HomeMy WebLinkAbout19971212Order No 27249.doc BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
IN THE MATTER OF THE APPLICATION OF FILER MUTUAL TELEPHONE COMPANY FOR DISBURSEMENTS FROM THE IDAHO UNIVERSAL SERVICE FUND.
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CASE NO. FIL T 97 1
ORDER NO. 27249
On June 24, 1997, the Filer Mutual Telephone Company (Filer Mutual) filed an Application for authority to receive disbursements from the Idaho Universal Service Fund (USF). Filer Mutual is a mutual, non-profit telephone company providing local exchange telephone service and related telecommunications services in the states of Idaho and Nevada. Filer is incorporated in Idaho and maintains its business office in the town of Filer, Idaho. In Case No. USW-S-96-4, this Commission required U S WEST to implement three new extended area service (EAS) regions within its southern Idaho service territory. One of those three new regions is located in south central Idaho; encompassing the Magic Valley. In its Application, Filer Mutual notes that with the implementation of EAS earlier this year, all telephone calls between communities in the Magic Valley EAS became toll-free. Filer Mutuals Filer and Hollister exchanges are contiguous to the Magic Valley EAS territory. In fact, the Filer exchange is located between U S WESTs Twin Falls and Buhl exchanges. Filer states that many of its customer/owners, as well as U S WEST customers in adjacent exchanges, have requested that Filer Mutuals service territory be included within the Magic Valley EAS. Consequently, Filer Mutuals Board of Directors voted to include Filer Mutual within the Magic Valley EAS.
According to Filer Mutual, implementing EAS with U S WESTs Magic Valley region will have a substantial impact on Filer Mutuals net income. In its Application, Filer Mutual estimated that based on 1996 recorded revenues, intrastate access charge and billing and collection revenue losses are estimated at $312,923 and $173,735, respectively, for an annual revenue loss of $486,658. Filer Mutual also estimates that the reduction in total toll minutes will cause a shift in separated expenses from the interstate jurisdiction to Idaho, thus increasing local exchange costs by an additional $40,166 annually. Adding the revenue losses and increased costs together, Filer Mutual originally estimated that the net impact of implementing EAS would be a reduction in net income of $526,824.
Filer Mutual contends that in order to partially meet its post-EAS revenue requirement, it will increase its local exchange rates to a level slightly in excess of 125% of the weighted statewide average local exchange rate. Rates will increase from $6.00 to $15.50 per month for residential customers and from $8.00 to $33.50 per month for business customers. This increase will produce $306,552 of additional annual revenue. At the same time, Filer Mutual proposes to reduce its access charges to a level equal to 100% of the weighted statewide average access charge, resulting in a further revenue reduction of $59,825 annually.
According to its initial calculations, the realignment of rates described above will leave Filer Mutual with a residual annual revenue requirement of $222,887. Filer Mutual states that, according to Idaho Code 62-610 and Rule 106 of the rules for Idaho Universal Service Fund, Filer Mutual is entitled to recover not less than 75% nor more than 100% of this residual revenue requirement from the Idaho USF.
On October 8, 1997, this Commission conducted a technical hearing to resolve Filer Mutuals Application. Although AT&T Communications of the Mountain States, Inc. and MCI Telecommunications Corporation were both granted intervention in this matter, the only parties to present evidence at the hearing were Filer Mutual and the Commission Staff. MCI and AT&T submitted joint comments in response to Filer Mutuals Application as discussed below. MCIs counsel presented oral argument at the hearing.
Prior to the commencement of the technical hearing, Filer Mutual and the Commission Staff were able to resolve a number of issues that had arisen as a result of Staffs audit of Filer Mutuals records. Consequently, there are only three issues left for this Commission to resolve.
CLASS Service Rates
Filer Mutuals CLASS calling features include Caller ID (Number only), Call Forwarding, Call Waiting and Automatic Recall. Staff compared Filer Mutuals CLASS rates with the rates of the seven other small independent companies that currently receive USF funding. The results of that analysis, attached as Exhibit No. 102 to Staff witness Carolee Halls testimony, show that for each CLASS service feature, Filer Mutuals rates are below the average rates of the seven aforementioned telephone companies. Staff believes that although the Commission does not have the authority to set rates for a mutual telephone utility such as Filer Mutual, it can, nonetheless, impute what it believes to be fair and reasonable rates when determining whether a non-profit telephone provider is entitled to USF funding and in what amount. Consequently, Staff proposes that the average CLASS feature rate for the seven independent companies receiving USF funding be imputed for Filer Mutual. This results in a decrease of $3,574 annually in Filer Mutuals residual revenue requirement.
