Resolution T-16376January 20, 2000

AL 9141/BIL

PUBLIC UTILITIES COMMISSION OF THE STATE OF CALIFORNIA

Telecommunications Division /

RESOLUTION T-16376

Carrier Branch *

/ Date: January 20, 2000

RESOLUTION

RESOLUTION T-16376. GTE CALIFORNIA INCORPORATED (U-1002-C). ORDER APPLYING THE ADOPTED PRICE CAP MECHANISMS IN COMPLIANCE WITH DECISIONS 89-10-031 AND 94-09-065 THROUGH ADJUSTMENTS TO SURCHARGES/SURCREDITS TO BE EFFECTIVE FEBRUARY 1, 2000.

BY ADVICE LETTER NO. 9141 FILED OCTOBER 1, 1999

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SUMMARY

This resolution orders GTE California Incorporated (GTEC) to increase its annual revenue by $0.364 million effective February 1, 2000 to reflect a reduced recovery from the federal Interstate High Cost fund.

Through it’s price cap advice letter filing GTEC requests the following adjustments to it’s revenue: (1) the interstate high cost fund, and (2) NRF audit fee recovery.

AT&T Communications of California, Inc.(AT&T), and the Office of ratepayer advocates (ORA) filed timely protests to GTEC’s price advice letter filing.

2000 Price Cap Revenue Change
(In Millions)
Price cap impact without Z-Factors, LE factors / $ -0-
Ongoing Z-factors
Interstate High Cost Fund / $ 0.364
LE-factors
(none) / $ -0-
Other Adjustments
(none) / $ -0-
Net Z-factor, LE-factor, and Other Adjustments / $ 0.364
Total Price Cap Impact effective February1, 2000 / $ 0.364

BACKGROUND

In Decision (D.) 89-10-031 the Commission adopted an incentive –based regulatory framework (called the new regulatory framework, or “NRF”) For Pacific, and GTE California Incorporated (GTEC). The decision stated:

This new regulator framework is centered around a price indexing mechanisms with sharing of excess earnings above a benchmark rate of return level.

Following a startup revenue adjustment (D.89-12-048)…Prices for the utilities’ basic monopoly services and rate caps for flexibly priced services will be indexed annually according to the Gross National Product Price Index (GNP-PI) inflation index reduced by a productivity adjustment of 4.5%.

The indexing formula also allows for rate adjustments for a limited category of exogenous factors whose effects will not be reflected in the economy wide GNP-PI. While all such costs cannot be foreseen completely, we recognize that the following factors may be reflected in rates as exogenous factors (called Z-factors): Changes in federal and state tax laws to the extent that they affect the local exchange carriers disproportionately, mandated jurisdictional separations changes, and changes to intraLATA toll pooling arrangements or accounting procedures adopted by this Commission.

However the Commission did not authorize Z-factor treatment for all unforeseen or exogenous factors. In D.89-10-031, the commission stated that:

…normal costs of doing business (including costs of complying with existing regulatory requirements) or general economic conditions would be excluded as Z-factor items.

In D. 93-09-038 the Commission ordered GTEC to replace the GNP-PI with the Gross Domestic Product Price Index (GDP-PI) commencing with GTEC’s 1994 price cap filing. In addition, the Commission adopted a productivity factor of 4.6% for GTEC for its 1996 price cap filling.

In 1995 the Commission issued D.95-12-052 regarding the second triennial New Regulatory Framework Review. In O.P. 4 of that decision, the CPUC suspended the application of the GDP-PI minus productivity factor formula used in price cap regulation of GTEC and Pacific until further order of this Commission or until a final decision is issued in the next triennial review.

In October 1998 the commission issued D.98-10-026 regarding the Third Triennial review of the NRF. The order continues the suspension of the GDP-PI minus productivity factor formula, suspends for the first time the sharing mechanism, permanently eliminates the depreciation review, replaces Z factors with limited exogenous (LE) factors, and effectively imposes a cap on residential services by keeping price caps generally.

The order also specifies that in the future LE cost recovery is confined to recovery for cost increases or decreases resulting from (1) items mandated by the Commission and (2) changes in total intrastate recovery resulting from changes between federal and state jurisdiction.

