III. Scope of the Proceeding
This ruling refines and clarifies the scope of the proceeding in response to the parties' comments and motions. Any issue not identified in the Order or this ruling is outside the scope of the proceeding. As authorized by the Order, the assigned Commissioner may issue additional rulings that amend and clarify the scope of this proceeding.
A. Scope of Phase 1
As described in the Order, Phase 1 will focus on the resolution of factual issues related to ORA's audit of Verizon. The Commission will determine in Phase 3 whether and how NRF should be revised based, in part, on the record developed in Phase 1. Accordingly, parties will have an opportunity in Phase 1 to identify findings of fact regarding the Verizon audit that are relevant to Phase 3 issues. Parties may also recommend remedial measures that should be implemented at the conclusion of Phase 1 in response to the Verizon audit. However, parties may not recommend revisions to NRF in Phase 1 unless the revisions are remedial actions that should be implemented expeditiously. Additionally, parties may not litigate issues of fact regarding the Verizon audit in Phase 3. All litigation of factual issues regarding the audit must occur in Phase 1.
ORA states that Phase 1 should address issues associated with Resolution T-16572. In that resolution, the Commission "accepted" Verizon's rate of return (ROR) for the year 2000, subject to any corrections or adjustments that may result from this proceeding. Parties may present testimony in Phase 1 on issues associated with Resolution T-16572 that have a clear and direct connection to ORA's audit report. For example, parties may offer testimony on how the findings in ORA's audit report affect Verizon's ROR for the year 2000. Conversely, any issue associated with Resolution T-16572 that does not have a clear and direct connection to ORA's audit report is outside the scope of Phase 1.
ORA also states that it should be allowed to propose ratemaking adjustments in Phase 1 that are based on its audit. This matter appears relevant to Phase 1, but parties will have the burden of demonstrating that any proposed ratemaking adjustment has a clear and direct connection to ORA's audit report, is legal (e.g., does not constitute an impermissible form of retroactive ratemaking), and is consistent with NRF.2
Finally, ORA states that Phase 1 should include issues associated with the transfer of Verizon's Yellow Page revenues to an affiliate in the year 2000. According to ORA, the diversion of Yellow Page revenues has caused a material understatement of Verizon's earnings for the year 2000, which could hinder the Commission's ability to render an informed decision on many Phase 3 issues.3 ORA also recommends that the Commission consider penalizing Verizon for its transfer of Yellow Pages revenues. ORA did not demonstrate a connection between its audit of Verizon and the transfer of Yellow Page revenues. Consequently, issues associated with the transfer of Yellow Page revenues are outside the scope of Phase 1. ORA may address in Phase 3 issues regarding the treatment of Yellow Page revenues. The issue of penalties may be raised in a different proceeding, including a complaint if ORA chooses to file one.4
B. Scope of Phase 2
As described in the Order, Phase 2 will address factual issues associated with (1) TD's audit of Pacific, and (2) how service quality has fared under NRF. Each of these topics is addressed in more detail below. In Phase 3, the Commission will determine whether and how NRF should be revised based, in part, on the record developed in Phase 2.
1. Pacific Audit
Phase 2 will resolve factual issues associated with TD's audit of Pacific. Parties will have an opportunity in Phase 2 to identify findings of fact regarding the Pacific audit that are relevant to Phase 3 issues. Parties may also recommend remedial measures that should be implemented at the conclusion of Phase 2 in response to the Pacific audit. However, parties may not recommend revisions to NRF in Phase 2 unless the revisions are remedial actions that should be implemented expeditiously. Additionally, parties may not litigate issues of fact regarding the Pacific audit in Phase 3. All litigation of factual issues pertaining to the audit must occur in Phase 2.
Pacific states that Phase 2 should address the recovery of Pacific's audit-related costs. This matter is within the scope of Phase 2, since it has a direct connection to TD's audit of Pacific. Accordingly, Pacific may offer testimony in Phase 2 regarding the amount of its audit-related costs as well as a proposal for recovering the costs in rates (e.g., recovery through the Limited Exogenous (LE) factor mechanism established by D.98-10-026). In addition to satisfying any other applicable requirements (e.g., for LE factor recovery), Pacific should show in any such testimony that its audit-related costs were reasonably incurred, would not have been incurred absent the audit, and are not recovered in rates.5
ORA states that Phase 2 should include issues associated with Resolution T-16571. In that resolution, the Commission "accepted" Pacific's ROR for the year 2000, subject to any corrections or adjustments that may result from this proceeding. Parties may offer testimony in Phase 2 on issues associated with Resolution T-16571 that have a clear and direct connection to TD's audit report. For example, parties may present testimony on how the findings in TD's audit affect Pacific's ROR for the year 2000. Any issue associated with Resolution T-16571 that does not have a clear and direct connection to TD's audit report is outside the scope of Phase 2.
2. Service Quality
In Phase 2, the Commission will assess how service quality has fared under NRF. This assessment will focus on the quality of service provided to end users by Pacific and Verizon.6 Issues that are beyond the scope of this proceeding include the following: (1) the quality of service provided by Pacific and Verizon to other carriers; (2) requests for relief that are better addressed in complaint or enforcement proceedings; and (3) matters pertaining to universal service. Parties will have an opportunity in Phase 2 to identify findings of fact regarding service quality that are relevant to Phase 3 issues. However, parties may not recommend revisions to NRF in Phase 2 that are related to service quality. Additionally, parties may not litigate issues of fact regarding service quality in Phase 3. All such litigation must occur in Phase 2.
