7. Access Charge Rates and Structure

7.1. Small LECs' Position

The Small LECs propose adoption of intrastate access charges based on the interstate access charge rate structure of the National Exchange Carrier Association (NECA). According to the Small LECs, they currently charge Pacific's access rates, which are far below the Small LECs' relevant costs. Use of NECA rates moves the Small LEC intrastate access rates closer to their own costs, but the rates would still remain within a reasonable range, as evidenced by the fact that NECA rates have been applied to interstate access traffic for many years. The NECA access tariff structure is also well-established and understood within the industry, and use of the same structure for intrastate services will simplify carrier access billing.

The Small LECs assert that the proposed rates filed with the Amendment to the Joint Application will move the access charges of the Small LECs closer to the relevant access costs of the Small LECs, but there will be a substantial balance of access-related costs in excess of access revenues. The $31 million in permanent replacement funding represents this balance of access costs, since it is a company-by-company total of the amount of costs reported to the pools, less the total access revenues that each company will receive using the access rates it has filed. According to the Small LECs, the access rates are calculated to generate $18.3 million in access revenues. When added to the $31 million balance represented by the permanent funding, the total of the access-related costs for the Small LECs is $49 million. The costs reported to the pools by each company are determined by application of the accounting, separations and cost allocation rules adopted by the FCC and this Commission.

The Small LEC proposal to use NECA-based access rates was supported in the opening testimony of ORA and AT&T, except both those parties opposed adoption of the Carrier Common Line Charge (CCLC) rate element.²² Sprint, however, took the position that the access rates of the Small LECs should not be set in relation to Small LEC costs. Sprint proposed, instead, that the Small LEC access rates should be based on a statewide average of the access rates of other California companies, which in effect would mean that the primary determinant of Small LEC access rates would be Pacific's operating costs.

The Small LECs state that Sprint attempted to justify its position by referring to the regulatory requirement that toll service providers charge statewide averaged toll rates. According to the Small LECs, Sprint's argument ignores the reason for requiring that carriers charge statewide averaged toll rates. Regulators require that toll service providers charge averaged toll rates because they realize that low-density areas are more expensive to serve than high-density areas. Based on the consumer-oriented public policy determinations by this Commission, IXCs are prohibited from recognizing these location-specific cost differences by adopting location-specific pricing. Sprint's proposal turns this policy on its head by suggesting that since IXCs are being required to charge averaged toll rates that do not vary with locality-specific service costs, the regulator is therefore obliged to eliminate the service cost disparities between high and low cost areas.

The Small LECs assert that Sprint's position that the Small LEC access rates would be too high is further undermined by the fact that Sprint's own incumbent LEC operations in several other states charge access rates as high as 13 cents to 22 cents per minute.²³ This is far in excess of the approximately 5.5 cent per minute rates proposed by the Small LECs.

According to the Small LECs, the suggestion of ORA, AT&T and Sprint that the CCLC should be eliminated is primarily based on a philosophical opposition to CCLCs in general and is not supported by the record in this proceeding. The elimination of the CCLC by the FCC has only applied to some of the larger price cap companies. Rate-of-return LECs, including the NECA companies, continue to have a CCLC access rate element in their FCC-approved tariffs. Further, when the FCC eliminated the CCLC for price cap carriers, it adopted a charge on presubscribed lines as a replacement for the CCLC revenues.

The proposal to eliminate the CCLC also fails to address the fact that even with the CCLC rate element, the access rates proposed by the Small LECs are below their access-related costs. (Bishop Reply Testimony, Exh. 2, p. 4.) Further, as demonstrated by Peters' testimony, Pacific's willingness to pay access rates which include the CCLC is based in part on Pacific's acknowledgement that the 5.5 cent access rates are below the 6.5 cent "traffic sensitive" portion of Small LEC access costs.

The Small LECs rebut the IXCs' argument that the proposed 5.5 cent Small LEC access rate would lead to an unprofitable toll market for IXCs serving Small LEC customers. There is no credible evidence in the record that can support such a conclusion. According to the Small LECs, there is no evidence of the cost and revenue factors that serve as a measure of toll service profitability. The only evidence presented by the IXCs that even remotely approached the subject of toll service profitability was in the prefiled testimony of Rearden that the "most competitive" toll rates were five cents per minute. (Rearden Opening Testimony, Exh. 18, p. 5.) Under cross-examination, however, Rearden was unable to provide any evidence whatsoever when asked about (1) the "least competitive" toll rates in the state; (2) the upper range of toll rates for Sprint customers who were not on a specific rate plan; (3) the rates for Sprint's interstate calling services; (4) whether in order to get the five-cent per-minute rate a customer had to pay $6.99 per month; and (5) whether a customer on a five-cent rate plan with a $6.99 monthly charge who used 100 minutes of toll service in a month would have an effective 12-cent per minute rate. (Rearden cross-examination, 3 R.T. 236-238.) Under cross-examination, Kong acknowledged that AT&T's basic intrastate toll rate was 13 cents per minute and that the interstate basic rate was 26 cents per minute, (2 R.T. 134.) but he did not know what AT&T's average revenue per minute was, inclusive of monthly minimum charges for rate plans.

