S T A T E O F M I C H I G A N

BEFORE THE MICHIGAN PUBLIC SERVICE COMMISSION

* * * * *

In the matter, on the Commission’s own motion, )to consider the total service long run incremental )costs for all access, toll, and local exchange services ) Case No. U-11832provided by GTE NORTH INCORPORATED. ) )

At the May 3, 2000 meeting of the Michigan Public Service Commission in Lansing,

Michigan.

PRESENT: Hon. John G. Strand, ChairmanHon. David A. Svanda, CommissionerHon. Robert B. Nelson, Commissioner

OPINION AND ORDER

On November 5, 1998, the Commission issued an order commencing a review of GTE North

Incorporated’s (GTE) total service long run incremental cost (TSLRIC) studies. The order

provided a schedule for GTE to file its cost studies and for interested parties to file comments,

responses, and replies. The Commission subsequently extended the schedule on January 19 and

April 23, 1999 in response to the parties’ requests for additional time.

Pursuant to the Commission’s November 5, 1998 order, as amended, GTE filed its cost

studies by January 21, 1999. As it had for its previous cost studies in Case No. U-11281, GTE

excluded confidential and proprietary information from the public version of its studies and

included that information in a separate record. On January 22, 1999, an interim protective order

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concerning the confidential materials was entered. Following a hearing on January 27, 1999,

Administrative Law Judge Theodora M. Mace (ALJ) signed a final protective order.

On February 4, 1999, a prehearing conference was held at the offices of the Commission

before the ALJ. At that time, representatives for the following parties appeared: GTE, the Com-

mission Staff (Staff); AT&T Communications of Michigan, Inc., and TCG Detroit (collectively

AT&T); MCI Telecommunications Corporation, MCImetro Access Transmission Services, Inc.,

WorldCom Technologies, Inc., WorldCom Network Services, Inc., Brooks Fiber Communications

of Michigan, Inc., and MFS Intelnet of Michigan, Inc., (collectively, MCI WorldCom); Attorney

General Jennifer M. Granholm; the Michigan Pay Telephone Association; LCI International

Telecom Corp and Qwest Communications Corp; Sprint Communications Company L.P.;

Ameritech Michigan; and the Michigan Exchange Carriers Association, Inc. (MECA).

The Staff and AT&T filed comments on April 8, 1999. On April 23, 1999, a hearing was held

on GTE’s motions to strike certain portions of AT&T’s comments, which the ALJ denied.

On May 27, 1999, the Commission received response comments from the Staff, AT&T, GTE,

and MCI WorldCom. On June 10, 1999, GTE, the Staff, AT&T, and MCI WorldCom filed final

reply comments.

Overview of GTE’s Methodology

GTE states that its cost studies follow the principles of TSLRIC required by the Commission

pursuant to the Michigan Telecommunication Act, MCL 484.2101 et seq.; MSA 22.1469(101)

et seq., (MTA) and total element long run incremental costs (TELRIC) required by the Federal

Communications Commission (FCC) pursuant to the federal Telecommunications Act of 1996 (the

FTA), 47 USC 251 et seq. GTE asserts that it has responded to criticisms of its previous cost

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model and has developed a user-friendly model that enables other parties to easily review and

understand the company’s cost studies. GTE states that the new model, titled “Integrated Cost

Model” (ICM) Release 3.1, reflects GTE’s engineering standards and the technologies now in use

and going forward and is specific to GTE’s data and network topology. GTE further states that the

ICM provides costs for GTE’s basic network functions (BNFs) and unbundled network elements

(UNEs). It includes costs calculated for modules related to the loop, switching, transport,

signaling, and expenses.

AT&T takes the position that GTE’s ICM is fundamentally flawed because the company

consistently uses embedded or historic costs of its current network, rather than ascertaining and

assuming the use of the least-cost, most efficient technology that is currently available. AT&T

argues that the Commission should reject the ICM altogether and require GTE to provide a cost

study that more fully complies with the TSLRIC principles set out in the Commission’s order in

Case No. U-10620. However, should the Commission determine not to reject the entire cost study,

AT&T argues, several adjustments must be made to reflect the TSLRIC principles ignored or

misapplied by GTE.

The Staff takes the position that GTE did not sufficiently map the method and results of its

new ICM to that which the Commission approved in Case No. U-11281. It states that the results

of the ICM vary considerably from the results reached in the prior costing case, without adequate

explanation. Further, the Staff states that some of the same problems identified by the Commis-

sion in the previous cost study case appear to be present with the new model.

The Staff asserts that GTE failed to incorporate three major Commission determinations from

the prior case related to depreciation lives and salvage, rate of return, and fill factors. However,

the Staff notes, the differences caused by those changes do not account for the increases in the

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results produced by the ICM. According to the Staff, despite declining costs in the industry as a

whole, the only unbundled element that reflects a cost decrease is the network interface device. In

contrast, for example, the Staff states, proposed tandem switching costs reflect a 421% increase.

The Staff asserts that the burden should be on GTE to demonstrate the cause of such a substantial

change.

The Commission finds that it should not reject GTE’s ICM altogether. However, it is apparent

that certain adjustments are required for the results to be reflective of TSLRIC principles. The

Commission does not object to the development of improved cost studies, but does not subscribe

to the view that the results of newer studies are necessarily better, or more reflective of economic

costs. For reasons discussed below, the Commission does not adopt all of GTE’s new methodolo-

gies, or all of the results of the company’s studies. Likewise, the Commission does not adopt all of

the parties’ recommended methods or results. The Commission further notes that the issues

decided and costs approved in Case No. U-11281 are presumptively valid and thus continue in

effect until changed by the Commission.

Direct, Shared, and Common Costs

The Staff complains that GTE filed essentially two cost studies: one for which the company

assumed that it would provide only wholesale services, and the other for which the company

assumed it would provide only retail services. One problem with that approach, the Staff argues, is

that GTE did not assume the same amount of common costs for each of these studies. The Staff

asserts that, by definition, common costs must be equally spread among all services, because they

are costs that are common to all services or elements and not assignable to any one or group of

services. It suggests that GTE may be attempting to disguise the fact that it proposes the same

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level of combined shared and common costs that the Commission rejected as excessive in Case

No. U-11281.

The Staff argues that GTE must be required to compute TSLRIC using one study, inclusive of

all services, retail and wholesale, with common costs being accommodated in a flat percentage

addition. In the Staff’s view, the appropriate level of common costs are those assumed in the

wholesale study ($40 million) adjusted to reflect other issues discussed separately. The Staff

argues that the additional $10 million that GTE seeks to recover exclusively through retail services

should be rejected. The Staff recommends that the Commission require GTE to rerun its cost

studies as one, unified study that assumes the company will have a mix of about 80% retail and

20% wholesale services and $40 million in common costs.

Moreover, the Staff argues, GTE has inappropriately relied upon unadjusted 1997 embedded

cost data to determine forward-looking costs. It points out that the Commission has consistently

rejected the use of unadjusted embedded historical costs for TSLRIC studies. The Staff proposes a

20% reduction to direct expenses as well as shared and common costs to better reflect the TSLRIC

requirement that costs be forward-looking, as the Commission did in Case No. U-11448 and Case

No. U-11815, both cost cases involving small providers.

GTE replies that its two studies conform to the TSLRIC principle concerning cost causation.

Rather than alternately assuming that GTE operates in a 100% wholesale or 100% retail environ-

ment, GTE says, the studies simply reflect that certain operating expenses are associated with only

retail and access services. It argues that the Staff’s proposal would have the incongruous effect of

including 80% of common costs, which GTE has determined are specific to retail services only, in

the costs associated with wholesale services. The proposed remedy, argues GTE, is not consistent

with TSLRIC principles.

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As to the objection to using actual 1997 costs as a basis for its studies, GTE argues that the

Staff rejects the Activity Based Costing (ABC) approach primarily because that approach results in

costs higher than those approved in 1997. The Staff’s objection, argues GTE, is based on the

erroneous, unsupported presumption that overall costs are decreasing in the industry.

The Commission finds the Staff’s concerns about GTE’s dual study approach well-founded.

GTE should have filed one unified cost study, rather than dividing it into two studies as it did.

Although the most significant problem identified with GTE’s two-studies approach is the differ-

ence in common costs, the Commission finds that the method GTE chose also makes it more

difficult to be certain that costs are not inadvertently double counted between the two studies. The

Commission rejects GTE’s argument that its common costs for retail services are different than the

common costs for wholesale services. The definition of common costs does not allow for that

difference. If a cost is associated with a group of services, but not associated with other services, it

is a shared, not common, cost. Therefore, the Commission concludes that for the next TSLRIC

case, GTE should file a unified study for all services, retail and wholesale. For the present case,

the Commission finds that the appropriate common cost estimate is the one from the wholesale (or

UNE) study, which is $40 million.

Further, the Commission finds that it should adopt the Staff’s proposal to reduce by 20% the

direct expenses and shared and common costs in order to reflect a more forward-looking environ-

ment. In an industry in which costs are generally declining, it is unreasonable to use historic

embedded costs without adjustment to reflect forward-looking costs. See Michael R. Norris

affidavit p. 7 and the Staff’s final comments pp. 16-17. The Commission further admonishes GTE

that it should devote greater effort to estimating forward-looking costs rather than using historical

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expenses reduced by a percentage. The Commission expects future TSLRIC filings from GTE to

identify forward-looking costs rather than simply relying on historical expenses.

Cost of Capital

In support of its contention that the cost of capital should be assumed to be 12.65%, GTE

submitted the affidavit of its Treasurer, Gregory D. Jacobson. In that affidavit, Mr. Jacobson

explains that the economic cost of capital employed in the ICM study uses “the current costs of

debt and equity, which reflect the expected future risk faced by investors in the company, and the

market value percentages of debt and equity in a company’s capital structure.” Jacobson affidavit,

p. 5. He further states that investors base their decisions primarily on expected future returns and

the risk or uncertainty surrounding those returns. The degree of competition, says Mr. Jacobson, is

a key factor in determining the risk. He opines that the legislative design to foster competition in

basic local exchange services has significantly altered the risk profile for GTE. That risk, states

Mr. Jacobson, is compounded by GTE’s obligations as an incumbent provider of basic local

exchange services to provide telecommunications services to all customers, even in cases for

which the economic cost of providing service is greater than the prices charged to customers. In

addition, Mr. Jacobson points to the rapid technological changes that he says characterize the

telecommunications industry. Those changes, he argues, may make GTE’s facilities obsolete

before economic recovery of the investment, and may also reduce the cost of entry for future

competition. In Mr. Jacobson’s view, a potential investor in GTE would consider the company to

face the same level of risk as any company operating in a competitive market, and would thus

require a rate of return commensurate with investments in the stock of the average competitive

firm, as represented by the Standard and Poor’s Industrials. He therefore found that an appropriate

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overall cost of capital would be 12.65%, reflecting a 6.94% cost of debt and a 14.3% cost of

equity, based on a capital structure containing 22.45% debt and 77.55% equity.

In its initial comments, the Staff argues that the Commission made a specific finding regarding

the appropriate assumption for GTE’s cost of capital for purposes of TSLRIC studies in Case

No. U-11281. In that case, the Staff states, the Commission found that an overall rate of return of

10.54%, which GTE proposed, was appropriate. In the present case, the Staff argues, there is no

reason to depart from the Commission’s previously determined overall cost of capital, because the

previous assumption was adopted on a forward-looking basis. It argues that GTE has not

demonstrated any changes in the last two years that would warrant the increase in the cost of

capital. To GTE’s argument that the cost of capital is outdated, the Staff responds that North

Carolina, the one state that has made a determination on the overall rate of return for specific use

in GTE’s ICM, found an overall cost of capital of 10.01% to be appropriate for GTE. The Staff

takes the position that the 10.54% assumed cost of capital is not outdated, but should the Commis-

sion desire a more recent determination, it could adopt the North Carolina finding.

AT&T agrees with the Staff that GTE has not presented any substantive reason that the cost of

capital established by the Commission in Case No. U-11281 should be changed at this time.

The Commission finds the challenges to GTE’s assumed cost of capital well taken. The

February 25, 1998 order in Case No. U-11281 reflects that the Commission approved as reasonable

the forward-looking cost of capital that GTE proposed, 10.54%. No convincing evidence was

presented that would justify altering the cost of capital two years later. The Commission deter-

mined that it was a reasonable estimate of the forward-looking cost of capital for TSLRIC

purposes, and it remains a reasonable estimate.

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In the present case, GTE argues that competitive forces require a higher assumed rate of return,

yet GTE is experiencing very little competition, likely due in large part to its reluctance to fully

engage in the competitive process by complying with the Commission’s orders and federal and

state legislation. GTE has failed to convince the Commission that circumstances have changed

significantly since the Commission determined 10.54% to be a reasonable approximation of the

forward-looking cost of capital. Therefore, the Commission concludes that the cost of capital

assumed in the TSLRIC studies should remain as it was previously approved.

Loop Module

1. Inclusion of Growth (Fill Factors)

The Staff states that probably the most glaring problem with GTE’s cost study filing relates to

the fill factors that the company used. GTE has used actual fill factors based on 1997 embedded

demand, rather than the objective fill factors approved by the Commission’s orders in Case

No. U-11281. In that case, the Staff states, the Commission determined that objective fill factors

of 80% for loops and 90% for circuit and switching equipment should be used. The Staff further

states that GTE’s omission of these objective fill factors results in overstated costs.

AT&T also objects to GTE’s failure to use objective fill factors. As its affiant Roger Riggert

noted, GTE included investment and operating expenses associated with a future growth in

demand, but spread the costs necessary to accommodate that growth over a lower number of

demand units. Such a mismatch is inappropriate, says AT&T. It argues that the Commission has

previously held that although it is common to use fill factors to estimate spare capacity in TSLRIC

studies, such spare capacity must be accounted for consistently with the nine costing principles

established in Case No. U-10620.

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Through the affidavit of David G. Tucek, GTE claims that the fill factors ordered for use in

GTE’s compliance filing in Case No. U-11281 are not correct. In GTE’s view, cost study results

should not necessarily reflect utilization levels consistent with objective fills, particularly with

respect to distribution plant. Even feeder plant, according to GTE, should not be analyzed using

objective fills, because to do so means that costs will be based on a network in which the feeder

plant would immediately require reinforcement everywhere. Such a circumstance, argues GTE,

would require an immediate reinforcement, and fill levels would decline below the objective level.

GTE asserts that the appropriate fill levels for use in a TSLRIC study are the average actual fills.

In its February 25, 1998 order in Case No. U-11281, the Commission found that GTE’s reli-

ance upon either current or expected actual fill was not appropriate, because that reliance ignores

“any inquiry into whether there is excess installed capacity that serves no immediate useful

purpose and lacks a justification based on the engineering or technical limitations of the network.”

Order, pp. 11-12. GTE has not persuaded the Commission that its findings in the prior case are

either in error or require modification due to engineering or technical issues. Therefore, the

Commission concludes that the fill factors approved in Case No. U-11281 should be used in this

cost study.

2. Network Structural Assumptions

a. Use of Grid Architecture v Clustering Approach

For estimating distribution costs, the ICM employs a theoretical block grid approach.

AT&T argues that the grid architecture that GTE employed leads to “such major departures

from efficient engineering practices (including those embodied in GTE’s own engineering guide-

lines) that the model is incapable of generating accurate estimates of the forward-looking cost of

unbundled loops.” Riggert affidavit, p. 6. According to Mr. Riggert, GTE’s grid method ignores

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geographic units of significance to outside plant engineering and does not reflect natural or

manmade features (such as lakes, rivers, or roads) that affect plant design. He contends that GTE’s

approach assumes the existence of customers in areas that are not in fact populated, and ignores

natural population clustering with the concomitant potential for increased efficiency.

Mr. Riggert goes on to note that the FCC has determined that a clustering approach is superior

to a grid-based method for modeling customer serving areas accurately and efficiently. Consistent

with actual efficient network design, Mr. Riggert states, a clustering model minimizes costs by

designing the most efficient manner of serving the clustering of customers. Mr. Riggert argues

that although the simplicity of using a grid model is appealing, it can lead to significant artificial

costs.

In Mr. Riggert’s view, GTE’s grid method leads to overstatement of loop and drop lengths,

number of drops (particularly for businesses), and the resultant costs for longer, fiber-based loops.

Further, he states that GTE’s approach results in assuming inadequate sharing of digital loop

carriers (DLCs). Mr. Riggert states that he could not adequately compensate for the ICM’s rigid

grid-based rules for building fiber feeder and DLC systems without a major rewrite of the model’s

code. However, he suggests that the Commission could conservatively reduce feeder costs by 35%

to more accurately reflect economic costs. Riggert reply affidavit, p. 13.

The Staff agrees with AT&T that the grid architecture is not appropriate for use in TSLRIC

studies. The Staff asserts that the assumed grid patterns have no relationship to actual topography,

physical structures, or population location, and tend to inflate loop costs. The Staff agrees that it is

reasonable to recognize customer clusters as proposed by AT&T and that the adjustments proposed

by AT&T on this issue appear reasonable.

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GTE argues that AT&T and the Staff have misunderstood the use of the grid-style templates

within the ICM and perhaps even the nature of certain ICM modeling assumptions. It claims that

each of the grid-style templates represents designs of actual neighborhoods and bear no resem-

blance to any uniform distribution. It says the only assumption concerning a uniform distribution

is the equal assignment of customers to each cable section. Moreover, GTE states, the model

incorporates data concerning roads and topography using an auditable sophisticated mapping

program that is designed for that function. In rural areas, in which a census block may be 100

square miles, GTE states, the area would contain a large number of grid squares, and the exact

distribution of customers cannot be specified. To address this problem, GTE assigns census block

lines to each grid square based on relative road feet, excluding on/off ramps, freeways, and

interstate highways. In sparsely populated areas (20 or fewer lines), GTE says, it reduces the

amount of modeled distribution plant by 20% to 60%.

GTE further asserts that its grid-style templates are flexible and user adjustable, in contrast to

the FCC model for universal service that relies on one template for all scenarios. It states that the

ICM loop module incorporates GTE’s engineering practices and the company’s Michigan-specific

characteristics. Moreover, GTE argues, the ICM makes realistic assumptions concerning the

sharing of DLCs and places those DLCs based on factors that are necessary to meet customers’

needs in a cost-efficient manner. Further, it asserts, the ICM permits extensive sharing of feeder

fiber. It asserts that the pine tree design used in the ICM has been endorsed by Bellcore engineer-

ing practices, and presents the least-cost method of deploying a feeder network. GTE claims that

using AT&T’s clustering approach and keeping a 12,000 feet maximum loop length would actually

result in a higher investment than that modeled by the ICM.

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The Commission finds that the results of GTE’s ICM must be adjusted to compensate for the

inaccuracies inherent in the use of a rigid grid design rather than using a cluster-based algorithm.

For example, the Commission finds that the resultant drop lengths are not reasonable. The

Commission concludes that AT&T’s proposed adjustment as recalculated by GTE is more

reasonable and should be employed to bring GTE’s cost study into closer alignment with TSLRIC.

The Commission is further persuaded that the ICM has overstated fiber loop costs due to ineffi-

cient sharing of feeder fiber and DLCs. As pointed out by AT&T, even GTE’s own engineering

guidelines provide no rational basis for the approach taken in modeling the feeder routes. More-

over, the Commission finds that it is unreasonable to assume that each 4x4 grid area in which there

is any demand requires its own DLC. Therefore, the Commission adopts the adjustment proposed

by AT&T to correct for this problem.

b. Segment Placement Labor Costs

Mr. Riggert criticizes GTE for its failure to recognize discounts available when placing cable

throughout the grid. He argues that there are discounts available for trenching when the job is

greater than 1,000 feet. Therefore, he states, for the ICM to capture the discounts available for

constructing the network, it should use the discounted rate for segments greater than 1,000 feet.

Applying the available discounts for buried cable, says Mr. Riggert, results in significant savings.

GTE responds that AT&T incorrectly determined that the ICM used 24% as the assumed

percentage of cable segments less than 1,000 feet, when the actual assumption was less than half

that number. Moreover, GTE states, its assumptions regarding the percentage of segments less

than 1,000 feet are reasonable in its current environment.

The Commission rejects AT&T’s proposed adjustment for the placement of segments less than

1,000 feet. GTE’s reply comments provide a convincing argument that AT&T has incorrectly

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calculated the percentage of segments affected by the assumption. Moreover, the percentage of

shorter segments appears reasonable.

c. Facility Sharing

Mr. Riggert criticizes GTE’s proposed level of facility sharing as unrealistic in a competitive

environment on a going forward basis. For example, he states that GTE assumes no sharing of

buried feeder, distribution, or drop structures with another utility. This assumption ignores,

Mr. Riggert states, the savings available when multiple utilities use the same trench or other

structure to house their facilities. He states that GTE’s failure to reflect efficient sharing practices

inflates the ICM results.

GTE responds that it has accurately calculated trenching costs and that its model reflects actual

levels of sharing in Michigan. It argues that to achieve the savings on drop facilities suggested by

AT&T, 100% of its drop facilities would be sharing facilities with at least two other utilities. That

level of sharing, says GTE, will never occur. In addition, GTE argues, Mr. Riggert made serious

computational errors. According to GTE, Mr. Riggert’s assumptions regarding distribution and

feeder sharing are also unreasonable.

The Commission finds that the model inputs should be adjusted to reflect additional sharing of

facilities, where to do so is more efficient. However, the Commission is not persuaded that the

drop and distribution and feeder sharing levels proposed by either GTE or AT&T are reasonable.

GTE’s historical sharing levels are unreasonably low, and AT&T’s proposed sharing levels are

unreasonably high. Therefore the Commission adopts the Staff’s proposal to assume a 25%

sharing level as more reflective of current technologies and competitive factors.

1In the Matter of the Commission’s Investigation and Generic Proceeding on GTE’s Ratesfor Interconnection, Unbundled Elements, Transport and Termination under the Telecommuni-cations Act of 1992 and Related Indiana Statutes, Indiana Utility Regulatory Commission CauseNo. 40618, Order dated May 7, 1998, p. 15.

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d. Digital Loop Carrier Technology

Through its affiant, Mr. Riggert, AT&T argues that GTE has inappropriately assumed the use

of universal digital loop carriers (UDLCs) rather than newer, more efficient, integrated digital loop

carriers (IDLCs) to calculate the costs for unbundled loops. AT&T argues that the assumed use of

UDLC creates a lack of parity in service provided to competitive local exchange carriers (CLECS).

Moreover, this assumption, Mr. Riggert states, would reflect higher costs, based on GTE’s

embedded network, rather than the economic costs based on least-cost currently available

technology that TSLRIC is intended to derive.

In its reply comments, AT&T argues that the IDLC technology is currently available and is in

use by GTE today. It points to the finding of the Indiana Utility Regulatory Commission that

required GTE’s cost studies be adjusted on the same issue that Mr. Riggert recommends in the

present case. It quotes the Indiana commission as stating that “GTE’s own use of integrated

systems in self-providing unbundled loops further confirms the efficiency of these integrated

systems in our view.”1

MCI WorldCom agrees with AT&T that use of the IDLC should be assumed for purposes of

TSLRIC studies. MCI WorldCom argues that the standard to determine whether the IDLC tech-

nology should be used is whether it is the least-cost technically feasible technology for unbundled

loops, not whether the newer system is in wide use or universally accepted today. It points to

costing principle No. 6 which states: “Technology used in a long run incremental cost study should

be the least-cost, most efficient technology that is currently available for purchase.” MCI World-

2In an order issued today in Case No. U-11831, the Commission has reopened AmeritechMichigan’s most recent TSLRIC case to receive further evidence regarding whether IDLC tech-nology should be used in that company’s studies. That reopening is based on Ameritech Michi-gan’s acknowledged rollout of Project Pronto. No similar GTE acknowledgment has been made.

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Com asserts that there is no lawful basis for imposing higher costs associated with UDLC when

GTE will be providing local service to its own customers using IDLC.

Through its affiant Randall L. Patton, GTE argues that it has appropriately modeled the least-

cost forward-looking DLC technology. Specifically, Mr. Patton says, the ICM uses Litespan and

DISC*S Next Generation Digital Loop Carrier (NGDLC) technology, which are low cost, high

quality, feature rich, and forward-looking systems. (Patton affidavit, p. 29) Moreover, Mr. Patton

asserts that certain of Mr. Riggert’s assumptions regarding the ILDC are not accurate, which

renders the projected cost reductions based on those assumptions also inaccurate. For example, he

states, a terminal would still be required at switches not capable of directly interfacing with an

OC-3 optical signal. Mr. Patton further states that the NGDLC technology modeled by the ICM

does not inflate fiber optic costs. He states that the line sizes being modeled within the ICM can

be handled with the identical number of fibers and NGDLC integrated optics regardless of whether

the DLC is modeled in a UDLC or IDLC configuration. Further, Mr. Patton states, contrary to the

models submitted in other jurisdictions, the model in this case does not assume additional DS-Os,

because the Litespan NGDLC in a UDLC configuration handles ISDN as it would a normal POTS

service, which does not require additional DS-Os. Therefore, GTE argues, no adjustment to

GTE’s DLC cost is either required or appropriate.

The Commission concludes that it should not require that IDLC technology be assumed for

this TSLRIC case. The Commission is not persuaded that IDLC is the least-cost technology for

GTE at this time.2 However, as advancements are made, the Commission expects GTE to update

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its assumptions in future cost cases to ensure that they continue to reflect the least-cost technically

feasible technology and configurations then available, consistent with the costing principles

outlined in Case No. U-10620.

e. Site Preparation Costs for DLC Remote Terminals

AT&T, through Mr. Riggert, argues that GTE includes a very high cost for DLC site prepara-

tion and submitted costs for 65 sites. Mr. Riggert complains that no supporting information was

provided to explain or justify the “ridiculous” cost levels. He recommends reducing the site

preparation costs by 60% to reflect a more reasonable amount.

GTE responds that the ICM accurately estimates forward-looking DLC site preparation costs,

based on a nationwide sampling of actual projects for GTE. It states that the sampling was

national because the company could not obtain a large enough sample using Michigan-only

projects. It argues that AT&T’s proposed site preparation costs are not supported. Further, GTE

states, the challenged costs are for pad-mounted units, which are placed only when the site will

serve more than 449 lines (approximately 4.2% of the DLC applications). According to GTE,

accepting the removal of the challenged costs would result in a change of less than $0.01 per line.

The Commission is not persuaded that AT&T’s proposed adjustment for site preparation costs

should be made. It appears that AT&T has improperly calculated the adjustment, which even if

accepted would have very little effect on the cost of the loop. However, any efficiencies realized

in DLC placements from the use of clustering algorithm should be incorporated by GTE.

f. Minor Materials Adjustment

AT&T argues that GTE’s material input prices should be rejected because they are ultimately

based on unsubstantiated source documentation. Mr. Riggert challenged GTE’s use of the GTE

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Advanced Material System (GTEAMS) database for obtaining initial inputs for material invest-

ment. He states that GTE did not demonstrate that the information is the best available.

GTE responds that the ICM inputs reflect current prices paid by GTE. It states that the

GTEAMS data is used by GTE Supply, an affiliate, to perform inventory planning, inventory

accounting, purchasing, and material management functions. It argues that this source contains the

current price of required materials in order to estimate the cost of a project or service offering. It

states that the prices are the same as actual work order material prices and reflect the actual prices

paid by GTE.

AT&T replies that GTE’s argument might be plausible if these cost studies were to reflect

embedded costs, but not in a study intended to reflect TSLRIC. However, Mr. Riggert admits that

he used an inappropriate factor when he calculated his original recommended adjustment. He

provides a corrected calculation at page 10 of his reply affidavit.

The Commission finds that AT&T’s adjustment for minor materials, as corrected in

Mr. Riggert’s reply affidavit, should be adopted. At best, GTE has based its inputs for these costs

on embedded costs. At worst, they may be even further inflated. The Commission is not per-

suaded that GTE has demonstrated that these costs reflect the forward-looking least-cost for

materials.

g. Efficiency of the Main Distribution Frame (MDF) and Protector

AT&T charges that GTE did not use the forward-looking or least-cost equipment selection for

the MDF input in the ICM. Rather, AT&T argues, GTE used the standard frame investment that is

higher than a more forward-looking Porta Systems computer-administered modular distributing

frame, which is also designed to allow short, punch-down type jumpers, resulting in significant

savings in expenses associated with central office activity.

Page 19U-11832

GTE responds that the inputs on this issue reflect forward-looking, least-cost MDF equipment

recognized by GTE as a standard product. GTE argues that it did not use the Porta System Frame

because it violates GTE product standards for MDF equipment by increasing overall costs due to

increased required maintenance. Moreover, GTE argues, AT&T used an incorrect factor to

calculate the effect on the loop cost.

AT&T replies that GTE has provided no support or documentation for its statement that

maintenance costs increase with the Porta System Frame. However, it acknowledges, GTE’s

corrections to Mr. Riggert’s calculations are correct.

The Commission finds that AT&T’s adjustment, as recalculated with the appropriate factor

supplied by GTE should be adopted. GTE has not provided any documentation to support its

statements concerning the maintenance costs associated with the Porta System Frame. The

Commission is persuaded that the system proposed by AT&T is the least-cost forward-looking

technology currently available and is therefore appropriate for use in the model.

Private Line Counts

Mr. Riggert charges that GTE’s line demand in the ICM is set to reflect GTE’s actual demand

of residential and business use, excluding private/special access lines and access lines used for all

“other” business services. These exclusions, claims Mr. Riggert, contradict generally accepted

engineering practice, and result in overstating the cost per unit.

GTE responds that private lines are already included in the ICM inputs and no adjustment is

necessary.

The Staff recommends that the Commission reject AT&T’s proposed adjustment for private

lines.

Page 20U-11832

The Commission finds that AT&T’s proposed adjustment should be rejected, because the

private lines have been included.

Billing and Collection, Marketing, and Annual Charge Factor

Mr. Riggert criticizes the ICM’s calculation of costs associated with billing and collection,

marketing, and the annual charge factor. He states that GTE erroneously based its billing and

collection costs on a study for business end users, which would necessarily include items not

needed in the wholesale environment. Mr. Riggert asserts that wholesale billing costs should more

nearly match the costs associated with billing interexchange carriers for access charges.

GTE responds that, for wholesale billing and collection costs, it correctly used only the

distribution and data processing components of billing and collecting costs for end users. It says

that its position is more consistent with its interconnection contracts, which specify the billing

center used. The business end user billing method includes more information than the access

billing system from which Mr. Riggert proposes to import costs.

The Staff states that AT&T’s adjustments are not necessary for billing and collection,

marketing, and the annual charge factor if the Commission adopts the Staff’s proposal concerning

the adjustment to direct, shared, and common costs, which already include the effect of these

adjustments.

The Commission is persuaded that GTE’s proposed cost levels for these items are impermis-

sibly based on embedded costs, without the necessary adjustments for improved efficiency.

Moreover, the Commission concludes that GTE has included costs that are not necessary in the

wholesale environment. However, as discussed earlier in this order, the Commission adopts the

Staff’s proposed adjustment to direct, shared, and common costs, which already incorporates the

3In the Matter of the Implementation of the Local Competition Provisions in theTelecommunications Act of 1996, CC Docket No. 96-98, FCC 96-325, August 8, 1996.

Page 21U-11832

effect of the adjustments proposed by Mr. Riggert. Therefore, no further adjustment is needed for

these items.

Nontraffic Sensitive Costs

The Staff is concerned that GTE has decided to allocate the entire cost of the loop to basic

local exchange service, with no allocation to toll or switched access services, even though the

completion of a toll call requires the use of the loop. The Staff asserts that just as the cost of the

central office switch is apportioned among services, the cost of the loop must also be apportioned.

MCI WorldCom argues that the Staff’s position is contrary to law and public policy and its

loop allocation is convoluted and arcane. MCI WorldCom asserts that the Staff’s methodology is

contrary to economic cost-based pricing and, if adopted, will stifle competition. In support of its

position, MCI WorldCom argues that there is no incremental cost for the loop that is caused by toll

or long distance services. MCI WorldCom points to ¶675 of the FCC’s First Report and Order3 in

which the FCC stated that the incremental cost of carrying a call from a residence that is already

connected to the network is “virtually zero.” Moreover, MCI WorldCom argues, if the costs of the

local loop are to be shared by toll and access service, those costs also should be shared by Internet

access service and vertical services such as caller ID or call waiting.

Moreover, MCI WorldCom argues, adopting the Staff’s proposal would reverse the Commis-

sion’s determination in the prior costing case, Case No. U-11281, in which the Commission

established loop prices that include 100% of the TSLRIC of the loop. It argues that because GTE

must charge 100% of the TSLRIC of the unbundled loop in its pricing to competitors, and adopting

Page 22U-11832

the Staff’s proposal would cut the percentage of those costs collected from GTE’s own retail

customers, the Commission would be essentially compelling a price squeeze.

Finally, MCI WorldCom argues that recovery of local loop costs from the loop provided for

basic local exchange service or the loop as a UNE simplifies cost recovery. GTE would recover

the cost of the loop from end users when it is provided directly by GTE and from the CLEC when

it is provisioned as a UNE. MCI WorldCom argues that the Staff’s proposal on the other hand,

would allow GTE to set its retail rates below TSLRIC, which violates the mandates of the MTA.

On the other hand, MCI WorldCom argues, if GTE sets its basic local rates at or above TSLRIC

for the local loop, it would double recover its costs.

AT&T agrees with MCI WorldCom that no costs of the loop should be allocated to other

services or elements. It argues that the Staff’s proposal is based more on value of services prin-

ciples than on economic costing principles. Although interexchange carriers (IXCs) cannot com-

plete toll calls without the loop and the value of basic local exchange service is enhanced by the

ability of the IXCs to reach end-use customers, AT&T argues, neither of those truths changes the

real cost causer, the end-use basic local exchange customer.

The Commission discussed the same issue in reference to the cost studies presented by Ameri-

tech Michigan in Case No. U-11831. In the November 16, 1999 order in that case, the Commis-

sion rejected the argument that all loop costs should be assigned to basic local exchange service:

First, the Commission rejects the position that the cost of the loop should bedirectly assigned to one specific service when numerous other services cannot beprovided without those facilities. Rather, the cost of the loop must be recognizedas a cost jointly utilized in the provision of local service, interstate and intrastateaccess services, toll services, and certain unregulated services. According to thecosting principles adopted by this Commission in its September 8, 1994 order inCase No. U-10620, loop costs are not unlike the shared and joint costs addressed inthat order because they cannot be readily identified with a specific service as is thecase with direct costs. Rather, these costs should properly be recognized as joint or

Page 23U-11832

shared costs that “are common to something less than the total output of the firm;costs that are common to a group of services or outputs.”

Second, assigning all loop costs to local service is directly contrary to existinginterstate allocation procedures, which continue to recognize assignment of aportion of loop costs in the rates for interstate toll access services. Under theprovisions of the [MTA], Ameritech Michigan has mirrored these interstate tollaccess charges for intrastate access purposes, thus assuring that a portion of theloop costs are recovered from services other than basic local exchange service. Assignment of all loop costs as a direct cost of local service would be directlycontrary to the allocation procedures presently in place that assure recovery of aportion of those costs from other services. Moreover, Section 254(k) of the federalTelecommunications Act of 1996 provides that a state:

[W]ith respect to intrastate services, shall establish any necessary cost allo-cation rules, accounting safeguards, and guidelines to ensure that servicesincluded in the definition of universal service bear no more than a reason-able share of the joint and common costs of facilities used to provide thoseservices.

47 USC 254(k).

The Commission therefore concludes that the costs of the loop assigned tolocal exchange service must be reduced by the recovery of those costs throughother revenue sources, including, for example, loop costs already recovered inrevenue from state and interstate end user charges, state and interstate primaryinterexchange carrier charges (PICC), state and interstate carrier common linecharges, vertical features, and federal universal service funding, to name only afew.

Order, pp. 23-24. (Footnote deleted.)

For the reasons stated in the previous order, the Commission reaches the same conclusion in

the present case. GTE’s cost studies should be modified accordingly.

Subloop Costs

The Commission notes that the FCC requires GTE to provide unbundled subloops, for which

no costs, analysis, or conclusions are provided in this case. The Commission finds that GTE

should file its tariffs for these new services as required by the FCC. When it does so, it shall file

Page 24U-11832

TSLRIC studies to support the rates for those services. The data and methodology shall be

consistent with the studies approved in this docket. To the extent that others dispute the support-

ing cost information, they may file complaints.

Switching

Mr. Riggert suggests that the Commission reduce GTE’s proposed TSLRIC for switching by

50% to more closely reflect the result that GTE would have reached had it correctly applied

TSLRIC principles to its switching module. Mr. Riggert identified what he considered to be

fundamental flaws with GTE’s analysis, including: (1) assumed incorrect model for switches

actually used in Michigan, (2) assumed incorrect melding of high switch prices for switch addi-

tions and lower switch prices for new switch placements, (3) arbitrary use of eight theoretical

switches to represent the population of GTE switches in the United States, but which do not reflect

switches in Michigan, (4) inclusion of GTD-5 switches, which do not represent least-cost tech-

nology, (5) double counting of switch investment, (6) inflated maintenance, engineering, and

installation factors, (7) double counting of software fees, (8) failure to include all features in the

port, and (9) failure to validate the detailed sub-elements by ensuring that the calculated individual

investments sum to the total switching investment. Based on additional material obtained from

and corrections proposed by GTE, Mr. Riggert modified his position somewhat in his rebuttal

affidavit, and recalculated some of his adjustments.

The Staff agrees with Mr. Riggert’s analysis, with the exception of his criticism concerning the

GTD-5 switches. The Staff states that GTE claims the GTD-5 switches are in fact the least-cost

technology currently available and, therefore, the Commission should allow the assumed use of

those switches. The Staff points out that the adjustments listed in Mr. Riggert’s affidavit will

Page 25U-11832

interact with each other and will require some adjustment. However, the Staff states, GTE may

compute the effect of that interaction by appropriately altering inputs to the ICM.

GTE responds that its ICM has correctly and accurately modeled the switches for GTE’s

Michigan network and that all of Mr. Riggert’s arguments should be rejected. In the alternative,

GTE says, Mr. Riggert’s calculations must be adjusted for various errors. For example, GTE

argues, it has used the correct switch prices and urges the Commission to reject AT&T’s proposal

to substitute Nortel DMS-100 prices as a surrogate for Lucent 5ESS switch prices. GTE says that

although the latter switches are integrated services digital network (ISDN) capable, it has used only

appropriate components of its contract prices with Lucent in its cost studies.

GTE further argues that its melded approach for switch growth and replacement is appropriate.

It argues that Mr. Riggert’s suggestion that the correct cost model would assume all new switch

placements ignores the discount that switch vendors typically give for new placements in anticipa-

tion of later selling additions to those switches at a greater margin. GTE asserts that if it requested

vendors to price switches assuming no future additions, the prices would be higher than those used

by Mr. Riggert. Moreover, GTE argues, if it used the current quoted material replacement prices

exclusively, the ICM would produce reductions in the 2-wire port and the average minutes of use

(MOU) that are less than Mr. Riggert calculated.

Additionally, GTE argues that the ICM correctly models the number and size of remote and

host switches and the quantity of lines required in Michigan. It argues that its calculations reflect

the actual numbers of lines and use the unit cost from the modeled switch sizes to determine

investment. It states that Mr. Riggert used incorrect numbers to arrive at his criticism and thus his

arguments should be disregarded. In fact, GTE states, when the correct numbers are used, the ICM

results in lower costs than the method proposed by Mr. Riggert.

Page 26U-11832

GTE further argues that the assumed use of GTD-5 switches in the model is appropriate. It

argues that, contrary to AT&T’s contentions, the GTD-5 switch is a forward-looking technology.

GTE asserts that this switch offers the same features as the DMS 100 and the 5ESS switch.

Moreover, GTE asserts, the GTD-5 switch is supported by the vendor as well as any other switch.

Besides the evidence that use of the GTD-5 will continue to grow, GTE states that it has already

purchased many GTD-5 host switches, which will require adding GTD-5 remotes for future

expansion. It states that the GTD-5 supports ISDN and local number portability. Finally, GTE

argues that when the appropriate number and placement of switches is taken into consideration, the

switch replacements that Mr. Riggert proposes would actually increase costs.

As to switch feature costs, GTE argues that Mr. Riggert’s analysis is flawed. It states that

there are about 1,000 features of the port, but many of these features are variations of the same

switch feature. Therefore, GTE argues, it is appropriate and lawful to model the cost of the 217

identified features because they represent the full extent of the features GTE offers to its customers

on the existing network.

As to AT&T’s claim that its maintenance, engineering, and installation factors are too high

when compared to the costs of other incumbent providers, GTE responds that its costs are specific

to GTE and may not be directly compared to other companies for which the switch vendor may

perform service. These costs, according to GTE, vary according to switch size.

GTE argues that it has appropriately modeled switch investment, without double counting. It

states that, although basic switching includes the equipment for features, some features require

additional investments for hardware, particularly when the additional hardware must be dedicated

to a particular customer.

Page 27U-11832

GTE continues that its switch module includes appropriate amounts of power equipment. It

states that the power board is one place in which it is appropriate to include growth projected over

10 years, because the power board is expensive and difficult to replace. Further, GTE asserts,

replacement of the power board causes total switch outage for the period required to finish the

replacement.

