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PUBLIC UTILITIES COMMISSION OF THE STATE OF CALIFORNIA

Telecommunications Division RESOLUTION T-16480

Market Structure Branch January 18, 2001

R E S O L U T I O N

RESOLUTION T-16480 VERIZON CALIFORNIA INCORPORATED (U-1002-C). ORDER APPLYING THE ADOPTED PRICE CAP MECHANISMS IN COMPLIANCE WITH DECISIONS 89-10-031 AND 94-09-065 THROUGH ADJUSTMENTS TO SURCHARGES/SURCREDITS TO BE EFFECTIVE FEBRUARY 1, 2001.

BY ADVICE LETTER NO. 9580 FILED SEPTEMBER 28, 2000

____________________________________________________________

SUMMARY

This resolution orders Verizon California, Inc. (previously known as GTE, California or GTEC) to reduce its annual revenue by $19.0 million effective February 1, 2001 to reflect implementation of the GTE-Bell Atlantic merger compliance adjustment (effective 2001-2005) as ordered in D. 00-03-021.

Through its price cap advice letter filing Verizon requests the following adjustments to its revenue: (1) GTE-Bell Atlantic merger compliance and (2) deferral, until the 2002 Price Cap, for inclusion of the recovery for its NRF audit expenses.

No protests to Verizon's AL 9580 were filed.

2001 Price Cap Revenue Change

  

(In Millions)

    

Price cap impact without Z-Factors, LE factors

  

$ -0-

     
     

Ongoing Z-factors

  

$0

     

 

     

LE-factors

    
 

(none)

$ -0-

     

Other Adjustments

    

GTE-Bell Atlantic Merger Compliance Adjustment

  

($19.0)

(effective 2001-2005)

    
     
     

Net Z-factor, LE-factor, and Other Adjustments

  

($19.0)

     

Total Price Cap Impact effective February1, 2001

  

($19.0)

BACKGROUND

In Decision (D.) 89-10-031 the Commission adopted an incentive -based regulatory framework (called the new regulatory framework, or "NRF") for Pacific and GTE California Incorporated (GTEC). The decision stated:

This new regulator framework is centered around a price indexing mechanisms with sharing of excess earnings above a benchmark rate of return level.

Following a startup revenue adjustment (D.89-12-048)...Prices for the utilities' basic monopoly services and rate caps for flexibly priced services will be indexed annually according to the Gross National Product Price Index (GNP-PI) inflation index reduced by a productivity adjustment of 4.5%.

The indexing formula also allows for rate adjustments for a limited category of exogenous factors whose effects will not be reflected in the economy wide GNP-PI. While all such costs cannot be foreseen completely, we recognize that the following factors may be reflected in rates as exogenous factors (called Z-factors): Changes in federal and state tax laws to the extent that 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.

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. In addition, the Commission adopted a productivity factor of 4.6% for GTEC for its 1996 price cap filling.

In 1995 the Commission issued D.95-12-052 regarding the second triennial New Regulatory Framework Review. In O.P. 4 of that decision, the CPUC suspended the application of the GDP-PI minus productivity factor formula used in price cap regulation of GTEC and Pacific until further order of this Commission or until a final decision is issued in the next triennial review.

In October 1998 the Commission issued D.98-10-026 regarding the Third Triennial review of the NRF. The order continues the suspension of the GDP-PI minus productivity factor formula, suspends for the first time the sharing mechanism, permanently eliminates the depreciation review, replaces Z factors with limited exogenous (LE) factors, and effectively imposes a cap on residential services by keeping price caps generally.

The order also specifies that in the future LE cost recovery is confined to recovery for cost increases or decreases resulting from (1) items mandated by the Commission and (2) changes in total intrastate recovery resulting from changes between federal and state jurisdiction. Recovery of Commission mandated cost changes must be annualized in the underlying Commission Decision.

Verizon's 2001 Price Cap Filing

On September 28, 2000 Verizon California Inc. filed AL No. 9580 requesting billing surcharge/ surcredit changes to be effective January 1, 2001 in order to implement the certain one time revenue adjustments for 2001.

Verizon California Inc.'s filing requests the following revenue adjustments (adjustment amounts in parentheses).

Verizon California requests a total revenue reduction of 19.0 million effective January 1, 2001, which reflects the GTE-Bell Atlantic merger compliance adjustments, ordered in D.00-03-021. Verizon used a billing base of $ 2.16 billion for calculating the surcharge/surcredit effective January 1, 2001, over twelve months. Verizon also identified billing base of $1.98 billion for calculating the surcharge/surcredit, effective February 1, 2001, over eleven months.

NOTICE/ PROTESTS

Verizon California Incorporated stated that a copy of the advice letter and related tariff sheets were mailed to those interested utilities and or parties. Notice of Advice Letter No. 9580 was published in the commission Daily Calendar of October 30, 2000.

No protests were filed.

