VI. Interim Rates for Unbundled Switching

In their motion for interim relief, Joint Applicants request that the Commission adopt an interim UNE switching rate equivalent to one of the two alternative switching rates that SBC has proposed for its Illinois affiliate, SBC-Ameritech. Specifically, Joint Applicants propose that the Commission set interim rates equivalent to either of the options shown below.

Table 1

Joint Applicants base their request on the contention that current switching prices are based on outdated 1994 to 1996 data. According to Joint Applicants, Pacific's own publicly available data reveals that certain switching costs have decreased significantly since that time.37 Further, Joint Applicants highlight two of Pacific's admissions to support an interim rate on par with Illinois. First, Pacific admits it buys switches under an SBC-wide switching contract. (Kamstra Declaration, 4/20/01, para. 6.) Second, Pacific has stated that it can obtain switching prices that are as favorable as, or more favorable than those that its affiliates in Illinois and Michigan receive. (Joint Applicants' Reply Comments, 9/7/01, p. 5, citing Pacific's response to discovery request No. 118.) Given these statements by Pacific, Joint Applicants claim there is no basis for assuming that Pacific's forward-looking switching costs exceed the costs of SBC-Ameritech for Illinois.

Joint Applicants justify the application of an Illinois rate by comparing the average lines per switch for Pacific with SBC-Ameritech in Illinois. Joint Applicants contend that Illinois is the closest proxy to California for local switching operations in SBC's service territory. Based on 2000 ARMIS data, Pacific has the highest average number of lines per switch, with Illinois as the next highest average. (Murray Declaration, 9/7/01, p. 5.) Joint Applicants also note that Pacific's current switching prices are as much as 252% higher than the prices SBC-Ameritech has proposed for Illinois and 207% higher than the prices the Michigan Public Service Commission recently adopted for SBC's affiliate in that state. (Motion for Interim Relief, 8/20/01, p. 8.) Joint Applicants maintain that this difference in rates is unsupportable given the similarities in switch density of the two states, shown by average lines per switch, and the admissions of SBC-wide purchasing.

To further support their request, Joint Applicants contend that the switching costs calculated by HAI confirm that switching prices should be as low as, or lower than, the proposed Illinois rates. Joint Applicants state that using Pacific's own public information about costs in 2000, HAI produces a total local switching cost per line of $2.82 per month. (Mercer Testimony, 8/20, p. 7; Mercer Declaration, 11/9/01, p. 3, footnote 10.) Based on this output of the HAI model, Joint Applicants maintain that either of the rate options proposed in Illinois would lead to conservative interim switching prices. In addition, the Joint Applicants contend that the FCC's Synthesis Model also produces forward-looking switching costs that support their interim relief request. (Klick Testimony, 8/20/01, p. 29-30.)

In the September 28 ruling, the Assigned Commissioner and ALJ stated a concern that the proposed interim rates from Illinois differ dramatically in price structure from Pacific's current rates. The ruling required Joint Applicants to reformulate their request to entail a percentage reduction from current switching rates using the same rate structure as is currently in use for Pacific. In their amended filing, Joint Applicants reformulated the price structure as requested, but continue to recommend that the Commission adopt interim unbundled local switching and tandem rates no higher than SBC-Ameritech's proposed rates for Illinois.

Joint Applicants derived a method to take the results of their switching analysis and convert it Pacific's current rate structure. Their proposal provides Pacific with the same compensation for an average end-user for local switching that SBC would receive for service provided to an average Illinois end-user based on the proposed Illinois prices. This reformulated request entails a 69.4% reduction from current local switching prices and a 79% reduction from current tandem switching rates.38 Once again, the Joint Applicants rely on the output of the HAI model to support their request for an interim rate equivalent to the rates proposed by SBC-Ameritech in Illinois.

Joint Applicants maintain that this across the board 69.4% reduction for local switching may inadvertently result in a large true-up once final rates are adopted. Joint Applicants ask that the Commission consider minimizing the expected true-up by simplifying the current UNE switching rate structure for interim pricing. Joint Applicants provide two alternatives to the across the board 69.4% discount that they believe will result in a smaller true-up. The first alternative entails simplifying the distinctions between call types. Joint Applicants suggest that the Commission should remove the distinction between call types because Pacific itself has proposed this simplification when it proposed a discount for switching rates in the 271 proceeding. Specifically, Joint Applicants ask that, identical to Pacific's Section 271 proposal, the Commission eliminate the distinction in rates between intraoffice calls and originating interoffice calls.

Joint Applicants' second alternative switching price structure takes this simplification of call types and also removes any separate vertical feature charges. Again, this mimics Pacific's own proposal in the Section 271 proceeding. This would result in a discount of 63.2% for switching, and no charge for features. Joint Applicants contend that this second alternative proposal will likely lead to a smaller true up than the 69.4% across the board discount once final UNE switching rates are adopted.

Pacific responds to this amended proposal by stating that Joint Applicants have not demonstrated that Pacific's switching costs have fallen by anything approximating 69.4% or that the prices SBC-Ameritech has proposed for Illinois are a reasonable surrogate for Pacific's switching costs. Pacific contends that Joint Applicants have failed to provide factual support for lower switch prices, more efficient switch maintenance practices or any new technology. Further, Pacific contends that Joint Applicants have made no showing that Illinois costs are relevant or determinative of Pacific's costs.

First, Pacific disputes any attempt by Joint Applicants to imply that the proposed price for unbundled switching in Illinois is sufficient to recover all of Pacific's switching costs. Pacific's witness Dr. Palmer explains that SBC-Ameritech disagrees with a number of aspects of the Illinois switching cost study and is appealing it. Further, Pacific contends that Joint Applicants have not established that California and Illinois have any similarity on a number of factors critical to switching prices including fill factors, cost of capital, cost of money, depreciation rates, labor rates, tax rates, and switch types. According to Pacific, the Joint Applicants' proposal to use Illinois prices is based solely on claims regarding switching investment and does not consider other factors that determine the UNE rate for unbundled switching.

Second, Pacific provides a comparison of the relative cost results of the FCC Synthesis Model for California and Illinois and uses this comparison to dispute the Joint Applicants' proposal to use Illinois switching rates.39 Based on its own run of the FCC's Synthesis Model, Pacific's contends that the Synthesis Model produces significantly higher end office usage and port costs for California than for Illinois and for other states where the incumbent local carrier has received approval under Section 271 to provide in-region long distance service.

Finally, Pacific notes that while Joint Applicants use a trend analysis using the HAI model to propose an interim loop rate, they do not use this same trend analysis to support an interim switching rate. According to Pacific, Joint Applicants performed the same trend analysis for switching costs and the results of that trend analysis do not justify the deep discount to Illinois rates that the Joint Applicants now propose. (Pacific Switching Comments, 10/30/01, p. 13.) According to Pacific, a trend analysis for switching suggests that local switching costs have fallen only 6% compared to the 69.4% reduction requested by Joint Applicants. (Id.)

At the heart of the debate over an interim UNE switching rate is whether to compare California to Illinois. Pacific argues that Joint Applicants have not convincingly shown that critical cost factors that affect the UNE switching rate, such as labor rates and switch types, are the same across the two states. As we discussed in Section IV above, Pacific did not provide the cost material requested by Joint Applicants regarding Illinois. This material might have supported Pacific's claim that costs in the two states are not comparable, but it might also have shown certain similarities in costs between the two states due to SBC-wide purchasing arrangements. As already discussed, because of Pacific's noncompliance with the ALJs' discovery rulings, we will deem the missing material to support the Joint Applicants' claim that switching rates in California should be lowered from current levels. Despite deeming this information to support interim rates, we will exercise our discretion so as not to adopt the full amount of interim rate discounts requested by the Joint Applicants. Rather, we will base interim rates on our review of the other issues raised in comments, and we will adjust Joint Applicants' proposed interim rates as set forth below.

