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PUBLIC UTILITIES COMMISSION OF THE STATE OF CALIFORNIA

Telecommunications Division

RESOLUTION T-16715

Market Structure Branch

December 17, 2002

R E S O L U T I O N

RESOLUTION T-16715. CITIZENS TELECOMMUNICATIONS COMPANY OF CALIFORNIA INCORPORATED (U-1024-C). REQUEST FOR APPROVAL OF PRICE CAP MECHANISM, IN COMPLIANCE WITH DECISION 89-10-031 AND DECISION 94-09-065, AND CORRESPONDING ADJUSTMENTS TO SURCHARGES WHICH WILL BE EFFECTIVE ON JANUARY 1, 2003.

BY ADVICE LETTER NO. 763 FILED ON OCTOBER 2, 2002.

_________________________________________________________________

Summary

This Resolution authorizes Citizens Telecommunications Company of California, Inc. (Citizens) to decrease its annual revenue by $42,473 effective January 1, 2003. The adopted revenue adjustments and surcharge/surcredit changes are shown in Appendices A, B and C attached to this resolution.

Citizens requested an annual revenue decrease of $42,473 due to the impacts of ongoing Z-factor adjustments for Interstate High Cost Fund payments, NECA true-up adjustments, an ongoing payphone deregulation cost reduction, and changes to reflect the reallocation in Other Billing and Collection (OB&C) expense.

Background

In Decision (D.) 95-11-024 the Commission adopted an incentive-based regulatory framework (called the new regulatory framework or "NRF") for Citizens based on the NRF adopted for SBC Pacific Bell Telephone Company (Pacific) and GTE California Incorporated (GTEC), which is now know as Verizon California Incorporated. The decision requires Citizens to follow the principles of NRF established in D.89-10-031, D.94-06-011, and D.94-09-065 subject to the following difference... Earnings between the benchmark and ceiling rates of return shall be shared equally between shareholders and ratepayers.

In D.89-10-031, we originally adopted an incentive-based regulatory framework for Pacific and GTEC. The decision stated that prices and rate caps would be indexed annually according to the Gross National Product Price Index (GNP-PI) inflation index reduced by a productivity adjustment.

The indexing formula allowed rate adjustments for a limited category of exogenous factors, called Z-factors, whose effects will not be reflected in the GNP-PI. Only specific types of costs were considered Z-factors: changes in federal and state tax laws to the extent they affect the local exchange carriers disproportionately, mandated jurisdictional separations changes, and changes to intraLATA toll pooling arrangements or accounting procedures adopted by this Commission.

However, the Commission did not authorize Z-factor treatment for all unforeseen or exogenous factors. In D.89-10-031, the Commission stated that ...Normal costs of doing business (including costs of complying with existing regulatory requirements) or general economic conditions would be excluded as Z-factor items.

Since D.89-10-031, the Commission has subsequently issued several decisions modifying the NRF program. In D.93-09-038, the Commission ordered GTEC to replace the GNP-PI with the Gross Domestic Product Price Index (GDP-PI) commencing with GTEC's 1994 price cap filing. The Commission, in D.94-06-011, also ordered Pacific to replace the GNP-PI with the GDP-PI commencing with Pacific's 1995 price cap filing. In D.94-09-065, the Commission authorized Pacific and GTEC to implement the 1995 price cap rate adjustments through the billing surcharge/surcredit mechanism. Ordering Paragraph 1 of D.95-11-024 requires Citizens to "file revised tariffs consistent with this decision, the revenue requirement and revenues in Appendix C (surcharges/surcredits) and the rates in Appendix E."

Citizens filed for a review of its NRF in March 1999. In D.00-03-040, the Commission approved a settlement agreement between Citizens and the Commission's Office of Ratepayer Advocates (ORA) regarding revisions to Citizens' NRF. Under the settlement, reporting requirements are modified, the Service Quality Assurance Mechanism (SQAM) and depreciation filings are eliminated, three on-going Z-Factors are kept while all others are eliminated, and suspension of the GDP-PI minus productivity factor formula is continued.

Citizens' Price Cap Filing

On October 2, 2002 Citizens filed Advice Letter No. 763 requesting billing surcharge/surcredit changes to be effective January 1, 2003 in order to implement the certain ongoing revenue adjustments for 2003.

Citizens' 2003 price cap filing consists of proposed revenue adjustments for:

Citizens requests a total revenue decrease of $42,473 to become effective on January 1, 2003. Citizens used an annualized billing base of $68,859,804 for calculating the surcharge/surcredit effective January 1, 2003. For the purpose of adjusting its price floors, Citizens proposes a GDP-PI Factor of 1.03%, which reflects the adjusted rate of inflation between the second quarters of 2001 and 2002. Citizens based its GDP-PI Implicit Price Deflator on data obtained from the U.S. Department of Commerce, Bureau of Economic Analysis.

As shown above, the net result of ongoing Z-Factor adjustments is a decrease of $42,473 below Citizens' 1996 base year revenues. Because the prior year's impact of this Z-Factor is due to expire at year-end 2002, the net surcharge/surcredit impact from this Z-Factor adjustment is not necessarily lower than last year and represents an increase for Local Exchange Services for 2003. Citizens requests authorization to modify:

Notice/Protests

Citizens stated that a copy of the advice letter, and related tariff sheets were mailed to all interested utilities and/or parties. Notice of Advice Letter No. 763 was published in the Commission Daily Calendar on October 4, 2002.

No protests were filed.

Discussion

NECA High Cost Fund Reduction

Citizens Advice Letter No. 763 included a $(101,300) Z-Factor adjustment to reflect reduced recovery from the Interstate Universal Service Fund (USF). USF is a federal program that provides subsidies to qualifying local exchange telephone companies that provide service to customers who live in areas that are expensive to serve. The Federal Communications Commission (FCC) determines which areas qualify as high cost areas.

To qualify for USF subsidies, a telephone company must demonstrate that the actual per-line cost to provide service to telephone customers that are expensive to serve exceeds a national average per-line cost determined by the FCC. Differences between amounts received from the USF by a qualifying company and its actual high costs are collected/refunded from intrastate customers.

Applying the USF adjustment to local exchange services only is consistent with the Commission's previous treatment of high cost fund adjustments. In 1995, the Commission approved a similar adjustment for GTEC and in 1996, the Commission approved Citizens' request for Z-Factor treatment of reduced recovery from the IHCF. In both instances, the adjustments were applied to local exchange services only.

The Telecommunications Division recommends that this policy be changed to allocate USF costs to the three classes of service: intraLATA access service, intraLATA exchange and private line services, and intraLATA toll services, which are those used under NRF to allocate surcredits and surcharges.

The Telecommunications Division advises that this surcharge/surcredit treatment complies with D.94-09-065, Ordering Paragraph 62 (IRD decision) that adopted a Rule 33 and Schedule A-38 surcharge/surcredit mechanism to make modest revenue changes in annual price cap advice letter filings for Pacific Bell and GTEC (now Verizon California). In D.95-11-024, OP 6, the Commission adopted the requirements of D.94-09-065 for CTCC. We find reasonable and adopt the Telecommunications Division's recommendation.

NECA High Cost Fund 2002 True-Up

As discussed in Citizens' 2000 price cap, Resolution T-16377, there can be a difference between the actual amount of receipts from NECA and the estimated NECA receipts used to derive the remaining USF amount to be recovered from California ratepayers. An overstatement of USF receipts based upon NECA estimates could result in an over-collection by Citizens, resulting in an over payment by Citizens ratepayers. Just as Citizens is entitled to differences between actual NECA receipts and the USF amount adopted in its 1996 General Rate Case, it is equally responsible for ensuring that any over-collections are appropriately corrected in its price cap filings. The following is an explanation of the NECA procedures for true-ups under the NECA settlement cycle no. 2.1:

2.1 Data Types

Each month participants in the NECA pools submit estimates of their revenues and expenses. As actual data becomes known, companies adjust their data to reflect their actual revenues and costs. For this reason, the common line and traffic sensitive pools operate with a 24-month "open window" in which the exchange carrier can revisit prior months to adjust data. Depending on whether they are reporting current estimated or true-up actual data, exchange carriers can make three types of data entry during a current month cycle: data month estimate, data month adjustment, or retroactive adjustment.

As ordered in the 2001 price cap Resolution T-16479 (O.P. 3), starting in the 2002 price cap filing, Citizens is required to submit true-up adjustments, in accordance with NECA true-up provisions. Citizens requests a NECA High Cost Fund 2003 True-Up increase of $411,741. The Telecommunications Division has reviewed the Citizens filing and believes it is reasonable to recommend adoption of the Citizens $411,741 proposal for the NECA High Cost Fund True-Up increase.

Payphone Deregulation

In Advice Letter No. 763, Citizens requests an ongoing Z-Factor adjustment decrease of $186,051 to reflect the impact of payphone deregulation.

