ALJ/TRP/avs DRAFT Item 3

9/7/2000

Decision DRAFT DECISION OF ALJ PULSIFER (Mailed 8/4/2000)

BEFORE THE PUBLIC UTILITIES COMMISSION OF THE STATE OF CALIFORNIA

Order Instituting Rulemaking on the Commission's Own Motion Into Competition for Local Exchange Service.	Rulemaking 95-04-043 (Filed April 26, 1995)
Order Instituting Investigation on the Commission's Own Motion Into Competition for Local Exchange Service.	Investigation 95-04-044 (Filed April 26, 1995)

OPINION

By this decision, we grant the Joint Motion for Adoption of the Proposed Settlement Agreement filed on May 19, 2000, relating to the recovery of Pacific Bell's (Pacific) Local Competition Implementation Costs. As agreed among parties to the Settlement, we authorize Pacific to recover $87.5 million over a two-year period beginning January 1, 2001. This phase of the Local Competition Proceeding addressing implementation cost recovery has previously covered the costs for both of the two major incumbent local exchange carriers (ILECs), Pacific and GTE California, Inc. (GTEC). The Settlement Agreement that is the subject of this decision, however, covers only Pacific's costs; it makes no judgment and establishes no precedent concerning the amount or manner of cost recovery that may subsequently be applied to GTEC with respect to the treatment of its implementation costs.

I. Procedural Background

The issue of cost recovery for local competition implementation costs incurred by Pacific and GTEC, first came before the Commission as one of the matters in the evidentiary hearings (EH) held in this docket during the fall of 1995. The Commission issued Decision (D.) 96-03-020 in March 1996, based upon those hearings, determining that it was premature at that point to authorize any implementation cost recovery. In D.96-03-020, we deferred consideration of the requests of Pacific and GTEC for recovery until after the costs of implementation of local competition were actually incurred. We authorized the ILECs to record such costs incurred since January 1, 1996, in memorandum accounts subject to later disposition. In conformance with that decision, Pacific filed a report on February 28, 1997, summarizing the implementation costs incurred for the calendar year 1996.

On December 31, 1997, an Administrative Law Judge (ALJ) ruling solicited further comments concerning (1) the basis upon which implementation cost recovery could be justified and what sort of cost recovery mechanism may be appropriate; (2) any modification to the ILEC's accounting and reporting of implementation costs necessary to permit adequate discovery to proceed; (3) the timing and coordination of any schedule for further Commission consideration of the recovery of implementation costs. Comments in response were filed on February 20, 1998, with replies filed on March 6, 1998.

Based upon those filed comments, the Commission issued D.98-11-066. In D.98-11-066, we defined "implementation costs" as those expenses incurred in response to a regulatory order implementing the infrastructure to enable Competitive Local Exchange Carriers (CLCs) to compete with the ILEC. The essential characteristic of such costs is that they are not intended to enable the ILEC to compete in the local exchange market, but are for the general benefit of competing carriers. The ILEC must incur these costs for the benefit of the CLC by virtue of the ILEC's control over essential bottleneck facilities and related processes. The implementation measures associated with such expenses are nonrecurring and necessary to transition to a competitive environment.

In D.98-11-066, we also authorized an interim per-line surcharge to recover 75% of the 1996 reported implementation costs of Pacific and GTEC subject to a subsequent true-up. In order to qualify for final recovery, the implementation costs had to reflect finished work products that had been prudently and effectively implemented. We further concluded in D.98-11-066 that EHs may be warranted to determine the appropriate level of implementation costs subject to final recovery.

Various parties subsequently filed applications for rehearing of D.98-11-066 challenging the legality of the customer surcharge without a finding of reasonableness, and related issues. The Commission stayed the authorization to recover 75% of the 1996 reported costs pending disposition of the rehearing applications.

In D.99-07-048, the Commission addressed the various applications for rehearing of D.98-11-066, and granted rehearing for: