Comments

In accordance with P.U. Code Section 311(g), CD mailed copies of the original draft Resolution (DR) on November 18, 2008 to Ponderosa and other interested parties.

On December 4, 2008, the law firm of Cooper, White and Cooper LLP (Cooper) filed timely comments, on behalf of Ponderosa, to CD in response to the DR. In its comments Cooper raised the following issues:

The Draft Resolution (DR) Unfairly And Arbitrarily Reduces Ponderosa's Employee Benefits To 38% Of Salaries

In its comments, Ponderosa asserts that CD's determination of a 38% benefit to salaries ratio is unsupported and is in part based on a comparison to the benefits received by Commission staff. It further argues that benefits to salary ratio of state employees should not be used as a benchmark for employees of a small private company. After further consideration, CD has revised its benefit to salaries ratio from 38% to 42%.

Ponderosa's level of benefits to total compensation appears to be high when compared to other similarly situated utilities. For test year 2009, the ratio of benefits to total compensation is 54%. CD applied a ratio of 42% that it deemed to be more reasonable for rate making purposes.

CD's use of the 42% benefit to salary ratio was developed through a comparison of ratios utilized by other communication carriers involved in General Rate Cases (GRC), a survey of the annual report filings and general rate cases of small water companies ranging from 2000-10,000 customers as well as U.S. Bureau of Labor Statistics (BLS) data, dated December 10, 2008 for those indicators relevant to small ILEC's operating in California.

CD found the average benefit to salary ratio for the water survey group to be 33%. While the study of the latest available data from the BLS, for similarly situated companies by size, location, and operation type as well as other indicators resulted in an average benefit to salary ratio of 42%. The BLS ratio supports CD's proposed rate of 42% therefore, CD caps the ratio of regulated benefits to salaries/wages at 42%, for the test year 2009 and concludes that its proposed benefit to salary ratio of 42% for Ponderosa is appropriate and adequate.

In its comments, Ponderosa is concerned that it will not be able to attract a pool of qualified labor, if its benefits are not competitive. CD could not find any collaborating support for this concern. Based on a review of unemployment rates in Ponderosa service areas that covered Fresno, Madera, and San Bernardino Counties, as of October 2008, CD found that unemployment rates were 11.4%, 9.7%, and 9%, respectively which are higher than the 8% unemployment rate for the state of California as a whole. With current layoffs among the larger carriers, CD does not agree that this issue will have adverse affect on Ponderosa's operations, or its ability to attract a workforce. Ponderosa's benefits offering appears to be competitive with those of similarly situated utilities.

The DR Adopts Excessive Increases to Ponderosa's Basic Rates

In its comments Ponderosa argues that the magnitude of the 20% increase to basic service proposed in the DR is not required. Ponderosa further argues that the basic rate should be reexamined in connection with its 2009 CHCF-A filing, or that any increase to the basic rate be phased in over two or three years, with offsetting increases in CHCF-A draws to replace revenues.

The Commission's CHCF-A rules currently require that small LEC's' residential service rates be at least 150% of AT&T's urban rate, and it is for this reason that CD is recommending increasing Ponderosa's residential basic rate. The required adherence to this "150% mechanism" is evidenced by the Commission's adoption of previous GRC resolutions in which the small LEC's local residential rates were increased to at least 150% of AT&T's (Pacific Bell's or SBC's) rates. This 150% mechanism was adopted by the Commission in Decision (D.) 91-09-042; Appendix.

 

The recent B-fund decision (D.) 08-09-042 in footnote number 29 reaffirms the requirement that companies who wish to receive CHCF-A support must first be at 150% of the AT&T rate. The footnote states as follows, "CHCF-A guidelines require a small LEC's CHCF-A requirement to first be met by increases in its local exchange rates up to, but not to exceed, 150% of comparable California urban rates. After this rate limit has been met, the small LEC's can then apply for CHCF-A funding if they make regular GRC filings."

