V. Discussion

The applicant, SBC, bears the burden of proving that its proposed surcharge is "justified." Pursuant to Pub. Util. Code ยง 454(a), prior to implementing the surcharge, SBC must make a "showing before the Commission," and, based on that showing, the Commission must find that the surcharge is "justified."

As discussed in detail below, we find SBC's showing on the forecasted costs to be scant; we therefore adopt limitations and oversight modeled on those applied to SDG&E.

The most significant change to SBC's proposal, however, occurs due to this Commission's intervening decision to adopt the Uniform Regulatory Framework. As discussed below and pointed out in several parties' comments, SBC's pricing freedom after January 1, 2009, obviates the need for this Commission to authorize the surcharge.

Prior to considering the specifics of SBC's proposal, however, we address the issue of our statewide plan for undergrounding utility lines and future applications similar to SBC's.

A. The Commission's Undergrounding Program

As discussed above, the Commission has adopted a long-standing program to determine an undergrounding program, in concert with the affected electric and telephone utilities. In Rulemaking 00-01-005, the Commission acted on Legislative directive (AB 1149) by studying ways to amend, revise, and improve rules for the conversion of existing overhead electric and communications lines to underground. The legislation required that the Commission study ways to: 1) eliminate barriers to undergrounding and to prevent uneven patches of overhead facilities; 2) enhance public safety; 3) improve reliability; and 4) provide more flexibility and control to local governments. The Commission issued an interim decision in that proceeding, D.01-12-009, which expanded the use of the existing program, and set several contentious issues for a subsequent Phase 2. That Phase has not yet been completed.

The parties in this proceeding raised policy issues regarding the wisdom of the Commission allowing its general ratemaking authority to be used by the City as a mechanism to collect the costs of undergrounding utility lines. Undergrounding utility lines is extremely expensive. With the proposed surcharge, San Diego residents will be paying an extra $4 per month in utility charges ($3 to SDG&E and $1 to SBC), on top of any other price increases. The Commission has historically shouldered the burden of balancing the costs of undergrounding with the benefits in adopting uniform statewide policies. With today's decision and Resolution E-3788, this Commission has allowed the City to effectively short-circuit the long-standing plan.

Extraordinary and unique events led to today's decision. Most significantly, the SDG&E franchise fee increase has been in place for some time and actual work on this project has commenced. On balance, the totality of the circumstances supports going forward with this surcharge despite its inconsistency with the statewide plan. We direct our staff to advise any utilities seeking such measures, either as surcharges or increases in franchise fees, that the statewide plan controls utility undergrounding.

B. Uniform Regulatory Framework and Pricing
Flexiblity

As discussed above, the Commission has now lifted any limitations on the prices SBC charges for its telecommunications services, with the exception of residential basic local service, which is scheduled for pricing freedom on January 1, 2009. Accordingly, after that date, Commission authorization for a surcharge, such as that proposed in SBC's application, will no longer be necessary. At that time, SBC will have the authority to adopt any surcharge it deems necessary. Several parties objected to extending SBC's surcharge authorization beyond the scheduled January 1, 2009, date for complete pricing flexibility because the authorization would be superfluous in light of D.06-08-030.

We agree. In adopting the Uniform Regulatory Framework, we concluded that customers are best served when market forces, rather than Commission-required cost-of-service studies, set the prices paid by customers. Consistent with that decision, we will decline to retain this cost-based surcharge beyond the date SBC obtains full pricing freedom, currently scheduled for January 1, 2009.

C. Cost Forecasts

SBC provided no forecasts based on its actual costs in support of its proposed surcharge. Instead, SBC witness Kieren derived SBC's cost forecast from SDG&E's forecast of its cost to underground its facilities in the same areas. SDG&E estimated $28.3 million for 2007, $51.8 million for 2008, and $31 million for each year thereafter until 2023. SBC multiplied SDG&E's annual amount by 0.23, which is the historical ratio of SBC's to SDG&E's costs. SBC's annual amount was then divided by 657,000 lines, which is the current average number of access lines in service in San Diego. Finally, the result was divided by 12 to arrive at a forecasted monthly per line surcharge.

