A. Flaws in the SBC-CA Models - CPUC - State of California

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|Application 01-02-024 |
|First Annual Review of Unbundled Network |(Filed February 21, 2001) |
|Element Costs Pursuant to Ordering | |
|Paragraph 11 of D.99-11-050. | |
| | |
|Application of AT&T Communications of | |
|California, Inc. (U 5002 C) and WorldCom, Inc.| |
|for the Commission to Reexamine the Recurring |Application 01-02-035 |
|Costs and Prices of Unbundled Loops in Its |(Filed February 28, 2001) |
|First Annual Review of Unbundled Network | |
|Element Costs Pursuant to Ordering Paragraph | |
|11 of D.99-11-050. | |
| | |
|Application of The Telephone Connection Local | |
|Services, LLC (U 5522 C) for the Commission to| |
|Reexamine the Recurring Costs and Prices of |Application 02-02-031 |
|the DS-3 Entrance Facility Without Equipment |(Filed February 28, 2002) |
|in Its Second Annual Review of Unbundled | |
|Network Element Costs Pursuant to Ordering | |
|Paragraph 11 of D.99-11-050. | | | | |
|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 |Application 02-02-032 |
|Transmission Facilities and Signaling Networks|(Filed February 28, 2002) |
|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 of Pacific Bell Telephone Company | |
|(U 1001 C) for the Commission to Reexamine the| |
|Costs and Prices of the Expanded |Application 02-02-034 |
|Interconnection Service Cross-Connect Network |(Filed February 28, 2002) |
|Element in the Second Annual Review of | |
|Unbundled Network Element Costs Pursuant to | |
|Ordering Paragraph 11 of D.99-11-050. | |
| | |
|Application of XO California, Inc. (U 5553 C) | |
|for the Commission to Reexamine the Recurring | |
|Costs of DS1 and DS3 Unbundled Network Element|Application 02-03-002 |
|Loops in Its Second Annual Review of Unbundled|(Filed March 1, 2002) |
|Network Element Costs Pursuant to Ordering | |
|Paragraph 11 of D.99-11-050. | | OPINION ESTABLISHING REVISED UNBUNDLED NETWORK
ELEMENT RATES FOR PACIFIC BELL TELEPHONE COMPANY
DBA SBC CALIFORNIA 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
OPINION ESTABLISHING REVISED UNBUNDLED NETWORK
ELEMENT RATES FOR PACIFIC BELL TELEPHONE COMPANY
DBA SBC