20020129Comments.pdf

WELDON STUTZMAN
DEPUTY ATTORNEY GENERAL
IDAHO PUBLIC UTILITIES COMMISSION
PO BOX 83720
BOISE,IDAHO 83720-0074
[phone]
ISB NO.3283
Street Address for Express Mail:
472 W.WASHINGTON
BOISE,IDAHO 83702-5983
Attorneyfor the Commission Staff
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
IN THE MATTER OF THE APPLICATION OF )CASE NO.RUR-T-01-01RURALTELEPHONECOMPANYFORAN)ORDER INCREASING USF FUNDING.)COMMENTS OF THE
)COMMISSION STAFF
COMES NOW the Staff of the Idaho Public Utilities Commission,by and through its
Attorneyof record,Weldon Stutzman,Deputy AttorneyGeneral,and in response to the Notice
of Application,Notice of Modified Procedure and Order No.28930 issued on January 15,2002,
submits the followingcomments.
BACKGROUND
On May 30,2001,Rural TelephoneCompany filed an Application to increase its
entitlement to Idaho USF funding.The increased fundingis to reimburse the Company for its
costs and expenses in providing EAS to the Tipanuk,Prairie,and Boise River exchanges per
Commission Order No.28114,Case No.GNR-T-97-9,dated August 20,1999.As originally
filed,the Company's Application asked for an annual increase in USF fundingin the amount of
$125,562.00.The Company subsequentlyrevised its request on November 16,2001 to an annual
increase of $81,042.92.This request is based upon a total of the followingrevenue related
elements:
STAFF COMMENTS 1 JANUARY 29,2002
Grossed-up return on the related capitalized costs and expensesAnnualDepreciationExpense
Annualized EAS Case Costs
Access Revenue Reduction
Shift in Federal Support to the State
Revenue increase from change in local rates
Staff and the Company now recommend that Rural Telephone be granted additional USF
fundingin the annual amount of $68,274.00.After completing its audit,Staff had recommended
that the annual amount be increased by $57,535.69.However,after reviewing Staff's original
recommendation with the Company,the Company and Staff reached agreement on several
contested issues that result in increased USF fundingof $68,274.00.Staff's original position and
the now agreed upon position are presented in the attached audit report (Attachment No.1).
EFFECTIVE DATE
The parties did not agree on one remaining issue,as follows:Should the annual increase
in payments from the USF to Rural Telephonebe retroactive to a specific date?If the increase in
payments is retroactive,what is the appropriate date for the payments to begin?
Staff identifies the followinglogical options for the beginning date of the payments.
a.The date the EAS and customer rate changes became effective,February 14,2001
as Rural proposes.
b.Thirty days after the May 30,2001 date of the Application Filing,which would beJuly1,2001.
c.Thirty days after the November 16,2001 date that Rural revised its Application,which would be December 16,2001.
d.Date of the Commission Order approving the increased USF funding.
DISCUSSION
AlthoughStaff supports prompt payment of USF funds to eligible telephonecompanies,
any company claiming additional USF draws should be prompt in its request,and in providing
the information required to verify its entitlement.In this case,Rural was perhaps dilatory in
presenting its request,and Staff believes awarding USF funds retroactivelycould unfairly reward
tardy business practices.In addition,the relevant USF statute requires that "[d]istributionsfrom
the fund shall be made monthly."Idaho Code §2-610(4).Deviation from that statutory
STAFF COMMENTS 2 JANUARY 29,2002
mandate,as would occur by distributing a lump sum to a retroactive effective date,should be
based on compelling circumstances.It is true that the costs that justifyRural's request for
increased fundinghad been incurred by the date of the EAS cutover,and it is reasonable for the
Company to expect to be compensated for those costs as of that date.It is also reasonable,
however,for the Commission to expect a company to be prompt in requesting such
compensation.Rural must bear some of the responsibility for the relativelylate date of a
Commission order for an increase in its annual USF draws.
When the Commission considered approving the EAS at issue,it deferred a decision on
the financial aspects of the case,other than consumer rates,primarily to obtain accurate costs for
the construction and upgrades necessary to implement the approved EAS routes.The
construction was essentially completed in October of 2000.Yet the Company's Application was
not filed until May 30,2001,some seven months after completion of construction and four
months after the cutover date.
