7. Assignment of Proceeding

Jack Leutza is the assigned Examiner in this proceeding.

Findings of Fact

1. Resolution T-17133 (Resolution) addressed Cal-Ore Telephone Company 's General Rate Case filing.

2. On July 14, 2009, Cal-Ore filed Application 09-07-016, a Petition to Modify Resolution T-17133, alleging the Resolution contained several calculation/methodological errors.

3. Although the Resolution incorrectly stated the Intrastate Network Access Services deflation factor, the work papers utilized the proper deflation factor of 11.31% and the adopted Results of Operations total used the correct figure for Intrastate Access Charges.

4. The Resolution contains a calculation error with respect to the addition of a central office technician.

5. The Resolution contains a calculation error with respect to the 2009 accumulated depreciation.

6. Attachment 1 contains a corrected version of Resolution T-17133 and its associated revised results of operations.

Conclusions of Law

1. The Applicant's request should be approved in part and denied in part.

2. The Intrastate Network Access Services (Intrastate Access Charges) is correctly calculated in Resolution T-17133, but the text on page 6, third paragraph should be changed to read:

...CD is projecting a more modest 11.31% decrease in Intrastate Network Access Services revenue for 2009, resulting in the proposed revenue amount of $534,204 for the test year, a difference of $70,043 from Cal-Ore's proposed amount of $464,161.

3. Annualizing the salary of the additional central office technician position for 2008 and 2009 results in additional total company expense of $12,651 and additional intrastate expense of $6,294.

4. The Total Company accumulated depreciation for test year 2009 should be ($20,259,104). The Intrastate accumulate depreciation should be increased by $70,925 to ($11,495,016).

5. The revised intrastate revenues, expenses, and rate base amounts for test year 2009 as identified in Appendix C, column (E) of Resolution T-17133 as modified by Decision 11-05-033, should be adopted for Cal-Ore Telephone Company.

ORDER

IT IS ORDERED that:

1. The Petition for Modification of Resolution T-17133, filed by Cal-Ore Telephone Company on July 14, 2009 is partially granted with respect to two of the three disputed items and partially denied with respect to the third disputed issue.

2. Resolution T-17133 as modified by Decision 11-05-033, as set forth in Attachment 1, is adopted and replaces Resolution T-17133 in its entirety.

3. The Communications Division shall publish Resolution T-17133 as modified by Decision 11-05-033 on the Commission's website and place it in the file of Advice Letter 320.

4. The Communications Division shall remit the additional California High Cost Fund A support of $18,183 to Cal-Ore Telephone Company. This amount represents the California High Cost Fund A amount that Cal-Ore Telephone Company would have received if the calculation errors, as identified in Sections 3.1 and 3.3, had not occurred.

5. Application 09-07-016 is closed.

This order is effective today.

Dated May 26, 2011, at San Francisco, California.

ATTACHMENT 1
Revised Version of T-17133

PUBLIC UTILITIES COMMISSION OF THE STATE OF CALIFORNIA

Communications Division

RESOLUTION T-17133

Licensing, Tariffs, Rural Carriers, and Cost Support Branch

January 29, 2009

R E S O L U T I O N

Resolution T-17133. Cal-Ore Telephone Company (U-1006-C). General Rate Case Filing In Compliance With G. O. 96-B, Paragraph VI.

By Advice Letter No. 320, filed on December 27, 2007.

_________________________________________________________________

Summary

This resolution addresses the General Rate Case (GRC) filed on December 27, 2007 by Cal-Ore Telephone Company (Cal-Ore) through Advice Letter (AL) No. 320, for test year 2009, in compliance with D.01-05-031. In AL No. 320, Cal-Ore proposes: (a) no changes to its basic rates or charges, however the company proposes to increase some of its discretionary rates and charges to bring its prices in line with the current marketplace, (b) an intrastate rate of return (ROR) of 10.00%, the same ROR granted in its previous GRC filing, and (c) $1,461,446 in California High Cost Fund-A (CHCF-A) support for test year 2009.

This Resolution authorizes CHCF-A support for Cal-Ore in the amount of $489,682, for test year 2009. This amount represents a decrease of $741,223 , or approximately 60%, from Cal-Ore's CHCF-A 2008 support level of $1,230,905. This decrease is due to adjustments made to revenue, expenses and rate base estimates. This resolution further authorizes an overall Intrastate ROR of 10.00% for test year 2009. This resolution also authorizes test year 2009 intrastate revenue in the amount of $3,604,658 , a difference of $329,027 , or 9.13% , from Cal-Ore's estimate of $3,933,685. This resolution authorizes average intrastate rate base for Cal-Ore in the amount of $4,910,875 , $245,183 , or 4.99% , less than Cal-Ore's proposal of $5,156,058. The authorized intrastate total operating expenses for Cal-Ore for 2009 is $3,113,571 , which represents a decrease of $304,509 , or 9.78% , when compared to Cal-Ore's estimate of $3,418,080.

Appendix A, to this resolution, compares the Communications Division's (CD) and Cal-Ore's test year 2009 Total Company Results of Operations at present rates before any CHCF-A adjustment. Appendix B compares CD's and Cal-Ore's Interstate and Intrastate Results of Operations at present rates before any CHCF-A adjustment. Appendix C compares CD's and Cal-Ore's Intrastate Results of Operations at proposed rates after Cal-Ore's and CD's proposed CHCF-A adjustments and after CD's proposed revenue, expense, and rate base adjustments. Lastly, Appendix D shows CD's calculation of the Net-to-Gross Multiplier and the changes in the gross intrastate revenue requirement based on an adopted intrastate rate of return of 10.00%.

Background

Cal-Ore is a local exchange carrier (LEC) that provides local, toll, and access telephone services in unincorporated portions of Siskiyou and Modoc Counties and in the cities of Dorris and Tulelake. Cal-Ore's territory is sparsely populated and bounds Oregon on the north and is made up of hilly, high elevation, semi arid type terrain.

As of October 2007, Cal-Ore had approximately 1,793 residential and 653 business customers. Out of Cal-Ore's 1,793 residential customers, 917 receive Universal Lifeline Telephone Service (LifeLine). These 917 LifeLine customers represent 51% of Cal-Ore's residential customers and 37.5% of its total customer base.

In Decision (D.) 01-05-031, the California Public Utilities Commission (CPUC) set in motion the waterfall provision3 for seven small LECs if they did not each file a GRC by the end of 2002.

The previous GRC filed by Cal-Ore was AL No. 274, filed on December 19, 2002, for test year 2004 was adopted by Resolution T-16762 on October 30, 2003. The CHCF-A funding amount granted to Cal-Ore in T-16762 was $1,341,356, with an additional one-time CHCF-A funding amount of $21,172 for uncollectible revenue that Cal-Ore was unable to collect due to the MCI/WorldCom bankruptcy.

Notice/Protests

Cal-Ore states that copies of AL No. 320 were mailed to the parties on its service list. Notice of AL No. 320 was published in the Commission Daily Calendar of January 11, 2008. No protests to AL No. 320 were received by CD, however CD did receive two customer complaint letters in response to Cal-Ore's proposed rate increases.

On April 14, 2008, CD held a Public Meeting in Dorris, California, to explain Cal-Ore's filing to its customers and to give customers the opportunity to ask questions of Cal-Ore and CD. Cal-Ore notified customers of the rate review request and public meeting by bill insert. No Cal-Ore customers attended the meeting.

On October 17, 2008, CD met with Cal-Ore and Moss Adams (Cal-Ore's consulting firm) at the Commission's San Francisco headquarters. The meeting was held to give CD and Cal-Ore the opportunity to discuss CD's proposal and for CD to address Cal-Ore's questions and concerns. Prior to this meeting CD sent Cal-Ore and Moss Adams draft copies of CD's draft Results of Operations, which form Appendices A through D to this resolution. During this meeting CD explained its reasoning and methodologies utilized in adjusting Cal-Ore's expenses, rate base estimates, and CD's 2009 proposed CHCF-A subsidy, all calculated with a 10% ROR on rate base.

