Discussion
Operating Revenues
Total Operating Revenues At Present Rates:
For test year 2009 CD identified the regulated components of Ponderosa's Total Operating Revenues as: Local Revenues, Access Revenues, Miscellaneous Revenues and Uncollectible.
Ponderosa's estimate of total company operating revenues at present rates of $20,078,759 is less than CD's estimate of $20,524,303 by $445,544 or <2.17%> (Appendix A; Column B; Line 9). The difference is due to the differing estimates developed by CD and Ponderosa as discussed below.
Local Revenues:
Ponderosa calculated it's Local Revenues by annualizing eight months of 2007 recorded revenue to project total 2007 revenues. The average growth in access lines from 2005 to 2007 was calculated to project 2008 and 2009 access lines and Associated Revenues. Ponderosa states in its filing that this provides the most representative basis for projecting future access lines and associated revenues.
CD does not accept Ponderosa's access line count as provided in its filing, as there are discrepancies in access lines as reported in its 2007 annual report and the actual 2007 access line counts submitted to CD in AL No. 374 A on June 20, 2008. In order to determine an accurate access line count, CD included the actual access line count changes from 2004, 2005, 2006 and 2007 as reported in AL No. 374 A. The percent change between each year was calculated, averaged for three years, and extrapolated into 2008 and 2009 access line count projections. At the October 22nd meeting, Ponderosa disputed CD's access line count. In response, CD requested that Ponderosa submit the latest access line count for consideration in determining test year 2009 access line count and associated revenues.
On October 27, Ponderosa replied to CD and verified that the access line count as stated in Ponderosa's 2007 Annual Report is correct. CD performed a second analysis utilizing data from Ponderosa's 2002 through 2007 Annual Reports, Form M Schedule S-3 access line count in its methodology. The average percent change for five years was calculated, and extrapolated into 2008 and 2009 access line count projections. For Test Year 2009, CD estimates 2,152 business lines, compared to Ponderosa's projection of 1,993 (an increase of 159) and 7,128 residential lines compared to Ponderosa's projection of 7,054 (an increase of 74), representing a Local Revenue increase of $29,548 at present rates. This disparity is the result of the difference between Ponderosa's projected access line losses of <1.64%> as compared to CD's projected loss of <0.95%>.
In addition, CD is also proposing tariff changes. The most significant are increases in Flat Rate Residential Service, and California Lifeline Service. This is due to D.08-09-042 as corrected by D.08-10-040, allowing AT&T to increase its monthly Residential Flat Rate up to $14.193. On October 28, 2008, AT&T notified the Director of CD in writing that AT&T will raise its Residential Flat Rate from the present $10.94 to $13.50. As a result of this AT&T rate increase; CD proposes increasing Ponderosa's Basic Residential rate from the current $16.85 to $20.25 (150% of AT&T's rate of $13.50 as of January 1, 2009) and California Lifeline rate from $5.47 to $6.11. After review of telephone rates throughout California, CD determined Ponderosa's Business Flat rate is at the low end of the comparative rates and should be increased from the current $28.45 to $30.05. The result of the increase in Flat Rate Residential service is $285,967, and the increase for Flat Rate Business service is $41,318.
In response to concerns raised during the meetings with companies submitting GRC's for test year 2009, CD is adjusting subscriber counts of Discretionary Services due to price elasticity. Moss Adams, an accounting firm representing three ILEC's (Incumbent Local Exchange Carrier) with GRCs pending, performed an analysis that demonstrates increases in Discretionary Services of at least 25%, would have a price elasticity factor of 5%. Considering the increases in rates CD is proposing for Ponderosa in test year 2009, CD performed the calculations and concurs with this methodology. The Discretionary Services CD is increasing in excess of 25% are adjusted by $22,231 in incremental revenue for Local Services in test year 2009.
Tariff Changes:
This Resolution authorizes Ponderosa to increase the rates of certain optional services such as Custom Calling Services, inside Wiring Protection for businesses and residences, Voice Mail Services, and business Centrex services monthly rates. Ponderosa estimates that as a result of these requested rate increases, its 2009 revenues will rise by $28,718.
In AL 374, Ponderosa proposed the following changes to its tariff schedules:
1. Increase various monthly rates offered in "Custom Calling Service" overall by 10% - Tariff Schedule No. A-20.
2. Increase monthly rates for the three basic feature packages for business
offered in "Centrex Service": "Package One" from $5.00 to $5.50, "Package Two" from $4.00 to $4.50 and "Package Three" from $3.00 to $3.50 - Tariff Schedule No. A-23.