Another issue resulting in delay,for which Rural must bear some responsibility,came
from an FCC order issued May 22,2001,prior to the filing of Rural's Application.A significant
portion of Rural's initial funding request was for a reduction in federal support the Company
anticipated due to the increase in intrastate minutes that occurs when EAS routes are approved.
The FCC in its May 22 order placed a freeze in jurisdictional factors,which means Rural's
federal support would not be reduced as much as anticipated.Staff contacted Rural's consultant,
GVNW,and it was mutually agreed that the Application would be revised in light of the FCC
order.Nonetheless,nearly four months passed before the revised Application was submitted.
Staff understands that it may take some time after the completion of construction to
collect the required data and post the financial transactions.It is also reasonable that analysis of
a decision as significant as the FCC's May 22 order may require some time.Staff nonetheless
believes the time involved in the Company's responses in this case are excessive.Under these
circumstances,making the increased USF payments retroactive to the date of the EAS cutover,
as requested by the Company,unnecessarily rewards slow business practices and complicates
administration of the state USF.
Considering that the Company reasonablyexpected some EAS costs to be recovered
through increased USF draws,and the Company's failure to make a more timely request,Staff
believes the appropriate effective date should be no earlier than July 1,2001,which is 30 days
STAFF COMMENTS 3 JANUARY 29,2002
after the May 30,2001 Application filing date.This date recognizes the responsibility the
Company has to file and pursue its claim in a timely manner.
If July 1,2001 is the beginning date,a one-time payment representing eight (8)monthly
payments (July2001 through February 2002)in the amount of $45,546.08 should be paid from
the USF fund.Beginning March 2002,the monthlyUSF payment to Rural should be increased
by $5,693.26 for 28 months,so that Rural is credited with the 36-month amortization for
recovery of the case costs as discussed in Attachment No.1,Staff Audit Report.Thereafter,the
monthlypayment should be reduced by $855.67 to reflect the cessation of recovery for the case
costs.
Respectfullysubmitted this B day of January2002.
Weldon Stutzman
Technical Staff:Joe Leckie
Terri Carlock
i:umisc:comments/rurt01.l wsjlte
STAFF COMMENTS 4 JANUARY 29,2002
CERTIFICATE OF SERVICE
I HEREBY CERTIFY THAT I HAVE THIS 29TH DAY OF JANUARY 2002,SERVED THE FOREGOING COMMENTS OF THE COMMISSION STAFF,IN CASE
NO.RUR-T-01-01,BY MAILING A COPY THEREOF,POSTAGE PREPAID,TO THE
FOLLOWING:
CONLEY WARD MICHAEL RICHMOND
GIVENS PURSLEY LLP GENERAL MANAGER
PO BOX 2720 RURAL TELEPHONE COMPANY
BOISE ID 83701-2720 704 W MADISON AVE
GLENNS FERRY ID 83623
SECRETARY
CERTIFICATE OF SERVICE
IDAHO PUBLIC UTILITIES COMMISSION
STAFF AUDIT REPORT
ON
RURAL TELEPHONE COMPANY
Prepared by Joe Leckie
Auditor
January 29,2002
Attachment No.l
Case No.RUR-T-01-1
Comments/Staff Audit Report
1/29/02 Page 1 of 9
BACKGROUND
On May 30,2001,Rural Telephone Company filed an Application to increase its
entitlement to USF funding.The basis for the increase funding is to reimburse the Company for
its costs and expenses in providingEAS to the Tipanuk,Prairie,and Boise River exchanges per
Commission Order No.28 114,Case No.GNR-T-97-9,dated August 20,1999.The Company's
original Application asked for an annual increase in USF funding in the amount of $125,562.00.