The Commission concludes that Mr. Riggert’s adjustments to switching costs, with the excep-

tion of his proposed exclusion of GTD-5 switches and his proposed total replacement of switches

rather than GTE’s proposed melding of 70% replacement and 30% purchased additions (Pattan’s

response affidavit p. 41), should be adopted as modified in Mr. Riggert’s reply affidavit. Riggert

reply affidavit, pp. 21-22. Based on GTE’s representations, the Commission is persuaded that the

GTD-5 switch is the forward-looking least-cost technology for purposes of this TSLRIC study.

Moreover, the Commission finds persuasive GTE’s argument concerning the likely increase in

switch price if no additions are contemplated. As to the other criticisms, much of GTE’s defense

of its proposal is based on assertions that the costs are actual costs or actual projected future costs.

It must be remembered that TSLRIC is not based on actual GTE costs, nor its actual projected

costs. Rather, it is the cost of providing the service in conformity with the principles set out in

Case No. U-10620. The Commission recognizes that the adjustments proposed by Mr. Riggert

will interact with each other. Therefore, the Commission finds that GTE should compute the

effect of that interaction by appropriately altering the inputs to the ICM, consistent with this order,

before resubmitting its cost studies.

Page 28U-11832

Fully Featured Port

Supported by AT&T, the Staff challenges GTE’s switch module for failure to include all of the

vertical features in the cost of the port, as required by prior Commission orders. The Staff notes

that GTE has submitted cost information that purports to be for a port including all features and

functionalities, but that a review of those costs compared to other port costs that the Staff has

reviewed renders GTE’s calculations suspect. The Staff asserts that GTE has failed to adequately

explain the excess port costs as compared to other Michigan providers. The Staff proposes that the

Commission adopt the TSLRIC port costs from the prior study as the cost for the port with all

features and functionalities of the switch. Even at that level, the Staff notes, GTE’s proposed port

costs would exceed those for Ameritech Michigan and the small providers that make up the

MECA.

GTE argues that there is no Commission order or statutory provision that requires inclusion of

all switch features in the port. GTE argues that the order relied upon by the Staff concerned

Ameritech Michigan and the conclusion was based on the inadequacy of Ameritech Michigan’s

workpapers to support its position. Thus, GTE argues, the Commission implicitly ruled that a

different record might lead to a different result. GTE argues that it has demonstrated in the

affidavit of David G. Tucek that the price of an unbundled switching element does not cover the

additional costs associated with the vertical features. However, it notes in a footnote, it is possible

to estimate the cost of a fully-featured port.

GTE is incorrect when it takes the position that it need not include all features in the port. The

Commission has previously held that “[w]hen a competing provider purchases an unbundled port,

it acquires all of the features and functionalities.” February 25, 1998 order in Case No. U-11281,

p. 21. The Commission finds that GTE’s proposed costs for a fully featured port are unreasonably

4SONET stands for synchronous optical network.

Page 29U-11832

excessive. The Commission concludes that the port costs adopted in Case No. U-11281 should be

adopted here as the fully functioned port costs.

Interoffice Transport Module

1. SONET4 Ring Configuration

In his affidavit, Mr. Riggert states that, in his opinion, GTE’s transport module should be

rejected because it significantly inflates costs. In Mr. Riggert’s view, the interoffice ring configu-

ration assumed in the ICM is not forward-looking because it uses the existing assignment of

remote offices to host offices and end offices to tandems. He criticizes GTE for failing to

determine if different and possibly more efficient assignments would produce reduced costs.

GTE argues that the transport module uses a three-step process that allows for auditing at each

step. The end results, argues GTE, are clearly documented and Michigan-specific. It insists that

its interoffice ring configuration is efficient and consistent with GTE’s engineering standards and

TSLRIC principles. It points out that AT&T has not proposed a different, more efficient ring

configuration, and its arguments that one might exist depends on a “scorched earth” network and

should be rejected.

The Commission finds that AT&T’s proposed adjustment for this issue should be rejected.

GTE is not required to modify the existing locations of its host and remote offices or its tandems.

The sixth TSLRIC principle adopted in the Commission’s September 8, 1994 order in Case

No. U-10620 provides for assuming the existing locations of structural facilities.

Page 30U-11832

2. Structure Sharing

AT&T states that the greatest potential shortfall of GTE’s interoffice transport module is the

failure to assume sufficient sharing of structure between the interoffice network and the feeder/dis-

tribution network. Although the ICM calls for subtracting a certain amount from the total distance

of the ring when calculating the conduit length, Mr. Riggert states that he does not believe that the

subtraction has occurred, or at least not consistently. Further, AT&T argues that the ICM assumes

insufficient sharing of interoffice facility structure between interoffice rings.

GTE responds that AT&T is not correct in its criticism. It states that the ICM specifically

considers the sharing of interoffice facility structures and appropriately reduces the support struc-

ture investment amount (not the total distance) to reflect the shared support structure. Through the

affidavit of Scott R. Matson, GTE provides a detailed explanation of the ICM’s shared structure

assumptions.

The Commission finds that GTE has adequately explained its assumed sharing of structures

for interoffice transport. Therefore, no adjustment is needed.

3. Joint Placement Activities

AT&T argues that economies of scale should be recognized for the sharing of feeder and

interoffice conduits, sharing between feeder and interoffice cable sheath, and sharing of cable

sheaths between multiple rings in the same exchange. It proposes a 10% reduction to interoffice

costs for this issue.

GTE responds that the ICM tests for the occurrence of longer construction jobs separately in

the loop and transport modules. Because the transport fiber rings range from 65 to more than 100

miles, GTE states, the buried and underground portions of the rings will rarely be less than 1,000

Page 31U-11832

feet. Thus, GTE argues, the labor rates for trenching over 1,000 feet will always apply to the

buried and underground transport cables.

In its reply to response comments, AT&T argues that GTE has failed to adequately address the

problem raised. Mr. Riggert explains that although GTE claims that it assumes some conduit shar-

ing, there is no evidence that the claimed sharing exists within the model. Although Mr. Riggert

acknowledges that there are times when physical diversity is desired for reliability and survival

needs, the capacity of fiber in the small towns that GTE services in Michigan probably does not

justify physical diversity. He still recommends a 10% reduction of interoffice costs as appropriate.

The Commission finds that GTE has failed to provide convincing argument or evidence that

AT&T’s adjustment should not be adopted. It appears that GTE has assumed little or no sharing of

conduit or cable sheaths, which should be present in an efficient forward-looking network. There-

fore, the Commission adopts AT&T’s proposal to reduce these costs by 10%.

Collocation Module

AT&T takes the position in its initial comments that GTE’s collocation module should be

rejected in its entirety because it is not comprehensive, not complete, and presents too many

individual case basis (ICB) prices. AT&T recommends that the Commission require GTE to file a

comprehensive cost study that reflects GTE’s actual costs. Moreover, AT&T objects to what it

sees as recovering nonrecurring costs in recurring charges. This objection relates to rate elements

for cable space, partitioned space, direct current (DC) power facilities, and DC power utility costs.

Perhaps AT&T’s most serious disagreement with GTE’s study is that GTE appears to propose

collecting from the first collocator all construction costs for modifying the central office for secure

admittance and creating secure equipment cages, etc., without any indication of what a second

5Report No. CC 99-6, CC Docket No. 98-147.

Page 32U-11832

collocator would be charged, or how the first collocator might be reimbursed for shared costs.

AT&T proposes instead that the Commission direct GTE to recover these costs through recurring

charges to each collocator based on the proportion of facilities used.

Moreover, AT&T argues, GTE’s collocation nonrecurring costs are inflated and not properly

supported. For example, AT&T states, costs for modification to central offices are far too high,

and should be reduced to reflect least-cost construction of new central offices designed for

multiple occupancy. AT&T points to the FCC’s First Report and Order and Notice of Proposed

Rulemaking (First Report and Order) relating to collocation issues.5

The Staff agrees that GTE’s existing central offices were generally built to accommodate

outdated technological requirements for equipment space and connectivity. It states that costs for

collocation should be developed to reflect forward-looking technological requirements for

equipment, space, and connectivity. The Staff also agrees that recovery of nonrecurring costs in

recurring charges is not appropriate.

GTE argues that the Staff has misapplied costing principles to reach the conclusion that

TSLRIC principles require assuming the new construction of central offices, rather than the

modification of existing buildings. In GTE’s view, Costing Principle No. 2, related to causation,

demands that GTE recover all costs for collocation because it would not need to modify its facili-

ties without the presence of CLECs. Moreover, GTE argues, the costing principles do not require

that the costs reflect forward-looking technology, only that costs be forward-looking. Principle

No. 6, which calls for the least-cost, most efficient technology that is currently available, GTE

argues, does not mandate that the company use assumptions that are neither technically feasible

Page 33U-11832

nor cost effective. According to GTE, the Staff’s position that the rebuilding of central offices

might be less expensive than modifications to existing structures violates common sense, because

costs for land, labor, and materials rose significantly after GTE’s central offices were built.

