TELECOMMUNICATIONS DIVISION ANALYSIS

The Telecommunications Division (TD) has reviewed Pacific's proposal and the comments and recommendations provided by ORA. TD agreed with ORA's comments in its February 15, 2000 letter, that in Pacific's December 7, 1999 filing the USOA summary report did not appear to be completely comparable with Column #1 of the IEMR.

One report that has been central to the regulation of Pacific under NRF is the IEMR. This report provides the Commission with earnings and rate-of-return information related to Pacific's intrastate operations and reflects the regulatory accounting requirements of the CPUC. The financial information is presented on a regulatory accounting basis, separated between federal and state jurisdictions. For the Commission to utilize the USOA summary reports as Pacific proposes, it is imperative that the linkage of this report to the IEMR be fully understood by the Commission and parties participating in NRF.

Pacific's August 31, 2000 supplement provides the documentation to understand the linkage between the IEMR and the USOA Summary report. On December 14, 2000, ORA filed comments stating that after reviewing Pacific's supplement, it is now satisfied with Pacific's requested modifications to its reporting requirements.

TD also supports ORA's recommendation that the reconciliation reports for August through December 2000 be provided. The additional reports will give a full year of comparative reports which will serve as a historical record of the change, and demonstrate that the two reporting formats reconcile.

In its request, Pacific provided a broad overview of the monitoring report / modification proposal with a matrix that contained short descriptions of the contents of each report. Included in the matrix are brief explanations for three of out of the five "minor" changes that Pacific requests.

Pacific proposes to replace two reports that Pacific filed with the SEC (the 10K and the 10Q) with SBC 10K and 10Q reports, and eliminate one supplemental Pacific SEC report (10Q annotated). According to Pacific, it is no longer required to file reports directly with the SEC, and that this reporting is now done on a consolidated SBC parent company basis.

The TD has concerns regarding this element of Pacific's request. The 10 K report report that Pacific filed with the SEC provided company specific, audited, financial information, as well as operational information. The SEC 10K and 10Q reports were adopted by this Commission as part of the NRF monitoring program for Pacific because the reports provided useful information to the Commission staff and interested parties that participate in proceedings related to the NRF, as well as in Pacific specific proceedings.

TD is concerned that the elimination of specific Pacific financial and operational information without reports that contain comparable, detailed information, may result in a diminution the quality of information received by the Commission on Pacific's operations through the NRF monitoring program. Pacific has made no representation that the SBC reports that will be filed with the SEC and will replace the Pacific SEC reports will contain comparable, detailed financial and operational information related to Pacific.

The reports that SBC will file with the SEC are prepared on a consolidated basis, and encompass all of SBC's operations. These reports do not contain discrete financial and operational information related specifically to Pacific. TD's review of the SBC 1999 SEC 10K report disclosed that no financial data was contained in the report and there were only high level discussions of SBC's overall operations. No Pacific specific information was contained in the SBC SEC report. In contrast, the SEC 10K reports that Pacific has filed with the Commission under the NRF monitoring program contain consolidated balance sheets, income statements, and statements of cash flow related to Pacific that have been audited by independent certified public accountants. The Pacific 10K also contained discussions by management on significant information on the business activities of Pacific, its properties, legal proceedings, selected financial and operating information, and management's discussion and analysis of results of operations. The 10Q provides information similar to the 10K, only in an abbrieviated format, and on a quarterly basis. One fundamental difference is that the financial information in the 10Q is unaudited.

The elimination of Pacific specific financial information provided to the SEC affects the efficacy of the monitoring program related to the goal of Financial and Rate Stability. Under the monitoring program, the principal financial report that the Commission adopted to monitor Pacific's intrastate operations is the IEMR. The IEMR reflects this Commission's accounting and ratemaking policies, resulting in information that is used to calculate Pacific's intrastate earnings and rate-of-return on a California ratemaking basis. One aspect of the monitoring program was to be able reconcile Pacific's regulatory ratemaking books to the financial statements provided to the investment community through the SEC 10 K report. Having this primary financial information certified by independent certified public accountants provides this Commission with an additional level of comfort that will not exist under Pacific's proposal. The following is an example that illustrates TD's concerns regarding the loss of information that results with Pacific's proposal. On March 31, 1998, Pacific transferred ownership of its wholly-owned subsidiary, Pacific Directory (PBD) to Pacific Telesis, Pacific's direct parent company. The TD became aware of the transfer through a note to the consolidated financial statement contained in the SEC 10Q for the period ending March 31, 1998 and the 10K for the period ending December 31, 1998.