Subsequently,the request was revised on November 16,2001,to ask for $81,042.92.This
request is based upon a total of the followingrevenue related elements:
Grossed-up return on the related capitalized costs and expenses
Annual Depreciation Expense
Access Revenue Reduction
Annualized EAS Case Costs
Shift in Federal Support to the State
Revenue increase from change in local rates
Based upon Staff's review,Staff is recommending that Rural Telephone be granted
additional USF fundingin the annual amount of $68,274.00.Staff had originally recommended
that the annual amount be increased by $57,535.69.However,after reviewing Staff's original
recommendationwith the Company,the Company and Staff have reached an agreement on
issues that results in the annual amount for increased USF fundingof $68,274.00.
Below is a chart showing the revenue elements as requested by Rural Telephone,the
amounts originally recommended by Staff,and the agreed upon amounts:
Revenue Elements Requested by Rural Staff Recommended Stipulated AmountGrossedupReturn
on Actual Capitalized
Costs/Expenditures $49,428.47 $29,862.79 $38,705.64AnnualDepreciation
Expense $32,317.18 $29,414.11 $29,646.39LostAccessRevenue$45,750.27 $45,750.27 $45,750.27ShiftinFederalSupport
to the State $14,760.00 $14,760,00 $14,760.00AnnualizedCaseCost
(3 year amortization)$9,643.41 $8,604.92 $10,268.00RevenueIncrease
from Local Rates $(70,856.40)$(70,856.40)$(70,856.40)Totals $81,042.93 $57,535.69 $68,273.90
Attachment No.1
.Case No.RUR-T-01-1AttachmentAshowsthedetailedcalculationoftheseamounts.Comments/Staff Audit Report
RURAL TELEPHONE COMPANY 1/29/02 Page 2 of 9
STAFF AUDIT REPORT 1 JANUARY 29,2002
I.Grossed-up Return on Actual Capitalized Costs/Expenses
A.Background
Pursuant to Case No.GNR-T-97-9 and Order No.28114 issued August 20,1997,the
Commission determined that Rural Telephoneshould provide EAS to the Boise River,Tipanuk,
and Praire exchanges.The Commission stated in its Order "that it is in the public interest to
support EAS for these exchanges in part by increased distributions from USF."In order to
provide the EAS service,Rural Telephonewas required to upgrade its then existing facilities and
equipment.The Company separated the upgrades to the three exchanges under three
workorders:W/O No.10022-Tipanuk,W/O No.10023-Prarie,and W/O No.10024-Boise River.
To determine the amount of additional USF funds the Company was entitled to receive,
Rural Telephonetotaled all the costs and expenses it incurred to upgrade the facilities and
equipment.The Company then determined a grossed-up rate of return on the additional costs
and expenses based upon its weighted cost of equity for the year 2000.
Rural's Staff's StipulatedFundingComponentRequestRecommendationAmount
Total Capitalized Costs
Expenses $511,467.73 $461,707.05 $469,198.60
Weighted Cost of
Equity-Attachment D 0.0474 0.042986 0.042986
Gross-up Factor
Attachment E 1.6469 1.00014 1.412655
Grossed-up Revenues $49,428.47 $29,862.79 $38,705.00
Attachment No.1
Case No.RUR-T-01-1
Comments/Staff Audit Report
RURAL TELEPHONE COMPANY 1/29/02 Page 3 of 9
STAFF AUDIT REPORT 2 JANUARY 29,2002
Staff examined all the claimed costs and expenses,the weighted cost of equity,and the
gross-up factor.Below is a comparison of these components as requested by Rural,as initially
recommended by Staff and then as agreed to by Rural and Staff.
B.Capitalized Costs and Expenses
The capitalized costs and expenses for the workorders claimed by Rural Telephone
totaled $511,467.73.After Staff s review,it recommends that $464,707.05 of the incurred costs
and expenses be allowed for recovery.Rural Telephone and Staff now agree on recovery for
capitalized costs and expenses in the amount of $469,227.98.
Staff initially recommended adjustments reducing the total amount of capital costs and
expenses requested by Rural Telephone by a total of $49,760.68.After reviewing those
adjustments,Rural Telephone agreed with $34,718.82 of the adjustments and disputed the
balance of $15,041.87.
