2. Background

In D.96-10-066, the Commission created the California High Cost Fund B (CHCF-B) to fund the provision of affordable local exchange service in high-cost areas of the State. The CHCF-B is funded with a surcharge paid by the end-users of intrastate telecommunications services. The proceeds from the surcharge are forwarded to the large local exchange carriers (LECs), including Pacific, to subsidize the carriers' provision of service in high-cost areas of the State.

To prevent the large LECs from reaping a windfall, the Commission in D.96-10-066 ordered the large LECs to reduce their rates (except basic service rates) by an amount equal to their draws from the CHCF-B. The Commission also gave the large LECs the option of filing applications to propose specific rate reductions to offset their draws from the CHCF-B.

On March 6, 1997, Pacific filed Application (A.) 97-03-004 for authority to reduce specific rates by an amount equal to Pacific's estimated annual CHCF-B draw of $305.2 million. In D.98-07-033, the Commission adopted rate reductions for Pacific that were designed to reduce Pacific's revenues by an amount equal to Pacific's estimated annual CHCF-B draw of $305.2 million. The Commission also ordered Pacific to true up its estimated draw with its approved draw:

Pacific shall reconcile its $305.2 million estimate with its approved draw from the [CHCF-B] for the 12-month period immediately preceding the date rates are effective. If the adjustment resulting from Pacific's reconciliation of its $305.2 million estimate to its approved draw from the CHCF-B is within 10% of $305.2 million, Pacific shall file by compliance advice letter to recover or refund the difference through a change to local usage and zoned usage measurement prices. If the adjustment is greater than 10% of $305.2 million, Pacific's advice letter filing will be subject to protest. (D.98-07-033, Ordering Paragraph 7.)

The above provision in D.98-07-033 was based on the Commission's recognition that Pacific's approved draw from the CHCF-B might be more or less than the estimate of $305.2 million. If the approved draw turned out to be more than $305.2 million, rates would have to be decreased to prevent Pacific from recovering a windfall. If the approved draw turned out to be less than $305.2 million, rates would have to be increased to make the company whole. The Commission had not approved Pacific's draw as of May 2001.

On October 22, 1998, Pacific filed Advice Letter 19765 in which it performed two separate true ups. The first true up pertained to the difference between Pacific's $305.2 million estimated draw and Pacific's requested draw from the CHCF-B. The second true up pertained to the difference between the $305.2 million reduction in revenues adopted by D.98-07-033 and the actual reduction in revenues caused by the rate reductions adopted in D.98-07-033. Pacific re-estimated the revenue effect by using more recent call volume data. According to Pacific, more calls were being made than anticipated by D.98-07-033, resulting in a reduction in revenues in excess of $305.2 million. The use of updated call volume data resulted in Pacific proposing only a $13.9 million reduction in rates rather than a $47 million reduction.

The Office of Ratepayer Advocates (ORA) and The Utility Reform Network (TURN) filed protests to the advice letter. ORA and TURN claimed that Pacific arrived at the $13.9 million reduction by erroneously re-estimating the revenue effect of the rate changes adopted in D.98-07-033. According to TURN and ORA, D.98-07-033 did not permit Pacific to true up the revenue effect of the new rates ("revenue effect"). Pacific did not respond to the protests.

On December 17, 1998, the Commission issued Resolution T-16260. In the resolution, the Commission rejected the first true up in Pacific's Advice Letter 19765 as premature, since the CHCF-B Administrative Committee had not yet approved Pacific's draw from the CHCF-B. However, Resolution T-16260 approved the methodology that Pacific used to true up the revenue effect.

On January 22, 1999, TURN filed A.99-01-025 for rehearing of Resolution T-16260. In its application, TURN argued that it was legal error for the resolution to approve a true up of the revenue effect, since no such true up was authorized by D.98-07-033. Pacific filed a reply in which it opposed TURN's application.

In D.99-06-061, the Commission held that D.98-07-033 did not authorize Pacific to true up the revenue effect. The Commission also held that Resolution T-16260, by approving the true of the revenue effect, inadvertently modified D.98-07-033 without providing notice and an opportunity to be heard on the modification as required by Pub. Util. Code § 1708.¹ The Commission then granted rehearing of Resolution T-16260, reopened A.97-03-004 for re-hearing of Resolution T-16260, and ordered a prehearing conference (PHC) to set a procedural schedule.

The PHC was held on September 8, 1999. At the PHC, the parties agreed that the appropriate way to proceed was for Pacific to file a petition for modification. Pacific filed a petition to modify D.98-07-033 on October 6, 1999. Notice of the petition appeared in the Commission's Daily Calendar on October 8, 1999. ORA and TURN filed responses to Pacific's petition on November 10, 1999. Pacific filed a reply on November 22, 1999.