G - Z-Factor

Appendix G

Calculation of Pacific Bell's SFAS 106 Z-Factor in 1997 and 1998

The SFAS 106 Z-Factor Is Based on D.92-12-015, OP 8, which Limited the Z-Factor to the Lesser of (i) SFAS 106 Accrual Less PAYGO Costs, or (ii) Tax-Deductible Contributions to PBOP Trusts.

Intrastate Regulated Amounts in

1997 Z-Factor

000's

Reference

1.

Annual SFAS 106 Cost

224,610

Note 3, Line 21 See also Note 2.

2.

PAYGO Costs

129,593

Note 5, Line 37

3.

Tax-Deductible Contributions (Excludes VEBA 3 Transfers)

224,610

Exhibit Phase 2A: 404, Vol. 2, Attach. 7-6 See also Note 9.

4.

Authorized Z-Factor = Lesser of (i) Annual SFAS 106 Cost minus PAYGO, or (ii) Contributions

95,017

Line 1 - Line 2 See Note 1 for Caveat.

5.

Actual Z-Factor Implemented by Pacific

99,500

D.98-10-026, 82 CPUC 2d 335, 366

6.

Difference Between Authorized and Actual Z-Factor

(4,483)

Line 4 - Line 5

1998 Z-Factor

000's

Reference

7.

Annual SFAS 106 Cost

179,193

Note 4, Line 30 See also Note 2.

8.

PAYGO Costs

132,671

Note 6, Line 44

9.

Tax-Deductible Contributions (Excludes VEBA 3 Transfers)

179,193

Exhibit Phase 2A: 404, Vol. 2, Attach. 7-7See also Note 9.

10.

Authorized Z-Factor = Lesser of (i) Annual SFAS 106 Cost minus PAYGO, or (ii) Contributions

46,522

Line 7 - Line 8 See Note 1 for Caveat.

11.

Actual Z-Factor Implemented by Pacific

99,500

D.98-10-026, 82 CPUC 2d 335, 366

12.

Difference Between Authorized and Actual Z-Factor

(52,978)

Line 11 - Line 10

Note 1: Calculated Z-Factors May Be Too High

The Z-Factors calculated by this Appendix might be too high because they include amortization of Pacific's PBOP Regulatory Asset (see Note 10 for caveat), and the Reg. Asset contained costs that Pacific was not allowed to recover via the Z-Factor (see Appendix I, Note 3). The Phase 2A record is not sufficient to determine: (i) what portion of Pacific's Reg. Asset was composed of costs that could not be recovered via the Z-Factor, (ii) if Pacific improperly included any such costs in its Z-Factor, and (ii) if any such costs are in the Z-Factors calculated by this Appendix.

Note 2: Annual SFAS 106 Cost

Annual SFAS 106 cost = (annual SFAS 106 accrual) - (capitalized part of SFAS 106 accrual) + (depreciation of previously capitalized SFAS 106 accruals). Appendix G assumes that annual SFAS 106 costs include amortization of the PBOP Reg. Asset to the extent tax-deductible contributions to PBOP trusts exceed the annual SFAS 106 cost. (See Notes 1 and 10 for caveats.) Thus, when there is a PBOP Reg. Asset and tax-deductible contributions exceed the annual SFAS 106 cost (before amortiz. of the Reg. Asset), the annual SFAS 106 cost equals tax-deductible contributions (except contributions in excess of the annual SFAS 106 cost, including amortiz. of the Reg. Asset, can not be recognized as an expense). In 1997 and 1998, Pacific had a large Reg. Asset and its contributions exceeded its SFAS 106 costs. Thus, as shown in Notes 3 and 4 below, Pacific's annual SFAS 106 costs in 1997 and 1998 equaled its tax-deductible contributions.

Note 3: 1997 Annual SFAS 106 Cost

000's

Reference

13.

Intrastate Regulated SFAS 106 Accrual

188,107

Exhibit Phase 2A: 404, Vol. 2, Attach. 7-6

14.

Capitalization Factor

0.9180

Exhibit Phase 2A: 404, Vol. 2, Attach. 7-6

15.

SFAS 106 Accrual Net of Capitalization

172,682

Line 13 x Line 14

16.

Plus: Depreciation of Capitalized SFAS 106 Accruals

8,185

Exhibit Phase 2A: 404, Vol. 2, Attach. 7-6

17.

