeze arguments because we must price UNEs based on TELRIC and not arguments of CLCs concerning their profitability.

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 many inputs based on the characteristics of SBC-CA's current network operations.

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

6. LoopCAT uses embedded cabling characteristics and lacks cable-sizing conventions to optimize network design.

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. Copper 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 SPICE 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 without knowing the assumptions embedded in SBC-CA's factors.

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 one-third of its estimate of TBO expenses from its ACF study.

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 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 based on current population characteristics.

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 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 labor rate assumptions in HM 5.3 related to SAI investment, terminal and splice investment, buried drop installation, and riser cable investment, 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. The SBC-CA models require time intensive efforts to modify, are prone to errors due to complex input modification requirements, produce varied results, and the results are difficult to replicate in a reasonable time frame with an acceptable level of confidence.

77. The SBC-CA cost factor module is an integral component in all other SBC-CA cost modules and modifications to the cost factor module require numerous manual input changes to flow the results into other SBC-CA cost modules.

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

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

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

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

82. 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.

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

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

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

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

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

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

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

90. 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.

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

92. The CAPM computes a cost of equity for SBC-CA of 11.78% when it is run with a 7.4% market risk premium, a beta coefficient of .93, and a risk free rate of 4.9%.

93. The 11.78% 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.

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

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

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

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

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

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

100. A CLC can gain access to an unbundled IDLC loop if it is willing to connect at the DS-1 level, although operational issues involving security and administrative concerns have yet to be fully resolved.

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

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

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

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

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

106. 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.

107. 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.

108. 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.

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

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

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

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

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

114. 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.

115. 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.

116. 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.

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

118. 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.

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

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

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

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

123. 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.

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

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

126. The SBC-CA models allow the user to assume a linear relationship between maintenance costs and fill factors, so that maintenance costs rise at higher fill levels.

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

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

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

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

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

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

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

134. Copper 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.

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

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

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

138. In D.98-12-106, the Commission rejected the assumption that 90% of lines could be purchased at the new line price.

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

140. 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.

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

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

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

144. 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.

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

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

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

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

149. 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 complete 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 SBC-CA models fail the Commission's modeling criteria to such a significant extent that we cannot reasonably rely on them to set UNE rates.

4. The SBC-CA models fail to produce results upon which we can reasonably rely because they produce varying results that cannot be replicated in a reasonable time frame with an acceptable level of certainty.

5. The SBC-CA models do not meet the basic modeling requirement of allowing the user to derive results with an acceptable level of confidence.

6. HM 5.3 inputs, as filed, are at the low end of what we consider reasonable.

7. The results of the SBC-CA models generally over estimate forward looking UNE costs.

8. It is reasonable to use the HM 5.3 model to set UNE rates, despite its flaws, rather than the SBC-CA models, which are flawed and fail our modeling criteria to such a significant extent.

9. The Commission should set UNE rates for SBC-CA based on the HM 5.3 model as run with the inputs described in this order and as set forth in Appendix A.

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

11. 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.

12. 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.

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

14. 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.

15. SBC-CA has failed to adequately support why the cost data related to its current network should be considered forward-looking.

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. The SBC-CA models should be adjusted to eliminate expenses for non-regulated activities, based on a comparison of regulated and non-regulated ARMIS data, as proposed by JA.

27. The SBC-CA models should be adjusted to remove approximately $301 million in affiliate transaction expenses.

28. The land and building expense factors in the SBC-CA models should be adjusted to incorporate forward-looking space requirements and an allocation of collocation revenues.

29. 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.

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

31. SBC-CA's ACFs should not include the TBO accrual because it is not a current operations cost, therefore the full amount of the TBO, as identified by SBC-CA, should be removed from the SBC-CA model.

32. It is not possible, given the current record, to isolate and remove expenses for Project Pronto and shared and common costs from the SBC-CA models.

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

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

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

36. 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.

37. The loop modeling and customer location process in HM 5.3 lacks transparency and its vast amounts of preprocessed data limit the Commission's ability to test various scenarios.

38. Both HM 5.3 and SBC-CA's LoopCAT can be faulted for the accuracy of customer locations because HM 5.3 ignores customer locations when modeling the distribution plant and LoopCAT does not attempt to accurately locate existing customers and assumes they are all evenly dispersed throughout the distribution area.

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

40. 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.

41. 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.

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

43. 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.

44. When HM 5.3 is re-run with clusters limited in size to 1,800 lines per cluster, the results demonstrate the tradeoff between feeder and distribution costs.

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

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

47. 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. Neither HM 5.3 nor the SBC-CA models allow the Commission the ability to fully understand or replicate their preprocessing steps.

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

49. Because it is not possible to change all labor rate assumptions in HM 5.3, the model may underestimate some labor-related costs, but this underestimate appears to have an insignificant effect on final rates and may be offset by conservative assumptions in other inputs.