GTEC’s 2000 Price Cap Filing

On October 1, 1999 GTE California Incorporated (GTEC) filed AL No. 9141 requesting billing surcharge/ surcredit changes to be effective January 1, 2000 in order to implement the certain one time revenue adjustments for 2000.

GTEC’s filing requests the following revenue adjustments(adjustment amounts in parentheses).

  1. Price Cap Index ($0) -The price cap index is calculated by using a GDP-PI factor less a productivity factor. This portion of the formula used in price cap regulation of GTEC was suspended by D.95-12-052 and D.98-10-026.
  1. Interstate High Cost Fund (+$0.364 million) A revenue adjustment to reflect the reduced recovery from the Interstate High Cost fund. This adjustment is applicable to local exchange billing only.
  1. Recovery of NRF Financial Audit Expenses(+$1.101 million) A one time revenue adjustment reflecting the cost of the NRF Financial Audit.

GTEC requests a total increase of $1.465 million effective January 1, 2000, reflecting one-time revenue adjustments. GTEC used a billing base of $ 2.036 billion for calculating the surcharge/surcredit.

NOTICE/ PROTESTS

GTEC stated that a copy of the advice letter and related tariff sheets were mailed to those interested utilities and or parties. Notice of Advise letter no. 9141 was published in the commission Daily Calendar of October 12, 1999.

Timely protest were filed to GTEC’s AL 9141 by ORA, and AT&T on October 28, 1999, and November 1, 1999, respectively. GTEC filed a response to the protests on November 4, 1999.

No protests were filed regarding GTEC’s revenue adjustments related to the Interstate High Cost Fund.

ORA, and AT&T protested the recovery of NRF audit expenses.

DISCUSSION

Protested Items and Other Issues

Interstate High Cost Fund
GTEC’s requested increase of $364 thousand related to the Interstate High Cost Fund (IHCF) was not protested by any parties. Telecommunications Division staff, however, have raised some concerns about the possibility of double recovery.

The IHCF, also known as the Universal Service Fund, is a federal fund that was established to partially compensate small and mid-sized LEC’s with high cost of providing local exchange service. High cost refers to lines which cost more to provide than the revenues received through tariffed rates. The federal IHCF mechanism provides a subsidy to qualifying LEC’s for both their low and high cost lines. When the amount of the IHCF subsidy is reduced,the qualifying LEC regulated under NRF seeks recovery of this reduction in their annual price cap filing.

The CPUC has established a mechanism, or fund to compensate qualifying LEC’s that provide local exchange service at a loss. This is called the California High Cost Fund B(CHCF B). Qualified LEC’s make a claim for CHCF B recovery based on the actual costs for qualifying high cost lines after subtracting out the revenue received from the local exchange service, the federal End User Common Line (EUCL) charge, the federal Carrier Common Line (CCL) charge, and the portion of the IHCF relating to said lines.

Excess recovery is possible because the IHCF partially offsets the California High Cost Fund B (CHCF B) claim. The CHCF B claim pays the remainder of the cost to support high cost lines, thereby automatically covering any reductions in IHCF funding. Recovery of the changes in the IHCF is also covered in the annual price cap filing. Therefore, if a CHCF B claim is not adjusted for the additional compensation for the high cost lines it covers due to IHCF recovery, then that LEC will get a double recovery for its qualifying high cost lines; once from the ratepayers through a surcharge, and once from the CHCF B.

In the instant case with GTEC, the company is requesting “ other Z factor recovery” for the total reduction in IHCF funding associated with it’s Contel California[1] subsidiary operation. Contel California also receives recovery from the CHCF-B for qualifying high cost lines that are partially covered in the price cap filing as well. GTEC informs us that there will be no IHCF funding for the Contel California operations in the year 2000 due to changes in the IHFC qualifying criteria.

