5. Should the Current EAS Payment from Pacific to Roseville be Discontinued?

5.1. Roseville's Position

Roseville states it is not opposed to termination of the current agreement with Pacific, as long as the Commission establishes replacement funding for the EAS revenues which are currently received by Roseville from Pacific. According to Roseville, the Commission determined in Roseville's GRC that the payment from Pacific recovers a significant portion of Roseville's annual revenue requirement. If the $11.5 million annual payment had not been available to Roseville, the Commission would have been required to fund that amount in another way to cover the NRF start-up revenue requirement the Commission determined was necessary for Roseville to provide utility service.

5.2. Pacific's Position

Pacific supports termination of its $11.5 million annual EAS settlement payment to Roseville. Pacific states the payments to Roseville are anti-competitive. The EAS payments that directly replaced support payments occurring through toll revenue pooling, are used by Roseville to support its operations. This places Pacific in the unique position of funding the operations of a potential competitor, Roseville, thereby making it more difficult for Pacific to compete with Roseville. According to Pacific, this results in a significant anti-competitive impact on Pacific vis-à-vis both Roseville and other potential competitors in Roseville's service territory since Pacific is the only company required to subsidize its competitor.

Pacific indicates that Pacific and Roseville have now entered into an ICA, which covers the local traffic previously covered under the STA. The new ICA is essentially a bill-and-keep arrangement, which will result in no payments to Roseville for local and EAS traffic. Pacific states it will cease making payments under the STA the earlier of: (a) January 1, 2001, or (b) the date the Commission determines replacement revenues for Roseville, if any. The new ICA was filed in this docket, as required in the scoping memo issued in this proceeding.

5.3. ORA's Position

ORA agrees with Pacific in supporting termination of the EAS arrangement between Pacific and Roseville, and recommends that the Commission not establish any replacement funding.³ According to ORA, Roseville should not be permitted to continue receiving $11.5 million in EAS revenues from Pacific. The EAS payments were intended to be temporary; the payments were never intended to be a permanent arrangement. Clearly, in D.91-07-044, the Commission intended for the EAS payments to end by 1997.

According to ORA, the Commission should end the EAS payment because it raises serious competitive concerns. Roseville is the only mid-size LEC that is still receiving a subsidy from Pacific. Both Citizens Telecommunications Company of California (Citizens), another mid-size LEC, and GTE California (GTEC) ended their EAS arrangement with Pacific in 1997. It would be anti-competitive to allow Roseville to continue to receive a subsidy while its competitors are not. EAS payments may have been appropriate years ago, but they are not appropriate now because the payments are used by Roseville to support the company's operations, presumably by allowing the company to lower local and access rates to its customers or realize higher profits. (ORA quoting Peters for Pacific, Exh. 10, p., 9.) ORA says the EAS payments also raise other competitive issues such as barriers to entry and cross-subsidization.

5.4. Discussion

We agree that the $11.5 annual EAS payment from Pacific to Roseville should be discontinued. As stated in D.91-07-044, we anticipated that the EAS payments would end in 1997. It is three years past the time we set for terminating the EAS payments, yet those payments are still in effect.

It is not sustainable in a competitive environment, for one company (Pacific) to make subsidy payments to its competitor. It also disadvantages other companies wishing to compete in Roseville's service territory and which must compete against a company with an outside source of revenue to fund its operations.

Pacific states its intent to suspend payments to Roseville the earlier of January 1, 2001 or when the Commission establishes replacement funding. We appreciate Pacific's desire to end the payments to Roseville as soon as possible, but we remind Pacific that it does not have the authority to unilaterally terminate payments under the STA. The STA was submitted as a proprietary exhibit in this proceeding so we are not able to quote directly from the agreement between the parties. However, the STA is clear that Pacific must continue to make its payments to Roseville until a permanent EAS funding arrangement is implemented. In the STA, the parties agree that if they are unable to reach agreement, either or both parties may request the Commission to establish a permanent EAS funding arrangement. (Exh. 4C at 15.)

We are aware that the parties have negotiated a replacement agreement which was submitted as an exhibit in this proceeding, which includes a bill and keep arrangement for exchange of local traffic. However, we believe that the terms of the STA require Pacific to make its payments to Roseville until a replacement arrangement is implemented. That arrangement must include action on replacement funding for the $11.5 million, which Roseville currently receives from Pacific. The new bill and keep arrangement cannot go into effect until we have approved an alternative funding arrangement.

However, it is our intent to terminate the payments Pacific makes to Roseville, and we will order that those payments be terminated effective 60 days following the effective date of this order.