B. The Small Telephone Companies' Motion

On April 3, 2000, the 13 small telephone company applicants to this proceeding filed a motion requesting an order resetting the CHCF-A waterfall to permit the small local exchange carriers (LECs) to receive full funding from that source in 2001. According to the small LECs, the motion requires expedited resolution because of the schedule adopted in the Assigned Commissioner's Ruling and Scoping Memo dated January 11, 2000 in this proceeding. The Scoping Memo states that a final decision is due in December 2000.

In this proceeding, the small LECs proposed to utilize the CHCF-A fund as a source of permanent funding to replace the settlement revenue² currently received from Pacific Bell (Pacific). To achieve this, the small companies propose to partition the CHCF-A to allow for the existing CHCF-A process to continue, while creating a separate source for the permanent funding. The CHCF-A has a feature that is frequently referred to as the "waterfall." A small company receiving funds from the CHCF-A may receive 100% of the funding requirement for the first three years after a Commission order in a GRC, but then may receive only 80% the fourth year and 50% the fifth year. After the fifth year, it receives no funding at all unless the waterfall has been reset in another GRC or other Commission order. A company may avoid these automatic reductions in CHCF-A funding by filing a GRC before the waterfall initiates its funding reduction.

All of the small LEC applicants had the waterfall reset by their GRC orders and resolutions in 1997. Therefore, they were entitled to 100% of their funding requirement, if any, from the CHCF-A in 1998, 1999 and 2000. In the year 2001 they will be entitled to only 80% of their funding requirement unless they file a new GRC before the end of 2000. Based on this, the schedule adopted by the Scoping Memo in this proceeding places the small companies in an untenable position concerning the year 2001 waterfall as it relates to the existing CHCF-A process and the proposed permanent funding.

The small LECs assert that because this proceeding will have such a profound impact on the small companies, they cannot, as a practical matter, prepare rate cases as long as this proceeding remains open. There are simply too many important issues unresolved to permit development of a GRC. However, unless the small LECs file GRCs before the end of 2000, they will no longer be eligible for 100% funding under the terms of the waterfall. The small LECs state the availability of only 80% funding for 2001 presents a serious problem for the companies.

Also, if the Commission's decision in this proceeding does not adopt the Joint Application's revenue neutral permanent funding proposal and instead determines that the replacement funding would be subject to the CHCF-A waterfall provisions, that funding would automatically be reduced by 20% for 2001. The small LECs assert such a revenue reduction would severely cripple the small companies because the permanent funding represents such a large portion of their intrastate revenues.

The potentially disastrous consequences of not having 100% of their CHCF-A funding for 2001 leaves the small companies with only two options: they must either persuade the Commission to reset the waterfall so that they are entitled to 100% of their funding requirement for 2001, or they must immediately begin to prepare GRC applications so that they may be filed before December 31, 2000. As explained in detail below, the small LECs contend that the option of filing rate cases is a practical impossibility with so many important revenue issues unresolved, and it would be tremendously wasteful and costly. Therefore, the small LECs urge the Commission to issue an order suspending the operation of the waterfall until January 1, 2002.

According to the small LECs, when they filed this application in September 1999, they expected a Commission decision in early 2000. Depending on the Commission's decision concerning all of the revenue issues to be determined in this proceeding and the issue of the application of the waterfall to the replacement funding being sought, they would have had ample time to file a rate case by the end of this year in order to protect their existing CHCF-A draw. However, now that a longer schedule has been adopted for this proceeding, the waterfall problem has become serious and must be addressed promptly.

The first problem created by the timing of the waterfall and this application is the difficulty of preparing a GRC when it is uncertain what the source of 30% to 80% of each company's intrastate revenues will be. In this proceeding, the Commission will be required to decide whether to approve the settlement transition agreements between the small companies and Pacific, and thus whether or not to approve the termination of toll, access and Extended Area Service (EAS) settlement payments to the small companies from Pacific. The Commission will determine whether the small companies will be in or out of the toll business, and when they will adopt intraLATA³ equal access, both decisions having large revenue impacts. The Commission will set the level of access charges that the small companies will be permitted to charge, and for some companies, whether to increase local rates to 150% of Pacific's.

In addition, the small LECs assert the current waterfall schedule will create a serious problem for all the companies because of its possible impact on permanent funding. By this Joint Application, the small companies seek a Commission order that the revenue impacts of the proposed termination of settlements and EAS payments be transferred to the CHCF-A. The Application seeks to have this revenue requirement treated as a permanent CHCF-A fund draw not subject to the waterfall or means test that are part of the fund. However, as outlined in the Scoping Memo, the Commission may establish the replacement funding at the levels requested but may not exempt that funding from the operation of the waterfall. That eventuality would have disastrous consequences for the small companies.

If a Commission decision is issued in December 2000 as scheduled, and the decision subjects the replacement funding to the waterfall, that funding will automatically be reduced by 20% in 2001 because the small LECs could not possibly prepare and file GRCs on only a few days' notice. The companies would also be entitled to only 80% of their funding requirement for succeeding years until the resolution of their rate cases. Inasmuch as the companies' new CHCF-A funding requirement would be such a large proportion of their revenues once settlement payments are incorporated therein, losing even 20% of that funding for a lengthy period would be intolerable.