Discussion

Total Operating Revenues

A comparison of CD's and Cal-Ore's estimates of proposed intrastate operating revenues for test year 2009 is shown in Appendix C. Cal-Ore's estimate of intrastate operating revenues is $3,933,685, a difference of $372,689 from CD's estimate of $3,560,996. The reasons for the differing estimates are further discussed below.

Cal-Ore used its historical data and managerial judgment to forecast local units, and estimated Local Revenue by multiplying the forecasted units by the tariff rates. Cal-Ore is also proposing some rate changes to better reflect those rates charged by comparable carriers; those changes are included in the Company's 2009 forecast.

In this GRC, Cal-Ore has proposed the following increases to its rates and/or charges:

CD is proposing an increase to Cal-Ore's Local Residential Service rate, Tariff Schedule A-1, from $16.05 to $20.252. This increase is 150% of AT&T's current residential rates as required of small LECs for CHCF-A support. The new charges will result in an increase of $90,418 in revenue. In D.08-09-042, as corrected by D.08-10-040, Universal Regulatory Framework (URF) Incumbent Local Exchange Carriers (ILEC) will adopt a transitional plan for increases to Basic Residential rates effective January 1, 2009. As a result, CD recommends Cal-Ore increase its Lifeline rates, from $5.47 to $6.11, since General Order 153 ties those rates to AT&T's basic rates.

CD proposes to increase Cal-Ore's Local Business Service rates, Tariff Schedule A-1, from $25.65 to $26.00 for the individual lines and from $25.65 to $29.00 for the key lines. The new charges would result in an increase of $5,792 in revenue. The increased Business Service rates would bring the charges more in line with rates charged by comparable carriers.

CD proposes the following increases to Cal-Ore's rates and/or charges - all contained in Tariff Schedule A-20:

CD agrees with Cal-Ore's proposal to increase its Local Area Operator Assistance Service charge, from $0.25 per call to $0.50 per call, and to reduce the business call allowance from 2 free calls to zero. CD disagrees with Cal-Ore's proposal to decrease the residential call allowance from 5 free calls to 0; instead CD proposes to change the Local Area Operator Assistance residential call allowance from 5 free calls to 1 free call. CD's reason is that after surveying other carriers' Local Area Operator Assistance residential free call allowances, CD believes its proposal to be reasonable and in line with those allowed by other comparable carriers. Factors such as the company's geographic location and the current service rates were taken into consideration. Adjustments for price elasticity were applied by CD in response to concerns raised by Cal-Ore in its meeting with CD and in response to information provided to CD in subsequent data requests.

CD believes its and Cal-Ore's proposed increases to Cal-Ore's rates and charges are reasonable and should be adopted.

Intrastate Network Access Services:

For its Intrastate Network Access Services, Cal-Ore collected data using amounts billed to the interexchange carrier and used current rates and units to develop its revenue forecast. Cal-Ore's proposed 2009 Intrastate Network Services revenue amount is based on the carrier's forecast of demand, such as the minutes of usage, and tariffed rates. Using this data, along with historical data for 2005-2007 that indicates a downward trend in usage of non-wireless transmission for intrastate network access services, CD is projecting a more modest 13.11% decrease in Intrastate Network Access Services revenue for 2009, resulting in the proposed revenue amount of $534,204 for the test year, a difference of $70,043 from Cal-Ore's proposed amount of $464,161.

Miscellaneous Revenue:

Based on historical data from 2002-2007, Miscellaneous Revenue for Cal-Ore has increased each year. CD finds the rate of increase from year-to-year is in line with the amount proposed by Cal-Ore for 2009. CD therefore finds reasonable, Cal-Ore's proposed Miscellaneous Revenue amount of $262,301.

Uncollectibles:

Uncollectibles are based on bad debts associated with local revenue and intrastate access revenues. Cal-Ore annualized the first 9 months of its 2007 Uncollectibles and based its 2008 and 2009 forecasts on the changes in Local Revenue. Cal-Ore states the 2007 local revenue bad debt at $10,645 and intrastate access revenue bad debt at $121,453. CD has reviewed the annual reports and does not agree with Cal-Ore's estimate of test year 2009 uncollectibles. CD analyzed five years (2003-2007) of recorded data to arrive at an average of 0.78% uncollectible for local revenue and 9.74% uncollectibles for intrastate access revenue. CD applies these percentages to derive the 2009 uncollectibles amount. Therefore, CD proposes an uncollectible amount of $59,069 for the 2009 test year, a decrease of $30,485 from Cal-Ore's proposed amount of $89,554.