The Small LECs assert the IXCs cannot have it both ways. Their failure to be forthcoming with hard information on toll service profitability eliminates the credibility of their claim that they cannot provide profitable toll services to Small LEC customers if the Commission approves the requested 5.5 cent per minute access rate. Furthermore, their argument completely ignores the policy basis for both California and federal requirements of toll rate averaging among high and low cost areas. The relevant costs for setting statewide toll rates are obviously statewide operating and access costs. The object of the policy is not to promote service redlining; it is, instead, to eliminate geographic price discrimination by IXCs, despite the existence of high and low cost service areas.

In their Reply Brief, the Small LECs indicate that ORA misunderstood the Small LEC access charge proposal. ORA states that the Small LECs' purpose in proposing to include the CCLC is to generate "additional" revenues for the Small LECs, in order to avoid revenue neutrality. That is not the case. All CCLC revenues are expressly included in witness Tutt's calculation of the settlements replacement funding, as a reduction to the funding requirement.

According to the Small LECs, the IXCs ignore two facts relating to access charges: (1) Small LECs have higher costs of providing access than large LECs, and (2) Replacement funding must come from somewhere, and the Commission has expressed a preference that costs be recovered through a carrier's own rates where reasonable.

The IXC brief also reiterates the unsupported claim that the CCLC is somehow unlawful or illegal. According to the Small LECs, this assertion is pure fabrication. According to the Small LECs, both the FCC and the CPUC have approved access tariffs that include a CCLC at various times since passage of the 1996 Act.²⁴ Also, the FCC has been able to eliminate CCLC charges for larger LECs by creating other forms of access charges to replace the CCLC revenues. (Exh. 2 at 4.) In the case of the Small LECs, however, no party has suggested an increase to local rates that are already at the maximum level under CHCF-A rules or the creation of a charge on presubscribed lines or some other charge to be assessed against IXCs as a replacement for CCLC revenues.

7.2. Pacific's Position

Pacific sees the access charge issue as a red herring. AT&T and Sprint ostensibly object to the proposed adoption of the NECA rates for the Small LECs to the extent that it introduces CCL charges into the Small LECs' intrastate rate structure. At least one other party, ORA, was left with the impression that AT&T and Sprint would not provide intraLATA toll service in the Small LECs' territories because of the proposed access charges. (Exh. 15, ORA Rebuttal Testimony, p. 10.)

ORA's impression regarding AT&T and Sprint's unwillingness to serve was contradicted by AT&T and Sprint. According to Pacific, AT&T and Sprint both stated they would provide intraLATA service in the Small LEC territories.²⁵ While it is clear that AT&T and Sprint would like lower access rates, Pacific asserts that allowing the Small LECs to raise their access rate to NECA levels (with CCL) will not create a barrier to entry for the intraLATA toll market. Pacific believes that the claim that there will not be enough carriers for presubscription balloting because of access charges is a scare tactic conjured up by AT&T and Sprint in their quest for lower access fees.

Likewise, Pacific states that AT&T's claims that the Small LECs' access charges may be too high for it to be profitable should also be disregarded. The incremental increase in access charges AT&T will pay on a statewide basis is negligible. (Exhibit 13-C Confidential.) Additionally, AT&T's access costs will be further significantly reduced on the interstate side as a result of the recent FCC CALLS Order.²⁶ The net result will reduce, not raise, the access charges that AT&T pays.

According to Pacific, Sprint's witness admitted that Sprint's incumbent LEC's access charges range from a low of 9 cents per minute to a high of 22 cents per minute. (Rearden for Sprint, 3 R.T. 251.) The proposed rate of about five and a half cents is lower than that charged by Sprint's incumbent LEC, and lower than the access charges both Sprint and AT&T pay in other states where they provide intraLATA toll service. (Id.)

