BILL ANALYSIS � 1
SENATE ENERGY, UTILITIES AND COMMUNICATIONS COMMITTEE
ALEX PADILLA, CHAIR
AB 1693 - Perea Hearing Date:
June 17, 2014 A
As Amended: April 2, 2014 FISCAL B
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DESCRIPTION
Current law requires the California Public Utilities Commission
(CPUC) to regulate electric, gas, water, and 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)
Current law requires the CPUC to administer universal service
programs to ensure statewide affordable basic telephone service
and access to broadband and advanced communications services,
including the California High Cost Fund A (A Fund) program to
support small independent telephone companies' provision of
basic service in rural, high-cost areas of the state. (Public
Utilities Code � 275.6)
Current federal law and decisions of the Federal Communications
Commission (FCC) provide federal universal service funding to
providers serving rural, high-cost areas to help pay for
facilities that provide customers both voice and broadband
service, and condition receipt of those federal funds on meeting
broadband deployment milestones and minimum network speeds. (47
U.S.C. 254)
Current law requires the CPUC, in administering the A Fund
program, to include in small telephone company rate calculations
the cost of all reasonable investments necessary to provide
voice service and deployment of broadband-capable facilities.
(Public Utilities Code � 275.6)
Current law requires the CPUC to resolve all adjudication cases
within 12 months of initiation unless the CPUC makes findings
why that deadline cannot be met and issues an order extending
that deadline. (Public Utilities Code � 1701.2)
Current law requires the CPUC to resolve each general rate case
and rulemaking proceeding within 18 months but allows extension
in 60-day increments if the CPUC determines in writing that it
cannot meet the deadline and issues an order extending the
deadline. (Public Utilities Code � 1701.5)
Current law requires the CPUC to issue a final decision on a
general rate case application of a large water corporation
within one year and requires interim rates to take effect if the
CPUC misses the deadline. (Public Utilities Code � 455.2)
Current law requires the CPUC to submit an annual report to the
Legislature on the number of cases where resolution exceeded
prescribed time periods. (Public Utilities Code � 321.6)
This bill requires the CPUC to issue a final decision in a
general rate case of a small independent telephone company no
later than 330 calendar days of filing and, if the deadline is
missed, provides that the proposed rates will take effect on an
interim basis on day 360, subject to a true-up if a final
decision is issued within 540 days. If a final decision is
issued after 540 days, the new rates will take effect
prospectively with no true-up to the interim rates.
BACKGROUND
Small Independent Telephone Companies - The following thirteen
small independent telephone companies (small telcos) provide
local exchange service primarily in rural areas of the state:
Calaveras Telephone is located in Calaveras County,
and is headquartered in the small town of Copperopolis;
Cal-Ore Telephone is headquartered in Doris, and
serves the Butte Valley and Tulelake areas in northern
California between Mt. Shasta and the Oregon border;
Ducor Telephone is headquartered in Ducor, which is
located in the southern San Joaquin Valley. It also
serves Rancho Tehama, west of the Corning/Red Bluff area,
and Kennedy Meadows, at the southern end of the Sierra
Nevada;
Foresthill Telephone (dba Sebastian) is located in
Foresthill, a small historical gold mining town,
northeast of Sacramento and east of Auburn;
Kerman Telephone (dba Sebastian) serves the Kerman
area in western Fresno County;
Pinnacles Telephone is headquartered in Paicines and
serves the rural areas of the Idria Valley and the San
Benito Valley;
Ponderosa Telephone is headquartered in O'Neals and
serves areas in Madera, Fresno, and San Bernardino
counties;
Sierra Telephone is headquartered in Oakhurst and
serves areas in eastern Madera and Mariposa counties;
Siskiyou Telephone is headquartered in Etna, and
serves a large area of Siskiyou County; and
Volcano Telephone is located primarily in Amador
County, and is headquartered in the small town of Pine
Grove near Jackson.
Unlike the Large Carriers - AT&T, Verizon, Frontier, and
Consolidated Communications (formerly SureWest), which have
competitive service areas and flexibility to set their own rates
- the small telcos are monopoly providers under traditional rate
of return regulation with rates set by the CPUC. Rates are
determined through either a general rate case (GRC) with
evidentiary hearings before an administrative law judge (ALJ) in
which the Office of Ratepayer Advocates (ORA) and other parties
participate, or a less formal advice letter process administered
by CPUC staff. In either process, the CPUC determines a "revenue
requirement" necessary to cover the company's expenses, a return
on capital investment, and a profit. Rates cannot exceed 150
percent of rates for comparable services in urban areas, and
currently are capped at $20.25. Because the cost of providing
service in the rural areas served by small telcos is so high,
the revenue from rates is supplemented with support from the A
Fund in order to meet the revenue requirement, with each
company's A Fund draw determined in its rate proceeding.
Federal High-Cost Program: Connect America Fund - In addition to
revenue from rates and the A Fund, the small telcos get 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 support
only 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, including
the small telcos that accept CAF funding must meet broadband
build-out requirements and demonstrate that their networks
provide minimum broadband speeds. Millions in annual federal
funding is at risk if California carriers do not meet these
requirements.
A Fund Proceeding - Shortly after the FCC issued the CAF
decision in November 2011, the CPUC opened a rulemaking to
undertake a comprehensive review of the A Fund program in order
to "develop a more efficient, prudent, and forward-looking plan
for rural consumers that will reflect realities of the market
place and technological advancements to safeguard California
ratepayers" (R.11-11-007). Among the reasons cited to support
the review was the FCC's shift to support broadband, along with
the observation that any reduction in federal high cost support
translates into an increase in support from the A Fund. This
proceeding also is considering how to implement SB 379 (Fuller,
2012) which requires the CPUC to include in small telco rate
calculations the cost of all reasonable investments necessary to
deploy broadband-capable facilities.
Delay in A Fund Proceeding and Rate Cases - It has been practice
for each small telco to file a rate case about every five years.
According to the CPUC, from 2006 to 2011, 10 small telcos filed
GRCs, and nine of them were completed in an average of 12.5
months. Currently nine of the small telcos are in line to file
rate cases, with the expectation of having new rates take effect
by 2016. Kerman filed a general rate application (A.11-12-011)
December 28, 2011, with the CPUC issuing its first scoping memo
six months later. The CPUC rejected a settlement agreement
between Kerman and ORA on December 20, 2012, nearly six months
after that agreement was filed. Two months later on February
26, 2013, the CPUC issued a revised scoping memo. Eventually,
Kerman filed for interim rate relief, which the CPUC denied.
The CPUC adopted a stay of Kerman's rate case on October 31,
2013, almost two years after it was filed. That decision
allowed for an additional six-month stay through an ALJ ruling,
and a further extension of the stay is now being considered
until at least December 31, 2014, at which point Kerman's rate
case will have been open for three years. Kerman has filed a
court appeal challenging the CPUC's delay.
Meanwhile, in the A Fund proceeding, the CPUC has issued several
revised scoping memos since opening the proceeding in November
2011. The latest scoping memo released March 18, 2014,
establishes a target date for a final decision by the end of
2014, although no evidentiary hearings have begun yet. The
other nine small telcos eligible to file rate cases are on hold
so that the issues resolved in the A Fund proceeding can be
uniformly applied in each rate case.
COMMENTS
1. Author's Purpose . According to the author: "Although a
core function of the CPUC is ratesetting, it recently
allowed two years to elapse before finally issuing a
decision to stay the rate case of Kerman Telephone, a small
telephone company in my district. Small independent
telephone companies cannot change any rate without CPUC
review and approval. And the longer the CPUC takes to
complete a ratemaking case, the more costly it becomes for
the telephone company and its customers. As such, the
efficient operation and economic health of rate-regulated
utilities, and ultimately their ability to make investments
and provide the services demanded by customers, depends on
the CPUC's timely resolution of rate cases. This bill will
motivate the CPUC to process small telephone company rate
cases in a timely manner, as well as prevent the type of
abuse of due process that has happened to Kerman."
2. Is Current Law Effective ? The current law (Public
Utilities Code Section 455.2) requiring the CPUC to
complete proceedings within 18 months of issuing a scoping
memo is easy to circumvent and has no consequences for
violation. There is no deadline for issuing a scoping memo,
so the CPUC can take months, even years, before issuing one
after a proceeding is open. For example, the CPUC opened
the A Fund proceeding on November 10, 2011, but did not
issue a scoping memo to trigger the 18-month deadline until
May 22, 2013, almost 18 months later. In addition, the law
allows the CPUC to extend the deadline without limit as
long as it makes a determination in writing that it cannot
meet the deadline, typically by resolution adopted on the
consent calendar at a CPUC meeting. The small telcos'
regulatory attorneys report that their review found that
during 2012 and 2013, the CPUC issued 138 decisions
extending deadlines in 78 different proceedings subject to
either the 12-month deadline in Section 1701.2 or the
18-month deadline in Section 1701.5. They reported that,
of those 78 proceedings, 25 had been pending for more than
three years, and six were pending for more than five years.
Similarly, it appears that current law requiring the CPUC
to submit an annual report to the Legislature on the number
of cases resolved within prescribed time periods may not be
effective. The most recent report for 2013 states: "This
is the fourth consecutive year, since the reporting periods
were initiated in 1998, that the Commission achieved 100%
compliance with the deadlines for proceeding resolution."
<1> Kerman's rate case (A.11-12-011) is shown in Appendix E
as a formal proceeding that is "still on schedule." The
report does not clearly indicate when proceedings were
open, and it does not list extensions of the 12-month or
18-month deadlines for each proceeding.
