B. Financing Request
In its Application, Cal-Ore seeks authorization to enter into a loan, in conjunction with its affiliate COC, in the amount of $446,600 with RUS under the BIP. RUS is also granting Cal-Ore and COC (collectively Awardees) a grant in the amount of $1,339,800 under the BIP. Both the loan and the grant will solely be used solely to finance the broadband infrastructure project (Project) which was approved by RUS.6
Cal-Ore previously secured several borrowings from the United States of America, acting through the RUS and the RTB. According to Cal-Ore, its credit standing with RUS was a significant factor in the Awardees receiving the broadband funds.
RUS requires Awardees to execute a Loan/Grant Security Agreement and a Promissory Note (Agreement) in conjunction with the loan and the grant. RUS loans 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.
To secure the payment of the RUS loan, Cal-Ore requests authority to pledge and grant to the RUS a security interest in and to all its property. RUS requires that the BIP funds totaling $1,786,400, the $446,600 loan and the $1,339,800 grant, be secured by the assets of both the Awardees. As of March 31, 2010, Cal-Ore had net property, plant and equipment in the amount of $8,022,587. According to the information provided by Cal-Ore on January 17, 2011, as of November 30, 2010, COC has net property, plant and equipment of $841,557.
The Agreement, as shown in Exhibit E of the Application, provides that Awardees 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.
C. Current Financing Authority
Cal-Ore's most recent long-term secured borrowings from the RUS are indicated herein.
In Decision (D.) 02-06-040, dated June 27, 2002, the Commission authorized Cal-Ore to enter into a secured loan agreement with the RUS for $4,239,000 and with the RTB for $2,472,750, for a combined total of $6,711,750, to finance:
1. the additions and improvements to plant to serve approximately 432 new subscribers;
2. the construction of two new fiber routes from the Macdoel and Dorris central offices to points of interconnection with other local exchange carriers;
3. the replacement of buried copper plant in the Dorris and Macdoel exchanges;
4. the addition of line extensions; and
5. the addition of fiber termination equipment in the Dorris and Macdoel central offices.
Both loans were paid off in 2005 when LICT Corporation acquired Cal-Ore.
In D. 87-06-023, dated June 15, 1987, the Commission authorized Cal-Ore to enter into a secured loan agreement with RUS for $875,700, to finance improvements and additions to plant. This loan was also paid off in 2005 when LICT Corporation acquired Cal-Ore.
As of March 31, 2010, Cal-Ore had no outstanding loan balances with RUS or RTB. Cal-Ore does not have any existing and unused debt authority from the Commission.
Cal-Ore does not have any long-term debt, except for a liability resulting from D.10-06-029, in the amount of $941,552. In D.10-06-029, dated June 24, 2010, the Commission determined the appropriate ratemaking treatment for RTB stock redemption proceeds that specific telephone companies received as a result of the dissolution of RTB. Several local exchange carriers obtained substantial loans from RTB prior to its dissolution in 2006, and from its successor entities, the RUS and the FFB. The RTB loan regulations required each borrower to purchase stock in RTB with 5% of the proceeds of each loan. Cal-Ore purchased $159,450 of class B RTB stock with its loan proceeds. According to D.10-06-029, Cal-Ore received $1,470,151 from the RTB redemption funds.
The Commission found in D.10-06-029 that 11 telephone companies, including Cal-Ore, received $31,299,810.13 from the RTB stock dividends and redemption.
D.10-06-029 ordered the telephone companies, including Cal-Ore, to effectuate a ratepayer credit reflecting the "jurisdictionally separated intrastate portion" of the RTB stock redemption funds received, plus interest on those RTB stock funds and the amounts calculated at the 90-day commercial paper rate. The Commission ordered telephone companies who drew funds from the California High Cost Fund A (CHCF-A), to issue a credit to the CHCF-A and ordered those utilities to file an advice letter to effectuate the credit.
On September 22, 2010, Cal-Ore filed Tier 3 Advice Letter (AL) 333 to establish the credit. The total amount that Cal-Ore proposes to credit to ratepayers through a series of payments to the CHCF-A is $949,655.72. As of March 28, 2011, AL 333 is active and has not been processed.