DISCUSSION

GTE-Bell Atlantic Merger Compliance

In D.00-03-021, (Ordering paragraph 1.b) Verizon (former GTE CA) was directed to

"GTE California, or its successor, shall reduce its annual revenues by $19.0 million per year for five years. GTE California, or its successor, shall include this revenue reduction in the first October 1 new regulatory framework price cap advice letter filling made after the consummation of the merger. GTE, California, or its successor, shall include this revenue adjustment in each October 1 price cap advice letter filing for a total of five years. Each price cap advice letter shall specify, among other things, the billing base for the purpose of this surcredit. The billing base incorporating the amount of both the CHCF-B and the annual total revenues from residential exchange service access charges. The billing base shall be updated with each price cap advice letter".

Verizon California, Inc's $19.0 million revenue reduction is due to this implementation of the GTE-Bell Atlantic merger compliance adjustment as ordered in D. 00-03-021. In Compliance with the decision Verizon California identified a billing base of $2.16 billion for calculating the surcredit for the 2001 price cap filing, effective January 1, 2001, over a twelve- month period. Due to the timing of this resolution, the Commission finds that a January 1, 2001 effective date is not possible, and adopts an effective date of February 1, 2001 for the surcredit calculating over an eleven month period, using a billing base of $1.98 billion.

Recovery of NRF Financial Audit Fee

The issue of cost recovery related to the NRF audit was discussed in D. 96-05-036. This decision did not guarantee recovery of audit related expenses, deferring such judgement until a request for recovery was submitted and given due consideration. Verizon in its last year price cap filing requested for LE factor recovery for NRF financial audit expenses. It was determined then that Verizon does have the authorization for LE factor treatment of the NRF financial audit expenses under the current procedures. In Resolution T-16376, issued January 20, 2000, we declined to authorize recovery of costs associated with the NRF audit prior to the incurrence of the costs. However, Verizon was allowed to seek recovery of costs associated with the NRF audit in 2001 price cap filing when actual costs are incurred. Verizon was also asked to include with its request the nine criteria analysis that was prepared in response to the protests of ORA and AT&T.

Since the NRF audit remains open, and actual costs will not be known until after the conclusion of the audit. Verizon has requested that recovery of NRF financial audit expenses be deferred until the 2002 Price Cap filing. Verizon has also included the nine criteria analysis as instructed in last year price cap resolution number T-16376. We believe that it is appropriate for Verizon to defer until its next price cap filing, after actual costs have been incurred, a request for recovery of NRF audit costs. Because the issue of audit cost recovery is deferred until Verizon's next price cap filing, Verizon is directed to include in that filing the nine-criteria Z-factor analysis, updated as necessary to reflect any changes that resulted from Commission orders in the proceeding addressing the NRF audit.

311 MAILING OF DRAFT RESOLUTION

The draft resolution of the Telecommunications Division in this matter was mailed to the parties in accordance with PU Code section 311(g) and Rule 77.1 of the Rules of Practice and Procedure. Comments were filed on (date) by (parties) and reply comments were filed on (date), by (parties). [disposition of comments/revisions to draft resolution}

FINDINGS

1. Verizon California, Inc. filed AL No. 9580 on September 28, 2000, to implement Verizon's 2001 price cap mechanism and certain LE factor adjustments. In the above-mentioned AL filing Verizon requested adjustments for GTE-Bell Atlantic merger and deferral of NRF Financial Audit Fee. Verizon also included the Nine-Criterion Z-factor analysis as instructed in last year's price cap resolution number T-16376.

2. Verizon California, Inc. requested adjustments for GTE-Bell Atlantic merger compliance per D. 00-03-021 should be adopted.

3. Verizon California, Inc's request for deferral of the NRF Audit Expenses until 2002 price cap should be granted.

4. A total price cap mechanism decrease of $19.0 million, effective February 1, 2001, is justified. The adopted revenue adjustments are summarized in Appendix A to this resolution.

5. Verizon California, Inc's surcharge/surcredit should be calculated on an eleven month basis with a February 1, 2001 effective date, using a billing base of $1.98 billion. The adopted surcredits are identified in Appendix B to this resolution.

THEREFORE IT IS ORDERED that:

1. Verizon California, Inc. shall reduce its annual revenue by $19.0 million as a result of it's 2001 annual Price Cap filing in Advice Letter (A.L.) No 9580.

2. Verizon California, Inc. shall defer audit expenses until the 2002 Price Cap filing and shall include in that filing the updated nine-criteria Z-factor analysis.

3. Verizon California, Inc. shall file a supplement to A.L. No 9580 on or before January 31, 2001 with the Commission's Telecommunication Division. This filing shall implement billing changes reflecting the revenue change in ordering paragraph No. 1, applied to a total billing base of $1.981 billion for local, toll and access services. The billing change shall be implemented on February 1, 2001, and continue for eleven months.

4. The revisions to Verizon California, Inc.'s price floors filed in A.L. no. 9580 are adopted, and shall be implemented on February 1, 2001. In instances wherein the price floor, exceeds the established price cap, GTEC shall file an application to amend the rates for those services, consistent with the provisions of D. 95-05-047.

This Resolution is effective today.

I hereby certify that this Resolution was adopted by the Public Utilities Commission at its regular meeting on January 18, 2001. The following Commissioners approved it:

Appendix A

Resolution T-16480

Verizon California, Inc.

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