 

Further, in Ordering Paragraph 3 of the original Decision 88-07-022, that established HCF (High Cost Fund; now called CHCF-A) and the 150% requirement, states, "Recover the remaining settlement effects from the intrastate High Cost Fund if the revised basic local rates do not fully recover the settlement effects but the 1-party residence flat rate has reached the 150% threshold level"

 

Additionally, Resolution T-13038 further affirms in Finding of Fact Paragraph 5 that, "To be eligible for intrastate HCF, D.88-07-022 requires the LEC's to propose a rate design that will increase or decrease basic exchange access line service rates by a uniform percentage while maintaining the 150% threshold level of comparable California urban rates presently measured by Pacific's 1-R flat rate of $8.35 per month."

 

It is clear from a review of Commission Decisions and the precedent set by countless GRC resolutions that Ponderosa' basic residential rate must be at the 150% level for Ponderosa to continue to be eligible to receive CHCF-A funding.

Ponderosa further argues that an elasticity factor should also be applied to any basic rate increase ordered as well. In the DR, CD has adjusted revenues for the custom calling and access services and charges which have been increased by 25% or more, in response to Ponderosa' expressed concerns. However, CD does not agree that basic residential service is subject to the same elasticity factors as custom calling and access services. Furthermore, CD has not received any data from Ponderosa that demonstrates its conclusion that the rate increase will result in lost access line revenues.

Given that AT&T has increased pricing flexibility under URF, we will be reviewing in the immediate future whether to continue linking the company's Basic Residential rate to 150% of AT&T's Basic Residential rates as a condition for the company to receive CHCF-A support.  We recognize that the changed circumstances may support reconsideration of this practice and we will also consider whether any changes we make should be reflected on a prospective basis for the company's rates. 

The DR Improperly Rejects $350,000 in Reasonable Salary Expenses For Ponderosa's Executives

In its comments, Ponderosa states that the DR improperly rejects $350,000 in reasonable salary expenses for Ponderosa's executives. CD has determined that the regulated portion of the salaries of the president and vice-president should be disallowed as they do not serve any discernable executive function to the operations of the regulated portion of Ponderosa Telephone Company. CD believes their duties to be duplicative and are currently performed by existing upper management executives.

The DR Improperly Disallows $94,503 in Reasonable Employee Bonuses

In its comments, Ponderosa states that the DR improperly disallows $94,503 in reasonable employee bonuses. CD does not agree with inclusion of Ponderosa's employee bonuses in operating expenses. CD acknowledges that it is within Ponderosa's shareholders' right to reward employees with bonuses, but payment of bonuses must not be charged at the expense of the rate payers who subsidize this regulated telephone company. Therefore, CD disallowed bonus payments of $94,503 from the base year calculation.

The DR Erroneously Understates Ponderosa's Access Line Losses

In their written comments, Ponderosa expressed concern that CD utilized two different sources of data in its projection of Access Line counts losses of <0.35%>. CD prepared another analysis using Ponderosa's Annual Report (Form M, Schedule S-3) data only, from 2002 through 2007. The revised average percentage change was calculated as <0.95%> and CD extrapolated this figure into years 2008 and 2009. The revised Access Line counts for 2009 are 2,152 for Residential, and 7,009 for Business.

Ponderosa Objects to CD's Disallowance of A New Regulatory Analyst Position

In its comments, Ponderosa objects to the disallowance of a proposed new regulatory analyst position, but has not provided any additional reasons for adding this new position in its comments. Ponderosa has simply restated its original needs for this position and failed to provide any additional information that would justify inclusion of this expense. Therefore, CD maintains its disallowance as reasonable and the proposed new position is disallowed.

The DR improperly Disallows Various Necessary Investments and Rate Base Components

In its comments Ponderosa states that the DR improperly disallows various necessary investments and rate base components. CD submits that after the October 24, 2008 meeting, Ponderosa resubmitted its 2008 and 2009 plant addition projects for CD's reconsideration.  CD has allowed all of Ponderosa's resubmitted 2008 projects (except for an $8,000 conference video equipment addition).  Ponderosa's resubmitted 2009 projects totaled $11,120,235.  CD re-examined the 2009 projects and has allowed $9,049,780, or 81%, of these 2009 projects.  CD determined that the remaining 2009 projects were not justified as necessary at this time and should be deferred by the company to a later date.

