Opinion ID: 786960
Heading Depth: 2
Heading Rank: 1

Heading: CPUC Proceedings

Text: 12 In this case, the CPUC determined what Pacific, an ILEC, may charge CLECs such as appellants MCI and AT & T for access to various network elements. Prior to the passage of the 1996 Act, California had passed legislation of its own that was designed to open local telephone service to competition. See Cal. Pub. Util.Code § 709.5 (West 2004). As a result, the CPUC had already begun holding hearings to implement the California law when the 1996 Act was passed. See The Open Network to Bottleneck Services and a Framework for Network Architecture Development of Dominant Carrier Networks, D.96-08-021, R.93-04-003, 67 CPUC 2d 221 (OANAD proceeding). After passage of the 1996 Act and the adoption of the Local Competition Order by the FCC, the CPUC adopted the TELRIC methodology, finding that it was superior to the methodology it had initially decided to employ. D.98-02-106 at 18 (First Cost Decision). 2 One of the features of the TELRIC methodology that the CPUC found attractive was the requirement that retail costs be removed from consideration when determining the amount of common costs to be borne by the CLECs in gaining access to UNEs. In concluding that the TELRIC methodology was better suited to its purposes, the CPUC relied on two experts who testified that because the CLECs are purchasing access to specific network elements, and not the services that the CLEC will itself sell to customers, TELRIC was a more appropriate method of calculating costs. They explained: 13 TELRIC is a cost concept that refers to an intermediate level of production, or to goods sold at wholesale. Therefore, TELRIC costs should not include any of the costs of supplying services to end user customers. This is an important difference between the two cost concepts. An entrant using [UNEs] as the inputs for its end user services can compete with the incumbent either on the level of retailing, or on the way it combines those elements to provide services, or both. If the entrant has to incur both its own retailing costs as well as having to pay some of the incumbent's retailing costs, it faces a barrier to entry. 14 First Cost Decision at 21-22 (emphasis in original). Thus, the CPUC adopted TELRIC, in part, in order to ensure that the CLECs would not be forced to pay the ILEC for the costs the ILEC incurred in performing its retail operations.
15 In its First Cost Decision adopting the TELRIC methodology, the CPUC noted that the costs from retail services should be excluded from the price of a UNE. Id. at 52. This is so, according to the CPUC, because retail costs are not attributable to the production of network elements that are offered to interconnecting carriers. Id. at 62. 16 In the same decision, the CPUC determined the amount of common costs that would be included in determining the common cost allocator, as well as the amount of common costs that were retail-based and thus would be excluded. See id. at 63 n. 55 (In this phase ... our task is to determine the retail portion of common costs that are likely to be incurred by Pacific in a forward-looking environment.). While Pacific claimed before the CPUC that its total common costs were approximately $1.2 billion, MCI and AT & T claimed that this figure included over $200 million in retail-related costs. The CPUC agreed with MCI and AT & T only in part, determining that only $68 million of the costs claimed by Pacific as common had a clear retail component and thus should be excluded. The district court described these excluded costs as those that, in a hypothetical forward-looking environment in which Pacific is solely a wholesaler, Pacific would not incur. AT & T, 228 F.Supp.2d at 1093. In other words, under the CPUC's analysis, if Pacific were to cease all of its retail operations, the CPUC should consider all of the remaining common costs. Since only $68 million of the additional common costs claimed by Pacific would not exist in a hypothetical world in which Pacific engaged in no retail operations, the CPUC excluded only those costs.
17 In the CPUC's Second Cost Decision, it set the forward-looking non-recurring costs for Pacific's Operations Support System (OSS) gateways. See D.98-12-079 at 1 (Second Cost Decision). 3 An OSS gateway is a kind of UNE that allows CLECs to interconnect with the ILEC. Costs associated with OSS gateways consist of pre-ordering, ordering, provisioning, maintenance and repair, and billing functions supported by an incumbent LEC's databases and information. 47 C.F.R. § 51.319; see also Local Competition Order at ¶ 517-18. As noted by the FCC and the CPUC, an OSS gateway is vital to implementation of the Act, since it is only through such a gateway that a CLEC can efficiently gain access to an ILEC's network to provide service to end-users. See Second Cost Decision at 4-5. 18 Although the primary purpose of the CPUC was to set the non-recurring costs (NRCs) for the OSS gateway, it also received studies from Pacific addressing the need to recover recurring costs for the provision of OSS gateways. NRCs are one-time expenses associated with initiating or disconnecting a service, and include the labor necessary to effectuate the interconnection of a CLEC with an ILEC. Recurring costs, by contrast, are those necessary to maintain the OSS gateway. Compare Second Cost Decision at 12 with id. at 42-43. 19 The NRCs of providing OSS gateways depend, in part, on how much labor is required to effectuate the interconnection. For example, a CLEC might call in or fax an order to the ILEC requesting service, with a CLEC employee then implementing the request. This, of course, would involve high labor costs, increasing the NRC. Or, to provide another example, the CLEC and ILEC might interact electronically, with minimal employee involvement, leading to lower NRCs. See id. at 3-5. 