Discussion

Currently, GTEC is receiving over recovery for its qualifying high cost lines in the areas served by the California operations of the Contel Telephone Company. The excess recovery has resulted because GTEC-Contel has not been appropriately offsetting the CHCF B claims with that portion of the IHCF recovery related to high cost lines covered by the CHCF B. This has led to double recovery of the portion of those funds used relating to its high cost lines. The appropriate manner in which to offset the IHCF is laid out in D. 96-10-066:

… the (CHCF B) should only be offset by the carrier’s per line monthly (IHCF) draw multiplied by the percentage of line eligible for high cost fund assistance. (D. 96-10-066 p.176-177, mimeo)

The proposed $364 thousand adjustment for the Interstate High Cost Fund is appropriate for recovery in this resolution because it is authorized in Commission Decision 96-10-066, and in Resolution No T-16263. However, to eliminate the over recovery from the CHCF B the above adjustment shall be treated in the same manner as a payment from the Interstate High Cost Fund to stop any double recovery. In other words, a sum equal to the $364 thousand adjustment divided into monthly installments and “multiplied by the percentage of lines eligible for high cost fund assistance”( D. 96-10-066 p.176-177, mimeo) should be used to offset part of the monthly CHCF B claim by using the following formula:

Offset = (IHCF recovery / # of months)* (Contel’s High Cost Lines/ Contel’s Total Lines)

Recovery of NRF Financial Audit Fee

In D. 96-05-036, ORA was directed to conduct financial audits of Pacific and GTEC in order to “effectively monitor the new (regulatory) framework” (D. 96-05-036, p. 8). The costs of the audit were directed to be paid by Pacific and GTEC, however rate recovery was not guaranteed with the Commission stating that they “may in turn seek Z-factor treatment for the costs”(D.96-05-036, p.8). GTEC contends that this instruction allows them to request LE factor recovery for NRF financial audit expenses in its 2000 price cap filing.

ORA and AT&T protested the recovery of the NRF financial audit fee. Both contend that it is procedurally incorrect to request recovery in a price cap filing citing the last NRF review which adopted procedures for LE factor.

…we limit rate changes for Commission- mandated cost changes(either increases or decreases) to only those costs for which an LE factor adjustment is authorized in the underlying Commission decision. That is, not every Commission-mandated cost change will necessarily be reflected in rates, unless considered by the commission at the time the program or event causing the cost change is authorized and is therein approved for LE factor recovery (D.98-10-026, p61-62).

AT&T said that GTEC needed to file a motion under I.87-11-033 which is the proceeding that governs the NRF financial audit. ORA did not mention a specific method, but did state that the recovery needed to be authorized through a formal proceeding.

GTEC responded to the protests by claiming that the Commission had authorized them to seek Z factor recovery for the NRF financial audit expenses in D.96-05-036, and that since this decision was rendered before D.98-10-026, the recovery request should go through the prior Z factor approval process. GTEC does recognize that Z factors has been replaced by the stricter LE factors, but claims that financial audit expenses meet the LE factor requirements. GTEC also points out that ORA and AT&T made no objection to the LE factor treatment, just to the method of approval. GTEC claims that a formal proceeding is not just legally unnecessary, but is contrary to the goal of streamlining the regulatory process.

Discussion

AT&T and ORA are correct in saying that GTEC does not have authorization for LE factor treatment of the NRF financial audit expenses under the current procedures. While D. 96-05-036 does state that GTEC “may…seek Z factor treatment for the costs (of the NRF Financial audit).” it also states that “We explicitly do not decide whether Z factor treatment will be allowed, only that …GTEC may submit a request”(D.96-05-036, p.8). Permission to seek approval is not approval itself.

The life of the GTEC NRF audit spans many years, and the Commission’s regulatory processes related to the NRF audit has changed since the audit was originally ordered in D.94-06-011 and issue of cost recovery was discussed in D.96-05-036. This decision did not guarantee recovery for audit related expenses, deferring such judgement until a request for recovery was submitted and given due consideration. At that time the D.96-05-036 was issued, Commission employed the “Z factor” method for recovery of exogenous costs that were beyond the control of utility management. Subsequently, the Commission in D.98-10-026 eliminated the use of the Z factor mechanism to recover new exogenous cost changes, with two exceptions, (1) matters mandated by the Commission, and (2) changes in total intrastate costs recovery resulting from changes between federal and state jurisdictions. A new process called the Limited Exogenous (LE) Factor mechanism for recovery of the two limited types of exogenous costs was adopted to distinguish the new process from the Z factor mechanism. Requests for recovery of these types of costs may be made by advice letter on October 1 of each year.

The LE factor mechanism limits rate changes for Commission-mandated cost changes to only those costs for which a LE factor adjustment is authorized in the underlying Commission decision and therefore precludes guaranteed recovery of such costs. In determining whether such costs should be granted recovery, the Commission will consider whether the cost is unique to Pacific and/or GTEC or is a cost generally borne uniformly by all carriers in the industry. For Commission mandated costs, the moving utility must present an evaluation of the nine criteria in the underlying proceeding in which LE factor treatment will be authorized or rejected.

GTEC did not include the nine criteria analysis in its AL, however it did provide such an analysis in its Response to the Limited Protest of Office of Ratepayer Advocates and Protest of AT&T Communications of California, Inc. to GTE California Incorporated Advice Letter 9141, dated November 4, 1999.

We decline to authorize recovery of costs associated with the NRF audit prior to the incurrence of the cost. We believe that it is consistent with our LE factor process to have GTEC make a filing requesting recovery of NRF audit costs. At this time there is no proceeding open regarding the NRF audit. GTEC may seek audit cost recovery in the next price cap filing request when actual costs are incurred. GTEC should include with its request the nine criteria analysis that was prepared in response to the protests of ORA and AT&T. We believe that this requirement is reasonable and appropriate given that the audit was ordered prior to, but commenced after the adoption of the LE factor mechanism.

COMMENTS

The draft resolution of the Telecommunications Division in this matter was mailed to the parties in accordance with PU Code section 311(g) and Rule 77.1 of the Rules of Practice and Procedure. Comments were filed on January 5, 2000 by GTEC. No reply comments were filed.

GTEC made comments stating that the refusal of the NRF audit fee recovery was a legal error, because GTEC was expressly authorized to request recovery in D. 96-05-036. GTEC states that the “hyper-technical” basis for the protests of AT&T and ORA is incorrect as the intent of D. 96-05-036 is for GTEC to make a request for recovery in a price cap filing. GTEC also gives an example from resolution T-14236, to demonstrate the Commission’s prior use of the intent of a decision in a changing regulatory environment. Finally GTEC restates it’s position that requiring the request for NRF audit fee recovery be addressed in a formal commission proceeding is contrary to the goal of streamlining the regulatory process.

We believe that it is appropriate for GTEC to include in its next price cap filing, after actual costs have been occurred, a request for recovery of NRF audit costs.

GTEC’s comments regarding the Commissions goal of streamlining the regulatory process were a restatement of their arguments, despite our explicit instructions that comments should focus on factual, legal, or technical errors. We find GTEC’s argument to be without merit.

Although there were no comments on it, the Telecommunications Division staff noted that the 2000 price cap surcharge should be calculated to be consistent with an eleven- month basis due to the February 1, 2000 effective date of the revenue increase adopted in this resolution.

FINDINGS

  1. GTEC filed Al No. 9141 on October1, 1999, to implement GTEC’s 2000 price cap mechanism, and certain LE factor adjustments. In the above mentioned AL filing GTEC requested adjustments for interstate High Cost Fund and Recovery of NRF Financial Audit Fee.
  1. GTEC’s request of an ongoing adjustment of $364 thousand in it’s revenue to reflect the reduction in payments it would receive from the Interstate High cost fund in 2000 should be adopted.
  1. We find that GTEC’s request for Interstate High Cost Fund Recovery will lead to double recovery of the percentage of those funds relating to High Cost lines also covered by the CHCF B, unless said recovery is appropriately used to offset the CHCF B.
  1. It is inappropriate and inconsistent with Commission ratemaking Policies to allow a LEC double recovery for high cost fund subsidies.
  1. We find that the appropriate method to determine the amount of the IHCF recovery needed to offset the CHCF B is the same method as is currently used for IHCF payments.
  1. AT&T and ORA filed timely protests to GTEC’s Price Cap Filing.
  1. GTEC has not been authorized LE factor recovery for NRF audit expenses.
  1. GTEC may file in it’s next price cap filing request for recovery of NRF audit costs.
  1. GTEC’s surcharge should be calculated on an eleven month basis due to the February 1, 2000 effective date.
  1. A total price cap mechanism increase of $364 thousand, effective February 1, 2000, is justified. The adopted revenue adjustments are summarized in Appendix A to this resolution.

THEREFORE IT IS ORDERED that: