B. Financing Request

In its Application (A.) 10-09-014 (Application), CTC seeks authorization to enter into a new loan in the amount of $1,226,093 with RUS under the Broadband Initiative Program (BIP) as authorized by the ARRA. CTC does not believe it prudent or in the best interest of its subscribers to finance some of the costs of its Poker Flat broadband project out of its earnings or resources when it has been awarded a loan with a below market interest rate pursuant to the BIP. CTC will not use the loan funds received for purposes chargeable to operating expenses or to income.

The loan will bear interest at the Treasury rate for comparable loans with comparable maturities. Interest will accrue from the first advance of funds and interest payments will be due and payable on the last day of the month following the month of the advance. The principal payments will begin one year after the date of the first advance. The direct cost-of-money loan will bear interest at the rate applicable to each advance of loan funds based on the average yield on outstanding marketable obligations of the United States having a final maturity comparable to the final maturity of the advance.

As indicated in Table 1, CTC previously obtained long-term secured borrowings from RUS, secured by executed mortgages and supplemental mortgages of substantially all of CTC's property. As of June 30, 2010, the total outstanding balance of CTC's existing RUS loans is $7,613,205, with mortgages as evidenced by the Amending Telephone Loan Contract, dated January 2, 2003, and the Restated Mortgage, Security Agreement and Financing Statement, dated February 7, 2005.

To secure the payment of the proposed RUS loan, the subject of the Application, CTC requests authority to pledge and grant to the RUS a continuing security interest in and to all of its property.7

The new Agreement, as shown in Exhibit D in the Application, provides that CTC will maintain and preserve the lien superior to all other liens affecting the collateral, and will forever warrant and defend the title to the collateral against any and all claims and demands whatsoever.

A RUS letter, dated September 15, 2010, also part of Exhibit D in the Application, stated, among other things, that the executed Agreement and supporting information must be submitted to the RUS within 60 days of the date of the Agreement pursuant to Section 8.1 of the Agreement.8

CTC disclosed in the information it provided on October 21, 2010, that it discussed with RUS officials the need for a time extension of the deadline in consideration of the Commission's meeting schedule. By email dated

November 8, 2010, RUS notified CTC that it granted CTC a 60-day extension, extending the deadline for CTC to submit the executed Agreement and supporting documents to January 15, 2011.

C. Current Financing Authority

January 2, 2003, and includes supplemental mortgages on CTC's properties.

As of June 30, 2010, this loan has an outstanding balance of $5,949,384.

In D.05-06-023, dated June 16, 2005, the Commission authorized CTC to enter into a loan agreement with RUS for $7,762,000 to be used for the upgrade of its facilities used in conjunction with the provision of broadband services, including the acquisition of facilities, customer premises equipment, and the construction of a redundant fiber route connecting the Copperopolis and Jenny Lind central offices. Of this $7,762,000 in debt authority, CTC only utilized approximately $2.9 million. This loan transaction was documented under the Restated Mortgage, Security Agreement and Financing Statement, dated February 7, 2005, and includes supplemental mortgages on CTC's properties.

As of June 30, 2010, this loan has an outstanding balance of $2,410,821.

D. Proposed Construction Plans

CTC developed its current video network two years ago. CTC asserts that it rolled out its video network, unregulated by the Commission, across its system to the areas able to support ten Mbps or more. CTC claims that it upgraded its data network with the start of the planned video two years ago to be prepared for higher bandwidths. CTC states that its current network is able to support the additions proposed in its Application.

According to Exhibit C in its Application, CTC plans to provide broadband, unregulated by the Commission, services to its Poker Flat service area via a Gigabit Passive Optical Network (GPON) FTTH system (Poker Flat Project).10 GPON is currently deployed in other locations within CTC's incumbent local exchange carrier (ILEC) service area. CTC states that the high cost of deploying FTTH in its Poker Flat service area has been a major deployment hindrance.

CTC's construction will include upgrading existing access cabinets with FTTH functionality. CTC states that the installation of new remote power and fiber management cabinets will support the FTTH development. Customer terminations will include network-powered systems installed at each location to convert the fiber-based access network to the copper-based system within each home. The proposed equipment for the network deployment will utilize

Calix C7 platform/system equipment. Delivery will include a new FTTH architecture overlay to the existing POTS and DSL platform.

To augment the broadband delivery, CTC will add a new ten Gigabit transport capacity. All proposed equipment will be located in central offices or a new prefabricated hut and will have redundancy on the common control and uplink cards. According to CTC, due to current limitations, the customer facing ports cannot be equipped in a redundant fashion. Instead, these components are addressed via the shelf sparing.