In its First Report and Order, FCC 96-388, the Matter of Implementation of the Pay Telephone Reclassification and Compensation Provisions of the Telecommunications Act of 1996, and in the subsequent Order on Reconsideration, FCC 96-439, the FCC ordered the deregulation of all payphone equipment and the removal of interstate and intrastate payphone subsidies. In relevant part, FCC 96-388 specifies that:

We require, pursuant to the mandate of Section 276(b)(1)(B), incumbent LECs to remove from their intrastate rates any charges that recover the costs of payphones.

Payphones were deregulated on April 15, 1997. Citzens correctly began to include payphone deregulation adjustments starting in the 1998 price cap and continuing as an annual adjustment. In A.99-03-027 Citizens requested no change in its basic NRF structure, and requested that the Commission make no changes in the criteria for exogenous factors (Z-Factors) recoverable by Citizens. In D.00-03-040 the Commission allowed Citizens to continue seeking ongoing adjustment decreases for payphone deregulation of $186,051. Citizens begins with its 1996 base-year revenue requirements and makes annual adjustments for all ongoing and one-time exogenous events. Each year the company starts with a clean slate. In contrast, the other large LECs reflect changes to their price caps on a year-to-year basis. The Telecommunications Division staff has verified that the two approaches produce the same results. The ongoing adjustment decrease of $186,051 requested by Citizens reflects twelve months of revenue.

The Telecommunications Division recommends adopting the Citizens proposed decrease of $186,051 for payphone deregulation.

Impact of Other Billing and Collection (OB&C)

Citizens requests an ongoing Z-Factor adjustment decrease of $166,863 to reflect the impact of FCC 80-286 (the OB&C Order). Citizens made annual adjustments to their 1996 base-year revenue requirement for all ongoing and one-time exogenous events. This adjustment is reasonable, and the Telecommunications Division recommends adoption Citizens proposed $166,863 decrease for the OB&C Z-Factor adjustment.

This is an uncontested matter in which the resolution grants the relief requested. Accordingly, pursuant to PU Code Section 311 (g) (2), the otherwise applicable 30-day period for public review and comment is being waived.

Findings

1. Advice Letter No. 763 filed on October 2, 2002 by Citizens propose a decrease of $42,473 over its 2002 base-year revenues. The implementation of Citizens 2003 price cap index filing will become effective on January 1, 2003.

2. Citizens Advice Letter No. 763 and it adjustments, supported by workpapers, reflects:

3. The Telecommunications Division recommends changing the current policy of applying the USF adjustment to local exchange services be changed to allocate USF costs to the three classes of service: intraLATA access service, intraLATA exchange and private line services, and intraLATA toll services, which are those used under NRF to allocate surcredits and surcharges.

4. Citizens request for an ongoing revenue adjustment associated with the deregulation of payphone is reasonable and should be adopted

5. Citizens request for an ongoing revenue adjustment associated with OB&C rule changes is reasonable and should be adopted.

6. A total price cap mechanism decrease $42,473, effective January 1, 2003, is justified and should be adopted.

7. Citizens' requested price floor revisions are reasonable and should be adopted.

THEREFORE, IT IS ORDERED that:

1. Citizens Telecommunications Company of California Incorporated shall decrease its annual revenue by $42,743 as a result of its 2003 annual Price Cap Adjustment filing in Advice Letter No. 763.

2. Citizens Telecommunications Company of California shall implement billing surcredits reflecting the revenue decrease ordered in Ordering Paragraph 1, applied to a total billing base of $68,859,804 for intraLATA access services, intraLATA exchange and private line services, and intraLATA toll services, to become effective on January 1, 2003, subject to review and approval by the Telecommunications Division.

3. The revisions to Citizens Telecommunications Company of California Incorporated price floors filed in Advice Letter No. 763 are adopted, and shall be implemented on January 1, 2003.

This Resolution is effective today.

I hereby certify that the Public Utilities Commission adopted this Resolution at its regular meeting on December 17, 2002. The following Commissioners approved it:

APPENDIX A

Resolution T-16715

Citizens Telecommunications Company of California Incorporated

2003 Price Cap Filing

(in Whole Numbers)

APPENDIX B

Resolution T-16715

Citizens Telecommunications of California Incorporated

2003 Price Cap Filing

(Adjustments by %)

 

Citizens

Existing

Surcharge/

Surcredit

Citizens

Proposed

Surcharge/

Surcredit

Adopted

Surcharge/

Surcredit

Access

(0.55%)

(1.06%)

(0.61%)

Local

1.30%

1.52%

1.24%

Toll

(0.55%)

(1.06%)

(0.61%)

APPENDIX C

Resolution T-16715

Citizens Telecommunications of California Incorporated

2003 Price Cap Filing

Calculation of Exogenous Changes

And "Z" Factor

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