F I N A L D R A F T
BEFORE THE
FEDERAL COMMUNICATIONS COMMISSION
WASHINGTON, D.C. 20554
IN THE MATTER OF )
)
Application by SBC Communications Inc., )
Pacific Bell Telephone Company, and ) CC Docket No. ______
Pacific Bell Communications Services, )
Inc., d/b/a Pacific Bell Long Distance )
For Provision of In-Region, InterLATA Services )
In California )
REPLY AFFIDAVIT OF LINDA S. VANDELOOP
PUBLIC VERSION
STATE OF CALIFORNIA )
)
COUNTY OF SAN FRANCISCO )
TABLE OF CONTENTS
PRICING AFFIDAVIT
SUBJECT
/ PARAGRAPHINTRODUCTION / 1
PURPOSE OF AFFIDAVIT / 3
EXECUTIVE SUMMARY / 4
CLAIMS REGARDING CLEC PROFITABILITY / 6
PACIFIC BELL’S UNE PRICES ARE WITHIN THE RANGE OF REASONABLENESS / 9
PACIFIC BELL’S UNE PRICES ARE TELRIC-BASED / 20
CONCLUSION / 31
INTRODUCTION
I, Linda S. Vandeloop, of lawful age, being duly sworn, depose and state:
1. My name is Linda S. Vandeloop. My business address is 140 New Montgomery Street, San Francisco, California 94105. I am employed by Pacific Bell Telephone Company (“Pacific Bell”), and my title is Executive Director-Regulatory and Constituency Relations.
2. On June 27, 2001, I filed an affidavit in this proceeding (hereinafter “Opening Affidavit”) concerning Pacific Bell’s network element prices. In addition, based upon illustrative comparisons, I demonstrated that Pacific Bell’s network elements and UNE-P prices are wholly reasonable and consistent with the Telecommunications Act of 1996 (“the Act”), as well as the California Public Utilities Commission’s (“CPUC’s”) and Federal Communications Commission’s (“FCC’s”) pricing rules and decisions.
PURPOSE OF REPLY AFFIDAVIT
3. The purpose of this affidavit is to respond to the comments submitted on August 23, 2001, by interested parties in this proceeding. As discussed more fully below, the facts and a proper analytical framework belie the unfounded criticisms directed at Pacific Bell’s network element prices.
EXECUTIVE SUMMARY
4. Several parties are critical of Pacific Bell’s UNE prices. The three major criticisms are (1) prices are too high to allow CLECs to make a profit; (2) prices are excessive when compared to other states; and (3) prices are not based on TELRIC. I will address each of these unsupported allegations. First, in evaluating a section 271 application, the FCC does not consider whether a CLEC could be profitable, but even if it did, there is significant margin for an efficient CLEC to be extremely successful. Second, under any realistic scenario, Pacific Bell’s prices are reasonable when compared to a number of states, including those that have already received section 271 approval. Third, Pacific Bell’s UNE prices are a direct result of an extensive CPUC proceeding, which examined costs and set TELRIC-based prices.
5. In its June 2001 filing, Pacific Bell provided substantial evidence that its network element TELRICs and resulting prices are consistent with the Act and FCC and CPUC rules and principles. In my Opening Affidavit, I demonstrated that Pacific Bell’s UNE prices are reasonable when compared to the prices of other former Bell Operating Companies (“BOCs”), particularly in those states where the incumbent BOC has been granted authority to offer interstate long distance services. Nevertheless, in comments filed with the CPUC on August 23, 2001, several parties assert, inter alia, that Pacific Bell’s UNE prices are excessive and preclude local exchange competition. These claims, as discussed below, are based upon erroneous assumptions.
Claims Regarding CLEC Profitability
6. In his declaration on behalf of AT&T and WorldCom, Michael R. Lieberman spends several pages attacking Pacific Bell’s prices, claiming the prices “preclude profitable UNE-based entry in California.” (Declaration of Michael R. Lieberman on Behalf of AT&T and WorldCom at 2, para. 2 (hereinafter “Lieberman Decl.”); see AT&T Brief at 19.) Mr. Lieberman then provides the results of a “margin analysis” that argues that Pacific Bell’s current residential UNE-P price precludes profitable UNE-P-based entry into the residential market.[1] The Office of Ratepayer Advocates (“ORA”) and Z-Tel Communications make similar claims. (ORA Brief at 10; Z-Tel Comments at 8.) These assertions miss the point. Pursuant to the Act, the FCC considers whether UNE prices are cost or TELRIC-based. The FCC, as it has stated repeatedly, does not and will not consider “whether a competitor can make a profit by entering the market.”[2] The FCC has, more than once, “held that this profitability argument is not part of the section 271 evaluation of whether an applicant’s rates are TELRIC-based.”[3] Thus, AT&T and WorldCom’s margin analysis is irrelevant.