On December 17, 2008, Moss Adams' representatives on behalf of Cal-Ore reviewed CD's workpapers and met with CD staff at CPUC's offices.  On December 30, 2008, Moss Adams responded to CD staff that they were still working through their analysis for Cal-Ore and would respond as soon as their analysis was complete.  To date, CD has not received any further information concerning possible calculation errors from Moss Adams.

Discussion

Total Operating Revenues

A comparison of CD's and Cal-Ore's estimates of proposed intrastate operating revenues for test year 2009 is shown in Appendix C. Cal-Ore's estimate of intrastate operating revenues is $3,933,685, a difference of $329,027 from CD's estimate of $3,604,658 . The reasons for the differing estimates are further discussed below.

Cal-Ore used its historical data and managerial judgment to forecast local units, and estimated Local Revenue by multiplying the forecasted units by the tariff rates. Cal-Ore is also proposing some rate changes to better reflect those rates charged by comparable carriers; those changes are included in the Company's 2009 forecast.

In this GRC, Cal-Ore has proposed the following increases to its rates and/or charges:

CD is proposing an increase to Cal-Ore's Local Residential Service rate, Tariff Schedule A-1, from $16.05 to $20.254. This increase is 150% of AT&T's current residential rates as required of small LECs for CHCF-A support. The new charges will result in an increase of $90,418 in revenue. In D.08-09-042, as corrected by D.08-10-040, Universal Regulatory Framework (URF) Incumbent Local Exchange Carriers (ILEC) will adopt a transitional plan for increases to Basic Residential rates effective January 1, 2009. As a result, CD recommends Cal-Ore increase its Lifeline rates, from $5.47 to $6.11, since General Order 153 ties those rates to AT&T's basic rates.

CD proposes to increase Cal-Ore's Local Business Service rates, Tariff Schedule A-1, from $25.65 to $26.00 for the individual lines and from $25.65 to $29.00 for the key lines. The new charges would result in an increase of $5,792 in revenue. The increased Business Service rates would bring the charges more in line with rates charged by comparable carriers.

CD proposes the following increases to Cal-Ore's rates and/or charges - all contained in Tariff Schedule A-20:

CD agrees with Cal-Ore's proposal to increase its Local Area Operator Assistance Service charge, from $0.25 per call to $0.50 per call, and to reduce the business call allowance from 2 free calls to zero. CD disagrees with Cal-Ore's proposal to decrease the residential call allowance from 5 free calls to 0; instead CD proposes to change the Local Area Operator Assistance residential call allowance from 5 free calls to 1 free call. CD's reason is that after surveying other carriers' Local Area Operator Assistance residential free call allowances, CD believes its proposal to be reasonable and in line with those allowed by other comparable carriers. Factors such as the company's geographic location and the current service rates were taken into consideration. Adjustments for price elasticity were applied by CD in response to concerns raised by Cal-Ore in its meeting with CD and in response to information provided to CD in subsequent data requests.

CD believes its and Cal-Ore's proposed increases to Cal-Ore's rates and charges are reasonable and should be adopted.

Intrastate Network Access Services:

For its Intrastate Network Access Services, Cal-Ore collected data using amounts billed to the interexchange carrier and used current rates and units to develop its revenue forecast. Cal-Ore's proposed 2009 Intrastate Network Services revenue amount is based on the carrier's forecast of demand, such as the minutes of usage, and tariffed rates. Using this data, along with historical data for 2005-2007 that indicates a downward trend in usage of non-wireless transmission for intrastate network access services, CD is projecting a more modest 11.31% decrease in Intrastate Network Access Services revenue for 2009, resulting in the proposed revenue amount of $534,204 for the test year, a difference of $70,043 from Cal-Ore's proposed amount of $464,161.

Miscellaneous Revenue:

Based on historical data from 2002-2007, Miscellaneous Revenue for Cal-Ore has increased each year. CD finds the rate of increase from year-to-year is in line with the amount proposed by Cal-Ore for 2009. CD therefore finds reasonable, Cal-Ore's proposed Miscellaneous Revenue amount of $262,301.