On October 26, 2010, CTC provided information claiming that its proposed broadband project will provide ancillary benefits to its POTS. CTC states that due to past service outages, the redundancy to be provided as part of the Poker Flat Project will greatly improve service. CTC indicated that not long ago, there was a fire near Valley Springs that severed a major AT&T fiber optic cable, which resulted in a limited outage for AT&T customers but a 100% extended outage and total isolation for CTC's customers. Additionally, a few years before the fire, there was a significant AT&T outage at Lockeford that left the entire foothills region isolated, including both CTC and Volcano Telephone Company.

CTC indicates that its planned transport redundancy will help alleviate this problem since both data and telephone traffic suffering a cable disruption in one direction can be re-directed automatically in the other direction without loss of connection. The redundancy will further enhance the customers' E-911 service in that its customers can call for emergencies during cable cuts and like situations. CTC claims that there are additional benefits to be provided, which include lower cost routing to pass along to ratepayers and providing private line services much faster to the community.

CTC pointed out that there are common costs that both its telephone service and broadband service can share. CTC is fully regulated by the Federal Communications Commission (FCC) which promulgates accounting cost allocation rules under Parts 32 and 64 of the Code of Federal Regulations Title 47, Telecommunications. These rules are administered through the National Exchange Carriers Association (NECA). CTC asserts that there is an extensive annual cost study procedure which allocates each and every asset based on an interstate/intrastate allocation and actual plant usage, and on numerous other factors. As part of this regulatory regime, DSL is a fully regulated, interstate service provided under approved NECA tariffs.

E. Construction Budget

Table 2

Poker Plat Project

Construction Budget for Years 2010 through 2013

Budget Category & Project Description 2010 2011 2012 2013 Total

Network Access Equipment/Install $ - $ 300,000 $ 250,000 $ 29,700 $ 579,700

Outside Plant/Install Cable & PF Fiber - 2,800,000 1,800,000 107,378 4,707,378

Cabinets/Install Equipment Node Upgrades - 95,000 30,000 - 125,000

Customer Premise Equipment/Install - 80,000 177,450 - 257,450

Oper's Spt. System - - - - -

Operating Equipment/Purchase - 380,000 - - 380,000

Professional Services/Engineering Serv. Contract - 244,448 42,000 18,000 304,448

Testing/Outside Plant - - 5,000 4,000 9,000

Upfront Costs/Pre-App. Engineering Services 44,000 - - - 44,000

CTC states that its construction budget is subject to change and claims that RUS indicated that it may consider certain budget transfers, if necessary.

F. Cash Requirements Forecast

CTC's estimated cash requirements forecast, based on information provided by CTC on October 25, 2010, is summarized in the following table:

Table 3

Cash Requirements Forecast for Years 2010 through 2013

Poker Flat Project $ 44,000 $3,899,448 $2,304,450 $ 159,078 $ 6,406,976

Other Construction11 2,400,000 1,700,000 1,500,000 2,300,000 7,900,000

Payment on Notes 735,000 747,000 782,000 818,000 3,082,000

Bonds, Notes Ret. 0 0 0 0 0

Cash Required 3,179,000 6,346,448 4,586,450 3,277,078 17,389,606

Less: Int. Funds12 2,540,000 2,925,000 3,170,000 3,327,000 11,962,000 External Sources $ 639,000 $3,421,448 $1,416,450 $ 0 $ 5,476,898

CTC's projected cash requirements indicate that cash available from internal sources which includes cash reserves, internally generated funds or other funds, if needed, will provide approximately $11,962,000 or 68.8% of its estimated cash requirements of $17,389,606 for years 2010 to 2013.

G. Poker Flat Project Funding

CTC intends to fund the construction of its broadband Poker Flat Project from four different sources:

1. California Advances Services Fund

Pursuant to § 281 (a), the Commission is required to develop, implement, and administer the CASF to encourage the deployment of high-quality advanced communications services in unserved and underserved areas in California to promote economic growth, job creation, and the substantial social benefits of advanced information and communications technologies.