Finally, Pacific concludes that AT&T and Sprint's claims regarding access charges are disingenuous given that Pacific, through the pooling process, has been subsidizing AT&T, Sprint and other IXCs for years. (Exh. 5, Testimony of Peters for Pacific, p. 4.) AT&T and Sprint have been paying Pacific's lower access rates (now less than one cent in the Small LECs' territories) while the Small LECs have been withdrawing their total costs to provide access from the pools. Pacific, in essence, has been paying the true cost of access while AT&T and Sprint were enjoying a free ride.

In its Reply Brief, Pacific rebuts the assertions by ORA and the IXCs that the Small LECs have not justified their access rates with cost studies. According to Pacific, the Small LECs have been producing access, intraLATA toll and EAS cost studies on an annual basis for the pools. Pacific paid the Small LECs their access, intraLATA toll and EAS costs that resulted from these studies through the pooling process. This process resulted in Pacific paying the Small LECs approximately 11 cents per access minute. (1 R.T. 67, Peters for Pacific.)

7.3. ORA's Position

The Small LECs should not receive a CCLC. Not only is such a charge inconsistent with Pacific's access rates (which the Small LECs currently use for their access rates), CCLC charges are inconsistent with the Commission's philosophy of trying to make telephone rates cost-based. The Commission eliminated the CCLC for both Pacific and GTEC. D.94-09-065 [56 CPUC 2d, 117, 191.]

According to ORA, nothing in the proposal to eliminate pooling arrangements justifies the re-imposition of this charge. The Commission should strive to be consistent in gradually eliminating the structure of subsidies and payments that has developed over the years. Re-imposing a CCLC, as the Small LECs have proposed, is a move in the opposite direction.

It is important to keep the purpose of the instant proceeding in mind in considering the CCLC question: to find a source of replacement revenues for the existing pooling agreements. During cross-examination, the Small LECs' witness acknowledged that establishing a CCLC in the context of this proceeding is really a device for generating additional revenues for the Small LECs. (Bishop for Small LECs, 1 R.T. 38.) Thus, establishing a CCLC for the Small LECs in the context of this application is inappropriate since the replacement source of revenue for the pooling agreements was supposed to be revenue neutral.

AT&T's witness Kong noted that the FCC is moving away from rate structures such as the CCLC because it is not cost-based. Kong also noted that, as a general matter, the FCC supports the replacement of implicit subsidies such as the CCLC with explicit subsidies. The Commission should follow the lead of its federal counterpart and not allow the Small LECs to use this application to re-impose this non-cost-based rate.

In its Reply Brief, ORA asserts the Small LECs have distorted the policies and actions of the FCC regarding the CCLC. The IXCs' Opening Brief makes it clear that the FCC intends to eliminate the CCLC and other similar non-cost-based charges. According to ORA, the Small LECs have failed to provide a compelling reason to retain this type of subsidy. Given that both the FCC and this Commission have stated their intention to move from implicit subsidies to explicit ones, it would be counterproductive for the Commission to sanction the Small LECs' attempt to bootstrap the CCLC into their rates.

7.4. The IXCs' Position

The Small LECs should not be allowed to increase their traffic-sensitive access charges without a cost showing. Without cost studies from the Small LECs, the Commission has no way of verifying that the proposed NECA rates correctly recover each Small LEC's access revenue requirement. Similarly, without these studies, the Commission cannot verify that the CHCF-A replacement funding requested by the Small LECs will not result in overearnings for any individual Small LEC.

The IXCs assert that CCL charges should not be included in the Small LECs' access charge structure. As AT&T explained in its opening testimony, CCL charges do not follow the principles of cost causation, and they recover the non-traffic sensitive (NTS) costs of the local loop via a per-minute rate. (Exh. 10, Kong for AT&T at 4.) The Commission eliminated the CCL charges for a number of LECs, including applicants, and neither Pacific nor the Small LECs have intrastate CCL charges in their tariffs at the present time. (1 R.T. 49.) The Small LECs imply that the CCL is an appropriate rate element because the FCC continues to approve interstate tariffs of smaller LECs which contain CCL charges, even after passage of the Telecommunications Act of 1996 (the Act). According to the IXCs, this misrepresents the full picture of the FCC's policies relating to the CCL. As AT&T witness Kong stated, the FCC has instituted access reform proceedings for both price cap LECs and rate-of-return LECs in which it has proposed to phase out the interstate CCL, and it has done so for a number of price cap LECs. Contrary to the Small LECs' implied argument, the fact that the FCC has not yet issued its order eliminating the interstate CCL charge for smaller LECs, there is no doubt as to the FCC's policy and intent regarding this subsidy.

