Risk of Increased Costs
Pacific's witnesses testified that they are convinced that the consolidation of support services will not mean increased costs for Pacific and will not form any part of a Pacific request for rate increases. On brief, Pacific states that under the new regulatory framework adopted by the Commission a decade ago, Pacific alone bears the risk of its management decisions, and not its customers.24
On cross-examination, however, TURN showed that the application could lead to increased costs for Pacific, and an ORA witness testified that Pacific could seek rate increases through such venues as franchise cost recovery, implementation cost recovery and proceedings to re-categorize services to Category III, which has no rate restrictions. Pacific's witness conceded that no analyses of cost savings had been prepared for this application, and that start-up costs such as internal system changes and reassignment of vendor software agreements cannot now be quantified. Moreover, a Pacific witness acknowledged that the company will lose the 10% premium on several hundreds of affiliate support contracts that now have been transferred from Pacific to SBC Services.25 The witness added, however, that Pacific also will be relieved of the cost of providing those services.
Given Pacific's assurance that no rate increases are likely to be based on the consolidation of support services, Pacific witness Webb was asked if it would be appropriate for the Commission to make that assurance a condition of approval of the application. He responded:
"I would have a problem with that....This industry is changing so rapidly. It is almost impossible to foresee the future and really be able to determine what costs were associated with this transfer and what costs would be associated with new products and services or mergers and acquisitions. My concern in agreeing to that would be that it would be an administrative nightmare to try to pinpoint the costs that were saved or the increased costs in the hypothetical situation pertaining to this." (Transcript, p. 166.)
TURN's brief concedes the validity of that view, but it argues that it would still be possible to segregate at least some of the costs caused by the transfer of support services. It proposes that Pacific be required as a condition of approval of this application to segregate such costs "to the extent feasible" in any proceeding that would increase consumer rates. TURN argues that such a condition, coupled with ORA's proposal for a going concern refund to ratepayers, would ameliorate the risk that the consolidation of support services could lead to increased costs for Pacific's customers.
We are not persuaded that such a condition is necessary. True, Pacific has fallen short of showing with certainty that rates will not be affected by the consolidation of services. But Pacific has shown that a primary reason for consolidation is increased efficiency, which presumably translates into lower costs for the parent company and its subsidiaries. The NRF procedure is intended to place the risk of management decisions like this one on shareholders, rather than on ratepayers, and for the most part we believe that protection is formidable. And, as Pacific points out, any application intended to increase rates through re-categorization or other means is subject to Commission review and to challenge by other parties. For these reasons, and on the basis of the record as a whole, we decline to condition our approval of the application on a hold-harmless rate provision.
24 In Re Alternative Regulatory Frameworks for Local Exchange Carriers (1989) 33 CPUC2d 43, the Commission discontinued traditional rate-of-return regulation for Pacific and GTEC, substituting the NRF procedure in which rates were adjusted annually based on a price cap formula, a predetermined productivity factor, and the effect on costs of exogenous events beyond the utility's control ("Z factors"). Even with subsequent changes in NRF, Pacific asserts that its prices have been delinked from changes in costs, with the exception of cost changes due to exogenous events beyond management's control.
25 Under affiliate transaction rules, when Pacific provides a service to an affiliate, it receives revenue equal to its booked cost, plus a 10% premium. As shown by Exhibit 18, there are several hundred separately tracked projects that Pacific was providing for affiliates prior to transfer of these projects to SBC Services.