Plus: Correction to TBO

2,148

Exhibit Phase 2A: 307, p. 25, Lines 1 -15; Appendix F, Line 18

18.

Less: TBO Reduction for VEBA 3 Contributions

(5,312)

Appendix I, Line 12

19.

Net SFAS 106 Cost

177,704

Line 15 + Line 16 + Line 17 + Line 18

20.

Tax-Deductible Contributions (Excludes VEBA 3 Transfers)

224,610

Exhibit Phase 2A: 404, Vol. 2, Attach. 7-6See Note 9.

21.

Annual SFAS 106 Cost: Higher of (i) Net SFAS 106 Cost, or (ii) Tax-Deductible Contributions

224,610

Line 20 See Note 2 for explanation and Note 11 for caveat.

Note 4: 1998 Annual SFAS 106 Cost

000's

Reference

22.

Intrastate Regulated SFAS 106 Accrual

165,311

Exhibit Phase 2A: 404, Vol. 2, Attach. 7-7

23.

Capitalization Factor

0.9180

Exhibit Phase 2A: 404, Vol. 2, Attach. 7-7

24.

SFAS 106 Accrual Net of Capitalization

151,755

Line 22 x Line 23

25.

Plus: Depreciation of Capitalized SFAS 106 Accruals

8,185

Exhibit Phase 2A: 404, Vol. 2, Attach. 7-7

26.

Plus: Correction to TBO

2,148

Exhibit Phase 2A: 307, p. 25, Lines 1 -15; Appendix F, Line 18

27.

Less: TBO Reduction for VEBA 3 Contributions

(5,312)

Appendix I, Line 12

28.

Net SFAS 106 Cost

156,777

Line 24 + Line 25 + Line 26 + Line 27

29.

Tax-Deductible Contributions (Excludes VEBA 3 Transfers)

179,193

Exhibit Phase 2A: 404, Vol. 2, Attach. 7-7See Note 9.

30.

Annual SFAS 106 Cost: Higher of (i) Net SFAS 106 Cost, or (ii) Tax-Deductible Contributions

179,193

Line 29 See Note 2 for explanation and Note 11 for caveat.

Note 5 - 1997 PAYGO Costs

000's

Reference

31.

PAYGO Costs

178,100

Exhibit Phase 2A: 307, p. 30

32.

Intrastate Factor

0.8043

Exhibit Phase 2A: 404, Attach. 7-6

33.

Regulated Factor

0.9409

Exhibit Phase 2A: 404, Attach. 7-6

34.

Expense Factor

0.9180

Exhibit Phase 2A: 404, Attach. 7-6

35.

Pre-Tax Intrastate Regulated PAYGO Costs

123,728

Line 31 x Line 32 x Line 33 x Line 34

36.

PAYGO Depreciation

5,865

Note 7, Line 49 See Note 9.

37.

Total PAYGO Costs

129,593

Line 35 + Line 36

Note 6 - 1998 PAYGO Costs

000's

Reference

38.

PAYGO Costs

181,200

Exhibit Phase 2A: 307, p. 30

39.

Intrastate Factor

0.8043

Exhibit Phase 2A: 404, Attach. 7-7

40.

Regulated Factor

0.9409

Exhibit Phase 2A: 404, Attach. 7-7

41.

Expense Factor

0.9180

Exhibit Phase 2A: 404, Attach. 7-7

42.

Pre-Tax Intrastate Regulated PAYGO Costs

125,882

Line 38 x Line 39 x Line 40 x Line 41

43.

PAYGO Depreciation

6,790

Note 8, Line 54 See Note 9.

44.

Total PAYGO Costs

132,671

Line 42 + Line 43

Note 7 - 1997 PAYGO Depreciation

000's

Reference

45.

SFAS 106 Costs Before Depreciation

172,682

Exhibit Phase 2A: 404, Attachment 7-6

46.

SFAS 106 Depreciation

8,185

Exhibit Phase 2A: 404, Attachment 7-6

47.

Depreciation Factor

0.0474

Line 46 Divided by Line 45

48.

PAYGO Costs Before Depreciation

123,728

Line 35

49.

PAYGO Depreciation - See Note 9

5,865

Line 47 x Line 48

Note 8 - 1998 PAYGO Depreciation

000's

Reference

50.

