ALJ/DOT/avs DRAFT H-3

5/16/2002

Agenda ID #299

Decision __________________

BEFORE THE PUBLIC UTILITIES COMMISSION OF THE STATE OF CALIFORNIA

Joint Application of AT&T Communications of California, Inc. (U 5002 C) and WorldCom, Inc. for the Commission to Reexamine the Recurring Costs and Prices of Unbundled Switching in Its First Annual Review of Unbundled Network Element Costs Pursuant to Ordering Paragraph 11 of D.99-11-050.	Application 01-02-024 (Filed February 21, 2001)
Application of AT&T Communications of California, Inc. (U 5002 C) and WorldCom, Inc. for the Commission to Reexamine the Recurring Costs and Prices of Unbundled Loops in Its First Annual Review of Unbundled Network Element Costs Pursuant to Ordering Paragraph 11 of D.99-11-050.	Application 01-02-035 (Filed February 28, 2001)
Application of The Telephone Connection Local Services, LLC (U 5522 C) for the Commission to Reexamine the Recurring Costs and Prices of the DS-3 Entrance Facility Without Equipment in Its First Annual Review of Unbundled Network Element Costs Pursuant to Ordering Paragraph 11 of D.99-11-050.	Application 01-02-034 (Filed February 28, 2001)

INTERIM OPINION ESTABLISHING INTERIM RATES FOR
PACIFIC BELL TELEPHONE COMPANY'S UNBUNDLED LOOP
AND UNBUNDLED SWITCHING NETWORK ELEMENTS

Table of Contents

Title Page

INTERIM OPINION ESTABLISHING INTERIM RATES FOR PACIFIC BELL TELEPHONE COMPANY'S UNBUNDLED LOOP AND UNBUNDLED SWITCHING NETWORK ELEMENTS 11

I. Summary 22

II. Background 33

A. Applications for Annual UNE Reexamination 33

B. The Scoping Memo for the 2001 UNE Reexamination 55

C. The Issue of Competing Models 66

D. Motion for Interim Relief 99

III. Interim Rates are Warranted 1111

IV. Pacific Should be Sanctioned for Failure to Comply with the ALJ's Discovery Rulings 2121

V. Interim Rates for Unbundled Loops 2525

A. Joint Applicants Proposal 2525

B. Response 2727

C. Discussion 2727

1. Line Growth 2727

2. Infill Growth vs. Plant Extension 3232

3. DLC Equipment Costs 3636

4. Loop Expenses 3939

5. Summary of Loop Changes 4242

VI. Interim Rates for Unbundled Switching 4343

A. Joint Applicants' Proposal 4343

B. Amended Proposal 4646

C. Responses 4747

D. Discussion 4949

1. Whether to Adopt Illinois Switching Rates 4949

2. Use of a Trend Analysis to Set Interim Switching Rates 5151

3. Adjustments to Trend Analysis Based on Comments on
Draft Decision 5454

4. Interim Pricing Structure 5858

5. Comparison of Interim Rates to Other Reference Points 6161

VII. True Up 6363

VIII. Categorization 6464

IX. Comments on Draft Decision 6464

A. General Comments of Pacific 6565

B. Inflation Adjustment 6666

C. Alleged Error Regarding Shared and Common Costs 6868

D. True-Up Comments 7070

E. Use of Synthesis Model 7070

F. Sanctions Against Pacific 7171

G. Deaveraged Loop Prices 7272

H. ISDN and Centrex Ports 7373

Conclusions of Law 7979

ORDER 8383

APPENDIX A - Interim Rates

APPENDIX B - Analysis of Interim Unbundled Loop Rates

APPENDIX C - Analysis of Interim Unbundled Switching Rates

I. Summary

This proceeding, known as the "UNE Reexamination," was initiated following formal requests by carriers interconnected with Pacific Bell Telephone Company (Pacific) for the Commission to reexamine certain prices that Pacific Bell charges competitors who purchase "unbundled network elements" (UNEs). Through purchase of these UNEs, competitors are able to use portions of Pacific's network. By this decision, we grant in part a motion for interim relief filed by AT&T Communications of California, Inc. (AT&T) and WorldCom, Inc. (WorldCom) (hereinafter referred to as "Joint Applicants") and we set interim rates for two UNEs, namely unbundled loops and unbundled local and tandem switching. We find that interim rates are necessary due to delays in this proceeding caused by inadequacies in Pacific's cost study filing and the need to examine competing cost models.

For unbundled loops, we adopt an interim discount of 15.1% from Pacific's current loop price for the basic (2-wire) loop, which results in an interim loop rate of $9.93.¹ We apply this discount to the deaveraged loop rates adopted in Decision (D.) 02-02-047. Joint Applicants had requested a 36% reduction, based on a trend analysis of 1994 and 2000 loop cost data using the HAI Model version 5.2a (HAI model or HAI). After considering comments on this approach, we have made adjustments to the HAI model. Specifically, we altered Joint Applicants' line counts to reflect physical facilities rather than "voice grade equivalents." Also, we removed the effects of the investment/expense factor approach from the HAI trend analysis by holding expenses per loop constant. The analysis leading to the discount noted above is contained in Appendix B.

For unbundled switching, we adopt an interim discount of 35.8% for the port, 50.8% for usage rates, and 41.9% for tandem switching. Joint Applicants requested that we impose an interim rate based on a proposal by SBC-Ameritech for switching rates in Illinois. This request amounts to a 69% discount from current local switching rates and a 79% reduction from current tandem switching rates. We decline to adopt this approach, and instead adopt interim switching rates using the same trend analysis that we used to set an interim loop rate. The trend analysis is based on HAI model runs that were submitted with Joint Applicants' motion for interim relief. Appendix C contains the trend analysis that results in the discounts described above.

This proceeding will remain open to set final UNE rates for unbundled loops and unbundled switching. The interim rates adopted in this order are subject to adjustment, either up or down, from the effective date of this order until final rates are adopted.

Through this interim order, we also dismiss Application 01-02-034, filed by The Telephone Connection Local Services LLC, which requested review of Pacific's costs for the DS-3 entrance facility without equipment.