Uncollectibles:

Uncollectibles are based on bad debts associated with local revenue and intrastate access revenues. Cal-Ore annualized the first 9 months of its 2007 Uncollectibles and based its 2008 and 2009 forecasts on the changes in Local Revenue. Cal-Ore states the 2007 local revenue bad debt at $10,645 and intrastate access revenue bad debt at $121,453. CD has reviewed the annual reports and does not agree with Cal-Ore's estimate of test year 2009 uncollectibles. CD analyzed five years (2003-2007) of recorded data to arrive at an average of 0.78% uncollectible for local revenue and 9.74% uncollectibles for intrastate access revenue. CD applies these percentages to derive the 2009 uncollectibles amount. Therefore, CD proposes an uncollectible amount of $59,069 for the 2009 test year, a decrease of $30,485 from Cal-Ore's proposed amount of $89,554.

In response to concerns raised during the meetings with companies submitting GRC's for test year 2009, CD is making adjustments to subscriber counts of Discretionary Services due to price elasticity. Moss Adams, an accounting firm representing three LEC's with GRCs pending, performed an analysis demonstrating that increases in Discretionary Services above 25% for test year 2009, would have a price elasticity factor of 5%. Considering the increases in rates CD is proposing for Cal-Ore in test year 2009, CD performed the calculations and concurs with this methodology. The Discretionary Services for which CD is increasing in excess of 25% equals $24,797 in incremental revenue for Local Services in test year 2009. This results in a difference of $122,157 in Access Revenue from Cal-Ore's projection of $780,086 to CD's projection of $902,243 at proposed rates for test year 2009.

Operating Expenses

Cal-Ore's estimate of total company operating expenses at $4,029,557 (less depreciation and taxes-income and other) is greater than CD's estimate of $3,893,409 by $136,148 or 3.50% . A comparison of CD's and Cal-Ore' estimates of total operating expenses for test year 2009, is shown in Appendix A. Differences between CD and Cal-Ore estimates include elimination of salary and benefits for a proposed new employee in 2009, capping benefits at 42% of salaries and wages, reduction in the rate case expenses, the use of nine months' annualized data for 2007 in Cal-Ore's initial filing and the difference between the Constant Dollar method used by the Commission and the method of applying Cal-Ore's application of annual growth rates in labor and non-labor expenses. These differences were discussed in the October 17, 2008 meeting between CD and Cal-Ore, adjustments were considered where appropriate and the results are described below.

For operating expenses, Cal-Ore forecasted 2009 expenses based on the following methodology. First, Cal-Ore broke expenses to salaries and benefits as labor expenses and rent, clearance, and others as non-labor expenses components. Then, it took 2007 expenses and applied an 8% capped growth rate to labor expenses and 5% capped growth rate to non-labor expenses and added two proposed employee expenses for 2008 to project 2008 expenses. These growth rates were solely based on the company's own judgment which, CD could not independently verify. Finally, Cal-Ore used 2008 expense projections and used the same growth rates as used in 2008, added expenses for one proposed employee for 2009 and projected its 2009 test year expenses. Cal-Ore believes this methodology to be reasonable for a small company. CD does not agree with Cal-Ore's estimated labor related and non labor expense growth rates. The growth rate factor used by Cal-Ore is too high compared to the Division of Ratepayers Advocates' of the California Public Utilities Commission (DRA's) labor and non-labor inflation factors.5 CD used Cal-Ore's recorded expenses in terms of labor and non-labor expenses and applied the constant dollar method to estimate Cal-Ore's 2009 expenses.