The Commission is persuaded that GTE failed to appropriately model the costs for collocation.

The costing principles set out in Case No. U-10620 contemplate the least-cost technology available

and requires modeling the most efficient manner in which collocation may occur given current

technology. Although the placement of central offices may remain unchanged, the new construc-

tion of central offices with multiple occupancy in mind provides a more efficient method of

providing for collocation than modifying the already constructed central offices. Moreover, the

Commission is persuaded that GTE may not charge to the initial collocator all costs associated

with new construction when that construction will benefit other expected future collocators. These

costs should be capitalized and included in the recurring charge for space within the central office.

The Commission further finds that GTE has inflated its cost estimates related to construction

of cages, security card swipe machines, and other items related to collocation. Therefore, the

Commission finds that GTE should be required to resubmit its collocation cost study in compli-

ance with this order, and to modify its cost estimates as reflected in Mr. Riggert’s affidavit, which

reflects costs that the Commission finds to be more reasonable and forward-looking than those

resulting from the ICM.

Another issue related to collocation arises out of GTE Service Corp v FCC, 205 F3d 416 (DC

Cir, 2000) in which the United States Court of Appeals vacated portions of the FCC’s collocation

order and remanded the matter to the FCC for further proceedings. The parties are invited to com-

ment on the effect, if any, of that decision on the studies approved by this order and to comment as

Page 34U-11832

well on any authority under the MTA for the Commission to continue to implement collocation in

a manner consistent with the FCC’s approach, regardless of the status of the FCC’s rules.

Nonrecurring Costs

Nonrecurring costs may be seen as the entry fee to the incumbent local exchange carrier’s

(ILEC) system and include such items as pre-ordering, ordering, and provisioning. In Case

No. U-11281, the Commission agreed that GTE’s proposed nonrecurring costs were excessive and

could harm competition. Additionally, the Commission found that a forward-looking estimate of

the costs incurred in service ordering should assume electronic interfaces. The Commission

ordered GTE to recompute the TSLRIC values used as the basis for the nonrecurring charges in

accordance with the modifications otherwise ordered, and imposed a cap of $5.00 on service

ordering charges. Other proposed nonrecurring charges were reduced by 50%.

In the present case, the Staff argues, GTE has again submitted nonrecurring costs that are

excessive, as they appear to substantially exceed those initially filed in Case No. U-11281. It states

that certain of the proposed costs have increased to over 8,000% of those approved in Case

No. U-11281.

In the Staff’s view, the Commission should reject GTE’s nonrecurring costs in their entirety

and choose one of two options: either the costs approved in Case No. U-11281 should remain in

place, with the Commission reducing any additional cost elements by 50%, or all costs proposed

by GTE in this case should be reduced by 50%. The Staff prefers the former option, as approved

costs will have risen significantly without adequate justification if the Commission chooses the

latter.

Page 35U-11832

AT&T criticizes GTE’s approach to nonrecurring costs as again taking the wrong approach to

TSLRIC studies. It states that GTE has inappropriately used its historical embedded costs as a

basis for calculating TSLRIC, which is not appropriate. Thus, AT&T proposes, the Commission

should reject altogether GTE’s nonrecurring cost module and, in its stead, adopt the Non-Recur-

ring Cost Model (NRCM), a new model developed by AT&T and others. In that manner, argues

AT&T, the Commission will approve costs that reflect the least-cost currently available technol-

ogy, rather than GTE’s actual costs, which reflect a less efficient embedded network structure.

According to AT&T, its recommended model uses the following appropriate assumptions:

(1) a network engineered using forward-looking technologies and efficient processes, (2) an

electronic ordering interface between the CLEC and ILEC that incorporates front-end edits to

minimize service order errors and the ability for those errors to be returned electronically, (3) an

efficient operational support systems (OSS) environment with unpolluted databases to minimize

fallout, (4) electronic provisioning where possible, (5) plain old telephone services (POTS) are

non-designed services, and (6) OSS investment and maintenance costs are recovered in recurring

rates. Mr. Riggert states that although there are some OSSs currently in place with a 1% fallout

rate, the consensus of experts was that it would be reasonable to assume a 2% fallout rate. Further,

Mr. Riggert states, the NRCM model assumes the use of local digital switches (LDS), GR-303

IDLCs for loops served by a fiber feeder, digital cross-connect systems, SONET rings for trans-

port, and a low profile, punch down block MDF for terminating copper loops in the central office.

These technologies, explains Mr. Riggert, use intelligent, processor-controlled network elements

that can communicate over standard interfaces to the OSS in such a manner that little or no human

intervention is required for provisioning and maintenance activities.

Page 36U-11832

GTE responds that AT&T has proposed the model advanced here in proceedings before

several state commissions, none of which have adopted it. The company argues that the assump-

tions underlying the AT&T model are unreasonable and unachievable given the company’s current

architecture, or even the least-cost technology currently available. GTE argues that AT&T’s

model assumes an architecture not yet built and not yet buildable. GTE states that the assumed 2%

dropout rate is neither reasonable nor attained by any carrier to date.

GTE further states that the Staff’s criticisms of the ICM’s nonrecurring cost module are not

well taken. It asserts that it has provided a comprehensive and well-documented study with more

than 700 pages of schedules, workpapers, and descriptions. Further, GTE argues, it has fully and

promptly responded to the Staff’s inquiries for more documentation. GTE argues that it is not

appropriate to reject the results of the new model merely because they are higher than those

reached two years ago, without addressing the accuracy of the new model.

The Commission finds that it should not accept the results of GTE’s nonrecurring cost study.

GTE’s submission fails to adequately justify the tremendous increases in nonrecurring costs com-

puted by its ICM over the costs approved in GTE’s last cost study. Moreover, it is apparent that

GTE has based its nonrecurring cost calculations on embedded costs and costs that it expects to

incur rather than employing an appropriate analysis of forward-looking costs using least-cost tech-

nology that is currently available. GTE has not made any adjustments for increased efficiency,

taking the position that it already is an efficient provider.

However, the NRCM proposed by AT&T is not comprehensive, and employs some assump-

tions that the Commission finds inappropriate. For example, the NRCM assumes the use of IDLC,

which the Commission rejected earlier in this order. Moreover, the Commission finds that, at this

juncture, it is not reasonable to assume that there will be only 2% fallout even in the most efficient

Page 37U-11832

of OSS available. While GTE’s actual experience of 35% fallout is unacceptable for purposes of

computing TSLRIC, 2% is not currently a reasonable alternative.

Because neither GTE’s proposal nor the NRCM produce reasonable results, the Commission

finds that it should adopt the first of the Staff’s proposals and leave GTE’s nonrecurring costs at

the level approved in Case No. U-11281, with any new elements reduced by 50%.

In a related issue, the Staff points out that GTE has proposed nonrecurring costs for resale

services, which it calculated with a “bottom up” analysis, rather than applying an approved

discount to retail charges. The Staff states that GTE did not present information concerning resale

discounts for its recurring charges and services. The Staff argues that it is not appropriate to

change nonrecurring costs for resale, without also changing the recurring resale costs. Further, the

Staff argues, it is not appropriate to perform a “bottom up” study for nonrecurring resale costs,

while continuing to rely on an avoided cost computed resale discount determined in Case

No. U-11281, as this provides a mismatch.

GTE responds that the Staff erroneously contends that GTE’s “bottom up” calculation of

resale nonrecurring costs is not appropriate. GTE states that it has submitted the results of both a

“bottom up” methodology and avoided cost methodology, but that the avoided cost method

required by 47 USC 252(d)(3) applies to retail telecommunication services that will be resold by

CLECs to retail end users. Thus, it argues, the statutory provision does not embrace activities

undertaken by the ILEC for a CLEC. GTE claims that it avoids no retail costs when it is com-

pelled to develop and implement a wholesale ordering and provisioning system.

The Commission finds that this issue has already been discussed and decided in GTE’s

previous cost case, Case No. U-11281. In the February 25, 1998 order in that case, the Commis-

sion determined that the rates, terms, and conditions of resale services, including applicable

Page 38U-11832

nonrecurring charges, must be determined by applying the resale discount percentage approved in

that order to the nonrecurring charges in GTE’s retail tariffs. The Commission is not persuaded

that a different result is required here. Therefore, GTE must remove these separately developed

charges for ordering and installing resale services.