C. Scope of Phase 3
In Phase 3, the Commission will consider whether to revise the specific elements of NRF that are identified in Appendix A of the Order. Parties will have an opportunity to recommend revisions to the elements of NRF identified in Appendix A based on the record developed in Phases 1 and 2.
ORA states that Phase 3 should address (1) ways to increase Commission oversight of utilities' pricing of Category III services, and (2) utilities' use of applications to raise prices for Category I and II services. TURN states that Phase 3 should address what criteria should be used to determine (1) whether a newly minted Category III service is fully competitive, and (2) whether a newly minted service should be treated below-the-line. These topics are within the scope of Phase 3 where the Commission will consider what criteria and procedures should be used to revise prices for Category I, II, and III services. Accordingly, parties may present recommendations on these topics in Phase 3. Parties are reminded that issues that are resolved in Rulemaking 98-07-038 are outside the scope of this proceeding.
Pacific and Verizon argue that it is improper for Phase 3 to address whether the sharing mechanism and the price-cap index should be reinstated. They note that the Commission in D.98-10-026 declared its expectation that sharing and the price-cap index would be eliminated in the next NRF review, not reinstated. The language cited by Pacific and Verizon from D.98-10-026 was not necessary to the resolution of the issues presented in that proceeding and is therefore dicta. Such dicta does not preclude the Commission's consideration of whether to reinstate sharing and the price-cap index. It would be imprudent, if not reckless, to rule out any option before a record has been developed in this proceeding regarding future modifications to NRF.7
Pacific and Verizon similarly argue that it is improper for Phase 3 to address what criteria should be used to determine which course of action to take with respect to sharing and the price-cap index. They note that the Commission in D.98-10-026 declared its expectation that sharing and the price-cap index would be eliminated unless (1) problems emerge that would have been cured by sharing or the price-cap index, or (2) there are other clear and convincing reasons not to eliminate sharing or the price-cap index. Pacific and Verizon contend that the criteria enunciated in D.98-10-026 must be followed in this proceeding. Again, Pacific and Verizon are relying on dicta from D.98-12-026 that was not necessary to the resolution of the issues presented in that docket. Here, as in each previous NRF review, the Commission is examining whether NRF can be improved. In making this assessment, the Commission is free to apply whatever criteria it finds, based on the record, to be the most appropriate.8
Pacific and Verizon next argue that the Order improperly adds a new criterion for modification of NRF - the level of competition - that was rejected in D.98-10-026 and D.99-02-087. In those decisions, the Commission determined that the modifications to NRF adopted in D.98-10-026 did not require specific evidence on the level of competition. However, there is nothing in those decisions that indicates it would be improper for the Commission to consider the level of competition in a future proceeding. This ruling clarifies that parties are not required to support their recommendations for revising NRF with specific evidence regarding the level of competition, but parties are at risk that the Commission might not adopt their recommendations without such evidence.
Pacific and Verizon contend that the Order improperly places the burden on those parties recommending the elimination of an element of NRF to demonstrate that the element is unnecessary. They state that no similar burden is placed on parties recommending the reinstatement of a NRF element to
demonstrate that the element is necessary. The intent of the Order was to place the same burden on each party to demonstrate that its recommendations are reasonable. Accordingly, this ruling clarifies that any party that recommends the elimination of a NRF element must demonstrate that the element is unnecessary, and any party that recommends the reinstatement of a NRF element must demonstrate why it is necessary to do so.
Pacific states that Phase 3 should address the utilities' recovery of costs associated with any changes to NRF related to service quality that may result from Phase 3. This topic is within the scope of Phase 3. Accordingly, parties may present recommendations in Phase 3 regarding whether and how utilities should recover costs associated with changes to NRF related to service quality. However, this proceeding will not address the recovery of a specific amount of costs, since the amount is unlikely to be known with precision until after the changes are implemented. If necessary, the amount of any cost recovery can be addressed in a later proceeding.
2 Parties may likewise propose ratemaking adjustments in Phase 2 that stem from TD's audit of Pacific. Parties will have the burden of demonstrating that any such proposal has a clear and direct connection to TD's audit report, is legal, and is consistent with NRF.
3 Verizon admits that the transfer of Yellow Page revenues decreased its ROR for the year 2000 by approximately 250 basis points.
4 ORA has standing to initiate complaints against utilities. (Decision (D.) 01-08-067)
5 Verizon may present testimony in Phase 1 regarding the recovery of its audit-related costs.
6 To help establish a record on how service quality has fared under NRF, the Order took the following actions: (1) provided summary information on the number of informal complaints filed at the Commission pertaining to Pacific and Verizon; (2) directed Pacific and Verizon to file compliance reports that contain specified information on service quality; and (3) authorized parties to submit customer surveys and other information that is relevant to assessing service quality.
7 Even if the language cited by Pacific and Verizon were not dicta, the Commission has authority under Pub. Util. Code § 1708 to modify D.98-10-026 after providing notice and an opportunity to be heard. The required notice was provided in the Order, and parties will have an opportunity to be heard in this proceeding.
8 See footnote 7.
