IV. Discussion

Section 281(c)(2) puts the Commission in the unique situation of approving the distribution of CASF monies as matching funds to eligible entities in conjunction with ARRA funds. The CASF enabling legislation requires the Commission to develop, implement and administer the CASF to encourage deployment of high-quality advanced communications services to all Californians that will promote economic growth, job creation, and the substantial social benefits of advanced information and communications technologies.

CTC's proposed Poker Flat project will deploy broadband bandwidth and deliver its services over FTTH to its broadband underserved Poker Flat area. The proposed project will increase its existing transport capacity and CTC asserts that the project will reduce the operational costs of its POTS and DSL services. In addition, the broadband plant will contribute to the stability of its POTS and

E-911 services. The additional transport capacity in the region will potentially assist other providers in its area which are currently limited by the same capacity issues.

In Res. T-17282, the Commission specifically approved contingent funding for CTC's Poker Flat project. In like manner, RUS awarded CTC with an opportunity to receive a grant and a loan for the Poker Flat project. The Commission and RUS having explicitly determined the use of proceeds acceptable, it is our responsibility in this unique instance to provide the regulated utility the means to receive this Commission's approval of the Application for an unregulated use of the loan proceeds.¹⁴ Most importantly, the Commission retains some discretion and jurisdiction over conditions attached to the CASF funding to ensure continued public benefits. The proposed Poker Flat project is for the public good and our approval will enable CTC to avail of the low-cost RUS loan and receive the RUS and CASF grants in order to deploy high-quality advanced communications services to its Poker flat service area.

Section 817 provides that a public utility may issue stocks and bonds, notes, and other evidences of indebtedness payable at periods of more than 12 months after the date thereof, for certain purposes, and no others. To the extent that the project provides ancillary benefit to POTS by creating system redundancy which may reduce outages and enhance E-911 service in the Poker flat area, the project is a proper use of funds under § 817(b) and § 817(c). However, we will not make a finding in this Decision on the reasonableness of CTC's proposed construction program or ancillary benefits to its POTS, if any. Construction expenditures and the resulting plant balances and any ancillary benefits from this project to its POTS are issues that are normally addressed in general rate cases.

CTC's projected cash requirements indicate that internally generated funds will provide approximately 68.8% of its cash requirements for 2010 through 2013, leaving $5,476,898 to be funded from external sources. CTC's requested financing authority appears necessary to assist CTC in meeting its projected external funds requirements. However, we will not address the cost of money resulting from CTC's financing activities. Such reasonableness is subject to review in subsequent ratemaking proceedings and may result in a disallowance, if determined imprudent.

As shown in Table 5, the construction of the planned improvements and the issuance of the proposed debt will significantly increase CTC's assets and capitalization. The estimated change in its recorded capital structure after CTC's issuance of the proposed debt is material. However, recorded capital structures may or may not be used for the ratemaking capital structure and ratemaking capital structures are normally subject to review in a general rate case or other proceeding. We will not make a finding in this Decision on the reasonableness of the projected capital structure for ratemaking purposes.

Section 818 states that no public utility may issue notes or other evidences of indebtedness payable at periods of more than 12 months unless, in addition to the other requirements of law, it shall first have secured from the Commission an order authorizing the issue, stating the amount thereof and the purposes to which the issue or the proceeds thereof are to be applied. Section 818 requires the Commission, in issuing such as an order, to find that the money, property, or labor to be procured or paid for with the proceeds of the debt authorized is reasonably required for the purposes specified in the order and, unless expressly permitted in an order authorizing debt, that those purposes are not, in whole or in part, reasonably chargeable to expenses or to income.

As set forth above, CTC's proposed loan would be for the purpose of constructing and improving its facilities and improving and maintaining its service, which falls within the scope of purposes in § 817. Moreover, CTC's proposed borrowing and the money, property, or labor to be procured or paid for with the proceeds of the debt authorized by this Decision is reasonably required for the purposes specified in Table 2 of this Decision, since these improvements will benefit customers in the Poker Flat service area over many years. CTC's proposed Poker Flat Project is not reasonably chargeable to expenses or income.