In response to concerns raised during the meetings with companies submitting GRC's for test year 2009, CD is making adjustments to subscriber counts of Discretionary Services due to price elasticity. Moss Adams, an accounting firm representing three LEC's with GRCs pending, performed an analysis demonstrating that increases in Discretionary Services above 25% for test year 2009, would have a price elasticity factor of 5%. Considering the increases in rates CD is proposing for Cal-Ore in test year 2009, CD performed the calculations and concurs with this methodology. The Discretionary Services for which CD is increasing in excess of 25% equals $24,797 in incremental revenue for Local Services in test year 2009. This results in a difference of $122,157 in Access Revenue from Cal-Ore's projection of $780,086 to CD's projection of $902,243 at proposed rates for test year 2009.

Operating Expenses

Cal-Ore's estimate of total company operating expenses at $4,029,557 (less depreciation and taxes-income and other) is greater than CD's estimate of $3,830,105 by $199,452 or 5.21%. A comparison of CD's and Cal-Ore' estimates of total operating expenses for test year 2009, is shown in Appendix A. Differences between CD and Cal-Ore estimates include elimination of salary and benefits for a proposed new employee in 2009, capping benefits at 38% of salaries and wages, reduction in the rate case expenses, the use of nine months' annualized data for 2007 in Cal-Ore's initial filing and the difference between the Constant Dollar method used by the Commission and the method of applying Cal-Ore's application of annual growth rates in labor and non-labor expenses. These differences were discussed in the October 17, 2008 meeting between CD and Cal-Ore, adjustments were considered where appropriate and the results are described below.

For operating expenses, Cal-Ore forecasted 2009 expenses based on the following methodology. First, Cal-Ore broke expenses to salaries and benefits as labor expenses and rent, clearance, and others as non-labor expenses components. Then, it took 2007 expenses and applied an 8% capped growth rate to labor expenses and 5% capped growth rate to non-labor expenses and added two proposed employee expenses for 2008 to project 2008 expenses. These growth rates were solely based on the company's own judgment which, CD could not independently verify. Finally, Cal-Ore used 2008 expense projections and used the same growth rates as used in 2008, added expenses for one proposed employee for 2009 and projected its 2009 test year expenses. Cal-Ore believes this methodology to be reasonable for a small company. CD does not agree with Cal-Ore's estimated labor related and non labor expense growth rates. The growth rate factor used by Cal-Ore is too high compared to the California Public Utilities Commission's Division of Ratepayers Advocates' (DRA) labor and non-labor inflation factors.3 CD used Cal-Ore's recorded expenses in terms of labor and non-labor expenses and applied the constant dollar method to estimate Cal-Ore's 2009 expenses.

The constant dollar method is used to measure financial statement items in dollars of the same (constant) purchasing power. Historical cost is restated in units of constant purchasing power as follows:

(Historical Expense) X (Average CPI for the Current Year/CPI at Time of Expense incurrence)

Restating all accounts in constant dollars provides greater comparability among years because all expenses appear in constant dollars regardless of when the expense was incurred. The Commission in Siskiyou's 1997-test year rate case proceeding discussed and adopted CD's use of the constant dollar methodology. In Finding of Fact 6 of Resolution T-16006, the Commission found "...CD's methodology in estimating expenses reasonable and adopt CD's recommended test year 1997 expenses contained in Appendix A." 4

Therefore, CD used Cal-Ore' recorded expense figures for the years 2005, 2006 and 2007 and then applied the recorded inflation factors for labor and non-labor for each year to convert the recorded expenses to constant 2007 dollars. CD then took the average of the inflation-adjusted amounts for those three years and used it as its base estimates. It then applied the cumulative inflation factors for 2008 and 2009 to the base estimate to arrive at the test year 2009 estimate. Because rents components are not subject to the same variability as other types of expenses, the constant dollar method was not applicable. CD accepted Cal-Ore estimate of rent and escalated it into the test year using DRA's estimated non-labor escalation factor.

Rate Case Expense:

Cal-Ore's estimate of rate case expenses is $225,000 amortized over a three year period and hence, it added $75,000 to expenses for the test year 2009. In Cal-Ore's last rate case, the Commission authorized rate case expenses of $50,000 for test year 2004.  Using the non-labor inflation factors for 2007, we are projecting that the rate case expenses for test year 2009 would be about $61,000 as added to the Corporate Operations Expense category. This reduces rate case expenses by $14,000 for the test year 2009.

New Employees:

Cal-Ore initially requested to add three new employees in 2008 and 2009. After reviewing the submitted reasoning, CD accepts the addition of two new employees in 2008 and added their associated expenses to its forecasted 2009 expenses. CD does not agree with the addition of the Customer Service Representative in 2009. Given the down turn in the housing market and existing economic conditions in the Cal-Ore territory, and based on staff field investigation, CD concludes Cal-Ore would be sufficiently staffed with the level of staff in 2008. In addition, CD believes that cross training of current employees can meet Cal-Ore's anticipated increased workload needs in regulatory and language requirement areas given that some of the current employees are already working on some of these areas. The language proceedings are still ongoing and the language requirements have not been determined at this time.

Wages, Salary and Benefits:

Cal-Ore's level of benefits to total wages and salaries appears to be high. For test year 2009, the ratio of benefits to total wages and salaries is 52.43%. Cal-Ore provided a list of salaries/wages and benefits for 2007. The 2007 data includes an employer funded Profit Sharing Plan which the employer contributes 15% on an employee's wages and salaries. CD believes a benefit to salary ratio of 38% is more reasonable.

CD's use of the 38% benefit to salary ratio was developed from ratios utilized by other Communication Carriers involved in GRCs. This 38% level represents a baseline for small Communication Carriers.

CD staff surveyed regulated small water companies ranging from 2000-10,000 customers filing rate cases with the Commission. CD found their average benefit to salary ratio was 28%5. Further, CD staff studied the latest available data from the U.S. Bureau of Labor Statistics (BLS), dated December 10, 20086 and found that BLS included paid leaves in its benefit calculations. For all small private companies with 1-49 employees total benefits to salaries and wages was 34%, and for all small private companies with 1-99 employees the ratio was 35.5%7. All of these ratios were below CD's proposed rate of 38%. Therefore, CD's concludes that the CD proposed benefit to salary ratio of 38%, is conservative, yet reasonable. Thus, CD recommends a benefit to salary ratio of 38% for Cal-Ore.

Depreciation Expense:

CD used its average TPIS for 2009 and Cal-Ore's current depreciation rates to calculate 2009 total company Depreciation Expense of $1,388,368. Cal-Ore's calculation of total company Depreciation Expense was $1,762,056. Both Cal-Ore and CD applied the same depreciation rates which had been previously approved by the Commission. Differences between CD's and Cal-Ore's depreciation expense calculations are due to differences in their estimated Telephone Plant-in-Service (TPIS) balances for 2009.

Rate Base

CD examined Cal-Ore's Rate Base components, which include Telephone Plant in Service, Telephone Plant Under Construction, Material & Supplies, Working Cash and Deferred Income Taxes.

In computing Telephone Plant in Service (TPIS), CD reviewed Cal-Ore's 2007 annual report, Capital Budget, including additions and retirements as reflected in the annual report, and the filed GRC work papers and responses provided by Cal-Ore through data requests. Cal-Ore's proposed plant additions for 2008 and 2009 are $1,740,000 and $1,735,000 respectively. These plant addition amounts are somewhat higher than Cal-Ore's historical 5 year average (2003 - 2007) gross plant additions of $1,456,634. CD has made adjustments to the proposed plant additions in the building, buried fiber, and central office digital switching equipment TPIS categories (see following section). CD's resulting estimate of plant additions for 2008 and 2009 are $1,254,258 and $835,000, respectively. The reasons for CD's disallowance of certain Cal-Ore TPIS projects are discussed below.

Fiber Project in Cities of Dorris and Tulelake:

Cal-Ore is proposing to install underground fiber cable plant throughout the cities of Dorris and Tulelake. These projects include bringing fiber facilities to every home in each of these two towns. At the meeting at the company's headquarters on April 15, 2008, Cal-Ore explained that there have been no service quality complaints resulting from the buried copper cable facilities nor have they received any requests for the provisioning of high technology services that might require the installation of the fiber plant.

Cal-Ore also informed CD that as part of the fiber installation, that each house would require an Optical Network Terminal/Unit (at a cost of $500 to $700 per residence). These devices are required (at each residence) to convert the fiber cable's light signal to an electrical signal, which can then be transmitted by the home's existing internal copper wiring. CD disallows the project (and related Central Office upgrades) in the towns of Dorris and Tulelake as part of its rate base adjustments for the following reasons. There are no service quality complaints in the two towns to warrant replacing the existing plant.

At the October 17th meeting, CD asked Cal-Ore why they could not install digital loop carrier (DLC)8 systems in Dorris and Tulelake and then provide fiber plant to the DLCs and then branch out from the DLCs with copper to each home. By this means Cal-Ore could provide voice as well as DSL service to any customer who requests it. Cal-Ore replied that the close proximity of the central offices to the homes in both Dorris and Tulelake, make installing DLCs unfeasible. CD believes that if the homes are so close to the central offices in Dorris and Tulelake, then installing copper plant in the two towns would be sufficient because the copper lengths would be short enough to enable Cal-Ore to provide DSL (as well as basic voice telephone service) to all its customers in both towns.

Materials and Supply (M&S):

Cal-Ore's estimate of Materials and Supplies (M&S) for 2009 is $126,351, which is approximately 0.004425% of its average 2009 TPIS amount. CD reviewed Cal-Ore's M&S recorded 5 years (2002-2006) amounts from its filed GRC workpapers, and calculated the ratio of the M&S amounts to the recorded average TPIS for those years. The M&S ratio ranged from 0.00369 to 0.004362, with an average ratio of 0.00401. CD then applied the average ratio of 0.00401 to its estimated average TPIS for 2009 to arrive at its M&S estimate of $111,621 for the test year. CD recommends that the average Total Company M&S of $111,621 be included in the rate base since it more closely approximates the future operations of Cal-Ore.

Working Cash:

Cal-Ore and CD utilized the simplified method described in the CPUC's Standard Practice U-16, to arrive at their working cash estimates. A ratio of 49.16% of toll revenue to total revenue was used to calculate the total company Working Cash estimate of $404,980 for test year 2009. CD's estimate of test year 2009 Total Company Working Cash is $20,583, or 5.08%, lower than the amount computed by Cal-Ore, due to the differences in estimated revenues and expenses for test year 2009.

Telephone Plant Under Construction:

Cal-Ore calculated its total company Telephone Plant Under Construction (TPUC) amount of $119,937, by taking the average of its 5 years of TPUC data and dividing it by the average of its 5 years TPIS, resulting in a 0.42% TPUC percentage. Cal-Ore then multiplied this percentage times its estimated 2009 TPIS. CD accepts Cal-Ore's 2009 percentage of 0.42% to calculate 2009 TPUC. CD used the 0.42% percentage multiplied by its calculated 2009 average TPIS of $27,835,721 to come up with $116,910 for 2009 TPUC. CD feels that using this 0.42% figure for TPUC will best reflect Cal-Ore's future TPUC for 2009, as it is based on Cal-Ore's recorded TPUC and TPIS amounts.

Depreciation Reserve (Accumulated Depreciation):

Cal-Ore's Accumulated Depreciation for test year 2009 is $20,494,336, $110,232, or 0.54% more than CD's Accumulated Depreciation estimate for 2009. CD calculated Accumulated Depreciation by taking its depreciation expenses for 2008 and 2009 and adding them to its calculated ending balances of Accumulated Depreciation for 2007 and 2008, to obtain an average Total Company Accumulated Depreciation for 2009 of $20,384,104. Differences between CD's and Cal-Ore's depreciation reserve are due to differences in their respective 2008 and 2009 estimated TPIS balances.

Separations

Cal-Ore provides both intrastate and interstate telecommunications services, subject to the regulation of the CPUC and FCC, respectively. Because Cal-Ore's property serves both jurisdictions, the utility's revenues, expenses, taxes, investments, and reserves are allocated between interstate and intrastate services.

"Separations" is a process of apportioning a telephone company's property costs, related reserves, operating expenses, taxes, and rate base between the intrastate and interstate jurisdictions. It is a method by which a telephone company can separately identify the amount of expenses and investments associated with the production of a given service. These apportionments are made on the basis of relative usage and direct assignment whenever possible. The costs to be apportioned are identified in the FCC's Part 36 Separations Manual, according to the classification of accounts as prescribed by the FCC's Part 32, Uniform System of Accounts (USOA) for Telecommunications Companies.

Cal-Ore used separation factors developed under the FCC's Part 36 to apportion its interstate and intrastate services. CD reviewed Cal-Ore's separation factors and found them reasonable, and accordingly CD used Cal-Ore's separation factors to estimate Cal-Ore's Intrastate Results of Operations.

2 On October 28, 2008, AT&T sent a letter to CD Director John Leutza informing him that AT&T will raise their residential flat rate to $13.50 per month from its present rate of $10.94. Commission Decision 08-09-042 allowed AT&T to increase its monthly residential flat rate up to $14.19, but AT&T indicated that it would not increase the rates to the full extent of the authorized rate cap at this time. As a result of this AT&T rate increase, CD has adjusted Cal-Ore's monthly residential flat rate to $20.25 (150% of AT&T's new rate of $13.50) from its current rate of $16.05 per month.

3 Division of Ratepayer Advocates: Estimates of Non-labor and Wage Escalation Rates for 2008 through 2012 from the November 2008 Global Insight U.S. Economic Outlook.

4 At page 5 of Resolution T-16006, the Commission stated, "Generally for traditional GRCs, the Commission adopts the constant dollar method".

5 Kenwood GRC filing Test Year 2009 at 28%, Alco Annual Report 2007 at 47%, East Pasadena Annual Report 2007 at 23%, Fruitridge Annual Report 2007 at 25%, Del Oro Annual Report 2007 at 18%.

6 http://www.bls.gov/news.release/ecec.nr0.htm.

7 Ibid, Table 8.

8 A digital loop carrier (DLC) is a system which uses digital transmission to extend the range of the local loop farther than would be possible using only twisted pair copper wires. A DLC digitizes and multiplexes the individual signals carried by the local loops onto a single datastream on the DLC segment.

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