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STATE OF CALIFORNIA Arnold Schwarzenegger, Governor

PUBLIC UTILITIES COMMISSION

505 VAN NESS AVENUE

SAN FRANCISCO, CA 94102-3298

September 9, 2004 Agenda ID # 3896

TO: ALL PARTIES OF RECORD IN APPLICATION 01-02-024 ET AL.

RE: NOTICE OF AVAILABILITY OF ALTERNATE PROPOSED DECISION
OF COMMISSIONER SUSAN P. KENNEDY

Consistent with Rule 2.3(b) of the Commission's Rules of Practice and Procedure, I am issuing this Notice of Availability of the above-referenced alternate proposed decision. An Internet link to this document was sent via e-mail to all the parties on the service list who provided an e-mail address to the Commission. An electronic copy of this document can be viewed and downloaded at the Commission's Website ( www.cpuc.ca.gov).

Any recipient of the Notice of Availability who is not receiving service by electronic mail in this proceeding may request a paper copy of the above documents from the Commission's Central Files Office, at (415) 703-2045; e-mail cen@cpuc.ca.gov.

This is the alternate proposed decision of Commissioner Kennedy to the proposed decision of Administrative Law Judge Duda previously mailed to you. The Commission may act then, or it may postpone action until later.

The alternate proposed decision of Commissioner Kennedy is on the Commission's September 23, 2004 meeting agenda. Consistent with Rule 77.6 of the Commission's "Rules of Practice and Procedure" comments are due on September 16, 2004, and reply comments are due September 21, 2004.

When the Commission acts on the proposed decision, it may adopt all or part of it as written, amend or modify it, or set it aside and prepare its own decision. Only when the Commission acts does the decision become binding on the parties.

As set forth in Rule 77.6, parties to the proceeding may file comments on the enclosed alternate at least seven days before the Commission meeting or no later than September 16, 2004. Reply comments are due on September 21, 2004. An original and four copies of the comments and replies with a certificate of service shall be filed with the Commission's Docket Office and copies shall be served on all parties on the same day of filing. The Commissioners and ALJ shall be served separately. Comments are limited to 15 pages, and reply comments to 5 pages.

When the Commission acts on the revised proposed decision, it may adopt all or part of it as written, amend or modify it, or set it aside and prepare its own decision. Only when the Commission acts does the decision become binding on the parties.

This matter was categorized as ratesetting and is subject to Pub. Util. Code Section 1701.3(c). Pursuant to Resolution ALJ-180, a Ratesetting Deliberative Meeting (RDM) to consider this matter may be held upon the request of any Commissioner. If that occurs, the Commission will prepare and mail an agenda for the RDM 10 days before hand. When an RDM is held, there is a related ex parte communications prohibition period.

In addition to service by mail, parties should send comments in electronic form to those appearances and the state service list that provided an electronic mail address to the Commission, including ALJ Duda at DOT@cpuc.ca.gov, Advisor Timothy Sullivan at tjs@cpuc.ca.gov and Commissioner Kennedy at sk1@cpuc.ca.gov. Electronic service will facilitate the preparation of the decision.

/s/ Angela K. Minkin

Angela K. Minkin, Chief

Administrative Law Judge

ANG/avs

Attachment

COM/SK1/tjs DRAFT Agenda ID #3896

9/23/2004 Item __

Decision ALTERNATE PROPOSED DECISION OF COMMISSIONER KENNEDY (Mailed 9/9/2004)

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 Second Annual Review of Unbundled Network Element Costs Pursuant to Ordering Paragraph 11 of D.99-11-050.

Application 02-02-031

(Filed February 28, 2002)

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 Interoffice Transmission Facilities and Signaling Networks and Call-Related Databases in Its Second Annual Review of Unbundled Network Element Costs Pursuant to Ordering Paragraph 11 of D.99-11-050.

Application 02-02-032

(Filed February 28, 2002)

Application of Pacific Bell Telephone Company (U 1001 C) for the Commission to Reexamine the Costs and Prices of the Expanded Interconnection Service Cross-Connect Network Element in the Second Annual Review of Unbundled Network Element Costs Pursuant to Ordering Paragraph 11 of D.99-11-050.

