II. Background

In January 2001, the City of San Diego (City) adopted its Underground Utilities Procedural Ordinance to provide for the expedited undergrounding of overhead utility wires within the city limits. The City's goal is to underground all currently overhead utility lines in 20 years. To accomplish this goal, the City must quadruple the current rate at which utility lines are undergrounded.

This Commission has adopted comprehensive, statewide rules that govern when and where a utility may remove overhead lines and replace them with underground service, and whether such costs will be recovered through rates. These rules are set forth in Tariff Rule 32 for SBC and Tariff Rule 20 for San Diego Gas and Electric Company (SDG&E). To accommodate the City's ordinance, SDG&E sought Commission authorization to deviate from Tariff Rule 20. In Resolution E-3788, the Commission granted both SDG&E and SBC permission to deviate from their respective tariffs and comply with the City's ordinance.

To finance SDG&E's portion of the undergrounding project, the City and SDG&E entered into an agreement whereby the franchise fee SDG&E pays to the City would increase from 1.9% of gross revenues to 5.78%. Ninety percent of the increased funds would be used by the City to pay for the undergrounding. The Commission also authorized SDG&E to increase the City's franchise fee surcharge to all City customers to reflect the increased fee, and directed SBC to file an application to seek permission to recover its increased undergrounding costs from City customers.

On March 3, 2005, SBC filed this application to approve a surcharge and balancing account to track and recover its costs for the City undergrounding project. SBC estimated that the total cost of the San Diego undergrounding project would be $125 million and that the project would extend over 17 years. SBC requested an initial surcharge of $0.94 per customer line per month, to be adjusted annually via the balancing account.

On April 7, 2005, the Utility Consumers' Action Network (UCAN) protested the application, arguing that undergrounding costs are before the Commission in the undergrounding rulemaking (Rulemaking 00-01-005). UCAN also found SBC's cost estimates to be "shockingly high" and suggested that the proposed cost recovery might violate the New Regulatory Framework under which the Commission regulates SBC's rates.

On April 18, 2005, the Division of Ratepayer Advocates (DRA) filed a motion requesting permission to late-file its protest to this application, which was granted on May 3, 2005. DRA also challenged the requested relief as violating New Regulatory Framework principles.

Telscape Communications, Inc. (Telscape), XO Communications, Inc., MPower Communications Corp., and the California Association of Competitive Telephone Companies also protested the application.

DRA and a coalition of the competitive carriers filed motions to dismiss the application, contending that it violated both federal law and the New Regulatory Framework under which this Commission regulates SBC. SBC and the City opposed the motions. On May 24, 2005, the assigned Administrative Law Judge (ALJ) convened a prehearing conference and set a procedural schedule to resolve the motions to dismiss. The Commission denied the motions to dismiss in Decision (D.) 05-10-028.

The assigned ALJ convened a second prehearing conference on December 5, 2005, and set a procedural schedule to address the merits of the application. After completing discovery, the parties distributed written direct testimony. Evidentiary hearings were held on May 15 and 16, 2006. The parties filed opening briefs on June 16, 2006, and the proceeding was submitted for Commission consideration with the filing of closing briefs on July 7, 2006.