This means that we do not agree to adopt the rates proposed in Illinois as interim UNE switching rates for California. While we will deem the missing cost data to support lower switching rates for California, we are not willing to presume that UNE switching rates for California and Illinois would be identical. We will not abdicate our responsibility under the Act to determine cost-based rates for California by merely adopting a rate proposed by an SBC affiliate in another state. We consider it plausible based on common sense that even if switching investment costs were identical in California and Illinois, certain differences in other cost drivers might exist between the two states, such as differences in taxes, labor expenses, or regulatory cost modeling assumptions. We note that Joint Applicants have presented public data showing a substantial degree of uniformity across geographic regions in switching cost trends. (Klick Declaration, 11/9/01, pgs. 11-13.) We agree with Joint Applicants' assertion that there are likely to be greater geographic differences in loop costs than in switching costs. And we also note that Joint Applicants have identified that on several switching cost drivers identified by the FCC, such as average number of lines per switch and the percentage of host and remote switches, there are similarities between Illinois and California. (Joint Applicants' Reply Comments, 11/9/01, p. 23; Klick Declaration, 11/9/01, pp. 15-16.) All of these factors point to using the proposed Illinois switching rates as a guidepost to refer to in lowering Pacific's UNE switching rates from their current levels. Nevertheless, we prefer to rely on a California specific cost model analysis to develop our actual interim switching rates. Therefore, we will not adopt Joint Applicants' recommendation of applying proposed Illinois switching rates as interim rates for California.

We are left with the predicament wherein we have some indication that rates might be lower in California, but we cannot accept the Joint Applicants' proposed solution because it is not convincing for other reasons. Therefore, we must find another method for setting interim switching rates. Under the circumstances, we find it logical to apply the same methodology that we used to set interim loop rates, namely a trend analysis using HAI. Joint Applicants actually performed a form of this trend analysis for switching and mention it briefly in their motion and supporting testimony. (Motion for Interim Relief, 8/20/01, p. 8-9; Klick Testimony, 8/20/01, pp. 10-11.) While Joint Applicants have not proposed the results of that trend analysis for setting interim switching rates, we can use the data supplied by Joint Applicants to perform our own trend analysis.

Before turning to that trend analysis, we note that we are further persuaded to adopt interim switching rate based on public data showing substantial declines in per line and per minute of use switching costs since we last adopted UNE switching prices in D.99-11-050. Specifically, Joint Applicants analyzed ARMIS data that Pacific reported to the FCC for switch investments in California and found that:

· Pacific's booked switching investments per minutes of use declined 28% from 1994 to 1999. (Pitts Declaration, 2/20/01, p. 6.)

· Pacific's switch expenses per line dropped 23% from 1994 to 1999 and expenses per minute dropped 32% over the same period. (Murray Declaration, 2/20/01, p. 4.)

· Pacific's support investments for unbundled switching, including the cost of computers and related equipment, declined 15% from 1994 to 1999. (Id., p. 7.)

· Pacific's ARMIS data for 2000 shows a continued decline in switch investments and switch expenses per minute of use. Specifically, Pacific reported a 26.5% decline in switching expense and a 51% decline in switching expense per DEM from 1994 to 2000. (Klick Declaration, 11/9/01, para. 18-19.)

We find that this publicly reported data supports the establishment of interim UNE switching rates while the Commission continues its review of updated cost models in this proceeding.

Joint Applicants used some of the public information cited above as inputs to their HAI model. Specifically, Joint Applicants filed testimony by Mr. John Klick describing a comparison of HAI model runs for 1994 and 2000 in which he adjusted model inputs related to switch usage levels. Klick's analysis indicated decreases of 20% for port costs and 33% for usage costs. (Klick Testimony, 8/ 20/01, p. 10-11, footnote 11.) Upon more thorough review of Klick's analysis, we find that it does not consider any changes in switching investment costs, which are central to the debate over declines in overall UNE switching rates.

Joint Applicants filed another switching cost analysis using HAI for the year 2000 by Dr. Robert Mercer. Mercer's analysis included a large amount of adjustments to default inputs in the HAI model, including changes to aerial and buried drops, distribution and feeder cable, fixed switching investment, depreciation and net salvage values, taxes, and the investment in switching related to peak usage. (Mercer Testimony, 8/20/01, p. 28-33; Pitts Testimony, 8/20/01, p. 16.) When we look at the adjustments that Mercer used in his analysis for year 2000, we find that it is appropriate to limit his analysis to fixed and peak usage switching investment levels and tax rate changes and remove all of his other adjustments. Mercer's switching investment figures and tax rates are based on publicly available FCC and OANAD information. We disregard Mercer's other adjustments because they mainly impact loop costs.

