V. Discussion
Fair competition in the long distance market is a long-standing goal of this Commission. Our purpose in opening this rulemaking was to evaluate AT&T's contention that long distance carriers were being subject to a "price squeeze" by local exchange carriers offering long distance service. AT&T argued that independent long distance carriers paid above-cost access charges, while the local carriers' long distance affiliates made only "paper transfers." See
R.03-08-018. Since that time, however, AT&T has merged with SBC and has, in effect, joined the affiliates of which it complained. Verizon and MCI have similarly merged.
A. Elimination of NIC and TIC
For many well-articulated reasons, all parties agree that access charges should be based on costs, and that the NIC and TIC elements of access charges are not based on costs. As a conceptual matter, no party supports continuing these cost elements, although ORA and TURN recommend that we maintain the status quo pending final actions by the FCC.
We agree with the parties that the NIC and TIC should be eliminated. Ensuring fair competition requires that access charges closely follow actual costs. The NIC and TIC are not consistent with this requirement, and we eliminate this component of access charges.
B. Methodology for Offsetting Rate Increases
In D.04-12-022, we concluded that if we reduce or eliminate access charges for SBC and Verizon, then we should order "offsetting rate increases." See Conclusion of Law 2. While dollar-for-dollar offsets were not required, we contemplated a reasonable approximation of on-going revenue deficiencies, consistent with our rate rebalancing history. See, e.g., Universal Service and Compliance with the Mandates of Assembly Bill 3643, 68 CPUC2d 524, 630
(D.96-10-066) (ordering local exchange carriers to reduce other rates to offset high cost subsidy amounts, and setting up memorandum account to true up actual amounts).
No party disputes SBC's and Verizon's estimates of 2004 revenues from the NIC and TIC. SBC and Verizon would have this amount added to their respective overall surcharges on an annual basis indefinitely.
The record in this proceeding, however, shows that all parties are adverse to forecasting lost revenue, and that current trends show overall access charge revenue decreasing. To avoid forecasting contentiousness, Verizon and SBC propose to use actual 2004 data. ORA and TURN do not oppose starting with 2004 data, but suggest building in a 5% or 10% annual reduction, which SBC and Verizon in turn oppose.
Due to the significant changes in the long distance market, most notably the mergers, we find that 2004 data is not reasonably representative of the expected future. We also find that a reasonable estimate should reflect the conceded declining revenue from access charges.
Given the unpredictable marketplace, we conclude that developing and adopting long-range reasonable forecasts of lost revenue from eliminating NIC and TIC would require substantial resources of the parties as well as the Commission. Such expenditure of resources is not justified in light of the amount likely to be at issue.
Therefore, we will adopt a ratemaking methodology that uses actual recorded lost revenue, adjusted for market share reductions, as the basis for making annual forecasts of lost revenue and calculating the annual surcharge. See Attachment A.
C. Intra-LEC3 and Affiliate NIC and TIC Access Charges
Although ordering "offsetting rate increases," D.04-12-022 did not define the exact amounts to be "offset." Instead, the Commission adopted rate rebalancing principles which require that the offsetting process create neither a windfall nor a loss of opportunity for the local exchange carrier to earn its authorized rate of return.
Specifically, the decision did not address the critical distinction between actual payments from independent carriers and the "paper transactions" of intra-LEC and affiliated long distance carriers. Since issuing D.04-12-022 this distinction has gained significance due to the Verizon/MCI and SBC/AT&T mergers discussed above. Today, the merged entities each control a substantial share of the long distance service in their respective service territories, and SBC/AT&T perhaps a majority.4 Thus, much of the lost revenue from suspending NIC and TIC is now comprised of "paper transfers" from intra-LEC and affiliated long distance companies, rather than actual cash payments from independent entities.
Applying the concept of "offsetting rate increases" for removing the NIC and TIC elements from access charges assessed to independent long distance carriers is straightforward. The local exchange carrier will receive less revenue from the long distance carrier, and this reduction must be made up by a corresponding increase to local telephone rates to leave the local exchange "revenue neutral." The process we adopted above calling for surcharges based on historic NIC and TIC collections, modified for declining markets, achieves this objective.
In contrast, the intra-LEC and affiliate transfers for NIC and TIC raise numerous complexities. Unlike the transfers with independent carriers, reducing these paper transfers has different consequences from reducing actual payments.
Verizon/MCI and SBC/AT&T argue, however, that the Commission resolved this issue in D.04-12-022 by taking comment, and declining to make changes to the draft decision which did not distinguish between the two types of transfers. ORA and TURN dispute this contention and provide quotations showing that the Commission took comment on the issue of whether the local exchange carrier would realize a windfall if the Commission did not order corresponding reductions in long distance rates. No party contends that including affiliate transfers in the lost revenue calculation was analyzed or explicitly addressed in that decision, and the decision contains to findings of fact or conclusions of law on the issue.
Since adopting D.04-12-022, the mergers discussed above have been approved and the share of NIC and TIC collections from intra-LEC and affiliate transactions has increased. These new developments magnify the importance of explicitly addressing and resolving this issue. Accordingly, we conclude that this issue should be addressed.
