BILL ANALYSIS                                                                                                                                                                                                    Ó






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          |SENATE RULES COMMITTEE            |                       SB 1122|
          |Office of Senate Floor Analyses   |                              |
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                                   THIRD READING 


          Bill No:  SB 1122
          Author:   Cannella (R) 
          Amended:  5/31/16  
          Vote:     21 

           SENATE ENERGY, U. & C. COMMITTEE:  11-0, 4/19/16
           AYES:  Hueso, Morrell, Cannella, Gaines, Hertzberg, Hill, Lara,  
            Leyva, McGuire, Pavley, Wolk

           SENATE APPROPRIATIONS COMMITTEE:  7-0, 5/27/16
           AYES:  Lara, Bates, Beall, Hill, McGuire, Mendoza, Nielsen

           SUBJECT:   Telecommunications:  small independent telephone  
                     corporations:  rates:  universal service:  California  
                     High-Cost Fund-A


          SOURCE:    California Communications Association

          DIGEST:   This bill requires the California Public Utilities  
          Commission (CPUC) to make a final decision in a general rate  
          case (GRC) 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 utility may file a tariff  
          implementing interim rates that may be increased by an amount  
          equal to the rate of inflation.  This bill requires the interim  
          rates to be subject to refund and adjusted consistent with the  
          final rates adopted by the CPUC.

          ANALYSIS:  
          
          Existing law:









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          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) 

          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  
            GRC 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 GRC 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 GRC  
            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  







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            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  
            revenue requirement of a small independent telephone  
            corporation includes rate expenses defined as the reasonable  
            costs, as determined by the CPUC, incurred by a telephone  
            corporation in preparing, initiating, and participating in any  
            CPUC proceeding or advice letter process in which its rates,  
            rate design, or revenue requirement are evaluated or adjusted.  


          2)Requires the CPUC to issue a final decision on a GRC 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 telephone corporation may file a tariff  
            implementing interim rates that may be increased by an amount  
            equal to the rate of inflation as compared to existing rates. 

          4)Requires that the interim rates to be subject to refund and  
            must be adjusted upward or downward to the interim rate  
            effective date, consistent with the final rates adopted by the  
            CPUC. The CPUC may authorize a lesser increase in interim  
            rates if the CPUC finds the rates to be in the public  
            interest. 

          5)Provides that if the presiding officer in the rate case  
            determines that the CPUC's decision can't become effective on  
            the first day of the first test year due to actions by the  
            small independent telephone corporation, the presiding officer  
            or CPUC may require a different effective date for the interim  
            rates or final rates. 

          6)Provides that the deadlines established by this bill can be  
            waived by mutual consent of the executive director of the CPUC  







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            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  
          through a 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 Section 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 Federal Communications Commission  
          in November 2011 issued a major decision revamping the former  
          Universal Service Fund into the Connect America Fund (CAF) to  







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          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 GRC 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  
          for Kerman.
          AB 1693 (Perea, 2014).  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 GRCs 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)        |
          |-----------------------------------+---------------------------|







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          |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,     |                           |
          |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 |                           |







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          |Participation Hearings held        |                           |
          |-----------------------------------+---------------------------|
          |Intervenor Testimony Due           |            150            |
          |-----------------------------------+---------------------------|
          |Rebuttal Testimony Due             |            180            |
          |-----------------------------------+---------------------------|
          |Evidentiary Hearings               |          210-220          |
          |-----------------------------------+---------------------------|
          |Opening Briefs                     |            250            |
          |-----------------------------------+---------------------------|
          |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 GRC, 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.  

          Is a bill needed?  While the Kerman Telephone GRC 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  







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          are based on the existing rates with some accounting for  
          inflation. Additionally, the water corporation statute related  
          to proceeding timelines provides the ALJ and CPUC additional  
          discretion, particularly if it is determined the delays in the  
          proceeding have been caused by the corporation.  

          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  
          GRC of a small independent telephone corporation within 390  
          days.  If the deadline was not met, the bill would have  
          established procedures for interim rates. The bill was vetoed.


          FISCAL EFFECT:   Appropriation:    No          Fiscal  
          Com.:YesLocal:   No

          According to the Senate Appropriations Committee, approximately  
          $184,000 (Public Utilities Commission Utilities Reimbursement  
          Account) to the CPUC for one full-time ALJs to ensure that the  
          codified deadlines are met.


          SUPPORT:   (Verified  5/31/16)


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


          OPPOSITION:   (Verified5/31/16)


          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  







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          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 CPUC has processed more than  
          two dozen small telephone company rate cases, resolving 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."

           

          Prepared by:Nidia Bautista / E., U., & C. / (916) 651-4107
          5/31/16 21:31:38


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