BILL ANALYSIS                                                                                                                                                                                                    Ó



          SENATE COMMITTEE ON ENERGY, UTILITIES AND COMMUNICATIONS
                              Senator Ben Hueso, Chair
                                2015 - 2016  Regular 

          Bill No:          SB 1122           Hearing Date:    4/19/2016
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          |Author:    |Cannella                                             |
          |-----------+-----------------------------------------------------|
          |Version:   |3/29/2016    As Amended                              |
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          |Urgency:   |No                     |Fiscal:      |Yes             |
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          |Consultant:|Nidia Bautista                                       |
          |           |                                                     |
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          SUBJECT: Telecommunications:  small independent telephone  
          corporations:  rates:  universal service:  California High-Cost  
          Fund-A

            DIGEST:    This bill requires the California Public Utilities  
          Commission (CPUC) to make a final decision in a general rate  
          case of a small independent telephone company no later than 390  
          days following the company's filing and if the deadline is  
          missed, provides that the proposed rates will take effect on an  
          interim basis subject to an accounting true-up if a decision is  
          issued within 420 days of the filing. If a final decision is  
          made after 420th day, the new rate will take effect  
          prospectively with no true-up to the interim rates.  This bill  
          also allows rate case expenses to be an eligible expense within  
          the California High-Cost Fund-A Program that provides universal  
          service rate support to small independent telephone  
          corporations.

          ANALYSIS:
          
          Existing law:

          1)Provides federal universal service funding to providers  
            serving rural, high-cost areas to help pay for facilities that  
            provide customers both voice and broadband service for  
            customers in rural, insular and high-cost areas to ensure they  
            have access to telecommunications services that are reasonably  
            comparable to those services provided in urban areas and that  
            are available at rates that are reasonably comparable to rates  
            charged for similar services.  (47 U.S.C. 254) 








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          2)Requires the CPUC to regulate utilities, including telephone  
            corporations and to establish just and reasonable rates for  
            service, with corporations proposing rates either through a  
            general rate case application or an advice letter.  (Public  
            Utilities Code §451)

          3)Requires the CPUC to exercise its legal authority to maintain  
            the California High-Cost Fund-A Administrative Committee Fund  
            program (CHCF-A program) to provide universal service rate  
            support to small independent telephone corporations in amounts  
            sufficient to meet the revenue requirements established by the  
            CPUC through rate-of-return regulation in furtherance of the  
            state's universal service commitment to the continued  
            affordability and widespread availability of safe, reliable,  
            high-quality communications services in rural areas of the  
            state. (Public Utilities Code §275.6)

          4)Requires the CPUC to resolve general rate case proceeding  
            within 18 months of the date the scoping memo is issued,  
            unless the CPUC makes a written determination that the  
            deadline cannot be met and provides that no single order can  
            extend the deadline for more than 60 days.  Provides that the  
            CPUC may specify in a scoping memo a resolution date later  
            than 18 months if the memo includes specific reasons for the  
            later date and the assigned commissioner approves the date.  
            (Public Utilities Code §1701.5)

          5)Requires the CPUC to issue a final decision on a general rate  
            case application of a large (Class A) water corporation within  
            one year and requires interim rates that may be increased by  
            an amount equal to the rate of inflation as compared to  
            existing rates to take effect if the CPUC misses the deadline.  
             Provides the presiding officer determines the water  
            corporation's actions have delayed resolution, the presiding  
            officer or the CPUC may require a different date for interim  
            rates. (Public Utilities Code §455.2)

          6)Requires the CPUC to submit an annual report to the  
            Legislature on the number of cases where resolution exceeded  
            prescribed time periods in scoping memos. (Public Utilities  
            Code §910.1)

          This bill:

          1)Revises the CHCF-A program requirements to provide that the  








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            revenue requirement of a small independent telephone  
            corporation includes rate expenses defined as the reasonable  
            costs incurred by a telephone corporation in preparing and  
            participating in any CPUC proceeding or advice letter process  
            related to its rates. 

