Citizens Comments

On August 9, 2006, Citizens filed comments on the draft resolutions and made the following points in its comments. Although Citizens appreciates the adjustment of the provisional permanent surcredit to three years only, the company states the adjustment:

Retroactive Ratemaking

Citizens asserts that under Public Utilities Code 728, the Commission is authorized to set rates that will be thereafter observed. Further, to account for possible delays in setting rates, the company states that the Commission uses memorandum accounts to determine prior period revenues or expenses that will be recovered or refunded in future years. Even though a surcredit is being set herein, this does not change the retroactive ratemaking analysis. Finally, Citizens states that the Commission has used the surcredit and rate reduction synonymously for determining the CHCF-B surcredit.

Decision 98-09-039

Citizens states that the Commission contradicts its ruling in D.98-09-039 that the company would not be required to implement a true-up mechanism. Specifically, Citizens points to OP 15 of D.98-09-039 which states:

Due Process and Discrimination

Citizens indicates that they did not receive any advance notice of the refund of additional CHCF-B amounts to its customers. The company further states that there are no Commission decisions and/or resolutions that notify Citizens that the provisional permanent surcredit is subject to retroactive refund. Finally, Citizens believes that only Verizon and Citizens are subject to retroactive adjustments of their CHCF-B draw.

TD's Response

We have reviewed Citizens' opening comments and disagree with its assertion that the Commission violates its prior decisions and therefore it does not have any authority upon which to base the creation of the additional surcredit.

Retroactive Ratemaking

The adjustments ordered in this resolution are not retroactive as the Commission clearly intended to adjust the provisional CHCF-B amount at a later date. The California Supreme Court noted that "The prohibition only applies in the situation when the Commission is "promulgating `general rates' " (Southern California Edison Company v. Pub. Utilities Com. (1978) 20 Cal.3d 813, 816 cited in D.03-02-035, p. 12; See also, California Manufacturers Association v. Public Utilities Commission, 24 Cal. 3d 251, 261 (1979)"). Furthermore, "Before there can be retroactive ratemaking there must be at least be ratemaking." (Id. at 817.) Here, no rates are being changed as a result of the implementation of the incremental surcredit. The surcredit adjustment at issue here will neither increase nor decrease the utilities' previously adopted rates. Rather, the purpose of the incremental surcredit is to adjust/true-up the "estimated" CHCF-B claims, which the provisional/interim surcredit is based on upon, with the actual, approved CHCF-B claims for prior years. This is necessary in order to effectuate the Commission's directives set forth in its prior decisions and resolutions.

Since December 1, 1998 to present date, Citizens has implemented the surcredits on a provisional basis because the surcredits are based on their "estimated" claims, and not "actual, approved" claims. In 2001, AC completed its review of the companies' claims and determined that the "actual, approved" amounts were greater than the companies' claimed amounts for the subject period (August 1997 to July 1998). In other words, the companies were drawing more money from the CHCF-B fund than they were offsetting through the provisional surcredits. Specifically, the difference between the approved and the claimed amounts was $234,781 per year for Citizens. In D.96-10-066 and D.98-09-039, the Commission emphasized that the surcredits that are equal to the monthly draws are necessary in order to prevent the LECs from receiving a windfall as a result of both remittances from the CHCF-B fund and the CHCF-B surcharge income. Moreover, it would be contrary to the Commission's intent and unfair to the customers if Citizens is not required to adjust/reconcile their estimated claims, which their provisional surcredits are based upon, with the Committee's actual, approved claims.

Furthermore, the ordering of the incremental surcredit is consistent with and supports the Commission's rationale behind the CHCF-B funding mechanism. In D.96-10-066, the Commission directed the large LECs to reduce their rates to ensure that they did not reap a windfall from the CHCF-B fund as follows:

Concurrent with the effective date of the fund, the five large and mid-size LECs affected by the CHCF-B shall reduce all of their rates, except for residential basic service and existing contracts, by an equal percentage. This overall reduction shall equal the anticipated monthly draw the incumbent LECs anticipate receiving from the fund. The rate reduction shall be accomplished by a monthly surcredit to each customer's bill through an advice letter filing. (68 CPUC 2d at 630).

Decision 98-09-039

OP 1 of D.98-09-039 ordered Citizens to file an AL to implement a permanent surcredit commencing December 1, 1998 that was supposed to be based on 12 months of actual, approved claims. However, since reviewing the 12-months of claims was not a quick and easy task, the Commission also adopted OP 3 of Decision 98-09-039, which states, "If material issues arise from the Committee's review of the CHCF-B claims, these companies' permanent surcredits shall be implemented on a provisional basis beginning December 1, 1998, and adjusted at a later date, if necessary, upon the resolution of these issues." (Emphasis added).

To comply with OP 1 of D.98-09-039, Citizens filed AL No. 632, but the permanent surcredit was based on the estimated, rather than the approved CHCF-B claim amount for the period ending July 1998. Thus, the Commission, in Resolution T-16239, approved Citizens' request to implement a permanent surcredit on an interim basis, subject to further revision by the Commission, pursuant to OP 3 of D.98-09-039. Further, OP 15 states "... shall not true up their permanent surcredits with their actual draws from the CHCF-B". (Emphasis added) However, the permanent surcredit was not based upon "actual" draws but "estimated" draws.

The intent of OP 3 of D.98-09-039 is to true-up the provisional permanent surcredit with the resolution of any issues associated with the 12 months of CHCF-B claims for the period ending July 1998. Thus, we believe that the difference between the CHCF-B estimated amount and the truncated previous three year calculation based on the implementation date of this resolution, including interest, totaling approximately $755,781 is material enough for Citizens operations to warrant an adjustment to CHCF-B surcredits.

Due Process

Citizens' due process argument also lack merit. Citizens has had ample notice and opportunity that the incremental surcredit adjustment was going to be addressed and ordered by the Commission in the future as follows:

Except as modified herein or discussed above, we reject all other comments filed by Citizens.

FINDINGS

1. In Resolution T-17008, issued July 20, 2006, the Commission approved Citizens Telecommunications Company of California's (Citizens) request in Advice Letter (AL) No. 722 to implement a California High Cost Fund B (CHCF-B) permanent surcredit of 3.63% to apply on Citizens intrastate billings, except residential basic service, contract services and Universal Lifeline Telephone Service (flat rate exchange service, reduced service connection charges, and mileage, if applicable)(ULTS), commencing on September 1, 2006 and continuing thereafter.

2. In this resolution, the Commission now finally and permanently resolves Citizens' provisional permanent surcredit adjustment in compliance with Decision 98-09-039 as set forth in Ordering Paragraph (OP) 7 of Resolution T-17008.

3. OP 7 of Resolution T-17008 stated "In the near future, the Commission shall consider and order final approval and adjustments of Citizens' permanent surcredit in accordance with D.98-09-039."

4. To comply with OP 7 of Resolution T-17008 and D.98-09-039, this resolution is being issued to resolve the material issues related to Citizens' permanent surcredit resulting from the difference of approximately $235,000 between the CHCF-B approved claim amount and Citizens' estimated claim amount (basis for the provisional permanent surcredit calculation).

5. In OP 3 of D.98-09-039, the Commission provided rules and authority for the adjustment of Citizens' permanent surcredit. The Commission also held that if any material issues that arose from the CHCF-B AC's review of the CHCF-B claims, the provisional permanent surcredit would be adjusted at a later date.

6. The CHCF-B AC's approved claim amount is $1.471 million, which is $235,000 more than Citizens' estimated claim amount of $1.241 million for the 12-month period ending July 1998.

7. The approximately $235,000 per year difference for several years is a material amount, which needs to be adjusted. The net effect of this disparity is that Citizens' customers have been receiving a smaller surcredit than they should have.

8. Failure to adjust the $235,000 difference would result in a significant harm to ratepayers and would also be inconsistent with the Commission decisions on how the CHCF-B funds are to be utilized and calculated. Thus, it is necessary to offset that difference of $235,000 per year for several years to Citizens' customers in the form of a surcredit to resolve the material issues set forth in Resolution T-17008.