7. Even if relevant, AT&T and WorldCom’s analysis also is wrong. In his Reply Affidavit, Professor Dale E. Lehman, Ph.D. demonstrates that the margin analysis is both misleading and incorrect. Specifically, Dr. Lehman concludes that a correct analysis demonstrates that significant market entry potential exists at Pacific Bell’s current UNE prices. (Lehman Reply Aff. at 3-4, paras. 5-8.) Further, Dr. Lehman asserts that, if entry to serve particular customers in a few rural locations is difficult, the problem results from retail prices and not UNE prices – a problem faced by all carriers, including Pacific Bell. (Lehman Reply Aff. at 6, para. 9.) Notably, in a recent business journal article, a WorldCom spokesperson represents that WorldCom can earn a profit on local service in New York, Texas, Georgia, Pennsylvania, Illinois, and Michigan.[4] With regard to entering the local market in California, the spokesperson said, “If [the price problem] is fixed, we would be ready to enter the market in 90 days.”[5] WorldCom’s position is untenable. Aside from the fact that WorldCom already has entered the California market, WorldCom ignores that New York’s present UNE-P price is higher than that in California.[6]
8. Moreover, AT&T’s and WorldCom’s contention that Pacific Bell’s UNE prices are too high to permit entry is belied by the fact that, as the Opening Affidavit of David Tebeau sets out in detail, both AT&T and WorldCom provide local service to hundreds of thousands of end users in California. (See Tebeau Aff. Attach. F.) Indeed, at the same time AT&T has been telling this Commission that it is precluded by Pacific Bell’s prices from competing for residential customers, it has been telling everyone else that it is “racking up customers and providing hefty local competition for Pac Bell.”[7] Indeed, according to the Vice President of AT&T Broadband, AT&T has been able to capitalize on its “tremendous growth rate” among California local service customers “to gain a significant piece of the market.”[8]
PACIFIC BELL’S UNE PRICES ARE WITHIN THE RANGE OF REASONABLENESS
Unbundled Network Element Platform (“UNE-P”)
9. Although Mr. Lieberman asserts that Pacific Bell’s UNE-P prices are “significantly inflated” compared to other states (Lieberman Decl. at 6, para. 13.), he fails to acknowledge that of the six states that have obtained authority to offer interLATA long distance services, three states have UNE-P prices that are higher, one has a price that is within 5 percent, and only two have prices that are lower than prices in California. While Mr. Lieberman, along with others, attempts to focus selectively on the prices of individual elements, the fact of the matter is that – as discussed in the Reply Affidavit of Mr. Richard L. Scholl – California’s rate structure and costing methodology do not permit meaningful comparisons among individual UNEs. Moreover, in discovery, AT&T admitted **PROPRIETARY Redacted PROPRIETARY** in California and Texas.[9] AT&T only buys **PROPRIETARY Redacted. PROPRIETARY** Thus, as discussed in my Opening Affidavit, the relevant analysis is whether the total price of an ILEC’s UNE-P configuration is TELRIC-based and reasonable. Pacific Bell’s UNE-P configuration meets both criteria. In the Open Access and Network Architecture Development (“OANAD”) proceeding, the CPUC found that Pacific Bell’s prices were TELRIC-based and reasonable.[10] And as explained in my Opening Affidavit, the Commission-approved UNE-P price in California compares favorably with other states generally, and particularly with states that have received long distance relief.
10. WorldCom criticizes the illustrative UNE-P scenarios provided in my Opening Affidavit. (WorldCom Brief at 43.) WorldCom claims that the analysis is “meaningless because it compares prices across states without making any effort to consider the cost differences that exist across those states.” (WorldCom Brief at 43.) Generally speaking, Pacific agrees that simple price comparisons, divorced from cost, are not particularly illuminating. AT&T/WorldCom cannot have it both ways. On the one hand, when prices are lower in other states, they claim costs are the same among states, but when Pacific Bell has a lower UNE price than other states, they argue that there are cost differences that must be considered. In fact, even when it comes to loop prices, AT&T/WorldCom claim that the costs must be the same as lower priced states like Illinois and Michigan and, by definition, must be different from Texas, Oklahoma, or New York.
