5. Verizon's Petition to Modify D.02-10-020

A. Summary of Verizon's Petition

In its petition to modify D.02-10-020, Verizon asks the Commission to (1) significantly reduce the scope of the audit ordered by D.02-10-020, (2) revise the audit period so that only the three most recent years are audited, and (3) implement these revisions in Phase 3 of the current NRF proceeding.

Verizon argues that the audit ordered by D.02-10-020 is a sweeping historical review that is inconsistent with Verizon's regulatory framework that was in effect during the period covered by the audit. Verizon asserts that the Commission has previously held that audits conducted pursuant to § 314.5 should be based on the regulatory framework of the audited company. In D.93-02-010, for example, the Commission found that monitoring reports submitted by AT&T were sufficient to fulfill the § 314.5 audit requirement:

At first glance, it appears that the audit requirement of [§ 314.5] is mandatory. However, [§ 314.5] was enacted well before the Commission granted AT&T-C limited rate flexibility. Since that grant of limited rate flexibility...[the Commission] has required AT&T-C to supply additional information on regular intervals as part of the monitoring plan...The purpose of the [§ 314.5] audit is "for regulatory and tax purposes." The information supplied by AT&T-C allows us to assess how well the interLATA market is working in light of the regulatory flexibility granted to AT&T-C. We believe that this information supplied by AT&T-C fulfills the "regulatory" purpose of [§ 314.5]. (D.93-02-010, 1993 Cal. PUC LEXIS 61, 54-55.)

As was the case for AT&T, Verizon states that it regularly submits monitoring reports to the Commission. Verizon believes that a periodic review of its monitoring reports by Commission staff would satisfy § 314.5.

Verizon claims that the comprehensive audit ordered by D.02-10-020 is inconsistent with several Commission decisions that limited the scope of audits under NRF, including D.04-09-061 (2004 Cal. PUC LEXIS 477, 7), D.98-10-026, (1998 Cal. PUC LEXIS 669, 70, 72), and D.96-05-036 (1996 Cal. PUC LEXIS 657, 11 and 12). Verizon states that the Commission should reduce the scope of the audit based on these past decisions.

Verizon also contends that its customers will not benefit from a comprehensive audit of 1999 - 2002. This is because there is no possibility that the audit will result in a rate reduction under the regulatory framework that was in effect during 1999 - 2002. Verizon argues that the absence of any customer benefits is reason enough to reduce the scope of the audit.

Verizon states that if the Commission decides to substantially reduce the scope of the audit as Verizon recommends, the Commission should wait until Phase 3 to establish the parameters of the downsized audit. Verizon believes this approach will ensure that the audit produces useful information. For example, if the Commission eliminates certain monitoring reports in Phase 3, Verizon believes there would be no point in auditing the eliminated reports that Verizon submitted during 1999 - 2002 as currently required by D.02-10-020. Verizon adds that this course of action has the added benefit of allowing the Commission in Phase 3 to advance the audit period to encompass only the most recent years so that more current information is reviewed.

B. ORA & TURN's Joint Response

ORA and TURN oppose Verizon's petition. They observe that § 314.5 requires the Commission to audit Verizon. The statue states:

The commission shall inspect and audit the books and records for regulatory and tax purposes (a) at least once in every three years in the case of every...telephone [corporation]... serving over 1,000 customers...An audit conducted in connection with a rate proceeding shall be deemed to fulfill the requirements of this section. Reports of such inspections and audits and other pertinent information shall be furnished to the State Board of Equalization for use in the assessment of public utilities. (Emphasis added.)

ORA and TURN dispute Verizon's claim that § 314.5 allows the Commission to limit an audit of Verizon to a review of monitoring reports. They argue that the statute's use of the phrase "regulatory purposes" requires the Commission to audit Verizon in a way that reflects Verizon's status as a dominant provider of local exchange services with billions of dollars of revenues. ORA and TURN contend that an audit of such an entity cannot be accomplished by reviewing monitoring reports. They note that the most recent audits of SBC and Verizon show that monitoring reports contain significant errors.⁷

ORA and TURN contend that there is no need to reduce the scope of the audit because there might be changes to Verizon's regulatory framework sometime in the future. They state that the Commission in D.02-10-020 found that it was unlikely that future changes to Verizon's regulatory framework would affect the retrospective audit.⁸

Finally, ORA and TURN maintain that the audit ordered by D.02-10-020 will not be unduly costly to Verizon and its ratepayers. They state that the most recent audit of Verizon cost approximately $1 million, which was charged to Verizon's ratepayers. ORA and TURN believe this cost was not excessive when compared to Verizon's substantial revenues and profits.

C. SBC's Response

SBC supports Verizon's petition to modify D.02-10-020. SBC contends that potential changes to Verizon's regulatory framework may obviate the need for a detailed audit. SBC also asserts that because costs and rates are de-linked under NRF, there is no need for the comprehensive audit ordered by D.02-10-020.

⁷ D.02-10-020, mimeo., p.44; D.04-09-061, mimeo., Appendix H

⁸ D.02-10-020, mimeo., p.58.