On November 18, 2008, Cooper White & Cooper LLP, filed timely comments on behalf of Ducor. Cooper, White & Cooper LLP, points out:

Ducor argues in its comments that the Commission should not reduce its employee expenses. Ducor states that its central office in Ducor, CA is separated from the Kennedy Meadows central office by more than 80 miles and Ducor's Rancho Tehama exchange is more than 380 miles away. Ducor asserts that the dispersed nature of Ducor's facilities and operations requires that high level supervisors be present each location and therefore they have a higher executive pay expense.

In response CD has not eliminated any executives or employees in its adjustments. However, CD has found there were duplication of task between President and Executive Vice President, and Ducor salaries were higher than other California utilities. In response to Ducor's comments CD has revised it's adjustments to more accurately reflect the salary levels of its employees as they relate to other small telephone companies operating in California. For rate making purpose, CD adjusted Ducor executives' wages and spread the adjusted differences into expense accounts for the test year 2009.

CD's use of the 42% benefit to salary ratio was developed through a comparison of ratios utilized by other communication carriers involved in General Rate Cases (GRC), a survey of the annual report filings and general rate cases of small water companies ranging from 2000-10,000 customers as well as U.S. Bureau of Labor Statistics (BLS) data, dated December 10, 20087 for those indicators relevant to small ILECs operating in California

CD found the average benefit to salary ratio for the water survey group to be 33%8. While the study of the latest available data from the BLS, for similarly situated companies by size, location, and operation type as well as other indicators resulted in an average benefit to salary ratio of 42%9. The BLS ratio supports CD's proposed rate of 42% therefore, CD caps the ratio of regulated benefit to salaries/wages at 42%, for the test year 2009 and concludes that its proposed benefit to salary ratio of 42% for Ducor is appropriate and adequate.

In its comments Ducor argues that the magnitude of the increase to basic service proposed in the DR is not required. Ducor further argues that the basic rate should be reexamined in connection with its 2009 CHCF-A filing, or that any increase to the basic rate be phased in over time, with offsetting increases in CHCF-A draws to replace revenues.

The Commission's CHCF-A rules currently require that small LECs' residential service rates be at least 150% of AT&T's urban rate, and it is for this reason that CD is recommending increasing Ducor's residential basic rate. The required adherence to this "150% mechanism" is evidenced by the Commission's adoption of previous GRC resolutions in which the small LEC's local residential rates were increased to at least 150% of AT&T's (Pacific Bell's or SBC's) rates. This 150% mechanism was adopted by the Commission in Decision (D.) 91-09-042; Appendix.

 

The recent B-fund Decision (D.) 08-09-042 in footnote number 29 reaffirms the requirement that companies who wish to receive CHCF-A support must first be at 150% of the AT&T rate. The footnote states as follows, "CHCF-A guidelines require a small LEC's CHCF-A requirement to first be met by increases in its local exchange rates up to, but not to exceed, 150% of comparable California urban rates. After this rate limit has been met, the small LECs can then apply for CHCF-A funding if they make regular GRC filings."

 

Further, in Ordering Paragraph 3 of the original Decision 88-07-022, that established HCF (High Cost Fund; now called CHCF-A) and the 150% requirement, states, "Recover the remaining settlement effects from the intrastate High Cost Fund if the revised basic local rates do not fully recover the settlement effects but the 1-party residence flat rate has reached the 150% threshold level"

 

Additionally, Resolution T-13038 further affirms in Finding of Fact Paragraph 5 that, "To be eligible for intrastate HCF, D.88-07-022 requires the LECs to propose a rate design that will increase or decrease basic exchange access line service rates by a uniform percentage while maintaining the 150% threshold level of comparable California urban rates presently measured by Pacific's 1-R flat rate of $8.35 per month."

 

It is clear from a review of Commission Decisions and the precedent set by countless GRC resolutions that Ducor' basic residential rate must be at the 150% level for Ducor to continue to be eligible to receive CHCF-A funding.

Ducor further argues that an elasticity factor should also be applied to any basic rate increase ordered as well. In the draft resolution, CD has adjusted revenues for the custom calling and access services and charges which have been increased by 25% or more, in response to Ducor' expressed concerns. However, CD does not agree that basic residential service is subject to the same elasticity factors as custom calling and access services. Furthermore, CD has not received any data from Ducor that demonstrates its conclusion that the rate increase will result in lost access line revenues.

Given that AT&T has increased pricing flexibility under URF, we will be reviewing in the immediate future whether to continue linking the company's Basic Residential rate to 150% of AT&T's Basic Residential rates as a condition for the company to receive CHCF-A support.  We recognize that the changed circumstances may support reconsideration of this practice and we will also consider whether any changes we make should be reflected on a prospective basis for the company's rates. 

Ducor asserts that the method utilized in the draft resolution for computing uncollectibles is not consistent with the methodology used to compute other expense categories as it does not include recorded data from 2007. CD agreed with Ducor's assertion and therefore requested that Ducor provide CD with the 2007 recorded uncollectible data

In response CD has modified its calculation to include 5-year (2003, 2004, 2005, 2006, and 2007) average uncollectibles to arrive at an uncollectible rate of 0.00% for local service revenue, and 8.04% for intrastate access revenue. CD used these new percentages to derive a 2009 test year uncollectible amount of $18,553 for present rate and $18,553 for proposed rate. (There is no change for intrastate access revenue in present rate and proposed rates).

Ducor states that the purported reasons for the largest reductions are that Ducor's overall investment per customer is high in certain exchanges and that Ducor's small ISP should bear a large proportion of proposed test year investment in DLCs. Ducor argues that it is unique among the smallest of LECs in having three widely separated exchanges with very low customer density. This necessarily means that plant investment per customer will be higher. CD agrees with this assertion and for that reason, the Commission must carefully evaluate all requests for additions to rate base due to the high cost to California ratepayers and the slow growth of the three exchanges.

CD agrees with Ducor about the need to improve the plant at Rancho Tehama exchange and has added back, two DLC's, in the amount of $366,000, to improve residential service and replace aging copper plant. CD is confident that the rate base additions to be approved in this resolution will also assure that Ducor's customers are provided with good basic telephone service on an ongoing basis.

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

8 Kenwood GRC filing Test Year 2009 at 35%, Alco Annual Report 2007 at 48%, East Pasadena Annual Report 2007 at 24%, Fruitridge Annual Report 2007 at 25%, Penngrove Annual Report 2007 at 32%.

9 Ibid, Table 8.

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