This transfer was not formally brought to the Commission's attention, despite the requirements of Public Utilities Code § 851. Nor was the transfer identified in the monitoring program report Notification of Asset Transfers (monitoring report code PF-06-06). This report was adopted by the Commission in the NRF monitoring program, and the information contained in the report is intended to be used in the monitoring of cross-subsidization and anti-competitive behavior. This report requires that Pacific notify the Commission of asset and property rights transfers of over $100,000. These transfers are to be reported 30-days prior to the occurrence. Transfers under $100,000 are required to be reported annually. This report supplements the Public Utilities Code § 851 requirements. TD has reviewed the monitoring report library and found that 1996 was the last year that Pacific has filed any Notification of Asset Transfers monitoring reports. For each of the years 1997-1999, all that has been filed are one page letters stating that there were no transfers to report.

There is one other report, the Results of Operations Report (Monitoring Report Code PD-XX-14), that is provided by Pacific under the NRF Monitoring Program that contained a discussion of the PBD transfer. One problem with using the Results of Operations report in lieu of the SEC reports is that the Results of Operations report is not filed on as timely a basis as the SEC reports. In the recent two years, the Results of Operations report has been filed 9 to 10 months in arrears of the year that was being reported. In comparison, the SEC 10K report is available by the end of the first quarter of the year following the year being reported.

TD is concerned that as a result of the elimination of Pacific specific reporting, that the information related to asset and property right transfers that would have been previously reported to the SEC may not be captured and reported in the Results of Operations monitoring report. Pacific has not explained to TD whether the source(s) of asset and property rights transfer information contained in the Results of Operations monitoring report are the same sources that were used for SEC reporting purposes. Nor has Pacific made any representations as to whether the reporting of asset and property rights transfers will continue to be reflected in the Results of Operations monitoring report, regardless of the changes in SEC reporting.

Additionally, the financial information contained in the Results of Operations report is not audited and it is not subject to SEC rules as are the 10K reports. Consequently, we do not have the same level of comfort as to the veracity and reliability of the data contained in the Results of Operations report.

TD recommends that certain conditions be placed upon Pacific to mitigate any negative or adverse affects on the quality and efficacy of the monitoring program that may result from granting Pacific's request regarding the SEC reports. TD's specific recommendations are as follows.

First, Pacific be ordered to follow the requirements of Asset Transfer Notification report.

Second, Pacific should be ordered to identify by year, all asset and property rights transfers that have been made subsequent to 1996, and file this information in the Asset Transfer Notification monitoring reports.

Finally, Pacific should be ordered to modify the contents of the Results of Operations Report (RO) to include a discussion of asset and property right transfers. The RO report should also be modified to include a statement of cash flows in the same format and with the same content as the Statement of Cash Flows that has been provided in the past to the SEC by Pacific in its 10K and 10 Q report. Also, the RO report should be modified, to the extent necessary, to include a Management Discussion and Analysis of Results of Operations that is based on the form and contain the same content as that included in Pacific's 10K SEC report.

We agree with, and adopt TD's recommendations and order Pacific to provide in the form of a compliance advice letter within 90 days of the effective date of this Resolution, the above identified information and changes to the monitoring program to comply with TD's recommendations.

Pacific also requests to change two "Monthly Reports"(MR) to two "Financial Reports"(FR) with the same information. In it's December 14, 2000 letter, ORA states that it is satisfied with Pacific's requested modifications as set forth in it's December 7, 1999 letter. TD recommends that this change be approved.