After making these adjustments to Mercer's 2000 HAI model run, we can compare the results to Klick's 1994 HAI model and obtain a percentage change for port costs, usage-related costs, and tandem switching costs resulting from that comparison. This trend analysis is essentially the same methodology that Joint Applicants used to arrive at an interim loop rate and we will use it here to adopt interim switching rates. The next section of the discussion describes corrections that we made to our switching trend analysis after the draft decision was mailed out for comment. In summary, the trend analysis, with the modifications described below, indicates a decline in port costs from 1994 to 2000 of 35.8%, a decline in usage related costs of 50.8%,40 and a decline in tandem switching costs of 41.9%. (See Appendix C for a description of this switching analysis.) The adopted interim rates are set forth in Appendix A.

3. Adjustments to Trend Analysis Based on Comments on Draft Decision

Joint Applicants state that the proposed discount to switching rates is too small because it does not reflect the undisputed decline in the cost of switching equipment. Although the draft decision indicated an intent to reflect switching investment declines, the actual rate calculations fail to do so because the two model runs used in the draft decision both use the same FCC-adopted switching investment figures. According to Joint Applicants, the Commission can correct this oversight by using the 8% annual switching equipment cost decline noted by Pacific in the prior OANAD proceeding and raised on the record of this UNE reexamination. If switching equipment costs are recalculated using an assumption of an 8% annual decline, Joint Applicants contend that these costs in 2000 are only 55.8% of what they were in 1994. If the trend analysis is performed using this updated switching investment cost, the interim switching discount increases substantially.

Pacific responds that Joint Applicants suggested "8% solution" is a brand new proposal based on untested facts and must be rejected for several reasons. First, the Joint Applicants' proposal uses the flawed expense to investment ratio that was already rejected in the draft decision's loop analysis. Second, the notion of an 8% per year reduction is illogical because it implies switching will drop by 80% by the year 2012. Third, the proposal ignores Pacific's evidence of actual switch purchase costs. Fourth, Joint Applicants cannot rely on the 8% reference from the prior OANAD record because it was not relied on in their motion for interim relief. Finally, Pacific describes numerous technical errors in Joint Applicants' analysis including an extra year of reductions and use of the wrong starting point for the calculation.

It appears that Joint Applicants have highlighted an unfortunate error in our switching trend analysis. We certainly intended for the trend analysis to capture the declining trend in switch equipment costs from 1994 to 2000 and our failure to compare different switching investment figures in the two model runs was an oversight. We will accept the Joint Applicants' suggestion to derive a 1994 value for switching investment using the reference by Pacific to 8% annual declines in switching equipment costs.

We disagree with Pacific that we cannot rely on this evidence to make this adjustment. We can rely on evidence within the record of this case and not just the positions put forth by Joint Applicants in their motion for interim relief. Pacific's own witness in the prior OANAD proceeding made this statement and it was a key reason that we established this UNE Reexamination process. Joint Applicants highlighted the 8% reference on the record of this proceeding when nominating switching for reexamination, and again in the motion for interim relief.41 Pacific never disputed this 8% reference when it was raised in this case. Even now, Pacific does not dispute the accuracy of the statement; it merely disputes its use in the HAI model.

While we agree with Pacific that it might be irrational to presume that switching costs will forever decline at a constant 8% rate, it is not unreasonable to use the 8% reference as a proxy in this context because we are only using it to set an interim rate, and we are only relying on the 8% reference for a limited time frame from 1994 to 2000. We agree it would be illogical to assume that switching costs will steadily decline at 8% beyond 2000, but we are limiting use of the 8% figure to a six-year time period. We also reiterate that Pacific has never contested the 8% figure until now.