On July 20, 2009, Governor Schwarzenegger signed Assembly Bill (AB) 1555 (Chapter 24, Statutes of 2009), amending § 281 to expand the CASF eligibility to any entity applying for CASF funding in conjunction with a Recovery Act funding request provided that the entity satisfies the eligibility requirements for CASF funding. AB 1555 also provides that the Commission establish requirements and guidelines for non-certificated applicants. Section 281 (c) (2) states:

Notwithstanding any other law and for the sole purpose of providing matching funds pursuant to the federal American Recovery and Reinvestment Act of 2009 (Public Law 111-5), any entity eligible for funding pursuant to that act shall be eligible to apply to participate in the program administered by the commission pursuant to subdivision (a), if that entity otherwise satisfies the eligibility requirements under that program. Nothing in this section shall impede the ability of an incumbent local exchange carrier, as defined by subsection (h) of Section 251 of Title 47 of the United States Code, that is regulated under a rate of return regulatory structure, to recover, in rate base, California infrastructure investment not provided through federal or state grant funds for facilities that provide broadband service and California intrastate voice service.

On September 25, 2010, the Governor signed Senate Bill (SB) 1040, thus increasing the funding authorized for CASF by $125 million and extended the sunset date of the CASF program to January 1, 2018.

In D.07-12-054, effective December 20, 2007, the Commission authorized the allocation of $100 million to support broadband deployment projects in accordance with the principles and processes under the CASF program. The number of traditional wireline telephone lines has declined, while the number of wireless and VoIP lines has increased. Voice service is simply one of many data streams flowing over a broadband connection. The voice telephony market now consists of a rich mix of wireline telephone, wireless telephony, VoIP, and satellite voice offerings. The Commission has authority to monitor and enforce any conditions attached to the approval of the CASF funding.

In Resolution (Res.) T- 17143, the Commission adopted the application requirements, timelines, and scoring criteria for parties to qualify for broadband project funding under the CASF. In Res. T-17143, the Commission indicated that while financial information may demonstrate that an applicant has sufficient funds at the time of application, it does not necessarily ensure that a CASF recipient will have sufficient funds when construction is scheduled to begin, or that funds will continue to be available during construction. The Commission acknowledged that small local exchange carriers (LECs) can utilize their own funds for 60% of a total project's costs, and other applicants are financing 60% through a loan or debt offering.

In Res. T-17143, the Commission provided that an applicant which certifies that 60% of the funding will be provided through its capital budget should not be required to post a performance bond. Such bonds usually serve an important function to ensure the completion of a project.

In Res. T-17143, the Commission stated that if applicants choose to offer voice service (other than basic service) as an additional feature to broadband customers, they must, at a minimum, comply with the FCC's E-911 and battery backup requirements. In setting this requirement, the Commission did not intend to modify existing minimum basic service requirements for local exchange service. The Commission noted that by providing broadband service to unserved areas, subscribers will have additional telephone service choices through VoIP providers. This will serve the Commission's goal of increasing phone service choices to consumers, consistent with federal and state laws and policies.

On July 29, 2010, the Commission issued Res. T-17282 authorizing CASF to award contingent grant funding of $640,698 to CTC for its Poker Flat Project to provide broadband service in an isolated shoreline community located six miles south from the main Copperopolis turn off from State Highway 4. There are 409 households located in the project area which covers approximately one square mile on Lake Tulloch.

In Res. T-17282, the Commission approved the CASF grant after the Commission's Communications Division (CD) reviewed CTC's eligibility through an analysis of the required submitted data, which included, but was not limited to: descriptions of current and proposed broadband infrastructure; geographic information system-formatted Shapefiles mapping the subject area; an assertion that the area is underserved; the potential subscriber size and household incomes; the project's construction schedule; the project's budget; a proposed pricing and commitment period for new subscribers; and the financial qualifications of CTC.

In addition, CD reviewed the Shapefiles submitted which mapped the broadband deployment proposed using United States 2000 Census data, the January 2009 Broadband Task Force Report including its on-line maps, and the revised August 10, 2009 California Broadband Task Force maps, among others. CD mapped the test locations to validate the test areas. Lastly, CD determined that the Census Block Group (CBG) covering the proposed area is qualified as underserved and recommended approval of a CASF grant in the amount of $640,698 for CTC.

In Res. T-17282, the Commission stated that CTC shall not be required to post a performance bond in conjunction with the CASF grant for CTC's Poker Flat project.13 However, CTC's receipt of the CASF grant is contingent on CTC's compliance with the requirements in Res. T-17143 and the receipt of Recovery Act funding for this project. If CTC is not successful in its request for the Recovery Act grant or if the Recovery Act grant is less than that requested, the Commission provided that CTC may request additional CASF funds in accordance with Ordering Paragraph No. 7 of D.09-07-020.

