II. Background

Over a decade ago, the Commission initiated a rulemaking and investigation to determine the costs for the basic network functions of Pacific Bell (now SBC-CA) and GTE of California (now Verizon) in order to set "unbundled" prices for competitors to purchase access to these network functions. (See Rulemaking (R.) 93-04-003 and Investigation (I.) 93-04-002 to Govern Open Access to Bottleneck Services and Establish a Framework for Network Architecture Development of Dominant Carrier Networks, hereinafter "OANAD proceeding.") After passage of the Telecommunications Act of 1996, the terminology shifted from the "basic network functions" defined in the original rulemaking to "network elements" as defined by the Federal Communications Commission (FCC). (47 C.F.R. Section 51.5.) Network elements are now commonly referred to as "unbundled network elements," or UNEs.

In D.99-11-050, the Commission set prices for UNEs offered by Pacific. The prices were based on costs developed using the Total Element Long Run Incremental Cost (TELRIC) methodology, as set forth by the FCC in 1996.¹⁰ In D.99-11-050, the Commission recognized that the TELRIC costs adopted by the Commission in 1998 (D.98-02-106) and used to set prices in D.99-11-050 were "based largely on data that has not been updated since 1994," and "there is evidence that some of these costs may be changing rapidly."¹¹

Accordingly, the Commission established a process in D.99-11-050 that invited carriers with interconnection agreements with Pacific to annually nominate up to two UNEs for consideration of their costs by the Commission. The decision required that a party nominating a UNE for review must include a summary of evidence demonstrating a cost change of at least 20% (up or down) from the costs approved in D.98-02-106 for the UNE to be eligible for nomination.

A. 2001 UNE Nominations

This proceeding, known as the "UNE Reexamination," was initiated following formal requests by carriers to review particular UNEs according to the process established in D.99-11-050. In February 2001, the Commission received nominations for review of four UNEs. In a June 2001 scoping memo, the Assigned Commissioner and Administrative Law Judge (ALJ) found sufficient justification to accept two of the four UNE nominations, namely the requests to review unbundled switching contained in A.01-02-024 and unbundled loops in A.01-02-035. The scoping memo set a schedule for Pacific to file updated switching and loop cost studies, and specified that competing cost models from other parties would not be allowed. A July 2001 ruling by the Assigned Commissioner and ALJ reiterated that competing models would not be considered as long as Pacific's cost filing met three criteria. Specifically, Pacific's cost filing must allow parties to: reasonably understand how costs are derived, replicate Pacific's calculations, and to modify inputs and assumptions.

Controversy ensued regarding whether Pacific's filing met the three criteria set forth in the July 2001 ruling. In August 2001, JA filed a motion for interim UNE rate relief, arguing for interim reductions to unbundled loop and switching rates due to delays caused by alleged inadequacies in Pacific's cost filings. In response to the motion, the Assigned Commissioner and ALJ ruled that interim relief appeared justified, but only after further filings addressing the exact amount and nature of interim UNE rate reductions.

In D.02-05-042, the Commission found that interim UNE rates for unbundled loops and switching were warranted due to delays in this proceeding caused by inadequacies in Pacific's cost study filing and the need to examine competing cost models. The Commission adopted an interim loop discount of 15.1% from Pacific's then current basic 2-wire loop price. For unbundled switching, the Commission adopted an interim rate discount of 69% for local switching and 79% for tandem switching based on rates proposed for Pacific's affiliate, SBC Ameritech, in Illinois. The interim rates are subject to adjustment, either up or down, from the effective date of D.02-05-042 until final rates are adopted.¹² The UNE Reexamination proceeding remained open for the Commission to review new cost study filings to set final rates for unbundled loops and switching.

B. 2002 UNE Nominations

In February and March 2002, the Commission received four additional nominations for review of specific UNEs. In a June 2002 scoping memo, the Assigned Commissioner and ALJ found sufficient justification for review of DS-3 Loops (Application (A.) 02-03-002), the DS-3 Entrance Facility without Equipment (A.02-02-031), Dedicated Transport and SS7 Links (A.02-02-032). Review of the UNEs in these applications was consolidated with the ongoing 2001 UNE Reexamination and a schedule was set for the 2001/2002 UNE Reexamination to allow the filing of cost studies for permanent UNE rates for all of the UNEs under review.

SBC-CA and JA filed competing cost models on October 18, 2002.¹³ On the same date, the United States Department of Defense and all other Federal Executive Agencies (DOD/FEA) filed an opening declaration by its witness Richard Lee on the issue of depreciation. The Commission held a Technical Workshop in December 2002 to allow parties to present an overview of their proposed cost models and to allow staff and parties to ask questions of key cost modeling experts. Reply comments on the cost model filings were filed on February 7, 2003¹⁴ by the Communications Workers of America District 9 (CWA), DOD/FEA, Joint Applicants, the Office of Ratepayer Advocates/The Utility Reform Network (ORA/TURN), Pac-West Telecomm Inc. (PacWest), SBC-CA, XO California, Inc. (XO), and Z-Tel Communications Inc. (Z-Tel).¹⁵ Rebuttal comments were filed on March 12 by CWA, DOD/FEA, Joint Applicants, ORA/TURN, PacWest, SBC-CA, and XO.¹⁶

In an April 4 ruling, the ALJ determined that five factual disputes in the parties' filings required evidentiary hearings, which were held on April 14 through 17, and continued on June 24. The hearings were limited to issues surrounding Integrated Digital Loop Carrier (IDLC) systems, specific features of Siemens switches, SBC-CA's contract for installation of digital loop carrier equipment, and aspects of SBC-CA's switching contracts with regard to capacity, and feature hardware and software. In addition to the evidentiary hearing limited to these five disputed issues, the ALJ and Commission staff determined that an additional technical workshop was required to facilitate understanding of the highly complex loop, switching, and interoffice facility cost models. The ALJ and staff facilitated this workshop on June 24 through 26.

Parties filed briefs on the five hearing topics on August 1. Reply briefs were filed on August 22 and the case was deemed submitted.

In a September 15 ruling, the ALJ set aside submission and requested supplemental briefing on the FCC's newly released "Triennial Review Order,"¹⁷ which clarified certain rules for setting UNE costs using the TELRIC methodology. Supplemental briefs were filed by JA, Covad Communications Company (Covad), Sage Telecom, Inc. (Sage), Tri-M Communications (Tri-M), and Anew Telecommunications d/b/a Call America (filing jointly), DOD/FEA, and SBC-CA on September 25. Supplemental reply briefs were filed on October 6 by JA, Covad, DOD/FEA, and SBC-CA.¹⁸ The case was deemed submitted on October 6.

After the submittal of the case in late 2003, the ALJ found it necessary to solicit further information from the parties to clarify their positions. The parties provided information via electronic mail and created a comparison exhibit at the ALJ's request. This information and exhibit were included in the record through an ALJ ruling and the submission date for the case was revised to December 5.¹⁹

On April 15, 2004, Sage filed a notice of withdrawal indicating that it was withdrawing as a party to these proceedings, in their entirety.