Pacific claims the 8% figure is contrary to evidence it has provided that its actual switch purchase costs show an overall switching price per line decrease of only 1.87%. This evidence was provided in Pacific's August 15, 2001 cost study filing, which we have already described as not meeting our criteria for use in this proceeding. Furthermore, we suspended examination of this evidence when we chose to consider interim relief. Therefore, the evidence cannot be relied on at this juncture. Interestingly, when we compare Pacific's switching discount proposal from the Section 271 proceeding to the results of our revised switching trend analysis that incorporates the "8% solution," the results are remarkably similar.42

We agree with Pacific that certain technical corrections must be made to Joint Applicants' analysis using the 8% figure. We will remove the seventh year of reductions that Joint Applicants included and we will use the switching investment in Mercer's analysis rather than Klick's analysis as the starting point for the calculation.43 We have also incorporated Pacific's suggested adjustment to one model input known as the "DLC offset." (See Response of Pacific to Joint Applicants Technical Workpapers, 3/29/02, p. 7 and p. 19). We will not back out switching expense reductions as Pacific suggests because we find adequate support on the record from ARMIS data that Pacific's switch expenses have declined over the 1994 to 2000 time period. Although we eliminated automatic expense reductions in our loop trend analysis because trends in loop expenses were unclear, ARMIS data consistently indicates a trend of declining switch expenses. Therefore, we will not adjust the switching trend analysis in this regard.

In addition to the "8% solution" discussed above, Joint Applicants comment that the draft decision's trend analysis for switching requires correction in three major areas. First, Joint Applicants allege that the draft decision used the incorrect model output in determining usage-sensitive costs. The Commission should have used the "cost per DEM" output rather than the "total switching cost" output. Second, Joint Applicants maintain that the draft decision inappropriately calculated tandem switching cost reductions by using the wrong output cell from the model. Third, Joint Applicants contend that the switching trend analysis used a 1994 base run that did not appropriately replicate OANAD adopted switching rates. They suggest several input modifications to items including switching expenses, land and building cost inputs, economic life assumptions and savings from integrated DLC systems to correct this alleged error.

Pacific does not comment on the alleged error regarding usage sensitive cost elements, but it does state that there is no merit to changes to the calculation of tandem switching costs. On the third point, Pacific challenges Joint Applicants suggested input modifications to the 1994 HAI model run by stating that the suggest modifications were not previously offered on the record of the case and it is improper to raise them now. Pacific also points out that Joint Applicants previously argued that if rates are based on a trend analysis, it is not necessary for the HAI model to exactly replicate OANAD results.

With regard to usage-sensitive costs, we have reviewed the staff's trend analysis and determined that we should have calculated the interim discount to the usage rate elements using the "cost per DEM" as suggested by Joint Applicants. The draft has been modified to reflect this change.

With regard to tandem switching costs, we agree with Joint Applicants that the analysis in the draft decision inadvertently referred to the wrong cell in the model. We accept the correction suggested by Joint Applicants and have modified the draft in this regard.

Finally, we agree with Pacific that it would be improper to accept any of Joint Applicants' input modifications in an attempt to replicate OANAD adopted rates in the 1994 HAI model run. Unlike the "8% solution" that we accept, there is no obvious error that these additional modifications are intended to correct. In their motion for interim relief, Joint Applicants suggested the inputs to the 1994 model run that we used. Pacific is correct that Joint Applicants claimed it was not necessary for HAI to replicate prior OANAD results in order to use HAI for a trend analysis. We cannot accept Joint Applicants' assertions that we must now modify the 1994 HAI model run for switching because we previously dismissed this argument. Therefore, we are not persuaded that changes to these items are necessary or appropriate at this late date.

With regard to pricing structure, Joint Applicants have actually provided three proposals involving interim switching rates, all with different price structures. In the September 28 ruling, the Assigned Commissioner and ALJ stated a preference to keep the pricing structure the same as current OANAD adopted rates. In response, Joint Applicants explain that adhering to the current pricing structure could lead to a large true-up once final rates are set. They also note that Pacific itself has modified the pricing structure through its discount proposal in the Section 271 docket. Although Joint Applicants would prefer a simplified rate structure similar to Pacific's proposal in the Section 271 case, we have no basis on which to make interim changes to individual switching rate elements by a percentage different from the one we derived from the trend analysis. Therefore, the interim switching rates that we will adopt are based on a discount from current rates of 35.8% for the port, 50.8% for usage, and 41.9% for tandem switching, as shown in Appendix C.