In Res. T-17282, the Commission included a summary of the estimated Poker Flat Project costs and funding sources, which is shown in the following table:

Table 4

Poker Flat Project Costs and Funding Sources per Res. T-17282

Expense Items Amount

Pre-Construction and Engineering $ 678,448

Materials/Supplies and Equipment 5,678,528

Environmental Studies/Permitting 50,000

Total Proposed Budget $6,406,976

Source of Funds Amount

2. RUS ARRA Grant and Low Cost Loan Award

By a letter dated September 15, 2010 to CTC, RUS confirmed the award of a grant in the amount of $2,860,883 and a loan in the amount of $1,226,093, for a total of $4,086,976, pursuant to the BIP as authorized by the ARRA. RUS specified that the loan and grant should be used solely to finance CTC's broadband infrastructure project.

RUS assessed the utility's system improvements, its financial needs, and the utility's ability to meet loan obligations. Pursuant to the proposed RUS Agreement, CTC is required, among other things, to do the following:

a. Provide broadband service described in the RUS approved application commencing from the date the project is substantially complete for at least as long as the composite economic life of the facilities financed by the grant and the loan.

b. Construct, build, and complete the project in accordance with the system design submitted with the RUS approved application.

c. Maintain and preserve the lien of the Agreement superior to all other liens affecting the collateral.

d. Begin construction and/or installation activities only after all necessary local, state and federal requirements have been satisfied.

a. CTC shall certify that the project is being constructed in accordance with a detailed schedule describing the project build out;

b. Loan/grant advances shall be provided on a reimbursement basis, or based on unpaid third party invoices for eligible purposes, or contracts approved by RUS, in accordance with the BIP contracting, work order and advance procedures guide;

c. CTC shall ensure that adequate funding is in place to complete the project and obtain additional loans of funds for supplemental funding in an amount needed to ensure completion of the project;

d. CTC shall substantially complete the project within two years;

e. CTC shall establish an accounting system satisfactory to RUS to account for all advanced funds;

f. CTC shall afford RUS, the Office of the Inspector General of USDA, and the Government Accountability Office, through their representatives, reasonable opportunity, at all times during business hours and upon prior notice, to have access to and right to inspect the project.

3. Internal Funds

As shown in Table 4, CTC intends to derive the remaining $1,679,302 needed for the project from its cash reserves and internally generated funds. CTC has other planned construction projects for its regulated telephone service estimated at $7,900,000 from years 2010 to 2013. CTC intends to use its cash reserves, internally generated funds, or if needed, request additional debt authority from the Commission.

H. Capital Structure

On October 25, 2010, CTC provided the following capital structure, as recorded as of June 30, 2010, and adjusted to give pro forma effect to its proposed financing transaction:

Table 5

Capital Structure

Long-term debt $ 7,613,205 46.78% (2,128,907)(A) $5,484,298 33.84%

Preferred Stock 0 0.00% 0 0 0.00%

Common Equity 8,662,186 53.22% 2,062,000(B) 10,724,186 66.16%

Total Capitalization $16,275,391 100.00% $( 66,907) $16,208,484 100.00%

Notes:

(A) Long-term Debt

Issuance of $1,226,093 requested in this Application and principal payment

of current and new debt from 2010 to 2013, estimated at $3,355,000.

(B) Common Equity

Projected net income of $2,062,000 from 2010 to 2013.

7 To cover all indebtedness, obligations and liabilities to the RUS, of every kind and description, now existing or hereafter arising.

8 Section 8.1 states that RUS, in its sole discretion, may terminate the offer to make the Loan or Loan/Grant Combination if it does not receive the Loan-Grant Documents, duly executed on behalf of the Awardee and all conditions in Section 4.1 hereof are not satisfied within sixty (60) days from the date hereof. Section 4.1 of the Agreement provides, among other things, that CTC should provide to the RUS satisfactory evidence that it has duly registered when and where required by law and with all state, Federal and other public authorities and regulatory bodies and obtained all authorizations, certificates, and approvals necessary for, or required as a condition of, the validity and enforceability of each of the loan/grant documents.

9 $5,949,384 + $2,410,821 - $747,000 = $7,613,205.

10 A passive optical network (PON) is a form of fiber-optic access network.

11 CTC explains that the funds for other construction are for regulated telephone projects.

12 Funds from internal sources include cash reserves, internally generated funds or other funds, if required.

13 See Ordering Paragraph 2 of Res. T-17282.

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