According to the IXCs, new implicit subsidies are prohibited by the Act. As the FCC noted in its Universal Service Order, "Congress intended that, to the extent possible, `any support mechanisms continued or created under new section 254 should be explicit, rather than implicit as many support mechanisms are today.'"²⁷ Thus, the IXCs assert the Commission may not now approve an implicit subsidy for the Small LECs in the form of CCL charges.

The IXCs state that any individual Small LEC's fixed loop costs which are not fully recovered via its basic exchange rates, must be recovered via an explicit subsidy from the CHCF-A. Because the CHCF-A does not afford the Small LECs guaranteed revenues, they seek to establish an implicit subsidy in a misguided attempt to guarantee a certain amount of revenues from IXCs. This is bad public policy. An implicit subsidy does not guarantee any particular level of funding because customer calling patterns cannot be relied upon to generate a guaranteed level of toll revenues. By contrast, the Commission can ensure that the CHCF-A is funded sufficiently to provide the Small LECs with the subsidies they require.

In their Reply Brief, the IXCs rebut applicants' argument that the proposed NECA level access rates are affordable because IXCs pay higher access charges in several other states. The IXCs assert those access rates levels are simply not applicable to California. In other states, the Small LECs' access charges generally contain implicit subsidies that the state commissions have not yet migrated to an explicit universal service fund in accordance with the Act. In California, by contrast, an explicit High Cost Fund has already been established, and access rates that contain implicit subsidies such as CCLC charges may not now be approved by this Commission.

The IXCs also refute Pacific's allegation that it has been subsidizing IXCs through the pooling process. According to the IXCs there has been no subsidy to IXCs due to the pooling process, because IXCs have been paying the implicit subsidies to Pacific, which, in turn, forwarded the subsidies to the actual recipients via its payments to the Small LECs. The proposition that Pacific's per-minute access rate is lower than the Small LECs' access costs is not the issue here. The fact remains that IXCs have been paying the entire access subsidy to the Small LECs-an amount of approximately $16.9 million-implicitly as part of Pacific's access rates. The Commission should remove this subsidy from Pacific's rates once Pacific stops paying it to the Small LECs.

7.5. Discussion

The major dispute centers on whether the access charges adopted for the Small LECs should include the CCLC rate element. ORA and the IXCs are correct that this Commission previously eliminated this rate element, as not-cost based. In our Implementation Rate Design proceeding, we eliminated the CCLC and mandated recovery of the revenue through other rates. We dispute the IXCs' contention, however, that the Act prohibits adoption of a new implicit subsidy in the form of a CCLC for the Small LECs. While the FCC did eliminate the CCLC for price cap LECs, the interstate CCLC is still in place for rate-of-return LECs. As the Small LECs state, since passage of the Act, both the FCC and CPUC have adopted access charge rate structures that included a CCLC rate element. Therefore, we believe we have the discretion to determine whether or not the Small LECs switched access rate design includes a CCLC.

Given that we have the discretion to make that decision, we make our determination on policy grounds. According to the record in this proceeding, the Small LECs' access rate including the CCLC is about 5.5 cents per minute. According to the First Amendment to the Joint Application, which the applicants filed on February 9, 2000, in response to the Scoping Memo and Ruling of Assigned Commissioner, the CCLC rate element accounts for about 1 cent per minute. Therefore, the switched access rate for the Small LECs without the CCLC would be about 4.5 cents per minute.

The IXCs have stated strong opposition to inclusion of a CCLC in the Small LECs' switched access rates. We recognize that the access rates in the Small LEC territories will be significantly higher than Pacific's rates, and would like to take the steps necessary to see that a competitive market develops in the Small LEC areas. We believe that elimination of the CCLC rate element will encourage IXCs to enter the market and will assist in the development of that competitive market.

By eliminating the CCLC rate element, we are ensuring that Small LECs will receive a reduced amount in revenues from their switched access rates. The Small LECs calculated that they would receive about $18.3 million in switched access revenues, with the CCLC. Without the CCLC, that amount will drop down to about $15 million. However, that does not mean that the Small LECs' revenue stream will be reduced by $3 million. It simply means that the anticipated draw from the CHCF-A will be increased by that amount.

We recognize that billing would be easier for the Small LECs if the interstate and intrastate access charges were the same. However, we feel we have good reason to eliminate the CCLC from intrastate rates, and are confident that the Small LECs will be able to adjust their billing systems to reflect the differing rates.

Therefore, for each of the Small LEC applicants we adopt the switched access rate structure in First Amendment to the Joint Application, with the exception of the CCLC rate element. The Small LECs should reflect these revenue effects in their CHCF-A Supplemental Advice Letter filings.