Although the record is limited, the essential facts are not in dispute. A substantial share of NIC and TIC transfers are intra-LEC or affiliate transfers for both Verizon/MCI and SBC/AT&T. The affiliated entities realize no revenue from these transfers, thus discontinuing NIC and TIC will have no revenue effect on the affiliated entities. 5 Verizon/MCI and SBC/AT&T advocate that we nevertheless recognize a revenue loss for surcharge calculation purposes. Our rate rebalancing principles, as restated in D.04-12-022, establish the goal of creating neither a windfall nor the loss of opportunity for the local exchange carriers to achieve their authorized returns. Verizon/MCI and SBC/AT&T ask that we, in effect, accept a fictional loss as the basis for a very real rate increase6 for local customers. Including intra-LEC and affiliate transactions in calculating the rate surcharge for local customers has the strong potential to create a substantial windfall for the Verizon/MCI and SBC/AT&T by offsetting a paper transfer with an actual rate increase. Such a windfall would violate our rate rebalancing principles.7
We must also consider whether excluding these transfers would result in the loss of opportunity for the Verizon/MCI and SBC/AT&T to earn their authorized return. Verizon/MCI and SBC/AT&T contend that both independent and affiliate intra-LEC transfers should be treated the same for purposes of calculating lost revenues. Verizon/MCI argued that excluding intra-LEC and affiliate transfers will result in a revenue shortfall because the independent long distance carriers will reduce their prices to reflect the lower access charges, and Verizon/MCI and SBC/AT&T will be forced to follow suit. Verizon/MCI and SBC/AT&T conclude that the losses caused by these price reductions will undermine their opportunity to earn their authorized return.
Consideration of the long distance market, however, calls into question Verizon/MCI and SBC/AT&T conclusions. Removing NIC and TIC will lift a non-cost-based charge effectively imposed only on independent carriers. As discussed above, the Verizon/MCI and SBC/AT&T control much of the long distance market and make paper transfers rather than paying actual access charges such that a substantial share of the prices in the long distance market are currently free of the NIC and TIC cost burdens. Removing the NIC and TIC cost elements for access charges imposed on independent carriers will put these carriers on the same cost footing as the Verizon/MCI and SBC/AT&T currently enjoy in setting prices. If, after being relieved of the NIC and TIC cost burdens, the independent carriers are able to reduce their prices below Verizon/MCI's and SBC/AT&T's, these lower prices will be due to other factors, such as efficiency. Our rate rebalancing principles do not require that Verizon/MCI's and SBC/AT&T's opportunity to earn their authorized return be protected from such consequences.
In sum, including intra-LEC and affiliate transfers in calculating the amount to be recovered from local customers creates a substantial likelihood of a windfall for local exchange carriers, and thus violates our rate rebalancing principles. Excluding such transfers cures this violation, and does not materially reduce Verizon/MCI's and SBC/AT&T's opportunity to achieve authorized returns.
Consistent with our rate rebalancing principles restated in D.04-12-022 we, therefore, order that intra-LEC and affiliate transfers be excluded from amount to be recovered from local customers.
The overall long distance market is declining such that Verizon/MCI and SBC/AT&T expect their future collection of NIC and TIC from all carriers to similarly decline. The size of the local market, from which the revenue reductions will be made up, is also declining. As set forth elsewhere in today's decision, we require annual filings to calculate the surcharge on local ratepayers.
D. Local Exchange Carriers Other Than SBC and Verizon
In D.04-12-022, we indicated that we would consider changes to access charges of the local exchange carriers other than SBC and Verizon in a third phase of this proceeding. These non-SBC or Verizon entities include small rural exchange carriers, 8 Frontier companies, 9 Surewest Telephone, and the competitive local exchange carriers. The Commission uses different procedural mechanisms to review the rates and charges for each of these types of entities. The small rural exchange carriers usually file either CHCF-A general rate cases via the advice letter process. Frontier-Citizens Telecommunications Company of California and Surewest have annual price cap filings and review similar to SBC and Verizon. The competitive carriers are not required to provide cost support for their services and have flexible pricing rules.
To consider extending our policy that access charges should exclude non-cost-based elements to the local exchange carriers other than SBC and Verizon, we adopt the following schedule10:
May 19, 2006 Each carrier file and serve testimony identifying and quantifying any non-cost-based elements in current access charges, addressing whether the policy adopted in today's decision should be extended to the specific carrier, showing the local service rate implications of rate rebalancing (with any California High Cost Fund affects), and including any other information the carrier believes will be helpful to the Commission when considering this question.
June 9, 2006 File and serve any responsive testimony.
Any further procedural steps will be set by ruling of the assigned ALJ or Commissioner.
3 We use the "intra-LEC" to refer to SBC's and Verizon's own long distance operations.
4 The record includes references to SBC's 40% share of the long distance market prior to the merger.
5 In fact, one recognized benefit of telecommunications company mergers is that the merged carriers will not have to pay each other fees to terminate calls on their networks. See Belson, AT&T Aims to Become All Things to All Customers, N.Y. Times, March 7, 2006.
6 Currently estimated at up to 4% for local services.
7 ORA and TURN's solution to this windfall would be ordering corresponding reductions in long distance rates such that, overall, Verizon/MCI and SBC/AT&T would be indifferent. This proposal is infeasible because we do not set long distance rates, and impractical due to the variety of factors that may affect the long distance market independently of access charges.
8 Calaveras Telephone Company, Cal-Ore Telephone Company, Ducor Telephone Company, Global Valley Network (Evans Telephone Company), Foresthill Telephone Company, TDS-Happy Valley Telephone Company, TDS-Hornitos Telephone Company, Kerman Telephone Company, Pinnacles Telephone Company, Ponderosa Telephone Company, Verizon-WestCoast, Sierra Telephone Company, Inc., Siskiyou Telephone Company, Volcano Telephone Company, TDS-Winterhaven Telephone Company, and Century Telephone of Oregon.
9 "Frontier companies" include Citizens Telecommunications Company of California, Inc., Citizens Telecommunications Company of the Golden State (a small rural exchange carrier), Citizens Telecommunications Company of Tuolumne (a small rural exchange carrier), Frontier Communications Company of America, and Electric Lightwave, Inc.
10 The assigned ALJ may alter the schedule as necessary for an efficient proceeding.