          2)Requires the CPUC to issue a final decision on a general rate  
            case of a small independent telephone corporation no later  
            than 390 days following the corporation's filing of its  
            general case application or advice letter. 

          3)Provides that if the CPUC fails to issue a final decision as  
            required, the rate design proposed by the small independent  
            telephone corporation in its application or advice letter  
            shall take effect on an interim basis beginning 390 days from  
            the filing. 
          4)Requires that the interim rate design will be subject to an  
            accounting true-up if a final CPUC decision or resolution  
            concluding the rate case is issued within 420 days.  The new  
            rate will be applied retroactively to the 390th day and the  
            accounting true-up will eliminate any revenue differences.

          5)Requires that if a final decision has not been made by the  
            420th day, the interim rate shall become final until the CPUC  
            issues a final decision without any true-up accounting. 

          6)Provides that the deadlines established by this bill can be  
            waived by mutual consent of the executive director of the CPUC  
            and the small independent telephone corporation.

          Background

          Small Independent Telephone Companies.  There are 13 small  
          independent telephone companies that provide local exchange  
          telecommunications service in rural areas of the state.  These  
          include: Calaveras Telephone located in Calaveras County,  
          Cal-Ore Telephone in Doris near Shasta, Ducor Telephone in the  
          Southern San Joaquin Valley, Foresthill Telephone located in  
          northeast Sacramento, Kerman Telephone in western Fresno County,  
          Pinnacles Telephone in San Benito Valley, Ponderosa Telephone in  
          Madera/Fresno/San Bernardino, Sierra Telephone serving  
          Madera/Mariposa, Siskiyou Telephone in northern California, and  
          Volcano Telephone in Amador County.  The small companies operate  
          as monopoly providers under traditional rate of return  
          regulation with rates set by the CPUC. Rates are determined  








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          through a general rate case (GRC) proceeding with evidentiary  
          hearings before an administrative law judge (ALJ) in which other  
          parties participate, or through a less formal advice letter  
          process administered by the CPUC staff.  As part of the rate  
          case, the CPUC determines a revenue requirement necessary to  
          cover the company's expenses, a return on capital investment,  
          and a profit.  However, since these areas are a high cost to  
          serve, the revenue from rates is supplemented with support from  
          the CHCF-A. 

          California High-Cost A-Fund.  Public Utilities §275.6 requires  
          the CPUC to minimize telephone rate disparities between rural  
          and metropolitan areas to keep rates affordable in areas with  
          lower population densities.  This fund supports the 13 small  
          independent telephone companies to allow rural residents to stay  
          connected to essential services to maintain public safety and  
          public health.  In the current fiscal year, the CPUC has  
          budgeted 43.3 million dollars from the A-Fund. 

          Federal High-Cost Program.  In addition to the revenue from  
          rates and the A-Fund, the small telephone companies receive  
          support from the federal universal service program as cost  
          recovery for the portion of their facilities that are deemed to  
          be for interstate services.  Although originally designed to  
          only be for voice service, the FCC in November 2011 issued a  
          major decision revamping the former Universal Service Fund into  
          the Connect America Fund (CAF) to provide subsidies for  
          facilities that provide broadband and voice service.  Carriers  
          that accept the CAF funding must meet broadband build-out  
          requirements and demonstrate that their networks provide minimum  
          broadband speeds.  

          The poster child - Kerman Telephone.  Kerman Telephone Company  
          filed a general rate case application in December 2011. The CPUC  
          issued its first scoping memo six months later.  In December  
          2012, the CPUC rejected a settlement agreement between the two  
          main parties, Kerman Telephone and the Office of Ratepayer  
          Advocates.  Eight months later the CPUC issues a revised scoping  
          memo.  Eventually, Kerman filed for interim rate relief, which  
          the CPUC denied. In October 2013, the CPUC adopted a stay of the  
          rate case.  The decision provided for an additional six month  
          stay.  Kerman filed a court appeal challenging the CPUC's delay.  
           Kerman has not had a rate change in nine years which has left  
          the company operating under a "cloud of regulatory uncertainty."  
           Recently, on March 29th, the CPUC released a proposed decision  








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          for Kerman.

          AB 1693 (Perea).  AB 1693 was passed unanimously by the  
          Legislature in 2014. The bill was very similar to this bill, as  
          it would have required a date certain for small telephone  
          companies on their GRCs.  However, the bill was vetoed by the  
          Governor.  In his veto message of the bill, Governor Brown  
          stated: "this bill sets inflexible time limits for the  
          completion of small telephone company rate cases and potentially  
          harm ratepayers.  I am directing the CPUC to address the  
          concerns of the proponents and to create a Rate Case Plan to  
          encourage timely completion of these rate cases."  Through  
          Decision 15-06-04 in June 2015, the CPUC adopted a plan that set  
          forth a timeline for how the CPUC will conduct general rate  
          cases for the small independent telephone companies going  
          forward.  The timelines adopted as guidelines for resolving rate  
          cases are those that are included in this bill as a requirement.  
           (Timeline table below)










                                          
           --------------------------------------------------------------- 
          |Table below sets forth benchmarks and associated timelines for |
          |             the GRC applications. (R. 11-11-007)              |
           --------------------------------------------------------------- 
          |-----------------------------------+---------------------------|
          |        Benchmark/Timeline         |        Day (Count)        |
          |-----------------------------------+---------------------------|
          |Applicant submits Notice of Intent |            -60            |
          |to CD                              |                           |
          |-----------------------------------+---------------------------|
          |Applicant provides initial         |      From -60 to -30      |
          |proposals, basic ratemaking and    |                           |
          |summary calculations to ORA, CD,   |                           |
          |and other interested parties.      |                           |
          |Parties make good faith effort to  |                           |
          |reach agreement on procedural,     |                           |








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          |discovery and confidentiality      |                           |
          |protocols.                         |                           |
          |-----------------------------------+---------------------------|
          |ORA sends Master Data Request to   |            -55            |
          |Applicant                          |                           |
          |-----------------------------------+---------------------------|
          |Applicant responds to ORA's Master |            -41            |
          |Data Request (MDR)                 |                           |
          |-----------------------------------+---------------------------|
          |CD provides deficiency or          |            -30            |
          |compliance letter to the Applicant |                           |
          |any dispute between the Applicant  |                           |
          |and ORA on the MDRs is to be       |                           |
          |resolved by the Director of CD.    |                           |
          |-----------------------------------+---------------------------|
          |Applicant resolves deficiencies    |   ASAP: -30 but by -20    |
          |-----------------------------------+---------------------------|
          |At  request of any party, CD       |      From -20 to -5       |
          |convenes informal workshop for     |                           |
          |parties to meet and confer, and to |                           |
          |address any potential application  |                           |
          |deficiencies/matters.              |                           |
          |-----------------------------------+---------------------------|
          |GRC Application Filed and          |             0             |
          |Testimony served                   |                           |
          |-----------------------------------+---------------------------|
          |Protest/Intervenor Deadline        |            30             |
          |-----------------------------------+---------------------------|
          |Reply to protest                   |            40             |
          |-----------------------------------+---------------------------|
          |Prehearing Conference              |            60             |
          |-----------------------------------+---------------------------|
          |Parties perform discovery          |           0-150           |
          |(including supplemental data       |                           |
          |requests and field visits); Public |                           |
          |Participation Hearings held        |                           |
          |-----------------------------------+---------------------------|
          |Intervenor Testimony Due           |            150            |
          |-----------------------------------+---------------------------|
          |Rebuttal Testimony Due             |            180            |
          |-----------------------------------+---------------------------|
          |Evidentiary Hearings               |          210-220          |
          |-----------------------------------+---------------------------|
          |Opening Briefs                     |            250            |
          |-----------------------------------+---------------------------|








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          |Reply Briefs/ALJ closes record     |            271            |
          |-----------------------------------+---------------------------|
          |Proposed Decision                  |            331            |
          |-----------------------------------+---------------------------|
          |Comments on PD                     |            351            |
          |-----------------------------------+---------------------------|
          |Commission Meeting/Decision        |          361-390          |
          |-----------------------------------+---------------------------|
          |Implement new GRC rate structure   |          390-420          |
          |                                   |                           |
           --------------------------------------------------------------- 
          
          Rate case expenses.  In the attempts to resolve the Kerman  
          Telephone general rate case, the CPUC essentially started anew,  
          restarting the case using a 2016 test year.  As a result,  
          Kerman, as well as, the other parties, namely ORA, had to  
          conduct new analysis and provide new testimony.  According to  
          CalCom, the original expenses had to be absorbed.  The changes  
          in this bill reflect that experience and provide telephone  
          corporations the opportunity to include rate case expenses  
          resulting from preparing and participating in a rate-related  
          proceeding.  However, it is unclear exactly what expenses are  
          covered and which would not be covered.  The author and  
          committee may wish to require the CPUC to determine what are  
          considered rate case expenses.

          Is a bill needed?  While the Kerman Telephone general rate case  
          may be an anomaly.  The CPUC has struggled with adhering to the  
          recommended timelines for resolving proceedings.  In recent  
          years, there's been an effort by the agency to better account  
          for the proceedings and their status.  The focused commitment  
          from the Executive Director, Commissioners and staff is showing  
          some measurable improvement.  However, there are also challenges  
          with the manner that some cases are closed and reopened as new  
          proceedings.  Proponents of this bill refer to the statute and  
          the deadlines included for water corporations as a model for how  
          timelines should be required for small telephone companies.   
          However, in the case of water corporations, the interim rates  
          are based on the existing rates with some accounting for  
          inflation, whereas this bill is proposing to adopt the  
          corporation's proposed rates as the interim rates.  Generally, a  
          utility will propose higher rates than what is usually found to  
          be just and reasonable.  Additionally, the water corporation  
          statute related to proceeding timelines provides the  
          administrative law judge and CPUC additional discretion,  








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          particularly if it is determined the delays in the proceeding  
          have been caused by the corporation.  The author and committee  
          may wish to add language to this bill in order to mirror the  
          provisions that exist for water corporations that establish the  
          interim rates based on the existing rate plus inflation and  
          allow the CPUC some discretion when it is determined the  
          corporation has caused the delay in the proceeding.

          Prior/Related Legislation
          
          AB 1693 (Perea, 2014) a bill very similar to the one being  
          proposes. AB 1693 would have required the CPUC to complete a  
          general rate case of a small independent telephone corporation  
          within 390 days.  If the deadline was not met, the bill would  
          have established procedures for interim rates. 

          FISCAL EFFECT:                 Appropriation:  No    Fiscal  
          Com.:             Yes          Local:          No


            SUPPORT:  

          California Communications Association (Source)
          California's Independent Telecommunications Companies

          
          OPPOSITION:

          None received

          ARGUMENTS IN SUPPORT:   The author states: "A core function of  
          the CPUC is rate-setting. Utilities subject to rate regulations,  
          like the member telephone companies of CalCom, cannot change any  
          rate without CPUC review and approval through a General Rate  
          Setting Application.  As such, the efficient operation and  
          economic health of rate-regulated utilities, and ultimately  
          their ability to make investments and upgrades to ensure they  
          are meeting the needs of their communities and customers.  If  
          the CPUC fails to timely process a telephone company's rate  
          case, there is no mechanism by which the company can compel the  
          Commission to act.  Plus, the current generic California  
          statutory requirement on the CPUC for the timely completion of  
          its proceedings is easily circumvented and even ignored by the  
          CPUC.  Over the past 20 years, the Commission has processed more  
          than two dozen small telephone company rate cases, resolving  








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          most of them within 13 months.  Kerman's rate cases filing was  
          straightforward, containing no matter that would justify  
          additional time.  Although Kerman could be considered an  
          anomaly, the fact that five years can go by and have no  
          resolution should give any company regulated by the CPUC pause."


          

                                      -- END --