II. Background

A. Kerman Telephone Company

Kerman owns and operates a telephone system that provides local exchange telephone service to approximately 6,800 customers in the City of Kerman and in surrounding unincorporated areas of Fresno County. Kerman is located approximately 15 miles west of the City of Fresno on State Route 180.

B. Interim Rate Relief

In D.03-03-009, dated March 13, 2003, the Commission granted Kerman's Motion for Interim Rate Relief and provided the interim relief through payment of an additional $1,937,350 in California High Cost
Fund-A (CHCF-A) revenues to Kerman based on Test Year 2002. Kerman originally filed for a General Rate Case (GRC) via Advice Letter (AL) 291 with the Commission's Telecommunications Division (TD) on June 1, 2001. Kerman asked for a revenue increase based on a 2002 Test Year of $2.255 million, which would have produced a 12.25% rate of return on an intrastate rate base of approximately $4,079,125.

Kerman provided notice to its customers by bill insert as well as by an advertisement in the Kerman Newspaper in June of 2001. There were no customer complaints pertaining to Kerman's AL filing, but the Office of Ratepayer Advocates (ORA) filed a protest to AL 291 on July 5, 2001.

In Resolution T-16597, the Commission denied Kerman's request and ordered Kerman to file a GRC application. The Commission provided a list of items or issues that Kerman must address or comply with in its application. In addition, the Commission ordered ORA to conduct an audit of the affiliated transactions and jurisdictional separation practices of Kerman. Kerman was also ordered by the Commission to fund the audit. Kerman complied with these orders in its Application 02-01-004, which it filed on January 4, 2002.

Kerman noted in its application that the primary factors driving the request for rate relief were additional plant investment and increased operating expenses. In D.03-03-009, we found that Kerman was facing a financial emergency and authorized it an interim increase of $1,937,350 based on a 10% intrastate rate of return. We granted this interim increase subject to "true-up," that is, Kerman would reflect any adjustments to its 2003 Test Year final revenue rate award. That "true-up" adjustment is a payment back to the CHCF-A by Kerman of $515,022, based on the Settlement Agreement between Kerman and ORA, which we are asked to approve.

C. Settlement Agreement

At the first day of hearings on February 19, 2003, Kerman and ORA announced that they had reached a full settlement of all the issues in the case and that a written stipulation would be forthcoming. On March 4, 2003, Kerman and ORA, the only parties to this proceeding, filed a joint motion requesting approval of an All-Party Settlement Agreement. (see Appendix B of this order.) This matter stood as submitted with the tendering of this motion.

Included in Appendix B to this decision are the joint exhibits reflecting the terms of the settlement, including (1) a comparison exhibit showing the unseparated 2003 Test Year Company Results of Operation, (2) an exhibit showing the separated, or intrastate, results of operation for the Test Year 2003 "base case," and (3) an exhibit showing separated results of operation reflecting the "adopted Test Year at New Rates." Additional attachments in Appendix B support the rate design calculations and propose a finding on service quality. The highlights of the settlement are as follows:

· A reduction of total company Test Year expenses (excluding depreciation) of $447,780 from the expense amount filed by Kerman in its original rate case filing.

· A reduction of total company test year depreciation expense of $813,618 from the level filed by Kerman in its original rate case filing. This reduction is attributable to an adjustment to depreciation rates on four accounts¹ beginning with Test Year 2003, consistent with ORA's recommendation in its direct testimony as originally served on December 16, 2002.

· A reduction of total company Test Year rate base from $12,760,448 to $10,000,000 prior to adjusting rate base to reflect changes in depreciation. (After taking into account impacts associated with changes in depreciation rates, the test year total company rate base is $10,406,810).

· Use of total company test year revenues as projected by Kerman in its original rate case filing.

· The rate design as proposed by Kerman in its original rate case filing, including the elimination of mileage bands.

· The use of a 10% intrastate rate of return on which to determine Kerman's revenue requirement.