D. Broadband Service Plans
Cal-Ore wants to improve its facilities and through COC to provide wireless broadband services and Voice over Internet Protocol (VoIP) services to a predominantly unserved rural area in Northern California. The Project requires
the building and managing of a last-mile-wireless broadband facility to serve end users. Cal-Ore states that the Project will provide an entry level wireless bandwidth speed of up to 1 megabit per second (Mbps) down and 512 kilobit per second (Kbps) up, with a maximum speed of 15 Mbps down and 5 Mbps up.
The rural area that the Project will serve lies within the more general communities of Weed, Edgewood, Lake Shastina, Grenada, Gazelle, Montague, and Yreka. Cal-Ore estimates that there are over 2,000 households, classified as operating farms or ranches and approximately 365 businesses that are predominantly farms, ranches, and other agricultural-related entities.
Cal-Ore claims that the Project will provide enhanced backhaul capacity7 to neighboring blocks that it currently serves, as well as additional coverage to underserved census blocks.8 The increase in backhaul capacity will allow existing regular telephone customers to utilize a higher capacity facility at a lower cost. Cal-Ore asserts that this will provide long-term economic and social benefits to the communities and that the availability of lower cost bandwidth may also assist current or future competitors in providing more affordable, higher speed broadband service to the various communities.
On January 7, 2011, Cal-Ore provided information claiming that the Project will provide ancillary benefits to its current telephone service and provide direct benefits to Cal-Ore's ratepayers in the form of both increased revenues and decreased costs. Cal-Ore states that it will provide COC bandwidth, transport, and backhaul services and will charge COC for these services. Cal-Ore asserts that the revenue from these services will reduce the pressure to raise local rates on existing ratepayers.
In its data response, dated January 21, 2011, Cal-Ore explained that the services to be provided to COC will be priced based on the current National Exchange Carrier Association (NECA) tariff.9 Cal-Ore asserts that the revenue will be booked into regulated revenue, which will be used to offset regulated expenses. Furthermore, as COC begins to offer voice services, the Project will generate additional revenues for Cal-Ore, as it will be able to leverage its existing network and charge COC for switching and related telephony services.
In its January 21, 2011 data response, Cal-Ore clarified that the facility that will be used for backhaul and transport is existing plant that is owned by Cal-Ore. COC will only own the facilities up to the point of interconnection with Cal-Ore.
Cal-Ore, which will sell bandwidth or network access by providing direct backbone access to the Internet and access to its network access points, is a network service provider (NSP). In contrast, COC, which will offer its customer
access to the Internet, is an Internet service provider (ISP). As explained in its January 21, 2011 data response, Cal-Ore has existing agreements with three IBP: 360 Networks, LS Networks, and Qwest. Cal-Ore states that as demand
increases, the price for bandwidth will continue to decrease.
Cal-Ore indicates that the benefits will accrue directly to Cal-Ore ratepayers without ratepayers having to take on the responsibility of servicing the loan. Cal-Ore asserts that its ratepayers will only take on a minor risk by Cal-Ore pledging its assets as security. The loan and assets will be directly recorded on COC's books and will not have any impact on any upcoming rate case for Cal-Ore. In addition,
Cal-Ore points out that in exchange for the pledge of its assets, Cal-Ore will realize new revenue streams and cost savings without having to incur any direct out-of-pocket costs.
Furthermore, Cal-Ore notes that the BIP application process was extremely competitive, and RUS was able to select only those projects with the highest likelihood of success. RUS's experience in evaluating rural telecommunications projects ensures that the risk to Cal-Ore's ratepayers is minimal.
E. Construction Budget
Awardees' two-year estimated construction budget for the Project, as shown in Exhibit C in the Application and information provided by Cal-Ore on December 3, 2010, is shown in the following table.
Table 2
Broadband Infrastructure Project
Construction Budget for Years 2010 and 2011
Budget Category & Project Description 2010 2011 Total
Network Access Equipment/Install $ - $ 63,600 $ 63,600
Outside Plant/Install Cable & PF Fiber - 247,800 247,800
Cabinets/Install Equipment Node Upgrades - 689,000 689,000
Customer Premise Equipment/Install - 680,000 680,000
Operating Equipment/Purchase - - -
Professional Services/Engineering Serv. Contract - 80,000 80,000
Testing/Outside Plant - - -
Upfront Costs/Pre-App. Engineering Services 26,000 - 26,000
Total $26,000 $1,760,400 $1,786,400
F. Cash Requirements Forecast
The Awardees will entirely finance the Project, totaling $1,786,400, through the BIP loan and grant. On December 3, 2010, Cal-Ore provided information that all transactions pertaining to the Project will reside in and become the property of COC. Cal-Ore will not record or show any effect of the loan on its books. In effect, Cal-Ore will assign the proceeds of the loan and grant, and the property constructed therewith, to COC. However, Cal-Ore will charge COC, and receive revenue, for bandwidth, backhaul, switching, and related telephone services that Cal-Ore will provide to COC.
G. BIP Grant and Low Cost Loan Award
RUS specified in the Agreement that the loan and the grant should be used solely to finance the Project. Pursuant to the Agreement, Awardees are required, among other things, to:
a. Construct, build, and complete the Project in accordance with the system design submitted with the RUS approved application.
b. Maintain and preserve the lien of the Agreement superior to all other liens affecting the collateral.
c. Begin construction and/or installation activities only after all necessary local, state and federal requirements have been satisfied.
d. Certify that the Project is being constructed in accordance with a detailed schedule describing the Project build out.
e. Receive loan/grant advances 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.
f. Ensure that adequate funding is in place to complete the Project and obtain additional loans or funds for supplemental funding in an amount needed to ensure completion of the project.
g. Substantially complete the Project within two years.
h. Establish an accounting system satisfactory to RUS to account for all advanced funds.
i. Afford RUS, the Office of the Inspector General of USDA, and the Government Accountability Office, through their representative, reasonable opportunity, at all times during business hours and upon prior notice, to have access to and right to inspect the project.
j. Provide broadband service as 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.
According to RUS, both Cal-Ore and COC as co-applicants are jointly and severally liable for the award, the note, and the requirements of the legal agreements.
H. Capital Structure
Pursuant to information provided by Cal-Ore on December 3, 2010, all transactions related to the Project, including the debt and equity and the Project itself will reside in and become the property of COC. Accordingly, the RUS loan transaction will not have any effect on Cal-Ore's capital structure, which as of March 31, 2010, consists of Long-term Debt of $1,341,737 or 8.78% and Stockholder's Equity of $13,932,202 or 92.22%.10
6 The Project is as specifically described in the Awardees' Broadband Infrastructure Application.
7 According to Cal-Ore, backhaul pertains to getting customer data to the internet backbone. The Internet backbone refers to the principal data routes between large, strategically interconnected networks and core routers in the Internet. This superfast network spanning the world from one major metropolitan area to another is provided by a handful of national Internet Backbone Providers (IBP).
8 According to Cal-Ore, the underserved census blocks will be provided voice service as traditional or regular telephone service. This includes local number dialing, enhanced 911, and directory service. These services will be provided because of the interconnection facility with COC and the interconnect agreement with AT&T, who is the incumbent local exchange carrier.
9 NECA is a not-for-profit association created in 1984 by telecommunications companies to administer the fees that long distance companies pay to access local telephone networks. After the Telecommunication Act of 1996, NECA became indirectly responsible for the Universal Service Fund (USF) programs through its subsidiary corporation, the Universal Service Administrative Company. It also manages the national Telecommunications Relay Service fund, which, though considerably smaller than the USF, is also sustained through long-distance telephone service carrier revenues.
10 Cal-Ore's long term debt of $1,341,737 consists of Long Term Debt of $941,552 and Deferred Income Taxes of $400,185. Cal-Ore's Stockholder's Equity consists of Common Stock of $47,800, Other Capital of $2,310,800, Current Period Net Income of $675,117, and Retained Earnings of $10,898,485.
