ALJ/DOT/hl2 Mailed 3/20/2006

Decision 06-03-025 March 15, 2006

BEFORE THE PUBLIC UTILITIES COMMISSION OF THE STATE OF CALIFORNIA

Rulemaking on the Commission's Own Motion to Govern Open Access to Bottleneck Services and Establish A Framework for Network Architecture Development of Dominant Carrier Networks.	Rulemaking 93-04-003 (Filed April 7, 1993)
Investigation on the Commission's Own Motion into Open Access and Network Architecture Development of Dominant Carrier Networks.	Investigation 93-04-002 (Filed April 7, 1993) (Verizon UNE Phase)

OPINION ESTABLISHING UNBUNDLED NETWORK ELEMENT
RATES AND PRICE FLOORS FOR VERIZON CALIFORNIA AND MODIFYING DECISION 99-11-050 REGARDING MONOPOLY BUILDING BLOCKS

TABLE OF CONTENTS

Title Page

OPINION ESTABLISHING UNBUNDLED NETWORK ELEMENT RATES AND PRICE FLOORS FOR VERIZON CALIFORNIA AND MODIFYING DECISION 99-11-050 REGARDING MONOPOLY BUILDING BLOCKS 11

I. Summary 22

II. Background 66

III. Applicable Standards 99

A. The Consensus Costing Principles 99

B. The TELRIC Standard 1010

C. Supreme Court Review of TELRIC Standard 1111

D. Updates to TELRIC 1212

E. Commission Cost Modeling Criteria 1212

F. Burden of Proof 1313

IV. Overview of Cost Models 1414

A. VZ Cost 1414

B. HM 5.3 1616

V. Analysis of Models 1818

A. Flaws in the Verizon Model 1818

1. Verizon Models a Network that is Not Forward-Looking 1919

2. Preprocessing Structural Flaws 2626

3. Lack of Integration 2929

4. Expense Modeling Flaws 3232

5. Switching Model Flaws 3636

6. Summary of Verizon Model Flaws 4141

B. Flaws in HM 5.3 4141

1. Inability to Modify Customer Location Process 4444

2. Ignores Engineering Standards 4747

3. Efficiency and Productivity Assumptions 5050

4. Expert Opinions Require Adjustment 5252

5. Investment Level Comparisons 5353

6. Summary of HM 5.3 Flaws 5454

C. Adherence to Commission Modeling Criteria 5555

D. The Commission Should Rely on HM 5.3 Because It is
Less Flawed than VZCost 5656

VI. Modeling Inputs and Other Changes 5858

A. Asset Lives and Depreciation 5858

B. Cost of Capital 6161

1. Verizon 6464

2. Joint Commentors 6464

3. TURN, XO, and ORA 6565

4. Discussion 6565

5. Summary of Weighted Average Cost of Capital 7979

C. IDLC/UDLC 8080

D. Fill Factors 8282

1. Copper Distribution 8484

2. Fiber Feeder 8484

3. Copper Feeder 8585

4. DLC Plug-In Equipment 8585

5. DLC Common Equipment 8686

6. Premise Termination 8686

7. SAI Equipment 8787

E. Structure Sharing 8787

F. Plant Mix 9090

G. DLC Costs 9292

H. Labor Costs 9595

I. Cross-over Point and Maximum Copper Loop Length 100100

J. Switching Inputs 101101

1. Price per Line 101101

2. Rate Structure 105105

K. High Capacity Loop and Transport Inputs 106106

L. Miscellaneous Adjustments to HM 5.3 112112

M. Shared and Common Cost Markup 113113

VII. Price Floors 117117

A. Background 117117

B. Petition to Modify MBBs 119119

C. Price Floor Proposals 123123

1. Verizon 123123

2. MCI 124124

3. AT&T 125125

4. TURN 125125

5. ORA 126126

6. Discussion 127127

VIII. Geographic Deaveraging 131131

IX. Billing Adjustment Issues 134134

X. Reexamination Process 136136

XI. Comments on Draft Decision 138138

XII. Assignment of Proceeding 143143

Findings of Fact 143143

Conclusions of Law 149149

Appendix A: Adopted UNE Rates

Appendix B: Switching Rates Based on Minutes of Use

Appendix C: Wire Centers by Zone

Appendix D: Glossary of Acronyms

Appendix E: List of Appearances

I. Summary

This proceeding, known as the Open Access and Network Architecture Development (OANAD) proceeding, was initiated in April 1993 to set prices that California's two largest incumbent local phone companies, Verizon California (formerly GTE California) ¹ and Pacific Bell Telephone Company d/b/a SBC California (SBC, formerly Pacific Bell²) charge competitors who lease specified portions of their network. By leasing network components known as "unbundled network elements" (UNEs), competitors are able to use portions of Verizon's network to offer competitive local exchange services.³

In this decision, in what is known as the "Verizon UNE Phase" of OANAD, the Commission adopts final rates for Verizon's UNEs, as set forth in Appendix A of this order. The newly adopted rates for the most frequently cited UNEs are:

Table 1

Adopted UNE Rates

UNE	Adopted Rate4
Average 2-wire Loop	$ 13.94
Average DS-1 Loop	$ 78.33
Average DS-3 Loop	$ 596.57
2-wire Port	$ 3.17
UNE-Platform5	$ 17.46

The rates in today's order replace Verizon's interim rates for loops and switching established in Decision (D.) 03-03-033, and later modified in
D.05-01-057, and the rates for other UNEs originally adopted when the Commission approved an interconnection agreement between AT&T Communications of California, Inc. (AT&T) and GTEC in D.97-01-022. On December 5, 2005, the U.S. District Court issued its order in Verizon v. Peevey and found the interim rates in D.03-03-033 did not comply with federal law. The rates were vacated and UNE rates adopted in D.97-01-022 were reinstated, subject to true-up once permanent rates are established. (Verizon v. Peevey, (N.D. Cal. 2005) Case No. C03-2838 TEH, discussed further in Section IX below.)