Section 851 requires Commission authorization before a utility may "lease, assign, mortgage, or otherwise dispose of or encumber the whole or any part of its... plant, system or other property necessary or useful in the performance of its duties to the public..." Section 851 permits the encumbrance of utility assets when such encumbrance serves to secure the authorized debt.

RUS requires an encumbrance on CTC's assets to secure the loan and the grant and the Commission frequently authorizes such encumbrances where, as here, it is not adverse to the public interest. As of June 30, 2010, CTC's outstanding loan balances with the RUS total $7,613,205. Since the lien on CTC's collateral continues as the former loans remain outstanding, RUS requires CTC to grant it a continuing security interest in and to all of CTC's property, and to execute a related agreement and supplemental security instruments in conjunction with the proposed loan and the grant.

According to the terms of the Agreement, RUS has and will continue to maintain a security interest in all of the assets of CTC and until all indebtedness is completely paid in full, RUS will maintain the security interest. According to RUS, it does not grant a partial release of liens when previous loans are fully paid and CTC continues to make payments on other RUS loans. In addition, the security interest covers CTC's property funded by RUS loans as well as any grant-funded assets. Federal regulation requires that the government has security/ownership rights in anything funded with federal grant funds.

However, RUS states that if CTC elects to go to another lender for future financing requirements, RUS is willing to share a first lien position on a pari passu basis with another lender.¹⁵ In fact, RUS is currently accommodating such an arrangement in the ARRA BIP program where awardees have existing outside indebtedness.

CTC's proposed borrowing and the money, property, or labor to be procured or paid for with the proceeds of the debt authorized by this Decision is reasonably required for the purposes specified in this Decision, which purposes are not, in whole or in part, reasonably chargeable to expenses or to income. In addition, it is necessary to authorize CTC to encumber its assets so that RUS will provide the grant and the loan.

Section 281 requires that the Commission develop, implement, and administer the CASF to encourage deployment of broadband service. According to the Agreement, CTC is required to secure the loan and the grant and its other obligations to the RUS. Without an authorization for the grant of this security interest to RUS, both the loan and the grant offer may be terminated.

Therefore, we will authorize CTC to obtain the RUS loan in the amount of $1,226,093 and to encumber its assets in connection with the debt. Our approval will complement the Commission's requirement that the approval of the CASF grant is contingent on the receipt of the ARRA funding and provide CTC with the loan authorization required by RUS.

The key factors that we considered in our disposition of CTC's request for debt authority in this proceeding follow:

1. The emergence of advanced information and communications technologies.

2. CTC's intention to provide broadband services in unserved and underserved areas in California.

3. The Commission's jurisdiction with respect to monitoring and enforcement of any conditions attached to approval of the CASF funding as stated in D.07-12-054.

4. While broadband is regulated by the federal authorities, the Commission retains some discretion to ensure continued public benefits since part of the infrastructure cost is being paid with CASF monies.

5. Section 281 requires that the Commission develop, implement, and administer the CASF to encourage deployment of high-quality advanced communications services.

6. The condition imposed by RUS that CTC obtain authorizations, certificates, and approvals from all state, Federal and other public authorities and regulatory bodies for the grant and the loan to be valid and enforceable.

7. The Commission's condition indicated in Res. T-17282, that the approval of the CASF grant to CTC is contingent on CTC's compliance, among other things, with the receipt of the ARRA funding for the Poker Flat project.

8. The various RUS conditions being imposed on CTC in conjunction with the completion of the project.

9. RUS' requirement stated in the BIP Loan/Grant and Security Agreement that CTC will grant RUS a continuing security interest in and to all of CTC's property to secure the loan and the grant combination.

Consistent with § 824, CTC should maintain records to (i) identify the specific long-term debt issued pursuant to this Decision, and (ii ) demonstrate that the proceeds from such debt was only used for the purposes specified herein.

CTC should keep and maintain copies of the Agreement and related loan documents and within fifteen days from request provide copies to the Utility Audit, Finance and Compliance Branch (UAFCB).

¹⁴ Res. T-17143 acknowledged that broadband is regulated by the federal authorities and is not a regulated service under the authority of this Commission. However, the Commission does and should retain some discretion to ensure continued public benefits since the Commission will approve up to 40% of broadband infrastructure costs.

¹⁵ Per information provided by RUS in its email dated November 9, 2010.