A.02-02-032 Et Al., ALJ/DOT/Avs DRAFT

A.02-02-032 et al., ALJ/DOT/avs DRAFT

COM/CXW/mnt ALTERNATE DRAFT

Agenda ID # 3524

(Alternate to Agenda ID # 3523)

Ratesetting

Decision PROPOSED ALTERNATE DECISION OF COMMISSIONER WOOD

(Mailed 5/3/04)

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 Paragraph11 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.9911-050. / 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 Paragraph11 of D.9911-050. / Application 02-02-031
(Filed February 28, 2002)

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A.02-02-032 et al., ALJ/DOT/avs DRAFT

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.9911050. / 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 Paragraph11 of D.9911-050. / 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.9911-050. / Application 02-03-002
(Filed March 1, 2002)

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

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A.01-02-024 et al. COM/CXW/mnt ALTERNATE DRAFT

TABLE OF CONTENTS

Title Page

TABLE OF CONTENTS i

OPINION ESTABLISHING REVISED UNBUNDLED NETWORK ELEMENT RATES FOR PACIFIC BELL TELEPHONE COMPANY DBA SBC CALIFORNIA 3

I. Summary 3

II. Background 7

A. 2001 UNE Nominations 8

B. 2002 UNE Nominations 9

III. Applicable Standards 12

A. The Consensus Costing Principles 12

B. The TELRIC Standard 13

C. Supreme Court Review of TELRIC Standard 14

D. Recent Updates to TELRIC 15

E. Commission Cost Modeling Criteria 15

F. Burden of Proof 16

IV. Overview of Cost Models 16

A. HM 5.3 17

B. SBC-CA Models 19

V. Both HM 5.3 and the SBC-CA Models Are Flawed 21

A. Flaws in the SBC-CA Models 26

1. LoopCAT Flaws 28

a. Reliance on Embedded Network Data 28

b. LoopCAT’s Network Configuration 35

c. Modeling of Multiple Dwelling Units 39

d. The Linkage of Fill Factors and Maintenance Expenses 39

e. Integration of Loop Studies 40

2. SICAT Flaws 41

3. Transport and High Capacity Loop Study Flaws 42

4. Annual Cost Factors and Expenses 46

a. Auditing and Modifying ACFs 46

b. Shared and Common Costs 48

c. Elimination of Other Expenses 50

i. Non-regulated Expenses 51

ii. Affiliate Transaction Expenses 52

iii. Project Pronto Expenses 53

iv. Transition Benefit Obligation (TBO) Expenses 54

d. Inflation and Productivity 56

5. Summary of SBC-CA Modeling Flaws 58

B. Flaws in the HM 5.3 Model 59

1. Engineering and Design Standards 61

2. Loop Modeling and Customer Location 68

a. Transparency of the Clustering Process 70

b. Accuracy of Customer Locations 72

c. Sensitivity to Clustering Changes 76

d. Cluster Size 77

e. Summary of Loop Modeling Criticism 80

3. Expert Judgments 81

4. Switching, Interoffice Demand, and Provisioning High Speed Services 83

5. Spare Capacity 87

6. Expenses 88

7. Validation of HM 5.3 Results 89

8. Summary of HM 5.3 Flaws 94

C. Adherence to Commission Modeling Criteria 94

D. UNE Rates Derived from the Results of Both Models 96

1. Rates Based on Midpoint of the Range 98

2. Description of “Endpoint” Model Runs 101

VI. Modeling Inputs 106

A. Asset Lives and Depreciation 106

1. SBC-CA Proposal 106

2. DOD/FEA and Joint Applicant’s Proposal 108

3. Discussion 111

B. Cost of Capital 113

1. SBC-CA Proposal 115

2. Joint Applicants’ Proposal 117

3. Proposals of XO, Z-Tel and ORA/TURN 118

4. Discussion 118

a. Proxy Group 120

b. Cost of Equity 121

i. DCF Analysis 122

ii. Market Risk Premium in CAPM 125

iii. Risk Free Rate 129

iv. Beta 130

v. CAPM Summary and Resulting Cost of Equity 131

c. Qualitative Risk Issues 132

d. Cost of Debt 138

e. Capital Structure 140

f. Summary of Weighted Average Cost of Capital 143

C. IDLC/UDLC 144

1. Modeling Proposals 144

2. Discussion 146

D. DLC Costs 148

1. JA Approach 148

2. SBC-CA Approach 149

3. Discussion 151

E. Fill Factors in Loop Model 153

1. Copper Distribution Fill 156

a. JA Proposal 157

b. SBC-CA Proposal 158

c. Discussion 161

2. Copper Feeder 163

3. Fiber Feeder 164

4. DLC Common Equipment 167

5. DLC Plug-In Equipment 169

6. SAI Equipment Fill 171

7. Premise Termination Equipment 172

8. Correlation of Fill Factors and Maintenance Costs 175

F. Structure Sharing 178

G. Plant Mix Assumptions 181

H. Labor Cost Assumptions 182

1. HM 5.3 182

2. SBC-CA Models 183

3. Discussion. 185

I. Crossover Point 186

J. Switching Inputs 188

1. Switch Vendors 188

2. Percentage of New, Growth and Replacement Lines 190

3. Vertical Features Costs 193

a. JA Position. 193

b. SBC-CA Position 195

c. Discussion. 195

4. Rate Structure 198

a. JA Position 199

b. SBC-CA Position 203

c. PacWest Position 206

d. Discussion 207

5. Switch Fill Factors 211

VII. DS-3 Loop Rates 213

VIII. Further UNE Reexamination Proceedings 214

IX. Assignment of Proceeding 215

X. Comments on Alternate Decision 215

Findings of Fact 215

Conclusions of Law 229

ORDER 244

Glossary of Acronyms 250

(END OF APPENDIX D) 250

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

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A.01-02-024 et al. COM/CXW/mnt ALTERNATE DRAFT

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 Rate[4]
Average 2-wire Loop / $13.26
Average DS-1 Loop / $46.94
Average DS-3 Loop / $439.14
2-wire port / $2.77
UNE-Platform[5] / $17.38

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 13states in which its parent corporation, SBC, operates. AT&T Communications of California, Inc. (AT&T) and WorldCom, Inc. (WorldCom) (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.[7]

Table 2

Comparison of Proposals

UNE / SBC-CA Proposal / JA Proposal / Interim Rate[8]
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 it cannot rely on either model alone to set UNE rates because of flaws in both models. 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 its inputs to overcome this flaw. 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 could not rely on either model by itself to establish UNE rates. To the extent possible, the Commission has 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. The degree of this convergence provides us additional confidence that the rates we adopt today are valid results, given our charge in this proceeding.

Based on our observation that the divergent model results converged as we corrected them, we determine that reasonable UNE rates lie within the zone created by the two models’ results. The Commission adopts the midpoint of this range for the final UNE rate.

Some of the key modeling inputs used for the Commission’s model runs include a 9.9% cost of capital, asset lives based on those adopted by the Federal Communications Commission (FCC), and a 51.6% 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, 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, 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.

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.

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.[9] In D.9911050, 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.”[10]

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 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 modify inputs and assumptions.