The constant dollar method is used to measure financial statement items in dollars of the same (constant) purchasing power. Historical cost is restated in units of constant purchasing power as follows:

(Historical Expense) X (Average CPI for the Current Year/CPI at Time of Expense incurrence)

Restating all accounts in constant dollars provides greater comparability among years because all expenses appear in constant dollars regardless of when the expense was incurred. The Commission in Siskiyou's 1997-test year rate case proceeding discussed and adopted CD's use of the constant dollar methodology. In Finding of Fact 6 of Resolution T-16006, the Commission found "...CD's methodology in estimating expenses reasonable and adopt CD's recommended test year 1997 expenses contained in Appendix A." 6

Therefore, CD used Cal-Ore' recorded expense figures for the years 2005, 2006 and 2007 and then applied the recorded inflation factors for labor and non-labor for each year to convert the recorded expenses to constant 2007 dollars. CD then took the average of the inflation-adjusted amounts for those three years and used it as its base estimates. It then applied the cumulative inflation factors for 2008 and 2009 to the base estimate to arrive at the test year 2009 estimate. Because rents components are not subject to the same variability as other types of expenses, the constant dollar method was not applicable. CD accepted Cal-Ore estimate of rent and escalated it into the test year using DRA's estimated non-labor escalation factor.

Rate Case Expense:

Cal-Ore's estimate of rate case expenses is $225,000 amortized over a three year period and hence, it added $75,000 to expenses for the test year 2009. In Cal-Ore's last rate case, the Commission authorized rate case expenses of $50,000 for test year 2004.  Using the non-labor inflation factors for 2007, we are projecting that the rate case expenses for test year 2009 would be about $61,000 as added to the Corporate Operations Expense category. This reduces rate case expenses by $14,000 for the test year 2009.

New Employees:

Cal-Ore initially requested to add three new employees in 2008 and 2009. After reviewing the submitted reasoning, CD accepts the addition of two new employees in 2008 and added their associated expenses to its forecasted 2009 expenses. CD does not agree with the addition of the Customer Service Representative in 2009. Given the down turn in the housing market and existing economic conditions in the Cal-Ore territory, and based on staff field investigation, CD concludes Cal-Ore would be sufficiently staffed with the level of staff in 2008. In addition, CD believes that cross training of current employees can meet Cal-Ore's anticipated increased workload needs in regulatory and language requirement areas given that some of the current employees are already working on some of these areas. The language proceedings are still ongoing and the language requirements have not been determined at this time.

Wages, Salary and Benefits:

Cal-Ore provided a list of salaries/wages and benefits for 2007 which showed its level of benefits to total wages and salaries to be excessive. For test year 2009, the ratio of benefits to total wages and salaries is 52.43%. Cal-Ore provided a list of salaries/wages and benefits for 2007. CD believes a benefit to salary ratio of 42% is more reasonable as explained below.

CD staff surveyed regulated small water companies ranging from 2000-10,000 customers filing rate cases with the Commission. CD found their average benefit to salary ratio was 33%7. Further, CD staff studied the latest available data from the U.S. Bureau of Labor Statistics (BLS), dated December 10, 20088 and found that BLS included paid leaves in its benefit calculations. The benefits to wages and salaries ratio for all civilian workers was 43.42% and 40.86% for civilian service workers which were derived from the data in Table 2. Cal-Ore has a non-unionized work force and the BLS data derived from Table 5 suggest a benefit to wage and salary ratio of 38.56% for non-union workers. Analyzing the data in Table 6 for the Trade, Transportation, and utilities sector yields a benefit to wage and salary ratio of 41.34%. Table 7 shows data for the Pacific region (which includes California) and indicates a benefit to wage and salary ratio of 41.98% for the Pacific region. Cal-Ore serves rural communities and the data from Table 7 for Non-metropolitan areas yields a benefit to wage and salary ratio of 41.15%. For all small private companies with 1-49 employees (such as Cal-Ore) total benefits to salaries and wages was 33.99% obtained from the data in Table 8.

In response to the data analyzed above, CD concludes that the proposed benefit to wage and salary ratio of 42% is conservative, yet reasonable. Thus, CD recommends a benefit to salary ratio of 42% for Cal-Ore.

Depreciation Expense:

CD used its average TPIS for 2009 and Cal-Ore's current depreciation rates to calculate 2009 total company Depreciation Expense of $1,388,368. Cal-Ore's calculation of total company Depreciation Expense was $1,762,056. Both Cal-Ore and CD applied the same depreciation rates which had been previously approved by the Commission. Differences between CD's and Cal-Ore's depreciation expense calculations are due to differences in their estimated Telephone Plant-in-Service (TPIS) balances for 2009.

