2. Procedural History

Roseville filed this application asking the Commission to address the rate and revenue issues related to the current EAS arrangements between Pacific and Roseville. The current EAS compensation agreement between the companies provides Roseville with $11.5 million in annual revenues. This was a significant portion of Roseville's start-up revenues utilized by the Commission to recover Roseville's cost of providing telephone service in its General Rate Case (GRC) decision in 1996.

In March 1999, Pacific sent Roseville a letter requesting that the parties terminate the current $11.5 million EAS compensation agreement and enter into a new EAS compensation arrangement. Pacific informed Roseville that the existing agreement was not consistent with the present competitive environment. Subsequently Pacific and Roseville entered into negotiations on a new compensation agreement. The new agreement was not completed at the time Roseville filed its application, but the parties did execute a new agreement during the course of the proceeding, and on May 31, 2000, Roseville and Pacific filed a joint motion for admission of the new interconnection agreement (ICA) as a late filed exhibit.²

The new compensation agreement terminates the current arrangement in which Roseville receives $11.5 million annually from Pacific, and establishes a system of bill and keep for exchange of local traffic. Therefore, the new agreement does not provide any replacement funding for the $11.5 million received from Pacific. Since the new agreement does not generate revenues to offset the loss of the existing EAS payments, Roseville suggests other funding alternatives, including the CHCF-A or CHCF-B.

The Office of Ratepayer Advocates (ORA) filed a protest to Roseville's application, stating that the Commission should dismiss the application because it was filed prematurely. According to ORA, the terms of the new EAS agreement need to be taken into account by the Commission in its review of various funding sources.

Also, ORA finds EAS compensation to be inconsistent with the Commission's New Regulatory Framework (NRF) goals. ORA agrees with Pacific that the telecommunications market has changed since the adoption of the EAS agreement. Roseville's EAS compensation should be eliminated because it undermines the NRF goal to provide telephone utilities with incentives to increase efficiency.

On September 27, 1999, Pacific filed a motion to intervene as a party to this proceeding. In its motion Pacific indicated that the issues in the proceeding directly affect the interests of Pacific. Due to prior Commission orders, Pacific currently pays Roseville approximately $11.5 million a year for settlements relating to 0-12 mile local calling, Zone Usage Measurement (ZUM) Zone 3, and the Lincoln-Roseville and Pleasant Grove-Roseville EAS routes. Those intercompany settlement payments generally have been referred to as "EAS payments."

In its investigation into existing settlement payments from Pacific to other LECs and their impact on the implementation of a NRF, the Commission, in Decision (D.) 91-07-044, decided to freeze the EAS payments to Roseville at approximately $11.5 million annually under a transitional settlement arrangement. Additionally, the Commission ordered Pacific and other mid-sized LECs (including Roseville) to enter into negotiations for EAS compensation with the understanding that permanent arrangements would be implemented by the end of 1997.

Pacific has established such permanent arrangements with all large and mid-sized LECs except Roseville. Pacific has also negotiated traffic compensation agreements with the small LECs in California, which have been submitted to the Commission for approval in Application (A.) 99-09-044.

Pacific states that its participation in this proceeding as a party will not unduly broaden the issues set to be considered. Roseville responded to Pacific's motion to intervene stating that it acknowledged Pacific's strong interest in the outcome of the proceeding and did not oppose Pacific's motion to intervene. Pacific's motion to intervene was granted by ALJ Ruling on November 23, 1999.

A Prehearing Conference (PHC) was held on December 6, 1999. The purpose of the PHC was to determine the scope of issues to be addressed, the schedule for resolving the issues identified, and to determine whether or not evidentiary hearings were required.

On December 22, 1999, Assigned Commissioner Carl Wood issued a Scoping Memo, which established the scope and timetable for the proceeding. Roseville was ordered to provide interested parties with the cost information and cost model developed for its last GRC, and to provide updated volume information by January 28, 2000. Interested parties filed briefs on use of the CHCF-A and CHCF-B on March 21, 2000, as ordered in Commissioner Wood's Scoping Memo. Evidentiary Hearings were held April 24-25, 2000, with Opening Briefs filed on May 25, 2000 and Reply Briefs on June 9, 2000. Two Public Participation Hearings were held in Roseville on June 27, 2000.