In adopting today's rates, the Commission evaluated two cost models. Verizon proposed UNE rates based on a model known as VzCost that it has recently developed for use in UNE costing proceedings. AT&T and MCI (formerly known as WorldCom) (hereinafter referred to as "Joint Commentors" or simply "JC") proposed UNE rates based on the latest version of the HAI Model, known as HM 5.3. The proposals of the parties differed greatly from each other and from the interim UNE rates currently in place for basic loops and switching, as seen in the table below:

Table 2

Comparison of Proposals

UNE	Verizon Proposal	JC Proposal	Interim Rate6
Average 2-wire Loop	$33.19	$5.12	$11.36
2-wire Port	$3.60	$1.39	$2.72
UNE-P	$43.74	$6.80	$17.62

After careful review of the competing cost models filed by Verizon and JCs, the Commission finds that although both models contain flaws, the Verizon model is not forward-looking because it attempts to replicate Verizon's embedded network configuration and fails to efficiently size and deploy current technology. In addition, the Commission finds errors in Verizon's preprocessed inputs and assumptions related to expense and switch modeling. Finally, the various modules that comprise Verizon's model lack integration which makes it cumbersome to test input sensitivity.

With regard to HM 5.3, the Commission finds that the method it uses to model customer locations, create customer clusters, and estimate the cost of reconstructing Verizon's loop network is reasonable. Moreover, the Commission can modify most inputs and assumptions in HM 5.3. Thus, the Commission modifies many inputs and assumptions in HM 5.3 and then uses the modified model run to set Verizon's UNE rates.

Some of the key modeling inputs used for the Commission's HM 5.3 model run include a 10.23% cost of capital, a 52% copper distribution fill factor, and an overhead markup for shared and common costs of 8.93%. The Commission's model run includes several inputs and assumptions proposed by Verizon, including asset lives, labor inputs, a 12,000-foot maximum copper loop length, and the weighting of switch line prices between new and growth lines. Furthermore, today's order adopts a flat-rate structure for the switching UNE wherein switching costs are incorporated into one flat monthly port price, as proposed by JC.

As set forth in D.03-03-033, Verizon must adjust, or "true-up" the interim rates it charged for some of its UNEs to the new rates adopted in this order. In other words, Verizon must calculate whether the previous interim rates were higher or lower than these newly adopted rates, and whether it has over or under-collected the appropriate revenues for any UNEs it sold at interim rates. This order stays the effective date of any true-up until its amount can be calculated and further proceedings held to determine payment options or consider other mitigations to minimize negative financial effects of the true-up on competitive carriers.

This decision establishes price floors for certain retail services offered by Verizon. The price floor methodology is modified, based on a petition filed by Verizon, to remove switching costs from the price floor calculation. The decision then relies on the interim price floors established in D.03-03-033, with adjustments based on the UNE prices adopted in this order, as permanent price floors for Verizon.

Finally, this order commits the Commission to establishing a procedure for reexamination of Verizon's UNE rates in the next phase of this proceeding. The Commission will consider a proposal to adjust UNE rates using a price cap mechanism, or the adoption of a procedure similar to the one established for SBC in D.99-11-050, coupled with the use of updated inputs and assumption to the HM 5.3 model. The Commission shall not reexamine the UNE rates adopted in this order before February 2008.

¹ This decision refers to GTEC as the incumbent local exchange carrier (ILEC) that existed at the time this proceeding was initiated and prior to GTE's merger with Bell Atlantic. The decision refers to Verizon as the successor to GTEC, following the merger with Bell Atlantic in July 2000.

² Pacific Bell adopted the name SBC for business purposes in late 2002. This order will refer to Pacific Bell as the entity involved in OANAD prior to 2002, and will refer to SBC as the current entity.

³ See Appendix D for a glossary of common acronyms used in this order.

⁴ These rates include an 8.93% shared and common cost markup, as set forth in Section VI.M of this order.

⁵ UNE-Platform (UNE-P) refers to the combination of a 2-wire loop, 2 wire-port, tandem switching and transport and is calculated assuming 1,400 local minutes and 300 toll minutes of usage. Based on recent federal actions, Verizon is no longer required to sell UNE-P to competitors. Nevertheless, the price for UNE-P is noted in this order because Verizon must perform billing adjustments for the period that interim UNE-P rates were in effect. (See Section IX.)

⁶ Interim rates were originally adopted in D.03-03-033, modified in D.05-01-057, and include a 10% shared and common cost markup.