3. Increase monthly rates for "Ponderosa Wiring Protection" simple inside wiring plan for business from $1.95 to $2.00 and for residence from $0.95 to $1.00 - Tariff Schedule No. A-31.
4. Increase monthly rates for the six mailbox options offered in "Voice Mail Service": "Call Answering" from $3.95 to $4.25, "Voice Messaging I" from$5.95 to $6.50, "Voice Messaging II" from $7.95 to $8.50, "Voice Messaging III" from $9.95 to $10.50, "Greeting Only Mailbox" from $3.95 to $4.25, and "Voice Menu" from $3.95 to $4.25 - Tariff Schedule No. A-35.
5. Elimination of "Transport Interconnection Charge," in accordance with D.07-12-020, Ordering Paragraph 8 - Tariff Schedule No. B-7.
CD reviewed Ponderosa's proposed tariff changes and found them reasonable with two exceptions. CD believes the following two "Wiring Protection" services should be priced at the comparable market rates. CD applied the lower of AT&T and Verizon (two major ILEC's) statewide rates and revised the proposed rates as follows:
1. Wiring Protection Business increase from $1.95 to $3.00 - Tariff Schedule No. A-31.
2. Wiring Protection Residential increase from $0.95 to $1.50 - Tariff Schedule No. A-31.
In addition to Ponderosa's proposed tariff changes, CD is recommending the following tariff changes based on a survey of AT&T's and other ILEC's rates and charges:
1. Flat Rate Residential Service monthly rate from the current $16.85 to $20.25 and California Lifeline Service from the current $5.47 to $6.11 in accordance with D.08-09-042 as corrected by D.08-10-040 (see Local Revenues above) - Tariff Schedule No. A-1.
2. Additional Listing Business increase from $0.95 to $1.50 - Tariff Schedule No. D-1.
3. Additional Listing Residential increase from $0.50 to $1.00 - Tariff Schedule No. D-1.
4. Additional line of Information increase from $0.50 to $0.75 - Tariff Schedule No. D-1.
5. Anonymous Call Rejection Residence from $3.00 to $4.00 - Tariff Schedule No. A-20.
6. Anonymous Call Rejection Business from $3.00 to $4.00 - Tariff Schedule No. A-20.
7. Call Forwarding Busy Business increase from $4.00 to $5.00 - Tariff Schedule No. A-20.
8. Local Operator Assistance Service (Directory Assistance) increase from $0.24 to $0.50 - Tariff Schedule No. B-8.
9. Directory Assistance Allowance Residential decrease from 5 free calls to 1 free call - Tariff Schedule No. B-8.
10. Directory Assistance Allowance Business decrease from 2 free calls to 0 free calls - Tariff Schedule No. B-8.
CD recommends the Commission adopt the proposed tariff changes listed above.
Access Revenues:
In its filing, Ponderosa reports State Switched Access and State Special Access as components of Access Revenues. Ponderosa is forecasting Access Revenues by projecting Minutes of Use (MOU) to determine Switched Access Revenues for 2008 and 2009. Minutes of Use are projected separately for interexchange carriers and wireless carriers based on the average growth in MOU from 2006 and 2007. Per minute rates were then applied to the calculated MOU to determine Switched Access Revenues. Direct trunk revenues were added to determine total Switched Access Revenues. The per minute rates utilized in this calculation were based on the projected rates for 2008 and 2009 for interexchange access and wireless carriers and adjusted for known factors for 2009. Included in this calculation is elimination of the Transport Interconnection Charge (TIC) rate element, establishment of a new meet point billing percentage with AT&T, and the new wireless reciprocal compensation rate.
Ponderosa stated in its filing that for Special Access Revenues an additional adjustment was made to 2009 revenues to account for new meet point billing percentage with AT&T. Upon examination of Ponderosa's Access Analysis, CD found inconsistencies in the methodology Ponderosa provided. One methodology calculated Total Switched Access Revenues based on forecasted MOU's for 2008 and 2009 projections. Another method utilized projections of Access Minutes of Use with actual 2005, 2006 and 2007 changes in growth. At the October 22nd meeting, CD asked Ponderosa to discuss their methodology used in projecting Access Revenues, and the actual amounts of decrease in TIC and Meet Point billing revenues. CD also requested from Ponderosa actual 2004, 2005, 2006, and 2007 Access Revenue data.
