IV. Discussion

(4) long-term economic and social benefits to certain rural communities, and

(5) direct benefits to Cal-Ore's ratepayers.

Although Cal-Ore did not receive any grant award for the Project under the California Advances Services Fund (CASF), we note that § 281 encourages the deployment of high-quality advanced communications services to all Californians to promote economic growth, job creation, and the substantial social benefits of advanced information and communications technologies. In Resolution (Res.) T-17143, dated June 12, 2008, the Commission approved the CASF application requirements and scoring criteria for awarding CASF funds for broadband projects. The Commission noted therein that by providing broadband service to unserved areas, subscribers will have additional telephone service choices through VoIP providers. The Commission indicated that the broadband projects will serve the Commission's goal of increasing phone service choices to consumers, consistent with federal and state laws and policies.

The Awardees' intention to provide broadband services in unserved areas complement the objectives stated in § 281 and Res. T-17143. RUS having explicitly determined Cal-Ore's proposed use of the loan and grant proceeds acceptable, it is our responsibility in this instance to consider whether to approve Cal-Ore's request to use public utility assets to secure loan proceeds to be expended by an unregulated affiliate (COC). As required by public interest and similar to the Commission's logic in Res. T-17143, the Commission has some discretion to ensure continued public benefits in relation to broadband projects. Therefore, we find it reasonable to authorize Cal-Ore to avail itself of the low-cost RUS loan and receive the BIP grant in order for wireless broadband to be provided in the unserved rural communities in Cal-Ore's service area. However, we do not make a finding in this Decision on the reasonableness of Cal-Ore's proposed construction program.

Cal-Ore's projected cash requirements indicate that no funds from its treasury or income will be used for the Project. Cal-Ore's requested financing authority and the BIP grant will fund the entire Project. Nevertheless, we do not address the reasonableness of Cal-Ore's cost of money resulting from the impact of the financing activity.

As mentioned earlier, Cal-Ore stated that the Project and the proposed debt will become the property of COC and that all transactions will be recorded on COC's books. This financing transaction will not affect the capital structure of

Cal-Ore.

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. Even though the debt will eventually be booked by and will primarily be the liability of COC, we must determine how this will affect Cal-Ore's liability and property. As a co-applicant, Cal-Ore is equally liable for the debt. Although Cal-Ore will assign the proceeds of the loan and grant, and the property constructed therewith, to COC, if COC defaults on the loan payments, Cal-Ore may have to advance the loan payments on behalf of COC.

In order to evaluate the appropriateness of the assignment of the loan, grant, and property, and the ongoing affiliate transactions related to the provision of the broadband service, the Division of Water & Audits' Utility Audit, Finance and Compliance Branch (UAFCB) should have access to COC's books and records to facilitate the Commission's obligations to regulate. By letter dated January 25, 2011, Cal-Ore confirmed that its parent company, California-Oregon Telecommunications Company, which maintains the books and records of COC, has agreed to provide UAFCB, upon request, COC's records pertaining to the assignment of the debt and property to COC, and related affiliate transactions information.

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.

Cal-Ore asserts that the ancillary benefits to ratepayers will substantially offset the increased risks to ratepayers from the pledge of the utility's assets. In addition, California-Oregon Telecommunications Company has provided us with access to review and evaluate COC's books and records with respect to its transactions, so we will have the ability to determine whether Cal-Ore's transactions with COC are appropriate. We find that granting Cal-Ore the authority to encumber its assets in conjunction with entering into the loan and grant agreement is not adverse to the public interest.

According to the terms of the Agreement, RUS will maintain a security interest in all of the assets of Cal-Ore until all indebtedness is paid in full. Cal-Ore requested RUS that RUS modify the Agreement to release the encumbrance of Cal-Ore's assets once the Project is completed and the debt and plant have been assigned to COC. As explained in its January 21, 2011 data response, Cal-Ore stated that RUS declined to address Cal-Ore's request at this time due to the ARRA stimulus program workload. RUS suggested that Cal-Ore make an official modification request after the Project is completed.

In D.10-12-045, dated December 12, 2010, the Commission granted Calaveras Telephone Company (CTC) debt authority to participate in the BIP. In that proceeding, CTC was able to secure RUS' confirmation that if CTC goes to another lender for future financing requirements, RUS will be willing to share a first lien position on a pari passu basis with another lender. Cal-Ore should pursue its request for the release of the encumbrance of Cal-Ore's assets. In the event that RUS declines to release the encumbrance of Cal-Ore's facilities once the broadband plant is assigned to COC, Cal-Ore should pursue getting a commitment from RUS similar to that granted to CTC.

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 and 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 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, the RUS loan would be for the purpose of constructing broadband facilities. Cal-Ore'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 BIP described in Table 2 of this Decision, and the construction is not reasonably chargeable to income. While constructing these facilities is not an approved purpose under § 817, the reduced costs and increased revenue from these improvements will benefit customers over many years, and approving Cal-Ore's requests is consistent with the goals stated in

§ 281.

Therefore, we will authorize Cal-Ore to (1) obtain the RUS loan in the amount of $446,600, (2) assign the proceeds of the loan and grant, and the property constructed therewith, to COC, and (3) encumber its assets in connection with the debt.

1. Cal-Ore's intention to provide broadband services through COC, in unserved and underserved areas in California is appropriate.

2. The BIP serves Commission's goal to increase phone service choices to consumers, consistent with federal and state laws and policies.

3. While broadband is regulated by the federal authorities, the Commission retains discretion to ensure continued public benefits.

4. The condition imposed by RUS that Cal-Ore obtain authorizations, certificates, and approvals from all state, federal and other public authorities and regulatory bodies for the grant and the loan is appropriate.

5. The other RUS conditions being imposed on Cal-Ore in conjunction with the Project are appropriate.

6. RUS' requirement that Cal-Ore grant RUS a security interest in and to all of Cal-Ore's property to secure the loan and the grant combination is appropriate, subject to the conditions and reservations set forth in the Discussion section of this Decision.

Consistent with § 824, Cal-Ore 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 were only used for the purposes specified herein. Cal-Ore must keep and maintain copies of the Agreement and related loan documents and must file with UAFCB a copy of the documents within 15 days of execution. In order to formalize the assignment to COC of the debt, property, and related affiliate transactions, Cal-Ore must file, in accordance with General Order 96-B, within 6o days from the date of completion of the Project, a Tier 2 advice letter that reports the assignment.

As confirmed by Cal-Ore, California-Oregon Telecommunications Company will provide UAFCB the records of COC pertaining to the assignment of the debt and property, and related affiliate transactions information, within 15 days of a request from UAFCB.

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