The Constant Dollar Method Fails to Adequately Capture the Ratemaking Impact of Recent Trends

In its comments Ponderosa states that CD's use of the constant dollar method fails to adequately capture the ratemaking impact of recent trends. CD explains it used Ponderosa's recorded years 2005, 2006 and 2007 labor and non-labor expenses and applied the constant dollar method to estimate Ponderosa`s 2009 expenses.

The constant dollar method is applied to the recorded inflation factors for labor and non-labor for each year. CD used the Division of Ratepayer Advocates estimates of Non-Labor and Wage Estimation Rates for 2008 through 2012 from the October 2008 Global Insight U.S. Economic Outlook. This is done by using the inflation factors for each year and compounding them to 2007 dollars.

The constant dollar method is applied to benchmark the price of a basket of utility purchases in various years to a selected base year. While expenses have been increasing in nominal dollars, when one applies the constant dollar method and adjusts the recorded figures to base year constant dollars, there is less of a variance and in many cases the inflation-adjusted figures remained relatively flat.

The constant dollar method has been the preferred methodology and endorsed by the Commission for analyzing recorded data and has been an accepted methodology in the traditional rate case.

The DR Does Not Make Increases for "Anonymous Call Rejection-Business" As CD Did for "Anonymous Call Rejection-Residential"

Ponderosa commented that CD had increased Anonymous Call Rejection-Residential from $3.00 to $4.00 in the DR, but did not make a corresponding increase to Ponderosa's Anonymous Call Rejection-Business rate. In response to Ponderosa's comments, CD is proposing to increase Anonymous Call Rejection-Business from $3.00 to $4.00 as well. This change will be in the Revenue-Tariff Changes section and Comments section.

Correction of Fixed Charges to Income Taxes Calculation

Ponderosa commented that CD had not reduced the fixed charge component to Ponderosa's income tax calculations in its DR calculations. CD has corrected the fixed charge component of the income tax formula and has recalculated all income tax figures accordingly.

Correct Customer Service Closing Time

In its comments Ponderosa states that the actual closing time of its customer service department is 4:30 p.m. and not 4:00 p.m. as CD stated in the DR. CD has corrected the closing time of Ponderosa's customer service center to 4:30 p.m. in the Operating Expenses section of this resolution.

DR Does Not Reflect The Staff's Intended Reductions in Directory Assistance Allowances to 0 for Business Customers, And 1 for Residential Customers, As Ponderosa Believes Was The Staff's Intent

In its comments, Ponderosa states that CD did not list 1 free call per month for residential customers and 0 free calls for business customers in the changes to Ponderosa's directory assistance allowance in the DR. CD now proposes that Ponderosa's directory assistance allowance be 1 free call for residential customers and 0 free calls for business customers.

The DR Should Account for the G.O. 96-B Requirement That Customer Notice Be Given in Advance of Rate Increases

In its comments, Ponderosa states that's comments CD has recommended that the 30-day notice requirement be waived and that Ponderosa send notice, within 7-days of adoption of this resolution, to all customers regarding the increases to Ponderosa's rates and charges. Additionally, CD recommends that Ponderosa file a Tier 2 advice letter supplement, within 7-days of the adoption of this Resolution, with a revision to its tariff schedules, for all the increases and changes to its rates and charges as proposed in this resolution and as discussed in the Revenue Section of this resolution. The effective date for all changes contained in Ponderosa's AL supplement will be January 1, 2009.

Access to Staff Work Papers

In its comments, Ponderosa asserts that for it to assure the adjustments in the DR are accurate it must be provided an opportunity to review staff's work papers. However, Ponderosa has already been provided this opportunity at the October 22^nd meeting with staff. At this meeting staff spent nearly 4 hours with the company to review work papers and its proposed results of operations. On December 17, 2008, Ponderosa was given a further opportunity to review the proposed resolution and supporting workpapers at a meeting with CD.