In its response, Ponderosa stated that because these changes in TIC and meet point billings are new, it is difficult to project, and that Ponderosa is modifying its methodology. Ponderosa calculated the change in percentage of Switched Access and Wireless MOU's for 2004, 2005, 2006 and 2007 and extrapolated the average into 2008 and 2009. Upon review, CD accepts this methodology as reasonable due to the fact that Ponderosa's Access MOU's are decreasing, while Wireless MOU's are increasing and therefore there is no discernable trend. The result is a revised projection of $757,423 in Access Revenues from $645,615 as stated in Ponderosa's filing. By utilizing the same methodology, CD revises upward Ponderosa's State Special Access revenues from $214,895 to $218,239. This results in a total difference of $115,152 in Access Revenue from Ponderosa's projected $860,510 to CD's projection of $975,662.
Miscellaneous Revenues:
Ponderosa reports Miscellaneous Revenues as being comprised of: Directory Revenue, Rents, 911 Re-imbursement, and Miscellaneous-Other, and Intrastate Billing and Collection. In its filing, Ponderosa states that the average historical changes and known 2008 and 2009 impacts in miscellaneous revenues were utilized to determine miscellaneous revenues for 2008 and 2009. The basis for the average historical changes and known impacts varies among each individual miscellaneous revenue item. At the meeting, Ponderosa conveyed to CD that 911 revenue is a static set amount, a fixed cost and did not result from projections. CD accepted that assertion.
In its filing, Ponderosa is forecasting an increase in Directory Revenues for Test Year 2009. Because of Ponderosa's efficiency and enterprise in marketing its Directory products despite an overall industry downward trend, CD accepts Ponderosa's methodology and forecast for Directory Advertising. Since lease agreements are traditionally long-term, negotiated between AT&T and Ponderosa, and are fixed, CD accepts Ponderosa's forecast for rental revenue. Ponderosa forecast Intrastate Billing and Collection by applying their access line count growth forecast of <1.64%> extrapolated to 2008 and 2009 from actual 2007 data. CD does not accept this methodology, since CD forecasts an access line count growth of <0.95%> based on the same methodology CD applied to project Local Revenue (see above). This change results in an increase of Miscellaneous Revenue from Ponderosa's forecast of $513,514 to CD's forecast of $516,786 at proposed rates.
Uncollectible Revenue:
Ponderosa forecasts Uncollectible Revenue by averaging 2006 and 2007 Uncollectible as a percentage of billed local revenues to project 2008 and 2009 uncollectible revenue. After analysis of Ponderosa's forecasts of Uncollectible Revenues in test year 2009, CD finds the ratio between Uncollectible and Total Operating Revenue (less CHCF-A)4 to be insignificant. Since Ponderosa is demonstrating efficiencies in reconciling Uncollectible Revenue, CD accepts its forecasts.
CD calculated that its and Ponderosa's proposed rates and charges increases will result in an increase of $377,478 in annual intrastate revenues.
Revenue Effect Associated with Wireless Intercarrier Compensation:
Ponderosa's filing for CHCF-A funding for calendar year 2009 included a prior period adjustment in the amount of $967,524 for recovery of lost revenues due to moving from a tariffed rate to an interconnection agreement with New Cingular Wireless PCS, LLC, dated May 20, 2005. The requirement for an interconnection agreement was due to the Commission's Final Arbitrator's Report A.06-02-028 dated January 14, 2008.
This prior period adjustment, in the amount of $967,524, will be included in Commission Resolution T-17181, which funds the 17 small Local Exchange Carriers for calendar year 2009. The total funding for Ponderosa for 2009 will include the amount approved in Resolution T-17181 plus the amount approved in this Resolution.
Operating Expenses
3 Universal Regulatory Framework (URF) Incumbent Exchange Carriers (ILEC) will adopt a transition plan for increases to Basic Residential rates effective Jan. 1, 2009. The increase is within the 150% threshold of AT&T at current rates as required to receive CHCF-A support. General Order 153 currently ties the California Lifeline rate to AT&T's Basic Residential rate.
4 At present rates, $4,451 of $17,725,401 or 0.0002%. At proposed rates $4,451 of $11,470,430 or 0.0003%.