9. OP 7 of Commission D.02-04-059 adopted the three-month commercial paper rate issued by financial institutions (available at Federal Reserve Board website) as the uniform interest rate applicable to late payment of reimbursement and carrier claims, beginning with payments processed in the first payment cycle (which is May 1, 2002).

10. To determine the amount that Citizens should offset to its customers, TD believes that it is equitable and reasonable to limit the basis for the incremental permanent surcredit calculation to three years.

11. The Telecommunications Division (TD) has calculated the incremental permanent surcredit to be 1.44% based on three years' (from October 1, 2003 through October 1, 2006) difference between the CHCF-B AC's approved claim amount and the estimated amount of $704,342.31, plus interest of $51,439.09, totaling $755,781.40. The total was then divided by the net billing base of $52,384,462 for the 12-month period ending December 2005.

12. It is reasonable to include interest onto the $235,000 per year difference for three years because this amount has been retained by Citizens for these years which should have accrued interest in a financial institution, pursuant to D.02-04-059.

13. Citizens should implement an incremental permanent surcredit of 1.44% to resolve material issues of dispute. The surcredit will apply on all intrastate billings, except residential basic service, contract services, and ULTS commencing October 1, 2006 and ending on the last day of the 12-month implementation period.

14. The 1.44% incremental permanent surcredit will be in addition to the 3.63% permanent surcredit, adopted in Resolution T-17008, which becomes effective on September 1, 2006 and continuing thereafter.

15. Within five (5) business days of the effective date of this resolution, Citizens should be required to file a compliance advice letter to address and adjust the material issues set forth in Resolution T-17008, by reflecting (1) an incremental permanent surcredit of 1.44% for one year to apply on all intrastate billings, except residential basic service, contract services, and ULTS, commencing October 1, 2006 and ending on the last day of the 12-month implementation period; and (2) the incremental permanent surcredit of 1.44% is in addition to the permanent surcredit of 3.63% adopted in Resolution T-17008.

16. Within five (5) business days of the effective date of this resolution, Citizens should provide to the Director of TD for review and approval, a copy of the customer notice that will be in the free-form section of the customer bill, explaining that the 1.44% incremental permanent surcredit is in addition to the permanent surcredit of 3.63% for one year (pursuant to Resolution T-17008), commencing October 1, 2006 and ending on the last day of the 12-month implementation period.

17. On August 9, 2006, Citizens filed comments on this resolution.

18. TD addressed Citizens' comments in this resolution. Those comments not addressed in this resolution are denied.

19. The recommendations, as stated in this Resolution, are reasonable and appropriate, and should be adopted.

THEREFORE, IT IS ORDERED that:

1. Citizens shall implement an incremental permanent surcredit of 1.44% to resolve material issues of dispute. The surcredit shall apply on all intrastate billings, except residential basic service, contract services, and Universal Lifeline Telephone Service (flat rate exchange service, reduced service connection charges, and mileage if applicable) (ULTS), commencing October 1, 2006 and ending on the last day of the 12-month implementation period.

2. The 1.44% incremental permanent surcredit will be in addition to the 3.63% permanent surcredit approved in Resolution T-17008, which becomes effective on September 1, 2006 and continuing thereafter.

3. Within five (5) business days of the effective date of this resolution, Citizens shall file a compliance advice letter to address and adjust the material issues set forth in Resolution T-17008, by reflecting (1) an incremental permanent surcredit of 1.44% for one year to apply on all intrastate billings, except residential basic service, contract services, and ULTS, commencing October 1, 2006 and ending on the last day of the 12-month implementation period; and (2) the incremental permanent surcredit of 1.44% is in addition to the permanent surcredit of 3.63% adopted in Resolution T-17008.

4. Within five (5) business days of the effective date of this resolution, Citizens shall provide to the Director of the Telecommunications Division for review and approval, a copy of the customer notice that will be in the free-form section of the customer bill, explaining that the 1.44% incremental permanent surcredit is in addition to the permanent surcredit of 3.63% for one year (pursuant to Resolution T-17008), commencing October 1, 2006 and ending on the last day of the 12-month implementation period.

This Resolution is effective today.

I hereby certify that this Resolution was adopted by the Public Utilities Commission at its regular meeting on August 24, 2006. The following Commissioners approved it:

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