Application 02-02-034

(Filed February 28, 2002)

Application of XO California, Inc. (U 5553 C) for the Commission to Reexamine the Recurring Costs of DS1 and DS3 Unbundled Network Element Loops in Its Second Annual Review of Unbundled Network Element Costs Pursuant to Ordering Paragraph 11 of D.99-11-050.

Application 02-03-002

(Filed March 1, 2002)

OPINION ESTABLISHING REVISED UNBUNDLED NETWORK
ELEMENT RATES FOR PACIFIC BELL TELEPHONE COMPANY
DBA SBC CALIFORNIA

TABLE OF CONTENTS

Title Page

OPINION ESTABLISHING REVISED UNBUNDLED NETWORK ELEMENT RATES FOR PACIFIC BELL TELEPHONE COMPANY DBA SBC CALIFORNIA 11

I. Summary 11

II. Background 77

III. Applicable Standards 1212

IV. Overview of Cost Models 1717

V. Both HM 5.3 and the SBC-CA Models Are Flawed 2222

VI. Modeling Inputs 128128

VII. DS-3 Loop Rates 236236

VIII. Further UNE Reexamination Proceedings 236236

IX. Assignment of Proceeding 237237

X. Comments on Proposed Decision 238238

Findings of Fact 244244

Conclusions of Law 259259

ORDER 273273

APPENDIX A Adopted UNE Rates

APPENDIX B Comparison of Proposed and Adopted UNE Rates

APPENDIX C Switching Rates Based on Minute of Use

APPENDIX D Glossary of Acronyms

APPENDIX E List of Appearances

OPINION ESTABLISHING REVISED UNBUNDLED NETWORK
ELEMENT RATES FOR PACIFIC BELL TELEPHONE COMPANY
DBA SBC CALIFORNIA

I. Summary

This proceeding, known as the "UNE Reexamination," was initiated following formal requests by carriers interconnected with Pacific Bell Telephone Company d/b/a SBC California (hereinafter SBC-CA)1 for the Commission to reexamine certain prices that SBC-CA charges competitors who purchase "unbundled network elements" (UNEs).2 By purchasing UNEs, competitors are able to use portions of SBC-CA's network to offer competitive local exchange services.

In this decision, the Commission adopts updated and final rates for the following UNEs: loops (including deaveraged rates for 2-wire, DS-1 and DS-3 loops), switching, dedicated transport, signaling system 7 (SS7) links, and the DS-3 entrance facility without equipment.3 The newly adopted rates for the most frequently discussed UNEs are:

Table 1

Adopted UNE Rates

UNE

Adopted Rate4

Average 2-wire Loop

$15.08

Average DS-1 Loop

$73.83

Average DS-3 Loop5

$573.20

2-wire port

$3.27

UNE-Platform6

$19.60

The rates in today's order replace interim rates for loops and switching that were set in Decision (D.) 02-05-042.7 The rates in today's order for other UNEs, namely dedicated transport, SS7 links, and the DS-3 entrance facility without equipment, replace rates originally adopted in D.99-11-050.

In adopting today's rates, the Commission considered two divergent cost models offered by the parties to this proceeding. SBC-CA proposed updated UNE rates based on a series of cost models that it has developed for use in the 13 states in which its parent corporation, SBC, operates. AT&T Communications of California, Inc. (AT&T) and WorldCom, Inc. (WorldCom, now known as

"MCI")8 (hereinafter referred to as "Joint Applicants" or "JA") proposed updated 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 as seen in the table below.9

Table 2

Comparison of Proposals

UNE

SBC-CA Proposal

JA Proposal

Interim Rate10

Average 2-wire Loop

$23.86

$5.24

$9.82

2-wire Port

$3.13

$1.28

$0.83

Switching Usage

$3.34

$1.57

$3.28

UNE-P

$30.33

$8.09

$13.93

After careful review of the competing cost models filed by SBC-CA and JA, the Commission finds that both models are flawed. The principal flaws with SBC-CA's models are that we are not able to modify easily many of the models' inputs to perform routine sensitivity analysis. When we attempt to modify certain inputs in the SBC-CA models, the lack of flow through from one model to the other necessitates extremely time-intensive manual manipulation that is prone to error.