3. Interim Rates as Incentive for CPUC Action or Desired
Outcome for Telcos ? This bill seeks to motivate timely
CPUC action with the threat of a company's proposed rates
taking effect on an interim basis. Typically, rates
adopted by decision or through a settlement with ORA are
lower than proposed rates, sometimes significantly lower
because of CPUC and ORA scrutiny of claimed expenses and
other issues. The CPUC and ORA, in opposing this bill,
state that the tight timeframe denies parties due process
and that interim rates may not be "just and reasonable" and
will harm ratepayers. On the other hand, similar to the
12-month requirement for water rate cases, this bill makes
interim rates subject to true-up so that ratepayers will be
--------------------------
<1> CPUC Report to the Governor and Legislature on the Timely
Resolution of Proceedings and Commissioner Presence at Hearings
in 2013 (submitted January 31, 2014)
http://docs.cpuc.ca.gov/PublishedDocs/Published/G000/M087/K341/87
341995.pdf
refunded any difference if final rates are adopted within
18 months. In addition, the bill allows the deadlines to
be waived by mutual consent of the CPUC and the small telco
rate applicant, providing some flexibility for
extraordinary circumstances.
The CPUC and ORA also state that this bill incentivizes the
small telcos to create delay once a rate application is
filed so that interim rates will take effect. However,
those interim rates, likely higher than final rates, would
be subject to refund to customers unless the rate case
extends beyond 18 months.
4. Effect of Delay on Achieving State Broadband Goals .
Through many programs and policies, California has made it
a key priority to close the digital divide and provide
universal access to broadband statewide. The prospect of
continued delay in rate cases may have a chilling effect on
small telco investment in broadband infrastructure,
especially since the pending rate cases will be the first
to comply with the SB 379 requirement to allow recovery of
reasonable investment in broadband-capable facilities. As
stated by the author, if a small telco had planned to make
infrastructure investments but is in limbo while awaiting
action on its rate case, the company has two choices: move
forward with the capital improvements in the absence of a
new rate design without any hope of recovering the costs,
or, more likely, suspend investment in infrastructure
improvements, to the detriment of the company's customers,
while waiting for the CPUC to act. Moreover, to the extent
these investments impede a small telco's ability to meet
FCC broadband build-out requirements it could lose federal
universal support.
5. How Long to Resolve Broadband Revenue Issue ? The CPUC
states that a major reason it will be difficult to meet the
deadlines imposed by this bill is that the broadband
requirements of SB 379 "will undoubtedly prove contentious
among the parties." At the same time, the CPUC is
addressing implementation of SB 379 in the A Fund
proceeding so that the outcome can be uniformly applied in
the small telco rate cases, which are on hold until that
proceeding is complete. SB 379, enacted nearly two years
ago, was a response by the small telcos to frustration with
CPUC denial of cost recovery for any portion of facilities
beyond what was required for providing landline voice
service given that those facilities could also be used for
broadband access, an unregulated service. SB 379 expressly
requires the small telcos to provide the CPUC "information
regarding revenues derived from the provision of
unregulated Internet access service by that corporation or
its affiliate within that corporation's service territory."
This requirement was intended to enable the CPUC to make
the determination in each rate case of what is a
"reasonable investment" in broadband-capable facilities.
Moreover, the policy and provisions of SB 379 flow from the
FCC's National Broadband Plan issued in March 2010 and from
the FCC decision transforming the federal universal support
program to support broadband, issued in 2011.
6. Amendment . This bill would take effect on January 1,
2015. If the CPUC completes the A Fund proceeding before
the end of 2014 (as the most recent scoping memo projects),
the small telcos may be able to file rate applications
prior to January 1, 2015, with rates proposed to take
effect January 1, 2016. It is the author's intent that the
deadlines imposed by this bill would apply to applications
filed but still pending before the bill takes effect.
Thus, the author and committee may wish to consider
amending this bill to specify that interim rates take
effect no later than 330 calendar days after an application
is filed or the effective date of this bill, whichever is
later, with conforming changes for the 360-day and 540-day
deadlines.
7. Ratepayer Impact . This bill does not have a direct
impact on the level of rates adopted in any rate
proceeding.
8. Related Legislation .
SB 1364 (Fuller) extends the sunset date of the California
High Cost Fund A. Status: Set for hearing in the Assembly
Committee on Utilities and Commerce June 23rd.
SB 1409 (Hill) requires CPUC annual report to the
Legislature on proceedings to include safety
investigations. Status: Pending consideration by the
Assembly Committee on Appropriations.
ASSEMBLY VOTES
Assembly Floor (75-1)
Assembly Appropriations Committee (16-0)
Assembly Utilities and Commerce Committee
(15-0)
POSITIONS
Sponsor:
California's Independent Telecommunications Companies
Support:
California Communications Association
City of Kerman
Fresno Chamber of Commerce
Oppose:
California Public Utilities Commission
Office of Ratepayer Advocates
The Utility Reform Network
Jacqueline Kinney
AB 1693 Analysis
Hearing Date: June 17, 2014.