SBC proposed to use a balancing account to track actual labor and expense costs associated with undergrounding and to adjust the surcharge up or down as needed. The surcharge would also be adjusted to reflect changes in the number of access lines in San Diego. The collected surcharge funds would be held in an interest bearing account.

In short, SBC's surcharge proposal, which is contemplated to collect over $125 million, is derived from three numbers obtained from SDG&E - cost estimates for 2007, 2008, and $31 million for each year thereafter. Other than elementary mathematical manipulation, SBC added nothing to SDG&E's forecasts.

SBC, however, is not in any way bound to the cost forecasts. SBC proposed to recover its actual costs over the 17-year project by recording those costs in a balancing account and then setting the surcharge to recover that amount. After setting the initial surcharge, which will be subject to true up to actuals, the cost forecasts will be irrelevant.

Accordingly, the key elements of SBC's proposal are the recording of actual costs and the balancing account to ensure full recovery. These two elements work together to allow SBC a direct path from recorded costs to customers' bills.

SBC proposes to send an annual report to the Director of the Commission's Telecommunications Division to "allow the Commission to track and validate the cost associated with the project and the correctness of the surcharge amount."

XO witness Knowles was skeptical that SBC's promised annual reports would be sufficient to allow the type of detailed auditing required for this $125 million, 17-year project. Knowles testified that SBC could be tempted to load up the undergrounding surcharge account "with all manner of oversight, management, supervision, systems development and general costs." Annual reports with very little detail will not be sufficient to thwart this temptation.

We agree. SBC's proposed virtually no oversight of costs that might be recorded in the balancing account, and the surcharge will enable SBC to recover the recorded amounts directly from customers. Detailed auditing and oversight, however, would require a commitment of significant Commission and SBC resources.

As an alternative, we find that the historic ratio of SBC's and SDG&E's undergrounding costs provides a convenient point of reference for evaluating future costs. To the extent SBC's future costs exceed this historic ratio, we will impose enhanced oversight obligations on SBC.

If, as XO fears, SBC allocates unrelated costs to the San Diego undergrounding project, then SBC's costs would be expected to exceed 23% of SDG&E's. Such an increase would be a signal to the Commission, and the parties, that greater scrutiny of the cost allocations is required. On the other hand, if the historical ratio remains stable in the future, then the Commission would have some evidence that SBC is not allocating unrelated costs to the San Diego undergrounding program.

Therefore, to the extent SBC's costs do not exceed 23% of SDG&E's costs in any calendar year, SBC will be required to submit a semi-annual report to the Telecommunications Division Director showing the status of the project, items recorded in the balancing account, and surcharge calculations. Supporting detail should also be available. SBC's semi-annual reports shall be filed contemporaneously with SDG&E's similar reports to the Energy Division. Each report shall show the ratio between SBC's and SDG&E's costs. The surcharge shall be recalculated annually via advice letter filing, with supporting workpapers.

Heightened review will be required should SBC's undergrounding costs exceed 23% of SDG&E's costs for the areas included in a particular semi-annual report. A semi-annual report with such a showing should be submitted to the Executive Director, who shall investigate the cause. Unless the amount by which the 23% has been exceeded is: 1) immaterial or 2) readily explained by easily verified facts, the Executive Director shall authorize an audit of SBC's balancing account.3 The audit will be funded by SBC, with the total costs of the audit not to exceed 1% of total costs proposed to be recorded in the balancing account that year. Until the cost allocation issues have been resolved, no changes will be made in the surcharge.

Pursuant to the Uniform Regulatory Framework decision, SBC is scheduled to obtain full pricing freedom on January 1, 2009. As determined above, our authorization for this surcharge will expire at that time. The balancing account and audit rights will extend only for the authorized duration of the surcharge. No later than 90 days prior to the date SBC obtains full pricing freedom, SBC shall file and serve its final surcharge advice letter adjusting the surcharge to clear the amount in the balancing account by the date pricing freedom occurs.

Finally, in D.05-10-028, we directed the assigned Commissioner and ALJ to manage this proceeding to ensure that a full factual and legal record was created for our consideration on the issue of whether the undergrounding costs were included in SBC's New Regulatory Framework and network element revenue requirements. Allowing the same costs to be used as a basis for the surcharge would result in double-counting.

