August 6, 2002 PUC: 64 Docket #: R.01-09-001, I.01-09-002

Media Contact: PUC Press Office, 415.703.1366, news@cpuc.ca.gov

PUC PROPOSED DECISION FINDS VERIZON MISSTATED PROFITS

The California Public Utilities Commission (PUC) today issued a Proposed Decision finding that Verizon California Incorporated (Verizon) understated its profits on regulated operations for the years 1996 through 2001. The Proposed Decision calls for further proceedings to determine whether Verizon should be subject to a monetary penalty for any violations of PUC rules.

The Proposed Decision brings to a close the first phase of the Commission's triennial review of the New Regulatory Framework (NRF), the purpose of which was to consider issues associated with the audit of Verizon that was conducted by the Commission's Office of Ratepayer Advocates (ORA).

The Proposed Decision agrees with ORA's allegation that Verizon improperly failed to include its full profits from telephone directories (yellow pages and white pages) in its regulated earnings. The impact of correcting for that error, as well as other improper allocations of costs was to cause a significant restatement of Verizon's earnings on regulated operations. The Proposed Decision adopts restated Verizon's rates of return (ROR) as follows:

The Commission considers a 10.5 percent ROR to be a healthy profit level for Verizon. The adopted profit levels are subject to further adjustment, up or down, in future proceedings.

The Proposed Decision rejects ORA's request for immediate refunds as a result of the understated profits. Under existing Commission decisions, the restated earnings did not increase Verizon's earnings to levels that required profit sharing with ratepayers in years when profit- sharing rules were still in place. Additionally, in a 1998 decision, the Commission suspended profit sharing beginning in 1999. However, beginning this Fall, the Commission will hold further hearings on whether Verizon's profits are excessive and whether the profit-sharing mechanism should be reinstated. In addition, the Proposed Decision states that the Commission will institute further proceedings to determine whether to impose a monetary penalty against Verizon.

The Proposed Decision directs ORA to conduct another audit of Verizon and authorizes ORA to hire Certified Public Accountants (CPAs) and other technical experts to conduct the audit. Verizon is directed to pay for the cost of the CPAs and technical experts, and Verizon is authorized to recover these costs in rates.

Background

In 1989, the Commission replaced cost-of-service regulation for Verizon and Pacific Bell with NRF. Under the original NRF adopted in 1989, rates for individual services were adjusted annually based on a formula called the price-cap index. The original NRF also included an earnings-sharing mechanism.

Previous Commission decisions divided this proceeding into three Phases. Phase One is to address factual issues related to ORA's audit of Verizon. Phase Two is to address factual issues related to the audit of Pacific Bell that was conducted by Commission staff, and to address how service quality for end users has fared under NRF. The purpose of Phase Three is to review and revise, as necessary, the major elements of NRF based, in part, on the record developed in Phases One and Two.

Today's Proposed Decision regarding Phase One issues is scheduled to come before the Commission in September.

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