11. The scenarios in my Opening Affidavit were a direct response to Z-Tel’s and WorldCom’s multi-state price comparisons, which were completely divorced from any meaningful cost basis.[11] (See Notice of Ex Parte Contact by Z-Tel Communications, Inc. (U-6027-C), R.93-04-003, I.93-04-002, A.01-02-024, A.01-02-035, A. 01-02-034 (dated May 11, 2001); Notice of Ex Parte Contact by Z-Tel Communications, Inc. (U-6027-C), R.93-04-003, I.93-04-002, A.01-02-024, A.01-02-035, A. 01-02-034 (dated April 25, 2001); WorldCom, Inc. Notice of Ex Parte Communication, R.93-04-003, I.93-04-002, R.95-04-043, I.95-04-044, A.01-02-024, A.01-02-035, A. 01-02-034 (dated May 4, 2001).) The UNE-P scenario analyses in my Opening Affidavit are illustrative and show that, when based upon realistic and conservative assumptions, unlike those in Z-Tel’s filings, Pacific’s UNE-P prices are reasonable as compared to other states. Although network element prices are directly related to costs, my affidavit does not specifically address cost methodologies, issues, or differences across states. Mr. Richard L. Scholl’s Reply Affidavit addresses the CPUC’s OANAD proceeding (costing phase) and describes in detail Pacific Bell’s TELRIC-compliant costing methods. It has been established, after years of adversarial proceedings and extensive CPUC scrutiny and oversight, that Pacific Bell’s prices are cost-based. (See generally Scholl Reply Aff., filed concurrently herewith.) Pacific Bell has not argued, nor am I now arguing, that multi-state UNE-P comparisons should be considered absent an appropriate cost foundation. For this reason, Pacific Bell, through Mr. Scholl’s Reply Affidavit, has established the cost basis for its UNE-P rate.
12. AT&T, WorldCom, and ORA state that the illustrative UNE-P comparisons provided in my Opening Affidavit, which were performed by the Director of the Consumer Advocate Division of the West Virginia Public Service Commission, contained inaccurate data and erroneous calculations. (ORA Brief at 10; Lieberman Decl. at 7-8; WorldCom Brief at 43.) In addition, AT&T/WorldCom’s declarant, Mr. Lieberman, claims that a corrected report has been posted on the NRRI home page. Mr. Lieberman makes the suggestion that Pacific Bell used the incorrect data because it resulted in a more favorable comparison for Pacific Bell’s UNE-P price. This suggestion is patently untenable. Notwithstanding minor errors in the NRRI survey, the conclusion drawn in my Opening Affidavit does not change – Pacific Bell’s UNE-P prices are reasonable when compared to those in other states – even after the corrections to the Study. Specifically, the original study data showed that, for the low cost or urban zone, 41 states had higher prices than Pacific Bell. The “corrected” data reduced the number to 35. In the high cost zone, the original data showed that 23 states had higher prices. The “corrected” data reduced that number to 22. Pacific Bell included the NRRI Study as a demonstrative exhibit and because it is an independent, objective analysis of network element and UNE-P prices. In addition, the revised, corrected report was apparently not published on the Internet until after Pacific Bell filed its June 27, 2001 draft application with the CPUC. Indeed, the original document was dated May 7, 2001, and while the total monthly local switched usage has been changed, the still does not have the correct price for Pacific Bell’s per MOU of interoffice terminating usage.[12]
13. Pacific Bell agrees with WorldCom that Pacific Bell is in the best position to identify its own prices and conduct its own analysis. (See WorldCom Brief at 43.) Indeed, the UNE-P results discussed in my Opening Affidavit at paragraphs 25 through 29 were based solely on Pacific Bell’s analysis and not on the data included in the NRRI Study. The NRRI Study, an add-on to my Opening Affidavit, was provided as an illustrative supplement because it reflects data from all 50 states (and the District of Columbia), and because it shows that Pacific Bell’s network element and UNE-P prices are reasonable compared to other states. In fact, contrary to their representations, AT&T/WorldCom are fully aware of the source data included in the Pacific Bell analysis because Pacific Bell provided work papers from my June 27, 2001 affidavit to AT&T/WorldCom on August 2, 2001.
14. Mr. Lieberman erroneously opines that all of Pacific Bell’s UNE prices are inflated based on his focus on unbundled local switching (“ULS”). (AT&T Brief at 16-17; Lieberman Decl. at paras. 8-9.) He claims that Pacific Bell’s unbundled local switching prices are “between 72% and 248% higher than those in other states.” (Lieberman Decl. at 8, para. 17.) Mr. Lieberman’s analysis is belied by the fact that, in reality, competitive carriers do not purchase ULS by itself. Indeed, AT&T admitted to Pacific Bell that it purchases ** PROPRIETARY Redacted PROPRIETARY**in California or in Texas.[13] In order to provide an end-to-end retail service, carriers purchase ULS in combination with other network elements. Therefore, switching prices cannot be considered alone, they must be considered along with the other costs of providing an end-to-end service, such as shared transport, the loop, and switch port.[14] The allocation of these costs can vary greatly from state to state and, therefore, the entire price of the service must be considered. In this regard, Pacific Bell’s UNE-P prices are reasonable as compared to other incumbent local exchange carriers (“ILECs”), including some ILECs that have been granted section 271 authorization.[15] Some illustrations are provided below.
15. Assume an end user that is served by a CLEC using UNE-P has monthly usage of 1,140 minutes of voice, 900 minutes of data, and 380 minutes of toll. Pacific Bell’s monthly UNE-P price charged to the CLEC would be $25.56. Under the same assumptions, Verizon’s UNE-P prices in Massachusetts, New York, and Connecticut are higher – $30.92, $28.21, and $26.20, respectively. Southwestern Bell-Oklahoma, under the same scenario, would charge only $1.24 less – $24.06.