Rate Base

CD examined Cal-Ore's Rate Base components, which include Telephone Plant in Service, Telephone Plant Under Construction, Material & Supplies, Working Cash and Deferred Income Taxes.

In computing Telephone Plant in Service (TPIS), CD reviewed Cal-Ore's 2007 annual report, Capital Budget, including additions and retirements as reflected in the annual report, and the filed GRC work papers and responses provided by Cal-Ore through data requests. Cal-Ore's proposed plant additions for 2008 and 2009 are $1,740,000 and $1,735,000 respectively. These plant addition amounts are somewhat higher than Cal-Ore's historical 5 year average (2003 - 2007) gross plant additions of $1,456,634. CD has made adjustments to the proposed plant additions in the building, buried fiber, and central office digital switching equipment TPIS categories (see following section). CD's resulting estimate of plant additions for 2008 and 2009 are $1,254,258 and $835,000, respectively. The reasons for CD's disallowance of certain Cal-Ore TPIS projects are discussed below.

Fiber Project in Cities of Dorris and Tulelake:

Cal-Ore is proposing to install underground fiber cable plant throughout the cities of Dorris and Tulelake. These projects include bringing fiber facilities to every home in each of these two towns. At the meeting at the company's headquarters on April 15, 2008, Cal-Ore explained that there have been no service quality complaints resulting from the buried copper cable facilities nor have they received any requests for the provisioning of high technology services that might require the installation of the fiber plant.

Cal-Ore also informed CD that as part of the fiber installation, that each house would require an Optical Network Terminal/Unit (at a cost of $500 to $700 per residence). These devices are required (at each residence) to convert the fiber cable's light signal to an electrical signal, which can then be transmitted by the home's existing internal copper wiring. CD disallows the project (and related Central Office upgrades) in the towns of Dorris and Tulelake as part of its rate base adjustments for the following reasons. There are no service quality complaints in the two towns to warrant replacing the existing plant. At the October 17th meeting, CD asked Cal-Ore why they could not install digital loop carrier (DLC)9 systems in Dorris and Tulelake and then provide fiber plant to the DLCs and then branch out from the DLCs with copper to each home. By this means Cal-Ore could provide voice as well as DSL service to any customer who requests it. Cal-Ore replied that the close proximity of the central offices to the homes in both Dorris and Tulelake, make installing DLCs unfeasible. CD believes that if the homes are so close to the central offices in Dorris and Tulelake, then installing copper plant in the two towns would be sufficient because the copper lengths would be short enough to enable Cal-Ore to provide DSL (as well as basic voice telephone service) to all its customers in both towns.

Materials and Supply (M&S):

Cal-Ore's estimate of Materials and Supplies (M&S) for 2009 is $126,351, which is approximately 0.004425% of its average 2009 TPIS amount. CD reviewed Cal-Ore's M&S recorded 5 years (2002-2006) amounts from its filed GRC workpapers, and calculated the ratio of the M&S amounts to the recorded average TPIS for those years. The M&S ratio ranged from 0.00369 to 0.004362, with an average ratio of 0.00401. CD then applied the average ratio of 0.00401 to its estimated average TPIS for 2009 to arrive at its M&S estimate of $111,621 for the test year. CD recommends that the average Total Company M&S of $111,621 be included in the rate base since it more closely approximates the future operations of Cal-Ore.

Working Cash:

Cal-Ore and CD utilized the simplified method described in the CPUC's Standard Practice U-16, to arrive at their working cash estimates. A ratio of 49.16% of toll revenue to total revenue was used to calculate the total company Working Cash estimate of $411,507 for test year 2009. CD's estimate of test year 2009 Total Company Working Cash is $14,056 , or 3.42% , lower than the amount computed by Cal-Ore, due to the differences in estimated revenues and expenses for test year 2009.