The principal flaws with HM 5.3 are that we did not agree with certain of its input assumptions, particularly those related to clustering of customers into distribution areas, certain labor inputs, and the interoffice transport network. We were unable to modify these particular input assumptions at all.

It was not possible to fix all of the flaws identified in either model. Because both models were flawed, we initially found we could not rely on either model by itself to establish UNE rates. To the extent possible, the Commission modified both models to run with common inputs. As we modified these models and their inputs to resolve the many disputes and to bring the models in line with Commission precedent, federal requirements, and additional rationale we develop herein, we found that the resulting cost outputs of the models converged.

Following comments on the Proposed Decision, we made appropriate adjustments to both HM 5.3 and the SBC-CA models to correct what we agree were errors and to make necessary adjustments. During this process, we determined the SBC-CA models are unduly burdensome to operate because they require extremely time-intensive manual manipulation to make input modifications and the models are prone to input errors due to extraordinarily complex input modification requirements. Except for the local loop, where the SBC-CA model better tracks California costs, reliance on the SBC-CA models adds little to our analysis. Therefore, the rates we adopt in this order for UNE-L11 are based on a blend of the SBC-CA and the HM 5.3 models. For all other costs we rely solely on HM 5.3.

Some of the key modeling inputs used for the Commission's model runs include a 10. 37% cost of capital, asset lives based on those previously adopted by this Commission, and a 41.7% copper distribution fill factor. The Commission's model runs include several inputs and assumptions proposed by SBC-CA, including plant mix, labor rates, Lucent and Nortel switch vendor assumptions, the forward-looking mix between Universal Digital Loop Carrier (UDLC) and Integrated Digital Loop Carrier (IDLC) technologies, and a 12,000-foot crossover point (beyond which fiber replaces copper). Furthermore, today's order adopts a flat-rate structure for the switching UNE wherein all switching costs are incorporated into one flat monthly port price, as proposed by JA.

As set forth in D.02-05-042 and D.02-09-052, SBC-CA must adjust, or "true-up" the interim rates it charged for its UNEs to the new rates adopted in this order. In other words, SBC-CA 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 and customers.

Finally, this order modifies the annual nomination process originally established in D.99-11-050 to suspend further review of SBC-CA's UNEs until February 2007, absent action by the FCC that alters the TELRIC methodology.

1 To avoid confusion, we will generally refer to Pacific Bell Telephone Company (Pacific) as SBC-CA because much of the record in this case references "SBC Pacific" and "SBC California" rather than Pacific. We will refer to the parent company of SBC-CA as simply, "SBC." 2 See Appendix D for a glossary of all acronyms used in this order. 3 See Appendix A for a complete list of the rates adopted in this order. 4 These rates include a 21% shared and common cost markup, as adopted in D.02-09-049. 5 In modeling DS-3 costs, the assumptions adopted in this decision produce costs substantially higher than that requested by SBC-CA. This result is so anomalous, that we believe that it is more reasonable to adopt that amounts requested by SBC-CA. This affects the following UNE's: DS-3 Loop, Unbundled Dedicated Transport using the DS-3 Loop, and the DS-3 Entrance Facility. 6 UNE-Platform (UNE-P) refers to the combination of a 2-wire loop, 2-wire port, and switching UNEs. 7 All of SBC-CA's UNE rates were further adjusted by D.03-07-023, which implemented an adjustment to SBC-CA's shared and common cost markup. 8 On April 20, 2004, WorldCom, Inc. completed its corporate reorganization and changed its name to MCI Inc. To avoid confusion, this order will refer to MCI/WorldCom because WorldCom was the name used on filings prior to submittal of the case. 9 For a complete comparison of the SBC-CA and JA UNE rate proposals, see Appendix B. 10 Interim rates initially adopted in D.02-05-042 and modified by D.03-07-023. 11 We use the word UNE-L as a shorthand expression for all loop costs (such as 2-wire, 4-wire, Coin, PBX, and ISDN) with the exceptions of DS1 and DS3, which have large electronic components.

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