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

51. 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.

52. 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.

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

54. 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.

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

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

57. 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.

58. 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.

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

60. 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.

61. It is unduly burdensome and unreasonable to use the SBC-CA models because the models lack flow through capability and require extensive manual manipulation, are prone to error when modifying inputs, and produce varying results that cannot easily be replicated.

62. HM 5.3 is less burdensome to operate because we can reasonably understand how to make necessary modifications, implement them quickly, and consistently replicate results in a reasonable time frame.

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

64. If expense levels in the SBC-CA models could be modified to remove expenses related to Project Pronto and shared and common costs, its results would be lower than the Commission's runs.

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

66. 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.

67. 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.

68. 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.

69. 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.

70. 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.

71. 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.

72. 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.

73. A market risk premium of 7.4%, based on Ibbotson Associates study of equity premiums from 1926 to 2001, is reasonable to use in our CAPM analysis because it is based on documented equity returns rather than disputed expectation of future returns.

74. 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.

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

76. 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.

77. When setting the cost of equity, we should give no weight to the DCF model results because DCF relies heavily on widely disparate growth forecasts for telecommunications firms.

78. It is reasonable to adopt an 11.78% cost of equity based on the conservatively higher CAPM results.

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

80. 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.

81. SBC-CA's UNE business is subject to regulatory risk regarding the accuracy of UNE prices and competitive risk, but it 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 6.34% 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 two lines per household with current line growth estimates or its temporary guidelines calling for less than two 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 62% 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 two 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. It is reasonable to modify HM 5.3 and the SBC-CA models to run with similar assumptions regarding the NID and premise termination fill factors for residential customers.

113. SBC-CA's proposed 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 11 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.

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 UNEs 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 the weighting of new and growth lines reflected in SBC-CA's SICAT model, which is based on SBC-CA's actual percentages of lines purchased during the 5 year study period, 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. We should take official notice of DS-1 and DS-3 loop cost calculations proposed by JA in the Verizon UNE Phase of R.93-04-003/I.93-04-002.

144. 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 Sections 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 modification of interim rates set in Decision 02-05-042 and Decision 02-09-052 to the rates in this order, but payment of any billing adjustments, or "true-up," is stayed pending the outcome of further proceedings in this docket to consider payment options or other mitigations to lessen any negative effects of the true-up.

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. Official notice is taken of the DS-1 and DS-3 loop cost calculations proposed by AT&T Communications of California and MCI-WorldCom Inc. in the Verizon UNE phase of Rulemaking 93-04-003/Investigation 93-04-002.

7. 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 shall remain open pending resolution of true-up payment issues.

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

DEM Dial Equipment Minutes

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)

APPENDIX E

LIST OF APPEARANCES

Applicants: Goodin, MacBride, Squeri, Richie & Day, LLP, by John Clark, Attorney at Law, for The Telephone Connection Local Services, LLC; David Discher and Stephanie E. Krapf, Attorneys at Law, for Pacific Bell Telephone Company; William C. Harrelson, Attorney at Law, for MCI/WorldCom, Inc.; Preston, Gates, Ellis & Rouvelas Meeds, LLP, by Christopher S. Huther and Megan Troy, Attorneys at Law for Pacific Bell Telephone Company; David J. Miller and W. Clay Deanhardt, Attorneys at Law, for AT&T Communications of California, Inc.; Earl Nicholas Selby and Karen M. Potkul, Attorneys at Law, for XO California, Inc.

Interested Parties: Goodin, MacBride, Squeri, Richie & Day, LLP, by John Clark, Attorney at Law, for Z-Tel Communications, Inc.; William J. Cobb III, Attorney at Law, for Covad Communications Company; Christine Mailloux, Attorney at Law, and Regina Costa, Representative, for The Utility Reform Network; Adams, Broadwell, Joseph & Cardozo, by Katherine S. Poole and Lonnie Finkel, Attorneys at Law, for Communications Workers of America, District 9; Terrance A. Spann, Attorney at Law, for United States Department of Defense and All Other Federal Executive Agencies; Glenn Stover, Attorney at Law, for Sage Telecom, Inc., Tri-M Communications, Inc., and Anew Telecommunications Corporation; Morrison & Foerster, LLP, by James M. Tobin, Mary E. Wand and Theresa L. Cabral, Attorneys at Law, for Pac-West Telecomm, Inc.;

Office of Ratepayer Advocates: Natalie Billingsley, Representative, and Natalie Wales, Attorney at Law.

(END OF APPENDIX E)

97 CALTEL, Vycera and Navigator filed motions to intervene in this proceeding along with their opening comments on 6/1/04. The unopposed intervention requests were granted by a subsequent ALJ ruling.

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