2. Background

2.1 Pacific's Petition for Modification

On August 20, 1996, AT&T applied for arbitration of an ICA with Pacific. On October 31, 1996, the Arbitrator issued his Arbitrator's Report. The Arbitrator found in favor of the position advocated by AT&T on the toll aggregation issue. That is, the Arbitrator determined that AT&T should receive the same volume discounts from Pacific to be used for AT&T's wholesale toll service that Pacific provides to Pacific's retail customers based on retail volumes without regard to the number of customers to which AT&T resells such service.

On the same day, the Assigned Commissioner directed parties to file alternate pages to the ICA implementing the position advocated by Pacific. That is, volume discounts would be based on the usage of each individual wholesale end-user, not the total usage of all wholesale customers.

The Commission adopted D.96-12-034 on December 9, 1996, including the recommendation of the Assigned Commissioner. That is, D.96-12-034 denied AT&T the right to aggregate the usage of its unaffiliated end-users in order to qualify for Pacific's toll volume discounts. On December 19, 1996, parties filed an ICA in conformance with D.96-12-034, and the ICA became effective that same day.

On January 8, 1997, AT&T filed a complaint in Court seeking to overturn the toll aggregation restriction. On May 11, 1998, the Court found in AT&T's favor, vacating the Commission's order, and reinstating the Arbitrator's determination.

According to the Court, the Federal Communications Commission (FCC) requires that states implement the Telecommunications Act of 1996 (Act), and the FCC's accompanying regulations, by applying the following standard, as explained by the FCC in paragraph 953 of its 1998 First Report and Order:

"With respect to volume discount offerings, however, we conclude that it is presumptively unreasonable for incumbent LECs to require individual reseller end users to comply with incumbent LEC high-volume discount minimum usage requirements, so long as the reseller, in aggregate, under the relevant tariff, meets the minimum level of demand. The Commission [FCC] traditionally has not permitted such restrictions on the resale of volume discount offers. [Footnote deleted.] We believe restrictions on resale of volume discounts will frequently produce anticompetitive results without sufficient justification. We, therefore, conclude that such restrictions should be considered presumptively unreasonable. We note, however, that in calculating the proper wholesale rate, incumbent LECs may prove that their avoided costs differ when selling in large volumes." (FCC 96-325, First Report and Order in CC Docket Nos. 96-98 and 95-185, adopted August 1, 1996, released August 8, 1998, paragraph 953.)

The Court found that the Commission failed in D.96-12-034 to correctly apply the FCC's standard, and ordered that:

" . . . the CPUC's [California Public Utilities Commission's] action on this provision, which overturned the arbitrator's determination, is vacated and the arbitrator's determination - i.e., that that [sic] AT&T `shall receive the same volume discounts from [Pacific Bell] for services based on its wholesale volume that [Pacific Bell] provides to its retail customers based on their retail volume without regard to the number of customers to which [AT&T] resells such service . . . ,' Arbitrator's Report, 31 - is reinstated." (Order dated May 11, 1998, page 22.)

The Court also ruled, however, that Pacific may seek modification of D.96-12-034 by presenting evidence to the Commission on its avoided costs, in accordance with paragraph 953 of the FCC's First Report and Order.

On June 19, 1998, Pacific filed a petition for modification of D.96-12-034. According to Pacific, D.97-08-059 finds that Pacific rebutted the presumption of unreasonableness.¹ Pacific recommends that the Commission adopt the record and findings from D.97-08-059, conclude that Pacific has rebutted the presumption that the toll aggregation restriction is unreasonable, and modify D.96-12-034 to maintain the restriction on toll aggregation. Alternatively, Pacific asks for an opportunity to rebut the presumption by presenting additional evidence on its avoided costs.

On August 3, 1998, AT&T filed a timely response in opposition to Pacific's petition.

2.2 Pacific's Motion to Establish Memorandum Account

On June 12, 1998, Pacific filed a motion to establish a memorandum account. The memorandum account would track charges associated with AT&T's purchases of the switching UNE.

On June 18, 1998, AT&T filed a response. AT&T took no position on Pacific's motion for a memorandum account, pointing out that AT&T had not yet ordered the switching UNE. According to AT&T, however, AT&T had been purchasing wholesale toll services for resale from Pacific, and was due a discount based on aggregated toll volumes. As such, AT&T requested a Commission order directing that Pacific calculate refunds due AT&T back to the effective date of the ICA based on the Court's May 11, 1998 Order, and hold that sum in a memorandum account (pending the outcome of an appeal by Pacific). Further, AT&T requested that the Commission order Pacific to immediately comply with the Court's May 11, 1998 Order and remove the toll aggregation restriction.

On July 9, 1998, Pacific filed a reply in opposition to AT&T's response.