SFAS 106 Costs Before Depreciation

151,755

Exhibit Phase 2A: 404, Attachment 7-7

51.

SFAS 106 Depreciation

8,185

Exhibit Phase 2A: 404, Attachment 7-7

52.

Depreciation Factor

0.0539

Line 51 Divided by Line 50

53.

PAYGO Costs Before Depreciation

125,882

Line 42

54.

PAYGO Depreciation - See Note 9

6,790

Line 52 x Line 53

Note 9 - Capitalization/Non-Capitalization of PAYGO Costs and Contributions

For the sake of consistency, both the SFAS 106 costs and PAYGO costs used to calculate the Z-Factor are treated as if a portion of these costs are capitalized and depreciated. In contrast, pursuant to today's decision, none of the tax-deductible contributions used to calculate the Z-Factor are treated as if a portion of the contributions are capitalized and depreciated.

Note 10 - Eligibility of PBOP Regulatory Asset for Z-Factor Recovery

This Appendix's calculation of Z-Factors for 1997 & 1998 assumes that amortization of the PBOP Reg. Asset was eligible for Z-Factor recovery. (See Note 1 for caveat.) This assumption may be wrong and should be evaluated in Phase 3B. In particular, D.92-12-015, OP 8, states that the Z-Factor should be based on the current year's SFAS 106 accrual. The current year's accrual must, by definition, exclude amortiz. of the Reg. Asset. Decision 97-04-043 states that the Z-Factor was limited to a one-time change in PBOP costs equal to the difference between SFAS 106 costs and PAYGO costs in 1993. (71 CPUC 2d 653, 665, 671.) The only adjustments to the Z-Factor were to be future reductions to the Z-Factor to avoid a utility windfall as the difference between SFAS 106 costs and PAYGO costs declined over time. (Id., 668-69, 671.) Decision 97-04-043 does not (i) address if the PBOP Reg. Asset qualifies for Z-Factor recovery (and it might not), or (ii) state that the Z-Factor would provide enough revenues to recover the Reg. Asset.


Appendix G

Calculation of Pacific Bell's SFAS 106 Z-Factor in 1997 and 1998
The SFAS 106 Z-Factor Is Based on D.92-12-015, OP 8, which Limited the Z-Factor to the Lesser of (i) SFAS 106 Accrual Less PAYGO Costs, or (ii) Tax-Deductible Contributions to PBOP Trusts.


			Intrastate Regulated Amounts in
		1997 Z-Factor	000's	Reference

	1.	Annual SFAS 106 Cost	224,610	Note 3, Line 21 See also Note 2.

	2.	PAYGO Costs	129,593	Note 5, Line 37

	3.	Tax-Deductible Contributions (Excludes VEBA 3 Transfers)	224,610	Exhibit Phase 2A: 404, Vol. 2, Attach. 7-6 See also Note 9.

	4.	Authorized Z-Factor = Lesser of (i) Annual SFAS 106 Cost minus PAYGO, or (ii) Contributions	95,017	Line 1 - Line 2 See Note 1 for Caveat.

	5.	Actual Z-Factor Implemented by Pacific	99,500	D.98-10-026, 82 CPUC 2d 335, 366

	6.	Difference Between Authorized and Actual Z-Factor	(4,483)	Line 4 - Line 5


		1998 Z-Factor	000's	Reference

	7.	Annual SFAS 106 Cost	179,193	Note 4, Line 30 See also Note 2.

	8.	PAYGO Costs	132,671	Note 6, Line 44

	9.	Tax-Deductible Contributions (Excludes VEBA 3 Transfers)	179,193	Exhibit Phase 2A: 404, Vol. 2, Attach. 7-7See also Note 9.

	10.	Authorized Z-Factor = Lesser of (i) Annual SFAS 106 Cost minus PAYGO, or (ii) Contributions	46,522	Line 7 - Line 8 See Note 1 for Caveat.