In another related issue, the Staff points out that GTE has proposed recovering disconnection

costs through nonrecurring charges, contrary to the Commission’s express holding in Case

No. U-11280, Ameritech Michigan’s cost study, that it is inappropriate to recover disconnection-

related expenses in service ordering charges Thus, the Staff recommends that disconnection-

related costs should be removed from service ordering nonrecurring costs and, instead, included in

recurring charges that reflect a five-year location life for UNEs and an eight-year location life for

retail services.

GTE argues that the Staff’s proposal to exclude disconnection-related costs from nonrecurring

charges is contrary to industry practice.

The Commission most recently addressed this issue in the November 16, 1999 order in Case

No. U-11831, Ameritech Michigan’s latest cost study. In that order, the Commission stated that,

when dealing with wholesale services, the ILEC may collect disconnection charges from the

provider that requests the service disconnection. For that reason, the Commission found that the

costs should not be treated as part of the cost of commencing service and should not be treated as a

recurring cost. For other services, the Commission adopted the Staff’s proposal, which is the same

as that presented here. The Commission finds no reason to alter its decision on this issue and

therefore holds that, for wholesale services, GTE should collect disconnection-related charges

from the provider that requests disconnection. For other services, GTE should amortize discon-

Page 39U-11832

nection charges over the periods proposed by the Staff and collect them through recurring charges

over the assumed service life.

Scope of this Case

MCI WorldCom argues that pricing is a legitimate and necessary part of this docket. MCI

WorldCom asserts that the fundamental nature of TSLRIC cases is to determine the incumbent’s

economic cost and to provide TSLRIC-based pricing for unbundled network elements, intercon-

nection, and collocation, all of which must be offered at rates based on forward-looking costs. In

Michigan, argues MCI WorldCom, there is no difference between TSLRIC and pricing for offer-

ings of the incumbent LEC.

AT&T argues that the Commission’s order in this case should also reduce GTE’s access rates.

AT&T says that if the Commission does not set prices based on the costs approved in this docket,

the purpose of this proceeding will be frustrated. In particular, it asserts that the Commission must

order GTE to reprice all of its toll access rate elements to be consistent with the findings in this

docket and must eliminate the PICC, the carrier common line charge (CCLC), the information

surcharge, and the special access service surcharge. It denies that the position it now takes is

inconsistent with the settlement agreement reached in Case No. U-11759, a complaint case filed by

AT&T against GTE.

GTE takes the position that pricing is neither required nor permitted in this case, its sole pur-

pose being to establish TSLRIC for network elements and telecommunications services. Thus,

GTE argues, the Commission must deny any request to establish prices here. GTE argues that the

order initiating this case identified that its purpose was to determine GTE’s TSLRIC of providing

its various services, and did not indicate that prices would also be under consideration. Further-

Page 40U-11832

more, GTE argues, AT&T agreed in a partial settlement agreement in Case No. U-11759 not to

pursue reductions in prices from GTE until the conclusion of this proceeding. Although GTE

acknowledges that AT&T reserved the right to address any issue within the context of this case, it

states that AT&T has gone far beyond the issues outlined in the Commission’s order initiating this

case, the testimony that GTE submitted in its filing, and the partial settlement agreement.

The parties to Case No. U-11831 raised similar arguments concerning the scope of Ameritech

Michigan’s TSLRIC proceeding. In the November 16, 1999 order in that case, the Commission

stated:

The Commission does not view the scope of this case as broadly as some of thecommenting parties. The Commission initiated this case to review AmeritechMichigan’s TSLRIC studies for all toll access, toll, and local exchange services,including local interconnection. Although the Commission agrees that thosestudies cannot be viewed in isolation, that is not the same as saying all rate andtariff issues are open for decision in this docket. First, the Michigan Telecommuni-cations Act prescribes the manner in which tariffs for individual services are estab-lished. Second, state and federal statutes create complaint and negotiation andarbitration procedures to resolve many of the disputes that may arise betweenparticular providers, and interconnection agreements provide dispute resolution andbona fide request processes. Third, in the time permitted by this proceeding, it isnot likely that the many ancillary issues can be adequately addressed, and theCommission does not want to encourage the proliferation of issues in a docket thatis already crowded with complex costing issues. Fourth, it is a broad reading of theCommission’s authority to conclude that when the Legislature granted the Commis-sion authority to establish and enforce a TSLRIC standard, it implicitly granted theCommission wide-ranging authority to set rates for all services at that standard. Asa result, the parties who seek to raise these ancillary issues may do so in theappropriate manner. In the meantime, the Commission will require only thatAmeritech Michigan file local interconnection service tariffs with rates equal to thecosts established by the revised cost studies filed to comply with this order.

Order, pp. 36-37.

The Commission reaches the same result in this case for the above-stated reasons. Therefore,

the Commission finds that GTE must file local interconnection service tariffs with rates equal to

the costs established by the revised cost studies filed to comply with this order.

Page 41U-11832

Future Filings

AT&T’s Mr. Riggert suggests that the requirement that GTE file biennial cost studies be

modified to require that cost studies be filed every three years. The Staff concurs and suggests that

three or four years between cost study filings might be an appropriate interval. AT&T suggests in

response that the Commission could try a three-year period and then perhaps move to a four-year

period as the competitive industry becomes more stable.

In its response comments, GTE notes that it does not object to a lengthened period between

cost study filings, as long as the Commission provides a reasonable procedure for GTE to establish

costs for new services offered during the time between compliance filings.

As the Commission determined for Ameritech Michigan in Case No. U-11831, the Commis-

sion finds that GTE should not be required to file cost studies every two years as previously

ordered. However, GTE should not be permitted to file cost studies sooner than two years, absent

a demonstration of a fundamental change in circumstances. The Commission further finds that

GTE should be permitted to file revised cost studies as it deems appropriate, although it may not

file cost studies for individual or just a few services (except new services). It must perform and

file TSLRIC studies for its entire network. Further, the Commission, either acting on its own

motion or at the request of another party, retains the authority to require GTE to file new cost

studies as well.

The Commission FINDS that:

a. Jurisdiction is pursuant to 1991 PA 179, as amended, MCL 484.2101 et seq.;

MSA 22.1469(101) et seq.; the Communications Act of 1934, as amended by the Telecom-

munications Act of 1996, 47 USC 151 et seq.; 1969 PA 306, as amended, MCL 24.201 et seq.;

Page 42U-11832

MSA 3.560(101) et seq.; and the Commission’s Rules of Practice and Procedure, as amended,

1992 AACS, R 460.17101 et seq.

b. GTE’s cost studies should be approved except as modified or rejected in this order.

c. GTE should be required to file cost studies, with the modifications required by this order,

within 30 days.

d. GTE should be relieved of the duty to file TSLRIC studies every two years.

THEREFORE, IT IS ORDERED that:

A. GTE North Incorporated’s cost studies are approved except as modified or rejected in this

order.

B. GTE North Incorporated shall file total service long run incremental cost and related

studies, with the modifications required by this order, within 30 days.

C. GTE North Incorporated shall file local interconnection service tariffs with rates equal to

the costs established by the revised cost studies, within 30 days.

D. Except as provided in Paragraph B, GTE North Incorporated is relieved of the duty to file

TSLRIC studies every two years.

The Commission reserves jurisdiction and may issue further orders as necessary.

Page 43U-11832

Any party desiring to appeal this order must do so in the appropriate court within 30 days after

issuance and notice of this order, pursuant to MCL 462.26; MSA 22.45.

MICHIGAN PUBLIC SERVICE COMMISSION

/s/ John G. Strand Chairman

( S E A L )

/s/ David A. Svanda Commissioner

/s/ Robert B. Nelson Commissioner

By its action of May 3, 2000.

/s/ Dorothy Wideman Its Executive Secretary

Page 44U-11832

Any party desiring to appeal this order must do so in the appropriate court within 30 days after

issuance and notice of this order, pursuant to MCL 462.26; MSA 22.45.

MICHIGAN PUBLIC SERVICE COMMISSION

Chairman

Commissioner

Commissioner

By its action of May 3, 2000.

Its Executive Secretary

In the matter, on the Commission’s own motion, )to consider the total service long run incremental )costs for all access, toll, and local exchange services ) Case No. U-11832provided by GTE NORTH INCORPORATED. ) )

Suggested Minute:

“Adopt and issue order dated May 3, 2000 establishing total service longrun incremental costs for access, toll, and local exchange services providedby GTE North Incorporated, as set forth in the order.”