Timing of Rate Increase
Staff notes that subsequent to the filing of Filer Mutuals Application in this case, the monthly USF threshold rates were raised from $15.50 to $17.51 for residential and $33.50 to $36.57 for business. The Commission postponed implementation of these new threshold rates for some of the independent companies currently receiving USF funding because EAS has not yet been considered for those companies and the Commission reasoned that one rate change would be preferable to two. In this case, Filer Mutual proposes delaying increasing its residential and business rates to the new USF threshold levels for at least six months. Staff opposes this on the basis that Filer Mutual has already implemented EAS and there is no reason to delay raising the Companys rates to the new threshold levels or at least imputing revenue as if the increases were implemented.
Rate of Return
Simply stated, the most complex and contentious issue in this case is whether Filer Mutual is entitled to some form of return on investment for the purpose of determining the amount of USF funding to which it is entitled. It is Staffs position that the revenue requirement for Filer Mutual should not include a return on equity because the Company is required to return profits to its membership. Consequently, if Filer Mutual is allowed to earn a return on investment while receiving USF funds, profits will ultimately be returned to the membership effectively reducing the rate Filer Mutual customers will pay below 125% of the statewide average, Staff contends. According to Staffs calculations, if a return on investment is not imputed for Filer Mutual, then the Company is not eligible to receive USF funds because it has a positive net income.
At the hearing, Staff witness Carlock suggested that Filer Mutual should be entitled to earn a return on new investments once its base rates are set at the current USF threshold. Under this proposal, any future investments in plant in service could earn a return. Investments in plant could be made by the net margin as Filer Mutual has done in the past or they could be taken from additional contributions from patrons above the threshold rate or from other sources such as debt. Under this scenario, these patronage equity contributions for investments, Staff contends, would not be classified as advances because the payments would not be made to reduce the rates below the threshold level.
Filer Mutual argues that the purpose of the return component of the revenue requirement is to compensate the Company for the cost of capital. Consequently, the Company argues, a return is just as necessary for a cooperative as it is for an investor-owned company. A non-profit telephone cooperative has the same need as commercial companies for regular infusions of capital. Filer Mutual points out that the utility that simply recovers its annual expenses on a dollar-for-dollar basis, including depreciation, would be out of business in a relatively short period of time. In order to recover their entire cost of operations, both regulated and non-regulated companies must recover their cost of capital in addition to their other expenses. Filer Mutual argues that the net effect of Staffs proposal is the complete elimination of cost of capital recovery from revenue requirement. If the resulting revenue requirement were actually used to develop rates, Filer Mutual argues, the Company would have no source of investment capital other than cash flows generated by depreciation. In a relatively short period of time, Filer Mutual would exhaust its available capital funds.
Position of MCI/AT&T
MCI/AT&T assert that the USF should not be used as a funding source for EAS expansion. They note that the stated statutory purpose of the USF is maintaining the universal availability of local exchange service at reasonable rates. (Citing Idaho Code 61-610). The purpose of the USF legislation, MCI/AT&T contend, is to provide support to high cost companies so that their rates remain reasonable. MCI/AT&T contend that Filer Mutuals rates, prior to the implementation of EAS, were not unreasonably high and that the purpose of the USF is not to facilitate the implementation of EAS.
MCI/AT&T argue that the implementation of EAS for Filer Mutual benefits these customers only and it would be unfair to burden interexchange carriers with additions to the MTS surcharge to support a program that deprives interexchange carriers of revenues and advances no goals to which interexchange carriers should legitimately contribute.