SBC's witness explained that SBC's undergrounding projects in San Diego which occur pursuant to SBC's tariff Rule 32 program will be segregated from the undergrounding projects required by the City's ordinance. SBC witness McDaniel testified that SBC will underground lines in San Diego simultaneously under both the tariff Rule 32 program and as required by the City's ordinance. Because the tariff Rule 32 program requires detailed cost accounting, SBC will be required to separately record and track the costs associated with each program.

This explanation, coupled with the auditing requirement imposed above, is sufficient to resolve the issue from our earlier decision.

In conclusion, we will authorize SBC to establish a City of San Diego Surcharge for Underground Conversion Costs Balancing Account, and to record costs associated with undergrounding aerial telephone lines pursuant to the City of San Diego's undergrounding ordinance in the account.

D. Applicability of the Surcharge

SBC proposed to apply the fixed surcharge to each line issued to customers that subscribe to business and residential telephone service.4 The parties took issue with SBC's proposal to exclude certain contracts from the surcharge unless the contracts allow for such charges. The parties also objected to SBC's proposal to include two types of customers - Lifeline and Wholesale Customers for two-wire voice grade UNE loops. Lifeline customers are participants in the Commission's program that provides basic telephone service at reduced rates to low-income customers. Wholesale customers that purchase two-wire voice grade UNE loops use that wholesale service to support their own local telephone service which they offer to end-user customers.

As analyzed below, our precedent requires that public policy surcharges, such as this, be applied to the widest possible customer base and that SBC has not presented a persuasive justification for excluding certain contracts from the surcharge. Similarly, end users served by wholesale customers also should be subject to the surcharge. Based on our precedent, we do, however, exclude Lifeline service from the surcharge.

XO witness Knowles objected to SBC's plan to impose the proposed surcharge on lines served pursuant to certain5 contracts "to the extent applicable contracts allow it." Knowles explained that SBC has not identified the number of customers or lines that might be included in this surcharge exemption, nor stated a rationale for treating these customers differently from similarly situated customers. Knowles concluded that excluding certain wholesale customers but not others, such as XO, constituted anticompetitive discrimination.

The Public Utilities Code requires that SBC justify its proposal to exclude customers from the surcharge. SBC's evidence on this point is limited to an assertion that customers will not be included where the "contract does not allow the surcharge to be applied." SBC has not provided for the record copies of any such contractual language, estimates of the numbers of lines to which this exemption would apply, nor any calculation of amount by which the surcharge will be increased to reflect these exemptions.

Our long-standing goal is to apply public policy surcharges to "the widest possible customer base." See, e.g., Re Alternative Regulatory Frameworks for Local Exchange Carriers, 56 CPUC 2d 117, 266 (D.94-09-065). SBC has proposed to exclude an unidentified share of the base from such a surcharge with only conclusory statements unsupported by record evidence. SBC has not provided sufficient justification for its decision to exclude any such pre-existing contracts from the surcharge, nor has SBC explained how it will prevent this class of exempted service from expanding. Therefore, we deny this portion of SBC's proposal and order SBC to impose the surcharge on lines served with SBC facilities in San Diego, whether provided pursuant to contract or tariff.

UCAN and DRA oppose SBC's proposal to apply its surcharge to all residential service lines participating in the Lifeline program. UCAN and DRA contend that this proposal is regressive and that SBC's rationale is not persuasive.

SBC concedes that it could easily exempt its own Lifeline customers from the surcharge. However, no means has been proposed or developed to exempt the Lifeline customers of the competitive local carriers from the surcharge. SBC concludes that, therefore, all Lifeline customers must be included in the surcharge.

We disagree. As discussed in more detail below, the Commission has created a number of public purpose programs which are funded by surcharges and Lifeline service6 is exempt from these surcharges. See Re Alternative Regulatory Frameworks for Local Exchange Carriers, 56 CPUC 2d 117, 266 (D.94-09-065). These surcharges illustrate that the carriers have developed and implemented a means to exempt Lifeline service. We are confident that a similar mechanism can be created to exempt Lifeline customers from a set fee surcharge. If necessary, the carriers may seek guidance from our Telecommunications Division on the best means to exempt Lifeline customers from this surcharge. All Lifeline service, whether provided by SBC or a competitive local carrier, will be exempt from the surcharge.

A similar result occurs with regard to Telscape's and XO's continuing objection to applying the surcharge to SBC lines leased to competitive local exchange carriers. These carriers calculate and collect the surcharges listed below from their customers. A similar process should be adopted for this much simpler, fixed amount surcharge.

E. Rate Design of Surcharge

SBC stated that a flat rate surcharge more appropriately reflects the costs and benefits of undergrounding aerial telephone lines. The costs are driven by the number of wire pairs that must be placed underground. Each pair costs the same to underground regardless of the amount of telephone services provided over the line. The benefits of undergrounding, which the City describes as primarily aesthetic, are shared equally by each resident, again regardless of the amount of telephone services provided.

As set out above, UCAN and DRA objected to the fixed amount surcharge as being regressive and unprecedented by this Commission.

SBC did not challenge the "regressive" characterization, but in its reply brief did cite to two Commission-approved fixed amount surcharges. The cited surcharges - one cent per year for number portability surcharge and 25 cents per month for payphones - are both de minimus amounts adopted as fixed surcharges primarily for administrative convenience, not after a thorough analysis of the Commission's policy against regressive surcharges. See Re Competitive for Local Exchange Service, 83 CPUC 2d 408 (D.98-12-044) (adopting one cent per year number portability surcharge because "the actual computed surcharge is less than one cent per line and fractions of a cent cannot be collected from customers."), and Re Statewide Expansion of Public Policy Pay Telephones, 83 CPUC 2d 41, 50-52 (D.98-11-029) (noting that pursuant to a settlement agreement, payphone providers pay the surcharge, rather than the Commission adopting a "broad based public service funding method.")

The surcharge SBC proposes requires just such a broad based public service funding method. The Commission's typical rate design for this type of surcharge is a percentage of intrastate revenue.

The Commission has adopted surcharges on intrastate revenues for the following public policy programs:

Each competitive and incumbent local exchange carrier in California must assess these surcharges on all intrastate revenues, and remit the collected funds to the Commission. See, e.g., Application of Transcend Multimedia, LLC for a Certificate of Public Convenience and Necessity to Operate as a Provider of Resold Local Exchange Telecommunications Service Within the State of California, D.06-07-009 (July 20, 2006).

As set forth above, our authorization for this proposed surcharge will no longer be necessary when SBC obtains full pricing flexibility, currently scheduled for January 1, 2009. Thus, the proposed surcharge is scheduled to be in place for about two years. In its comments on the Proposed Decision, SBC specified the administrative burdens created by a surcharge based on intrastate revenue. With the limited duration of the surcharge, we conclude that that these administrative burdens outweigh the need to conform to our precedent.

In conclusion, we will authorize SBC to assess the City of San Diego Surcharge for Underground Conversion Costs as a fixed amount on all local exchange customers served by SBC or with facilities leased from SBC, with the exception of Lifeline service. The surcharge shall be calculated annually, and SBC shall file an advice letter setting forth its calculations with supporting documentation. SBC's final surcharge advice letter shall be filed and served no later than 90 days before SBC obtains full pricing freedeom.

3 Such an audit may be performed by Commission auditors or outside vendors as deemed appropriate by the Director of the Telecommunications Division.

4 1FR, 1MR, 1MB, Centrex, ISDN Basic, Business Lines and Trunks, California 900, Direct Connection, FEX Lines, FPS Lines, PSP/COPT, ISDN PRI, PBX (Retail and Resale classes), Residence (Flat, Measured, ADL, and Lifeline) and SDS56.

5 SBC's rebuttal testimony suggests that customers taking service pursuant to Local Wholesale Complete, Individual Case Basis, Express, and Government contracts may be exempted from the surcharge if contract "does not allow the surcharge to be applied."

6 Any additional services purchased by the Lifeline customer are subject to the surcharges.

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