II. Background

In Application (A.) 95-05-030, RTC requested to change its intrastate rates and charges and to implement a NRF. In Decision (D.) 96-12-074, the Commission adopted new rates and a NRF, effective February 1, 1997. Ordering Paragraph 7 of the decision required RTC to file an application for NRF review on or before October 1, 1998. On April 17, 1998, the Executive Director granted RTC an extension of time to file its NRF review application until no later than 150 days after the Commission issued its order in A.98-02-003 and Rulemaking (R.) 98-03-040, the Pacific Bell (Pacific) and Verizon California Inc.¹ (Verizon) third triennial NRF review proceeding. The order, D.98-10-026, was adopted on October 8, 1998. Accordingly, RTC's NRF review application was due no later than March 8, 1999.

In D.96-12-074 the Commission adopted, with some modifications, the basic NRF framework already established for Pacific, Verizon, and Citizens Telecommunications Company of California (CTC).² The Commission adopted RTC's proposal to freeze, or cap, rates for three years, by suspending the I minus X factor portion of the NRF formula until the first review of RTC's NRF. Nevertheless, the order adopted the GDPPI as the inflation index and a 4.0% productivity factor.

RTC's current NRF also includes sharing consistent with that initially adopted for Pacific and Verizon. There is no sharing between the market and benchmark rates of return, 50% sharing between the benchmark and ceiling rates of return, and 100% return to ratepayers of earnings above the ceiling. The market rate of return is 10%. The benchmark rate of return is 150 basis points above the market rate of return and the ceiling rate of return is 500 basis points above the market rate of return.

A trigger mechanism, which initiates a review of the benchmark rate of return, applies if both the 30-year Treasury bond rate and the three-year forecast of the same rate differ by 150 basis points or more for at least three consecutive months from 6.86% (the average 30-year Treasury bond rate on the last days of July through November 1996). A floor rate of return 325 basis points below the market rate of return was also established. RTC may petition for reconsideration of adopted inflation or productivity factors if its earnings fall to the floor rate of return or below for two years in a row.

The Commission adopted the same service categories for RTC that are used for Pacific, Verizon, and CTC. Services are classified into three categories: Category 1 for basic monopoly services, Category 2 for discretionary or partially competitive services, and Category 3 for fully competitive services. Prices for Category 1 services are fixed, and are subject to annual change by application of the NRF price cap formula. Category 2 prices are subject to flexibility within ceilings and floors. Price floors are based on direct embedded costs or incremental cost studies filed with the Commission's Telecommunications Division, and are increased each year by inflation, unless a new cost study justifies a different floor. Price ceilings were to change annually by the NRF price cap formula; however, this portion of RTC's NRF was suspended. Category 3 prices are subject to the maximum pricing flexibility allowed by law.

RTC must also submit an annual application for review of its depreciation rates. These applications must address issues generally covered by both represcription and a technical update of depreciation rates.

Finally, the Commission adopted a series of NRF monitoring reports.

¹ Formerly known as GTE California, Incorporated. ² The NRF price cap formula adopted for Roseville was: R(t)=R(t-1) * (1+I-X + /- Z/R), where R(t) is the rate to be effective on January 1, of the coming year, R(t-1) is the rate effective December 31 of the current year, I is inflation, measured by the percentage change in the gross domestic product price index (GDPPI), X is the productivity factor, based on telecommunications industry productivity plus a stretch factor, Z is the annualized dollar effect of exogenous factors, and R is the annualized total local exchange carrier (LEC) revenues which match the Z estimate.