II. Background

In May 2002, the Commission adopted D.02-05-042 setting interim rates for certain UNEs that SBC-CA sells to competitive local exchange carriers (CLCs). In D.02-09-052, the Commission expanded the scope of the UNEs subject to interim discounts to include all UNE switch ports. The interim UNE rates in these two orders were adopted subject to true-up, either up or down, once permanent rates for SBC-CA were set.

In September 2004, the Commission issued D.04-09-063 adopting permanent UNE rates for SBC-CA, and ordering SBC-CA to calculate any billing adjustments owed to or by interconnecting carriers for the difference between interim rates set earlier in D.02-05-042 and D.02-09-052 and the new permanent rates. At the same time, the Commission stayed payment of these billing adjustments pending a review of the size of the actual true-up amounts and the outcome of further proceedings to consider the necessity for mitigation of potentially financially burdensome true-up payments. Furthermore, the Commission noted a recent order by the Ninth Circuit Court of Appeals¹ regarding the shared and common cost markup included in SBC-CA's UNE rates. Given this Ninth Circuit order, the Commission ordered that further proceedings would also consider whether and how to implement any shared and common cost markup revisions along with the true-up. (D.04-09-063, Ordering Paragraph 4.)

Following a prehearing conference held on October 13, 2004, the Administrative Law Judge (ALJ) determined the following issues would be considered in this phase:

· SBC-CA's calculation of the true-up amounts and the proper forum for carriers to resolve potential disputes over these calculations. True-up payments involve not only what carriers owe SBC-CA for increased UNE rates, but what SBC-CA owes other carriers where final rates are lower than interim rates.

· Whether payment of the billing adjustments will have negative effects on the competitive local exchange market or constitute a financial hardship for certain CLCs.

· Whether the Commission should order mitigation, including but not limited to long-term payment options and interest limits, to alleviate possible negative effects of true-up payments.

· Whether SBC-CA should include in the true-up calculation an adjustment of the 21% shared and common cost markup that a recent Ninth Circuit Court of Appeal order holds was incorrectly calculated.

On October 22, 2004, SBC-CA filed its preliminary calculation of the true-up payments it is owed by CLCs and wireless carriers. SBC-CA's preliminary figures indicate it is owed approximately $100 million.² In more detailed comments filed on November 1, 2004, SBC-CA urges the Commission to resolve the true-up phase of this proceeding quickly. SBC-CA proposes that carriers make true-up payments immediately if their publicly available financial information indicates they have sufficient cash or cash equivalents available to cover true-up payments. For all other carriers, SBC-CA suggests a deferred payment plan.

Responses to SBC-CA's true-up payment proposals were filed on November 19, 2004 by Arrival Communications Company (Arrival), AT&T Communications of California, Inc. (AT&T), the California Association of Competitive Telephone Companies (CALTEL), Covad Communications Company (Covad), MCI,³ MPower Communications Corp. (MPower), Pac-West Telecomm, Inc. (Pac-West), RCN Telecom Services, Inc. (RCN), and jointly by XO California, Inc. and Allegiance Telecom of California, Inc. (XO/Allegiance).⁴ Rebuttal comments were filed on December 8, 2004 by AT&T, SBC-CA, and jointly by The Utility Reform Network and the Commission's Office of Ratepayer Advocates (TURN/ORA). The issues raised by the parties in these various rounds of comments are addressed in turn below.