Joint Applicants have suggested that we consider an interim rate that eliminates charges for vertical switching features. Currently, each vertical feature involves a separate charge ranging from 29 cents to $1.73. (The exact prices for 31 separate vertical features are set forth in Appendix A of D.99-11-050.) Joint Applicants explain that the HAI model includes feature hardware in total switch investment, which is then assigned to port and usage price elements. (Pitts Testimony, 8/20/01, p. 18.) In other words, the HAI model does not derive separate vertical feature price elements. Further, Joint Applicants claim that if new rates are calculated with a single across-the-board percentage discount that includes separate vertical feature charges, this results in a higher percentage discount applying to port and usage rate elements than is true if feature charges are eliminated. Joint Applicants explain that this approach could lead to larger true-up payments once final rates are determined. (Joint Applicants' Amended Switching Proposal, 10/15/01, p. 8.) According to Joint Applicants, it is simpler to avoid feature penetration assumptions and eliminate the separate feature charges. (Id.) We note that Pacific itself proposed eliminating vertical feature charges when it proposed discounted switching rates in the Section 271 proceeding.

Joint Applicants are once again asking for a change in rate structure. In this case, we can distinguish this request because the HAI model is unable to calculate separate vertical feature costs. Instead, the model includes feature hardware costs in total switch investment. Because of this critical methodological difference, we are unsure what true-up effect might occur if we were to apply a straight percentage discount derived from the HAI model to the current vertical feature charges. Therefore, we will set all vertical feature charges, as listed in Appendix A of D.99-11-050, to zero for these interim switching rates because we think this will make any true-up to final rates much simpler. This elimination of all vertical feature prices for interim rates does not prejudge whether final rates will involve separate vertical feature charges. We will examine this issue in the next phase when setting final UNE switching rates.

In comments on the draft decision, Pacific claims that the draft commits legal error in setting vertical feature charges at zero. Specifically, Pacific contends that HAI's inability to identify separate vertical feature costs is not evidence those costs have dropped to zero. We agree with Pacific on this point. However, we do not agree that an interim rate of zero is legal error because the interim rates are subject to adjustment and we have made clear that this interim action does not prejudge whether final rates will involve separate vertical feature charges. The order explains the rationale behind an interim rate of zero, and we do not agree that this interim action amounts to legal error.

Tri-M and Call America request clarification that all vertical features, including Centrex type features, will be priced at zero for the interim. We have clarified that today's order applies to the features listed in D.99-11-050.

5. Comparison of Interim Rates to Other Reference Points

As we stated above, we can use the Illinois rates advocated by Joint Applicants as a guideline to determine whether our proposed interim rates are within a range of reasonableness. Although the interim rates set forth in Appendix A are not as low as the Illinois rates, we note that similarities between California and Illinois on switching characteristics noted by Joint Applicants, such as average number of lines per switch and the percentage of host and remote switches, lend credence to interim rates in California that trend in the direction of the Illinois rates.44

Our decision to set an interim switching rate is further supported by the results of the FCC's Synthesis Model. Pacific claims that its run of the Synthesis Model does not support a switching rate discount. According to Pacific's analysis, the model indicates that California end office usage and port costs should be 23% and 19% higher than Illinois costs, respectively. (Pacific Bell Switching Comments, 10/30/01, p. 10.) Joint Applicants respond that Pacific has miscalculated and misconstrued the Synthesis Model results because Pacific's analysis fails to correct a substantial input error regarding usage volume. (Klick Declaration, 11/9/01, p. 5-6.) Moreover, Joint Applicants claim further flaws in Pacific's analysis from several factors including the fact that it relies on 1998 data rather than updated data for 2000. (Id., p. 7.)

Based on analysis performed by our staff, we agree that Pacific's run of the Synthesis Model is flawed because Pacific did not re-run the model with correct usage volumes.45 Rather, our staff corroborated the run of the Synthesis Model performed by Joint Applicants and its results do indeed show switching rates for California lower than those suggested by Pacific, and in line with the results described by Joint Applicants. (Klick Declaration, 11/9/01, pp. 5-6.) The results also indicate less disparity in state switching rates between California and other states than Pacific has suggested. Hence, we can dismiss Pacific's contention that the Synthesis Model supports higher switching rates for California because corrections to that analysis actually support a reduction in UNE switching rates from current levels.

