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STATE OF CALIFORNIA ARNOLD SCHWARZENEGGER, Governor

PUBLIC UTILITIES COMMISSION

505 VAN NESS AVENUE

SAN FRANCISCO, CA 94102-3298

October 1, 2004

TO: PARTIES OF RECORD IN APPLICATION 01-02-024, et al.

Decision 04-09-063 is being mailed without the Concurrence of Commissioner Carl Wood and without the Concurrences of Commissioners Loretta Lynch and Geoffrey F. Brown. The Concurrences will be mailed separately.

Very truly yours,

/s/ ANGELA K. MINKIN.

Angela K. Minkin, Chief

Administrative Law Judge

ANG:mnt

Attachment

COM/CXW/mnt * * Mailed 10/01/04

Decision 04-09-063 September 23, 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 33

I. Summary 33

II. Background 88

III. Applicable Standards 1313

IV. Overview of Cost Models 1818

V. Both HM 5.3 and the SBC-CA Models Are Flawed 2323

VI. Modeling Inputs 131131

VII. DS-3 Loop Rates 245245

VIII. Further UNE Reexamination Proceedings 246246

IX. Assignment of Proceeding 247247

X. Comments on Proposed and Alternate Decision 247247

XI. Comments on Revised Proposed Decision and Revised Alternate Proposed Decision 255255

Findings of Fact 262262

Conclusions of Law 276276

ORDER 292292

Glossary of Acronyms 301301

(END OF APPENDIX D) 301301

(END OF APPENDIX E) 302302

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

$11.93

Average DS-1 Loop

$57.42

Average DS-3 Loop

$573.20

2-wire port

$3.35

UNE-Platform5

$16.53

The rates in today's order replace interim rates for loops and switching that were set in Decision (D.) 02-05-042.6 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")7 (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.8

Table 2

Comparison of Proposals

UNE

SBC-CA Proposal

JA Proposal

Interim Rate9

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 although both models are flawed, the SBC-CA models fail our modeling criteria to such a significant extent that we cannot reasonably rely on them to set UNE rates. The principal flaws with SBC-CA's models are that they rely too heavily on SBC-CA's embedded network configuration and costs and that we are not able to modify many of the models' inputs to overcome this flaw. 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, and produces varying results that cannot easily be replicated with a reasonable level of certainty. 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.

It was not possible, given the time constraints and the resources required by this proceeding, 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. In a few cases, the results converged to the point of becoming nearly the same.

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, the models are prone to input errors due to extraordinarily complex input modification requirements, and the model results were erratic, counterintuitive, and difficult to replicate. It is not reasonable to rely on the SBC-CA models because they produce such varying results that are difficult to replicate in a reasonable time frame, even after repeated attempts to do so. We cannot rely on the SBC-CA models to derive UNE rates with an acceptable level of confidence. Therefore, the rates we adopt in this order are based solely on HM 5.3.

Some of the key modeling inputs used for the Commission's model runs include a 9.44% cost of capital and a 51.6% copper distribution fill factor. The Commission's model runs include several inputs and assumptions proposed by SBC-CA, including asset lives, plant mix, labor rates, Lucent and Nortel switch vendor assumptions, the weighting of switch line prices between new and growth lines, and a 12,000-foot crossover point. 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. These further proceedings will also consider whether and how the Commission can expeditiously implement any shared and common costs markup changes, as recently ordered by the Ninth Circuit Court of Appeals, along with the true-up. (See AT&T Communication of California Inc. v. Pacific Bell Telephone Company, 375F.3d 894, Ninth Circuit 2004.)

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.

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 UNE-Platform (UNE-P) refers to the combination of a 2-wire loop, 2-wire port, and switching UNEs. 6 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. 7 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. 8 For a complete comparison of the SBC-CA and JA UNE rate proposals, see Appendix B. 9 Interim rates initially adopted in D.02-05-042 and modified by D.03-07-023.

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