20 In the proceeding before the CPUC to determine the OSS gateway NRCs, the interested parties submitted different proposed models to the CPUC for setting rates for the OSS gateways. Not surprisingly, MCI and AT & T assumed significant electronic interaction, leading to much lower NRCs. Id. at 19. Pacific, on the other hand, submitted a model with three variations, each with different levels of electronic interaction (and cost). Id. at 22-23. Ultimately, the CPUC adopted Pacific's model for determining NRCs, though with modifications. Id. at 30. It concluded that Pacific's model was the only one that included support for all of the UNEs specified by the CPUC and most of those specified by the FCC, and that accounted for variations in the ways that CLECs might choose to connect with the ILEC. Id. at 24-27. As required by the FCC, the CPUC required that the costs ultimately adopted be based on the most efficient technology currently available. That is, it selected the model that assumed a high level of electronic interaction. 21 With respect to the recurring costs of providing the OSS gateways, the parties were also in disagreement. MCI and AT & T contended that the recurring costs were so low as to be de minimis and thus should not be included in the cost of providing the OSS gateways. Id. at 43. Pacific, on the other hand, argued that these costs were significant and should therefore be passed on to the CLECs. Other parties responded that many of these recurring costs also supported Pacific's own retail operations, since the OSS gateways are also used by the ILEC in providing local telephone service to its own customers. Id. at 45. Based on the costs studies before it, the CPUC concluded that many of Pacific's proposed costs were retail-based, and further, that Pacific had failed to isolate costs that were unique to providing CLECs access to the OSS gateways: 22 We find merit in AT & T/MCI's ... assertions that Pacific's ... OSS functions provide benefits to[its] own retail operations. While Pacific attempts to identify discrete customer specific costs in its access port cost analysis, its showing fails to reflect that the underlying systems and databases are in place to serve both retail and wholesale customers and thus the costs cannot be attributed solely to CLCs. We find Pacific has not demonstrated that these costs should be recovered from competitors. 23 Id. at 45. 24 The CPUC concluded that Pacific had provided insufficient evidence to permit the CPUC to separate the retail-related recurring costs from the non-retail-related recurring costs as required by TELRIC. While concluding that the costs identified by Pacific should not be included in the price charged to CLECs, the CPUC did suggest that those costs might qualify as implementation costs, which were being considered in a separate proceeding. 4 Id. at 46. Pacific, apparently concluding that those costs were not implementation costs, declined to submit its cost studies at the separate proceeding and did not seek rehearing of the CPUC's decision in this proceeding.
25 In its third and final decision, the CPUC set the rates that Pacific would be permitted to charge for its UNEs. See D.99-11-050 (OANAD Decision). 5 Included in that decision was a determination of how the common cost markup would be calculated. Again, the interested parties offered different methods. Pacific argued that the markup should be determined by dividing the allocated common costs by the total direct costs of the various network elements. Id. at 54. This method creates a fraction, with the numerator being the total common costs, and the denominator being the total direct costs. The CPUC discusses this method in terms of the numerator and denominator, and this terminology was adopted by the district court. For ease of discussion, we will also adopt this terminology. Using this methodology, Pacific arrived at a figure of 22% for the common-cost markup. That is, the direct cost of each UNE would be increased by 22% to account for the common costs incurred by Pacific in producing that UNE. MCI and AT & T, however, argued that the denominator should also include retail-related and Category III costs. Category III costs are associated with unregulated aspects of a LEC, such as the provision of Internet access. MCI estimated that this adjustment would increase the denominator by approximately $2.9 billion, yielding a markup of 14%. 6 26 The CPUC adopted, in substantial part, Pacific's proposal. Although it added $375 million to the denominator to account for direct costs previously not counted, thereby decreasing the markup to 19%, it rejected AT & T and MCI's position that the denominator should include retail-related and Category III costs. In so doing, it adopted a statement from Pacific's representative that AT & T and MCI ignored the fact that all of the shared and common costs that are retail-related have been removed from the shared and common costs in this phase.... It is therefore entirely appropriate and proper to divide the non-retail shared and common costs by the non-retail [direct costs] to obtain the non-retail ... markup for UNEs. Id. at 64 (emphasis in original). 27 With respect to the Category III costs, the CPUC noted that Pacific's unregulated [Category III] businesses have their own overhead organizations. To the extent they use Pacific's overhead departments, the costs are directly billed to them under the Commission-ordered transfer mechanisms. Since these costs, like retail-related costs, are excluded from the common costs claimed by Pacific, the CPUC concluded that they should likewise be excluded from the direct costs in the denominator. Id. at 65-66. 28 Finally, the CPUC declined to revisit the issue of OSS gateway costs. It noted that [n]o OSS [recurring] costs were adopted, because the models submitted by Pacific were [] found to contain significant flaws. Id. at 55 n. 54. It once again suggested that Pacific seek recovery of OSS recurring costs attributable to servicing CLECs in the proceeding addressing implementation costs.