Telephone Plant Under Construction:

Cal-Ore calculated its total company Telephone Plant Under Construction (TPUC) amount of $119,937, by taking the average of its 5 years of TPUC data and dividing it by the average of its 5 years TPIS, resulting in a 0.42% TPUC percentage. Cal-Ore then multiplied this percentage times its estimated 2009 TPIS. CD accepts Cal-Ore's 2009 percentage of 0.42% to calculate 2009 TPUC. CD used the 0.42% percentage multiplied by its calculated 2009 average TPIS of $27,835,721 to come up with $116,910 for 2009 TPUC. CD feels that using this 0.42% figure for TPUC will best reflect Cal-Ore's future TPUC for 2009, as it is based on Cal-Ore's recorded TPUC and TPIS amounts.

Depreciation Reserve (Accumulated Depreciation):

Cal-Ore's Accumulated Depreciation for test year 2009 is $20,494,336, $235,232 , or 1.16% more than CD's Accumulated Depreciation estimate for 2009. CD calculated Accumulated Depreciation by taking its depreciation expenses for 2008 and 2009 and adding them to its calculated ending balances of Accumulated Depreciation for 2007 and 2008, to obtain an average Total Company Accumulated Depreciation for 2009 of $20,259,104 . Differences between CD's and Cal-Ore's depreciation reserve are due to differences in their respective 2008 and 2009 estimated TPIS balances.

Separations

Cal-Ore provides both intrastate and interstate telecommunications services, subject to the regulation of the CPUC and FCC, respectively. Because Cal-Ore's property serves both jurisdictions, the utility's revenues, expenses, taxes, investments, and reserves are allocated between interstate and intrastate services.

"Separations" is a process of apportioning a telephone company's property costs, related reserves, operating expenses, taxes, and rate base between the intrastate and interstate jurisdictions. It is a method by which a telephone company can separately identify the amount of expenses and investments associated with the production of a given service. These apportionments are made on the basis of relative usage and direct assignment whenever possible. The costs to be apportioned are identified in the FCC's Part 36 Separations Manual, according to the classification of accounts as prescribed by the FCC's Part 32, Uniform System of Accounts (USOA) for Telecommunications Companies.

Cal-Ore used separation factors developed under the FCC's Part 36 to apportion its interstate and intrastate services. CD reviewed Cal-Ore's separation factors and found them reasonable, and accordingly CD used Cal-Ore's separation factors to estimate Cal-Ore's Intrastate Results of Operations.

3 The waterfall provision refers to the 6-year phase down of the CHCF-A funding levels. The funding levels are 100% of the test year's level for the first 3 years, 80% for the fourth year, 50% for the fifth year and 0% thereafter.

4 On October 28, 2008, AT&T sent a letter to CD Director John Leutza informing him that AT&T will raise their residential flat rate to $13.50 per month from its present rate of $10.94. Commission Decision 08-09-042 allowed AT&T to increase its monthly residential flat rate up to $14.19, but AT&T indicated that it would not increase the rates to the full extent of the authorized rate cap at this time. As a result of this AT&T rate increase, CD has adjusted Cal-Ore's monthly residential flat rate to $20.25 (150% of AT&T's new rate of $13.50) from its current rate of $16.05 per month.

5 Division of Ratepayer Advocates: Estimates of Non-labor and Wage Escalation Rates for 2008 through 2012 from the November 2008 Global Insight U.S. Economic Outlook.

6 At page 5 of Resolution T-16006, the Commission stated, "Generally for traditional GRCs, the Commission adopts the constant dollar method".

7 Kenwood GRC filing Test Year 2009 at 35%, Alco Annual Report 2007 at 48%, East Pasadena Annual Report 2007 at 24%, Fruitridge Annual Report 2007 at 25%, Penngrove Annual Report 2007 at 32%.

8 http://www.bls.gov/news.release/ecec.nr0.htm.

9 A digital loop carrier (DLC) is a system which uses digital transmission to extend the range of the local loop farther than would be possible using only twisted pair copper wires. A DLC digitizes and multiplexes the individual signals carried by the local loops onto a single datastream on the DLC segment.

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