FINDINGS
This is a case of first impression for this Commission in that we have never been presented with an Application for USF funding by a non-regulated (i.e., non-profit) telephone company. The Legislature recently cleared up, in the affirmative, any ambiguity regarding whether non-profit telephone companies are eligible to receive USF funding this year when it revised Idaho Code 62-603(14) to specifically include those entities as eligible recipients of the USF. The issue we are called upon to resolve in this case, therefore, is not whether Filer Mutual constitutes an eligible recipient of USF funding but, rather, whether Filer Mutual has a residual revenue requirement, pursuant to Idaho Code 62-610, after deducting the revenue generated by all intrastate telecommunication services from Filer Mutuals total intrastate telecommunication service revenue requirement as determined by this Commission, including local exchange priced at 125% or more of the weighted statewide average and MTS/WATS access services priced at 100% or more of the statewide average, and contributions from the federal Universal Service Fund. In other words, we must analyze Filer Mutuals revenues and expenses and determine whether, and to what extent, it is eligible for USF funding in precisely the same manner as we do for regulated telephone utilities. As the evidence presented during the technical hearing conducted in this matter illustrates, however, non-profit cooperatives such as Filer Mutual differ from regulated utilities thereby creating issues of first impression; in this case, specifically, whether Filer Mutual is entitled to a return on equity.
Accounting Adjustments
Following the filing of Filer Mutuals Application in this proceeding, Staff conducted an audit of the Companys records. As a result, Staff witness Faunce, proposed a number of adjustments to Filer Mutuals calculation of its residential revenue requirement for USF purposes. Filer Mutual agreed to all of the accounting adjustments proposed by Staff which we accept as reasonable. The effect of these adjustments is to reduce Filer Mutuals intrastate rate base by $191,114 (Appendix page 2, column J, line 17) and increase the net margin by $61,915 (Appendix page 1, column K, line 22).
Timing of Rate Increase
We cannot find any justification for delaying the implementation of new residential rates for Filer Mutual to meet the USF threshold level of $17.51. We find, however, that the business rate of $33.50 is reasonable. Again, we do not have the authority to change Filer Mutuals rates. Nonetheless, we can impute the USF threshold rate for the purpose of calculating Filer Mutuals USF disbursement. While it is true that we have delayed the implementation of the new USF rates for other independent telephone companies, those companies, as Staff notes, are currently involved in EAS proceedings which will have an effect on their rates once those proceedings are concluded. We determined that from the standpoint of those companies customers, a single rate increase would be preferable to two separate increases. In the case of Filer Mutual, however, EAS has already been implemented and there is simply no reason to delay imputation of the new USF threshold rates for purposes of calculating USF funding.
Return on Investment
We find that it is reasonable to allow for some type of return on equity to the owners/customers of Filer Mutual. On the other hand, we find that the customers/owners of Filer Mutual incur significantly less risk than do the owners of a regulated, for profit telephone utility. Consequently, we find that the overall return requested by Filer Mutual is unreasonable.
We believe that a reasonable compromise is to allow Filer Mutual an overall rate of return of 10% but limit it to 60% of the Companys current rate base as reflected on Appendix page 2, line 19. We base our decision on Filer Mutuals Board of Directors decision to retain 60% of its net margin and to return the remaining 40% to its customers in 1995 and 1996. Filer Mutual will be allowed to earn a reasonable return determined in future proceedings on any prudently incurred new rate base investment. Based upon this finding, Filer Mutual does not require disbursements from the USF at this time. As additional investment is made and the Companys financial situation changes, Filer Mutual is free to file an Application with this Commission in the future seeking USF disbursements. The Commission will determine at that time what percentage of any resdiual revenue requirement Filer Mutual may have as provided for in Idaho Code 62-610.
Given our finding that Filer Mutual does not require USF disbursement at this time, we find that it is unnecessary to decide the CLASS services issue or resolve the concerns expressed by AT&T/MCI.
O R D E R
IT IS HEREBY ORDERED that the Application of Filer Mutual for authority to receive disbursements from the Universal Service Fund is denied consistent with the terms and conditions set forth in this Order.
THIS IS A FINAL ORDER. Any person interested in this Order may petition for reconsideration within twenty-one (21) days of the service date of this Order. Within seven (7) days after any person has petitioned for reconsideration, any other person may cross-petition for reconsideration. See Idaho Code 61 626.
DONE by Order of the Idaho Public Utilities Commission at Boise, Idaho this day of December 1997.
DENNIS S. HANSEN, PRESIDENT
RALPH NELSON, COMMISSIONER
MARSHA H. SMITH, COMMISSIONER
ATTEST:
Myrna J. Walters
Commission Secretary
vld/O:FIL-T-97-1.bp2
ORDER NO. 27249 -1-
Office of the Secretary
Service Date
December 12, 1997