Background

On September 19, 2002, this Commission issued Decision (D.) 02-09-050, its advisory opinion to the FCC on Pacific's compliance with the fourteen checklist items of Section 271. The decision also included an overview of the Performance Incentive Plan adopted for Pacific and an assessment of Pacific's operations pursuant to California Public Utilities (Pub. Util.) Code Section 709.2(c) (Section 709.2(c)). Section 709.2(c) requires this Commission to make four specific determinations before implementing any "order authorizing or directing competition in intrastate interexchange telecommunications."¹

D.02-09-050 determined, in accordance with Section 709.2(c)(1), that Pacific had demonstrated that competitors had "fair, nondiscriminatory, and mutually open access" to its exchanges. Pacific's strong showing of compliance with most of the fourteen checklist items substantiated its claim of fair and open access. However, the decision further found that, under Sections 709.2(c)(2) and (3), the existing record could not adequately support affirmative determinations of "no anticompetitive behavior" and "no improper cross subsidization," respectively. In addition, D.02-09-050 found that on the existing record Pacific's entry into competitive intrastate long distance telephone markets posed "a substantial possibility of harm" to those markets.

As noted in the decision, participating parties did not ask the Commission to bar Pacific's entry into the intrastate long distance market as a sanction or in recompense for Pacific's insufficient Section 709.2(c) showing. Instead, they urged the Commission to counter the potential harms to the market by applying several conditions to Pacific's long distance entry². Pac-West Telecomm, Inc. (Pac-West) and Working Assets Long Distance (WA) asked the Commission to structurally separate Pacific into retail and wholesale focused entities, and divest the wholesale portion.³ In consideration of that proposal, D.02-09-050 directed Pacific to file, no later than March 19, 2003, a "report or study detailing the cost of separating Pacific into two parts and divesting the segment covering wholesale network operations."⁴

Again, to lessen future harms, Pac-West/WA and AT&T Communications of California, Inc. (AT&T) proposed that a neutral third-party Primary Interexchange Carrier (PIC) administrator replace Pacific in the role of PIC administrator. In response, the Commission instructed the Telecommunications Division to prepare an Order Instituting Investigation to "examine the efficacy, feasibility, structural implementation, and selection criteria for selecting a competitively neutral third-party PIC administrator for California."⁵

To address several parties' concerns about the significant advantage that Pacific would have through the joint marketing of its affiliate's prospective long distance service with its local service, D.02-09-050 applied the limited marketing check of recently revised Tariff Rule 12 to Pacific's joint marketing ventures. The decision also stated the intention of closely monitoring Pacific's marketing activities to ensure compliance with federal and state requirements.

On October 4, 2002, the Assigned Commissioner issued a ruling (ACR) noting that although the Commission had favorably assessed Pacific's long distance application for the FCC, the status of Pacific's intrastate interexchange request was hampered by the Commission having affirmatively made only one of the four determinations required under Section 709.2(c). The ACR stated that upon reviewing the proceeding record after the issuance of the decision, the Assigned Commissioner believed that the outstanding Section 709.2(c) issues could and should be resolved promptly.

The Assigned Commissioner questioned how beneficial further proceedings and additional rounds of briefings would be in addressing the unfinished aspects of the Section 709.2(c) inquiry. In his view, the remainder of the proceeding should focus on strengthening the safeguards established in D.02-09-050, and establishing additional safeguards, if warranted, to mitigate the potential harms to the intrastate interexchange market. The ruling asked interested parties to consider and comment on four questions by October 14, 2002.⁶ Fifteen parties commented on the issues.

On November 6, 2002, the Assigned Administrative Law Judge (ALJ) and the Assigned Commissioner convened a prehearing conference (PHC) on Section 709.2(c). The purpose of the PHC was: (1) to advise the interested parties that the Commission wanted to resolve the remaining Section 709.2(c) issues as promptly as possible; (2) to urge the parties to collaborate on an Expedited Dispute Resolution (EDR) process in order to address the ongoing operational conflicts between Pacific and the competitors; (3) to ask Pacific to work as closely as possible with staff to keep it fully briefed and ready for any and all post authorization regulatory tasks; and (4) to allow the parties an opportunity to further express their views and concerns on the resolution of the Section 709.2(c) open issues.⁷