	11.	Actual Z-Factor Implemented by Pacific	99,500	D.98-10-026, 82 CPUC 2d 335, 366

	12.	Difference Between Authorized and Actual Z-Factor	(52,978)	Line 11 - Line 10

		Note 1: Calculated Z-Factors May Be Too High

		The Z-Factors calculated by this Appendix might be too high because they include amortization of Pacific's PBOP Regulatory Asset (see Note 10 for caveat), and the Reg. Asset contained costs that Pacific was not allowed to recover via the Z-Factor (see Appendix I, Note 3). The Phase 2A record is not sufficient to determine: (i) what portion of Pacific's Reg. Asset was composed of costs that could not be recovered via the Z-Factor, (ii) if Pacific improperly included any such costs in its Z-Factor, and (ii) if any such costs are in the Z-Factors calculated by this Appendix.



		Note 2: Annual SFAS 106 Cost

		Annual SFAS 106 cost = (annual SFAS 106 accrual) - (capitalized part of SFAS 106 accrual) + (depreciation of previously capitalized SFAS 106 accruals). Appendix G assumes that annual SFAS 106 costs include amortization of the PBOP Reg. Asset to the extent tax-deductible contributions to PBOP trusts exceed the annual SFAS 106 cost. (See Notes 1 and 10 for caveats.) Thus, when there is a PBOP Reg. Asset and tax-deductible contributions exceed the annual SFAS 106 cost (before amortiz. of the Reg. Asset), the annual SFAS 106 cost equals tax-deductible contributions (except contributions in excess of the annual SFAS 106 cost, including amortiz. of the Reg. Asset, can not be recognized as an expense). In 1997 and 1998, Pacific had a large Reg. Asset and its contributions exceeded its SFAS 106 costs. Thus, as shown in Notes 3 and 4 below, Pacific's annual SFAS 106 costs in 1997 and 1998 equaled its tax-deductible contributions.



		Note 3: 1997 Annual SFAS 106 Cost	000's	Reference

	13.	Intrastate Regulated SFAS 106 Accrual	188,107	Exhibit Phase 2A: 404, Vol. 2, Attach. 7-6

	14.	Capitalization Factor	0.9180	Exhibit Phase 2A: 404, Vol. 2, Attach. 7-6

	15.	SFAS 106 Accrual Net of Capitalization	172,682	Line 13 x Line 14

	16.	Plus: Depreciation of Capitalized SFAS 106 Accruals	8,185	Exhibit Phase 2A: 404, Vol. 2, Attach. 7-6

	17.	Plus: Correction to TBO	2,148	Exhibit Phase 2A: 307, p. 25, Lines 1 -15; Appendix F, Line 18

	18.	Less: TBO Reduction for VEBA 3 Contributions	(5,312)	Appendix I, Line 12

	19.	Net SFAS 106 Cost	177,704	Line 15 + Line 16 + Line 17 + Line 18

	20.	Tax-Deductible Contributions (Excludes VEBA 3 Transfers)	224,610	Exhibit Phase 2A: 404, Vol. 2, Attach. 7-6See Note 9.

	21.	Annual SFAS 106 Cost: Higher of (i) Net SFAS 106 Cost, or (ii) Tax-Deductible Contributions	224,610	Line 20 See Note 2 for explanation and Note 11 for caveat.


		Note 4: 1998 Annual SFAS 106 Cost	000's	Reference

	22.	Intrastate Regulated SFAS 106 Accrual	165,311	Exhibit Phase 2A: 404, Vol. 2, Attach. 7-7

	23.	Capitalization Factor	0.9180	Exhibit Phase 2A: 404, Vol. 2, Attach. 7-7

	24.	SFAS 106 Accrual Net of Capitalization	151,755	Line 22 x Line 23

	25.	Plus: Depreciation of Capitalized SFAS 106 Accruals	8,185	Exhibit Phase 2A: 404, Vol. 2, Attach. 7-7

	26.	Plus: Correction to TBO	2,148	Exhibit Phase 2A: 307, p. 25, Lines 1 -15; Appendix F, Line 18

	27.	Less: TBO Reduction for VEBA 3 Contributions	(5,312)	Appendix I, Line 12

	28.	Net SFAS 106 Cost	156,777	Line 24 + Line 25 + Line 26 + Line 27

	29.	Tax-Deductible Contributions (Excludes VEBA 3 Transfers)	179,193	Exhibit Phase 2A: 404, Vol. 2, Attach. 7-7See Note 9.

	30.	Annual SFAS 106 Cost: Higher of (i) Net SFAS 106 Cost, or (ii) Tax-Deductible Contributions	179,193	Line 29 See Note 2 for explanation and Note 11 for caveat.


