Parties' Positions

Pacific seeks authority to recover its costs for PEPs from ratepayers through the LE factor recovery mechanism. The LE factor mechanism was authorized in D.98-10-026 in which the Commission eliminated further Z-factor recovery but allowed Pacific and GTE California, Inc. (GTEC) to continue recovery of certain types of cost changes resulting from matters mandated by the Commission. The Commission called this type of recovery an LE factor adjustment, and stated that the LE factor adjustment should be authorized by the Commission in the decision authorizing the program or event causing the cost change. Pacific and GTEC were authorized to make requests for such treatment by advice letter filed on October 1 each year. The Commission designated this the LE factor mechanism. (D.98-10-026, p. 61.)

In establishing the new LE factor mechanism, the Commission retained the same nine criteria that had been developed and adopted for Z-factor recovery in D.94-06-011. These criteria are: (1) the event creating the cost at issue must be exogenous; (2) the event causing the cost must occur after the new regulatory framework (NRF) was adopted in late 1989; (3) the cost is clearly beyond management control; (4) the cost is not a normal cost of doing business, even if it is increased by an exogenous event; (5) the event has a disproportionate impact on local exchange carriers; (6) the cost is caused by the event reflected in the economy-wide inflation factor (GDPPI) used in the annual NRF price cap proceeding; (7) the event has a major impact on the utility's overall cost; (8) actual costs can be used to measure the financial impact of the event, or the costs can be determined with reasonable certainty and minimal controversy; and (9) the proposed costs are reasonable.

Pacific claims its costs for PEPs to be performed meet the criteria for recovery specified in D.94-06-011. Pacific claims the event creating these costs is exogenous since the Commission mandated implementation of the PEPs in D.96-12-086 in every NPA in which an overlay was to be implemented.

Since the Commission orders the specific activities included in the PEP and adopts budget levels for those activities, Pacific claims its management has no control over the costs for these activities. Moreover, Pacific claims these costs are not normal costs of doing business, but are new costs occasioned by the need to implement Commission-mandated area code overlays.

Pacific claims PEP costs impact local exchange carriers disproportionately. In defining the criterion of "disproportionate impact," the Commission stressed that the criterion was meant to preclude "double-counting between Z-factor adjustments and the inflation index."² In other words, the event causing the costs should not affect all businesses in the economy in the same manner or proportionately. Pacific claims that the PEP costs impact only telecommunications carriers providing service within the area covered by the overlay, and that no other businesses bear these educational costs. Similarly, Pacific believes the requirement that the cost not be reflected in the economy-wide inflation factor is satisfied. As stated above, since telecommunications providers in the area affected by the overlay are the only companies that experience these PEP costs, Pacific argues, these could have no measurable effect on GDPPI.

Pacific requests LE factor recovery for two types of PEP costs. "Group 1" costs are those that, for example, in the 310 overlay, were to be paid for by all code holders in the NPA in proportion to the number of NXX codes they held-costs for items such as public service announcements on broadcast television. "Group 2" costs were costs incurred by Pacific for items such as bill inserts and informational letters to customers, and were not part of the costs to be paid proportionately by all code holders. In its motion, Pacific offers to pay all Group 1 costs incurred for the 408 area code PEP and in other NPAs in the future if it is guaranteed recovery of these costs as an LE factor.

For the 310 overlay, the total for both groups of PEP costs incurred by Pacific equaled approximately $789,000.³ Pacific argues that similar costs will be incurred for any other overlays ordered by the Commission, resulting in a major impact on Pacific's overall costs.

Pacific proposes to keep records of its actual expenditures to carry out the PEPs according to the Commission's specifications. Each year, Pacific proposes to include with its annual Price Cap filing the amount of actual PEP costs incurred during the year. Pacific asks that the Commission, in its decision on the Price Cap filing, include recovery of those actual PEP costs.