9. Comments on Proposed Decision

The Proposed Decision of Administrative Law Judge Karen Jones in this matter was mailed to the parties in accordance with Pub. Util. Code § 311(d) and Rule 77.1 of the Rules of Practice and Procedure. Comments were filed on November 7, 2000 and November 9, 2000 and reply comments were filed on November 14, 2000. We have taken the comments into account in finalizing this order.

Findings of Fact

1. It is not sustainable in a competitive environment for one company to make subsidy payments to its competitor.

2. The Commission found that the $11.5 million EAS payment from Pacific to Roseville made up a significant part of Roseville's start-up revenues in its last GRC decision.

3. A utility whose rates are regulated by a government agency is entitled to the opportunity to earn a reasonable rate of return.

4. The Commission did not have an adequate record in this proceeding to support ORA and Pacific's contentions that Roseville does not need any replacement revenue for the $11.5 million.

5. The requirements for the waterfall and the means test ensure that the companies that draw from the CHCF-A are submitting themselves periodically to Commission scrutiny of their operations, and are not over-earning.

6. In D.96-10-066, the Commission stated its intent that larger LECs draw from the CHCF-B, and smaller LECS draw from the CHCF-A.

7. Significant changes would have to be made to the CHCF-B in order for it to be used for permanent draws of a fixed amount.

8. Both ORA's and Pacific's rate design proposals would result in rate increases for Roseville's ratepayers.

9. The audit report and findings from Roseville's NRF proceeding, A.99-03-025, are not within the scope of this proceeding.

10. The Commission has long stated its preference that local exchange companies be regulated under NRF.

11. NRF regulation puts a direct profit incentive on the companies which tends to generate efficiency-producing programs.

12. One of the key goals for NRF companies is economic efficiency.

13. At the time of Roseville's last GRC, the Commission did not have an adequate record to determine the best method for recovering the $11.5 million in revenues.

14. In D.96-12-074, the Commission mentioned the possibility of using a Z-factor or universal service funding, but did not set a specific method of revenue recovery for the EAS payment from Pacific.

15. The Commission approved Roseville's NRF status with the explicit recognition that the $11.5 million payment from Pacific was a significant portion of Roseville's revenues.

16. Changes in intraLATA toll pooling arrangements, of which EAS is a subset, were clearly delineated as an allowable exogenous factor in D.89-10-031.

17. When Pacific ended its EAS agreements with Citizens and GTEC in 1997, the elimination of the EAS payments was reflected in Pacific's rates through a Z-factor adjustment.

18. In D.98-10-026, intraLATA toll pooling was not included on the list of seven items which would be allowed continued Z-factor treatment.

19. Changes in intraLATA toll pooling were explicitly eliminated as a Z-factor adjustment in D.98-10-026.

20. Z-factors and LE factors both relate to exogenous cost changes.

Conclusions of Law

1. The $11.5 million annual EAS payment from Pacific to Roseville should be discontinued.

2. The terms of the Settlement Transition Agreement require Pacific to make payments to Roseville until a replacement funding source is implemented.

3. The new bill and keep arrangement between Roseville and Pacific should not go into effect until the Commission implements an alternative funding arrangement for the current EAS payment.

4. Eliminating the $11.5 million from Roseville's revenue stream without any reanalysis of Roseville's revenue requirement would constitute a taking.

5. Allowing Roseville to draw from the CHCF-A to recover the $11.5 million is anticompetitive since it allows Roseville to receive an outside subsidy that is not available to its competitors.

6. Roseville is not a small LEC and therefore is not covered by the provisions of Public Utilities Code Section 739.3(a).

7. The administrative rules to the CHCF-A and CHCF-B should not be modified to allow Roseville to draw on the funds as a permanent part of its revenue requirement.

8. The Commission should examine Roseville's intrastate operations to see if inefficiencies exist, similar to those found by the FCC for Roseville's interstate operations.

9. It is appropriate for the Commission to order further examination of Roseville's revenue requirement and expenses, in light of Roseville's request for the Commission to find an alternate source of funding to replace the $11.5 million payment currently received from Pacific.

10. The Commission should recalibrate Roseville's revenue requirement to determine whether Roseville is able to absorb some or all of the $11.5 million or whether the revenue must come from Roseville's ratepayers.

11. A competitor in the telecommunications market should not have the advantage of an outside subsidy to fund its operations.

12. The record of proceeding A.99-03-025 should be incorporated into the OII ordered in this decision so the Commission can take advantage of the information gleaned in the audit associated with the proceeding.

13. Roseville is entitled to recovery of the $11.5 million on an interim basis while we reconsider Roseville's revenue requirement, since the Commission established in Roseville's GRC four years ago that the $11.5 million made up a significant portion of Roseville's revenue requirement.

14. The monthly subsidy payments Roseville receives pursuant to this order should not be subject to the rules governing the CHCF-B and should be separate and apart from any draws Roseville receives under the CHCF-B for providing service in high-cost CBGs.

15. The CHCF-B Administrative Committee should make monthly payments to Roseville in the amount of $958,333. Those temporary payments should continue until further order of the Commission.

16. The monthly payments to Roseville should be contingent on Roseville's cooperating fully with the assigned ALJ, Commission staff and other parties to the proceeding to move the investigation forward in an expeditious manner.

17. For Pacific, changes in intraLATA toll pooling are exempt from either Z-factor or LE-factor treatment.

ORDER

IT IS ORDERED that:

1. Pacific Bell Telephone Company shall be authorized to discontinue its $11.5 million Extended Area Service payment to Roseville Telephone Company (Roseville). Pacific shall remain obligated to Roseville under the EAS arrangement through the calendar month in which this order is adopted. Pacific shall pay in full all amounts owed to Roseville within 60 days of the effective date of this order.

2. The California High Cost Fund B Administrative Committee is ordered to make monthly payments from the Fund to Roseville in the amount of $958,333 per month. The first calendar month for which the fund shall make payment to Roseville will be the calendar month following the month in which this order is adopted. Payment for a particular calendar month shall be made within 30 days of the end of that month. Those payments shall continue on an interim basis until further order of the commission. Those payments shall continue on an interim basis until further order of the Commission.

3. The assigned Administrative Law Judge (ALJ) shall prepare an Order Instituting Investigation into Roseville's revenue requirement, for our consideration, within 45 days of the effective date of this order.

4. The record in Application 99-03-025, Application of Roseville (U 1015 C) to review its New Regulatory Framework, shall be incorporated into the record of the Order Instituting Investigation ordered in this decision.

5. In the event that Roseville does not cooperate fully with the assigned ALJ, Commission staff and other parties to the proceeding to move the case forward in an expeditious manner, the assigned ALJ shall prepare a decision recommending elimination of a portion of the subsidy payment.

6. Roseville's June 29, 2000, motion to strike portions of the Office of Ratepayer Advocates' Reply Brief is hereby denied.

7. The May 30, 2000, Joint Motion of Roseville and Pacific Bell Telephone Company for Admission of Interconnection Agreement as Late Filed Exhibit, is hereby granted.

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