		Note 5 - 1997 PAYGO Costs	000's	Reference

	31.	PAYGO Costs	178,100	Exhibit Phase 2A: 307, p. 30

	32.	Intrastate Factor	0.8043	Exhibit Phase 2A: 404, Attach. 7-6

	33.	Regulated Factor	0.9409	Exhibit Phase 2A: 404, Attach. 7-6

	34.	Expense Factor	0.9180	Exhibit Phase 2A: 404, Attach. 7-6

	35.	Pre-Tax Intrastate Regulated PAYGO Costs	123,728	Line 31 x Line 32 x Line 33 x Line 34

	36.	PAYGO Depreciation	5,865	Note 7, Line 49 See Note 9.

	37.	Total PAYGO Costs	129,593	Line 35 + Line 36


		Note 6 - 1998 PAYGO Costs	000's	Reference

	38.	PAYGO Costs	181,200	Exhibit Phase 2A: 307, p. 30

	39.	Intrastate Factor	0.8043	Exhibit Phase 2A: 404, Attach. 7-7

	40.	Regulated Factor	0.9409	Exhibit Phase 2A: 404, Attach. 7-7

	41.	Expense Factor	0.9180	Exhibit Phase 2A: 404, Attach. 7-7

	42.	Pre-Tax Intrastate Regulated PAYGO Costs	125,882	Line 38 x Line 39 x Line 40 x Line 41

	43.	PAYGO Depreciation	6,790	Note 8, Line 54 See Note 9.

	44.	Total PAYGO Costs	132,671	Line 42 + Line 43



		Note 7 - 1997 PAYGO Depreciation	000's	Reference

	45.	SFAS 106 Costs Before Depreciation	172,682	Exhibit Phase 2A: 404, Attachment 7-6

	46.	SFAS 106 Depreciation	8,185	Exhibit Phase 2A: 404, Attachment 7-6

	47.	Depreciation Factor	0.0474	Line 46 Divided by Line 45

	48.	PAYGO Costs Before Depreciation	123,728	Line 35

	49.	PAYGO Depreciation - See Note 9	5,865	Line 47 x Line 48


		Note 8 - 1998 PAYGO Depreciation	000's	Reference

	50.	SFAS 106 Costs Before Depreciation	151,755	Exhibit Phase 2A: 404, Attachment 7-7

	51.	SFAS 106 Depreciation	8,185	Exhibit Phase 2A: 404, Attachment 7-7

	52.	Depreciation Factor	0.0539	Line 51 Divided by Line 50

	53.	PAYGO Costs Before Depreciation	125,882	Line 42

	54.	PAYGO Depreciation - See Note 9	6,790	Line 52 x Line 53


		Note 9 - Capitalization/Non-Capitalization of PAYGO Costs and Contributions

		For the sake of consistency, both the SFAS 106 costs and PAYGO costs used to calculate the Z-Factor are treated as if a portion of these costs are capitalized and depreciated. In contrast, pursuant to today's decision, none of the tax-deductible contributions used to calculate the Z-Factor are treated as if a portion of the contributions are capitalized and depreciated.


		Note 10 - Eligibility of PBOP Regulatory Asset for Z-Factor Recovery

		This Appendix's calculation of Z-Factors for 1997 & 1998 assumes that amortization of the PBOP Reg. Asset was eligible for Z-Factor recovery. (See Note 1 for caveat.) This assumption may be wrong and should be evaluated in Phase 3B. In particular, D.92-12-015, OP 8, states that the Z-Factor should be based on the current year's SFAS 106 accrual. The current year's accrual must, by definition, exclude amortiz. of the Reg. Asset. Decision 97-04-043 states that the Z-Factor was limited to a one-time change in PBOP costs equal to the difference between SFAS 106 costs and PAYGO costs in 1993. (71 CPUC 2d 653, 665, 671.) The only adjustments to the Z-Factor were to be future reductions to the Z-Factor to avoid a utility windfall as the difference between SFAS 106 costs and PAYGO costs declined over time. (Id., 668-69, 671.) Decision 97-04-043 does not (i) address if the PBOP Reg. Asset qualifies for Z-Factor recovery (and it might not), or (ii) state that the Z-Factor would provide enough revenues to recover the Reg. Asset.