4. Should the Commission Approve the STAs and Implement the Pool Termination Procedures Negotiated by the Applicants?

4.1. Small LECs' Position

In mid-1998, Pacific approached the Small LECs with a request that the parties enter into negotiations to terminate the inter-company settlement pools for toll, access, and EAS services. Pacific's belief was that with the advent of a competitive telecommunications market, it was no longer appropriate for support payments to be made entirely by one company.

As requested by Pacific, the parties entered into negotiations for a transition from pooling to a replacement funding mechanism. The negotiations extended over a period of fifteen months, and the resulting agreement, reflected in the STAs, provided for fixed transition payments from Pacific to each Small LEC, based on continuation of the most-recent level of pool revenue flows, followed by transition to a permanent, Commission-administered funding source based on the same fixed payment levels.

The Small LECs state the STA transition plan provides for revenue neutrality in connection with the implementation of the permanent replacement funding by adjusting the level of transition payments on a dollar-for-dollar basis to account for the changes in billed revenues and specific expense items that will occur in the post-pooling environment.

According to the Small LECs, the principle of revenue neutrality as reflected in the STAs neither harms nor benefits the Small LECs in connection with pool termination. The process set forth in the STAs was specifically designed to maintain the existing level of settlement revenue flows, net of pool termination impacts. In his Opening Testimony, Small LEC witness Tutt tracks the individual company settlement payments through the process of adjustment for pool termination-related revenue and expense changes.

The Small LECs assert no party took issue with any of Tutt's data or calculations or presented any other evidence on the subject. The other participating parties each presented rate design proposals that would impact the post-pooling revenues of the Small LECs, but each of those rate design changes was proposed to be offset by a corresponding increase or decrease in the level of the affected company's permanent replacement funding.

One important aspect of the replacement revenue methodology set forth in the STAs is that the payments will be fixed in amount, subject to change only in connection with Commission General Rate Cases (GRCs) for each Small LEC. In this respect, the replacement funding would be unlike pool revenues which typically increase between Commission rate reviews due to increases in operating costs. (Exh. 1, Bishop Opening Testimony at 6-7.)

According to the Small LECs, the pool transition plan set forth in the STAs is a balanced proposal that addresses each subject that is directly impacted by pool termination without wandering off into a "wish list" of proposals affecting general ratemaking methodology for Small LECs. It corresponds closely with the pool termination plans adopted in many other states that have addressed the subject. (Exh. 5, Peters Opening Testimony, at 4-7.) With respect to the revenue aspects of the pool exit plan, Pacific and the Small LECs negotiated as adverse parties. The plan advances the Commission's goals of replacing hidden subsidies with explicit payments, while maintaining reasonable local rates and the ability of the Small LECs to continue to provide high quality service to their customers.

4.2. Pacific's Position

Pacific asserts the STAs which end the pooling arrangement between Pacific and the Small LECs should be approved. According to Pacific, the intervenors' major objections to the STAs have either been abrogated or are without merit.

4.3. ORA's Position

While ORA concurs that an examination of the Commission's existing toll, EAS and access pooling agreements is overdue, ORA asserts the Small LECs' and Pacific's joint proposal is not acceptable in its current form. What the Small LECs and Pacific propose is to replace the existing toll, EAS and access pooling agreements with an explicit subsidy that has few of the consumer protections the existing pooling arrangements contain.

4.4. AT&T Communications of California, Inc. (AT&T); WorldCom, Inc. (WorldCom); and Sprint Communications Company L.P. (Sprint) (the IXCs') Position

The IXCs do not oppose the basic request of applicants to eliminate the access, toll and EAS pools. However, the IXCs assert applicants must bear the consequences of these changes. They cannot be allowed to exit these pools while demanding that IXC intervenors guarantee applicants' financial positions and, in the case of Pacific, obtain an unfair competitive advantage.

The IXCs' analysis of the applicants' proposal reveals that it is structured in a manner that is not in the public interest and is clearly unfair and discriminatory to IXCs. The IXCs point to various failings in the application which must be corrected by the Commission in order for the application to be in the public interest.⁵

4.5. Discussion

We support the end of the historical system of inter-company settlements between Pacific and the Small LECs. Continuation of this regime is not sustainable in a competitive telecommunications environment. Therefore, we will approve the STAs negotiated between the parties, with some adjustments, which are described in sections below. Section 6 of each STA, "Regulatory Approval and Review" was amended on March 2, 2000, in response to the Scoping Memo and Ruling of Assigned Commissioner, which ordered the applicants to amend their STAs to keep them effective until the Commission acts to establish a permanent funding source. The revised Section 6 in each STA reads as follows:

Except for Section 3b of the Agreement as amended, this Agreement shall not be effective until it has been approved by the CPUC and shall remain subject to the jurisdiction of the CPUC to the extent provided by law. By making this Agreement neither Party waives any rights to seek review or appeal of the decision of the CPUC in A.99-09-044. Insofar as such decision may affect Pacific's pool funding obligations, the Parties agree to be bound by such terms of such decision and any review or appeal thereof. (STAs, Section 6.)

In other words, the applicants state their willingness to abide by the decision of this Commission, while maintaining their review/appeal rights. The Commission has the authority to modify agreements which are submitted to it for approval. We therefore approve the STAs, subject to the modifications adopted below.