We need not delve further into the other alleged flaws in Pacific's Synthesis Model analysis because we will not use the Synthesis Model to set the level of interim switching rates. As Pacific has noted, the FCC has specifically stated that it "has never used the USF cost model to determine rates for a particular element, nor was it [the USF model] designed to perform such a task. The model was designed to determine relative cost differences among different states, not actual costs."46 The FCC has cautioned that state commissions may not find it appropriate to use the Synthesis Model with nationwide values for UNE cost and pricing, and may instead choose to use statewide or company specific values.47 We only note that the trend in cost declines shown by the Synthesis Model supports the rates we adopt today.

Finally, as we have already stated, our use of HAI to perform a switching trend analysis does not mean that we endorse the use of the model to set final UNE switching rates for Pacific. Although we base interim rates on a trend analysis using HAI, we make no determination that HAI is the proper modeling choice to set final UNE rates for Pacific.

37 Joint Applicants cite Pacific's testimony in the prior OANAD proceeding that the cost of new switches has been declining since 1993 at a rate of 8% per year. (D.99-11-050 at p. 172, fn. 152, as noted in Joint Applicants' Motion for Interim Relief, 8/20/01, p.7.) In addition, Joint Applicants explain that they ran HAI using SBC's publicly reported data for 1994 and 2000 for ARMIS expenses, ARMIS investment, and ARMIS demand data. (Klick Testimony, 8/20/01, p. 9.) 38 Joint Applicants calculate the 69.4% discount by first determining the total local switching revenue for an average per-line usage level based on the Illinois rate level. The result, $3.54, is then divided by an estimate of average current revenue from UNE local switching prices in California ($11.56). ($3.54/$11.56 = 30.6%, or a 69.4% discount). They perform a similar analysis to determine the tandem switching discount of 79%. (Amended Proposal of Joint Applicants, 10/15/01, p. 3-4.) 39 According to Pacific, the FCC has never used the USF cost model to determine rates for a particular unbundled network element and the model was not designed to perform such a task. Pacific explains that it makes this comparison only because Joint Applicants and others have suggested using the USF Model. (Pacific Switching Comments, 10/30/01, p. 9, footnote 19.) 40 The percent change in usage related costs is calculated based on a comparison of the dialed equipment minutes (DEMs) from 1994 to 2000. 41 See Pitts Declaration, 2/21/01, p. 5 and Motion for Interim Relief, 8/20/01, p. 7. 42 Based on Pacific's usage assumptions, its proposed switching discount in the Section 271 Proceeding results in a 40% discount to switching rates compared to a 46% discount based on the Commission's switching trend analysis. 43 The inputs that were modified in Mercer's analysis using the 8% per year adjustment were Switching Fixed Investment, Switching per line Investment and Common Equipment Investment. 44 We can also use the switching rates that Pacific itself proposed in the Section 271 proceeding as another point of comparison. It is illogical to assume that Pacific would voluntarily offer switching rates that are lower than what it believes its own costs to be. Indeed, Pacific itself stated that its "voluntary discounts have resulted in prices that are clearly within the range of reasonableness that a proper application of TELRIC would produce." (Pacific's Motion to Vacate, 10/19/01, Attachment B, p. 4.) While we have not analyzed Pacific's discount proposal in this proceeding, we note Pacific's own statements that its proposed rates are within the range of TELRIC. We have not verified the legitimacy of Pacific's assertion that the proposal is within a reasonable TELRIC range, and we express no opinion on the validity of this statement. Nevertheless, the interim switching rates proposed in this order are, depending on usage assumptions, within 5 to 7 percent of the rates that Pacific proposed in the Section 271 proceeding. By Pacific's own admission, its proposed rates are "reasonable," so it stands to reason that a rate that differs by only 5 to 7 percent is reasonable as well. 45 According to a response to a data request from Commission staff, Pacific corrected the error noted by Joint Applicants and re-ran the Synthesis Model, obtaining similar results to Joint Applicants. (Pacific Bell Response to Data Request, 12/11/01.) 46 See Pacific Switching Comments, 10/30/01, p. 9, (quoting from Memorandum Opinion and Order, CC Docket No. 01-9, Application of Verizon New England Inc. to Provide in-Region, InterLATA Services in Massachusetts, released 4/16/01, para. 32). 47 In the Matter of the Federal-State Joint Board on Universal Service, CC Docket No. 96-45, Ninth Report & Order and Eighteenth Order on Reconsideration, released 11/2/99, para. 41 and footnote 125.

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