Press Release

HARRISBURG – The Public Utility Commission (PUC) today took action on establishing the wholesale prices Verizon charges competitors who lease parts of its network in order to resell services to their own retail customers.

            The Commission voted 5-0 to modify several tentative variables in the methodology that it approved in November 2002 to calculate rates for various network components, called unbundled network elements or UNEs. The vote came on a motion by Chairman Terrance J. Fitzpatrick. (link to motion)

            Because today’s order changes inputs to the UNE formula, new prices for individual UNE components will not be available until Verizon reruns its calculations and submits the revised tariffs to the PUC.

            Chairman Fitzpatrick’s motion increases Verizon’s overall cost of capital from 9.83 percent to 12.37 percent. The cost of capital is one factor included in the calculation of UNE rates. It roughly reflects the rate of return a company can expect to earn to compensate it for its investment risks, which in this case means the risks associated with building and maintaining a telecommunications network in a competitive environment.

            Chairman Fitzpatrick said that in its recent triennial review order, the Federal Communications Commission (FCC) clarified that cost of capital should reflect the risks Verizon would face with facilities-based competition, in which competitors build their own networks. The FCC also said cost of capital should not be based on the assumption that Verizon will remain the dominant local telephone company.

            “The record shows that there is a range within which the cost of capital may be set from a low of 9.83 percent to a high of 12.95 percent,” Chairman Fitzpatrick said. “Upon further review of the record, and in accordance with recent FCC determinations, I believe that a cost of capital of 12.37 percent is more reflective of a competitive market.”

            Also today, the Commission said Verizon improperly applied a variable known as a forward-looking conversion (FLC) factor, which resulted in the company overstating operating expenses used in the calculation of UNE rates. The Commission directed the company to correct the flaw in its FLC application before rerunning the calculations.

            Verizon has 30 days from the entry date of today’s order to submit a compliance filing with the new rates. When it does, the company must also include an explanation for any UNE rate that increases or decreases by 50 percent or more from the current rate.

            The Commission found that many of the UNE rates developed in response to the PUC’s 2002 tentative order varied, up or down, from the current rate by 50 percent or more, without an obvious explanation for the different results.

            “It may not be surprising that in a case such as this that some rates will go up, and some will come down, but it is the magnitude of variation from current rates that are of concern,” Chairman Fitzpatrick said.

            Once Verizon submits its compliance filing reflecting the new rates, parties will be able to comment on the rates that have varied by 50 percent or more and on Verizon’s explanations for the changes. The Commission will then evaluate all the information when ruling on the compliance filing. If it believes a rate appears to be an aberration, the PUC may reject it and keep the current one that is in effect.

            The Pennsylvania Public Utility Commission ensures safe, reliable and reasonably priced electric, natural gas, water, telephone and transportation service for Pennsylvania consumers, by regulating public utilities and by serving as responsible stewards of competition.