The disputed balance is attributable to allocation of two categories of expenses.First,
Rural charged labor expenses and related employer contributions in the amount of $12,539.93 to
the workorders that were not documented by employee time cards.It subsequently provided
sworn affidavits from the individual employees who claimed their labor was in fact labor
performed in relation to the workorders.The Company and Staff both agreed that the best
documentation of the labor expense in question was the employees'time cards.However,based
upon the affidavits,it does appear that some if not all of the labor expense is an appropriate
allocation of expense.Since the actual amount of appropriate expense is not known,Rural and
Staff agreed that a fair and reasonable allocation of the disputed labor expense was to allow one-
half of the labor expenses and related employer contributions be recovered.The balance of
$6,269.97 of labor expense would not be allowed for recovery from USF funds.
Secondly,the Company employees who worked on W/O 10024-Boise River were
allowed to charge their meals to Nester's,a local retail business.Employees did not submit
receipts and Nester's did not maintain a detailed ledger of the employee charges,but only
maintained a runningtotal ledger.The employees charged a total of $2,501.94 during the time
period they worked on the Boise River project.Staff initiallydisallowed this claimed expense
because there were no individual charge receipts showing a detailed description of each charge.
After discussions with Rural Telephone,it is apparent that at least some of the charges are fair
Attachment No.1RURALTELEPHONECOMPANYCaseNo.RUR-T-01-1STAFFAUDITREPORT3Comments/Staff Audit Report
1/29/02 Page 4 of 9
and reasonable for meals for the employees.It was agreed that one-half of the amount requested
would be a fair and reasonable amount to allow for recovery,and that the balance of $1,250.97
should not be allowed for recovery from USF funds.
Therefore,the total amount of capital costs and expenses that both Staff and Rural
Telephoneagree to is $461,227.98.(See Attachment A for calculation of total capital costs and
expenses.)(See Attachment C for an explanation of each adjustment to the cost elements of
capital cost and expenses.)
C.Weighted Cost of Equity
Rural Telephone calculated a weighted cost of equity of.0474.This calculation was
included in the information the Company filed with its amended Application.Attachment D is a
chart showing Staff's calculations in determining the weighted cost of equity of .042986.The
difference between the two calculations is based upon the amount of total shareholder equity.
Greater shareholder equity will result in a higher weighted cost of equity,which will result in a
greater revenue requirement.
Rural Telephonedetermined its weighted cost of equity using the Company's equity
figures of $3,405,058 as reported in its audited financial statements.Althoughit reported
$3,656,194in its 2000 annual report,this amount was adjusted downwards by $251,136 and can
be attributed to "a late audit entry for additional income tax distribution to the shareholders."
Staff additionallyreduced the equity amount by $484,000.The Company's equity was
increased by $484,000 in 1999,when the Company elected to be treated as a Subchapter S
Corporation for tax purposes.By making this voluntaryelection,the Company reduced its
deferred tax obligations to zero and increased the shareholders equity by $484,000.The deferred
tax obligation of the Company is a ratepayer benefit that is a reduction to rate base currently.It
will also be realized by the ratepayers as the deferred tax liabilityreverses in the future.Staff
does not believe that it is equitable for the ratepayers to lose this benefit through a voluntary
shareholder election,which will then subsequently benefit the shareholders.Therefore,the
weighted cost of equity should reflect an amount that gives the ratepayers the benefit of the
Company's deferred tax obligation.Thus,for the revenue requirement calculation,Staff used an
equity amount of $2,921,058 ($3,405,058 -$484,000)to determine the weighted cost of equity.
Attachment No.1
Case No.RUR-T-01-1
Comments/Staff Audit Report
RURAL TELEPHONE COMPANY 1/29/02 Page 5 of 9
STAFF AUDIT REPORT 4 JANUARY 29,2002
After reviewing Staff's determination of the weighted cost of equity,and its reasoning for
such determination,Rural agreed to accept Staff s recommendation and use a weighted cost of
.042986 (See Attachment D).
D.Gross-up Factor:
In its request,Rural Telephone calculated a gross-up factor of 1.6469.Staff calculated a
gross-up factor of 1.00014.The difference between the two factors is attributable to the income
tax rate assumed to determine the factor.The calculation of a gross-up factor requires that a tax
rate be assumed.Rural Telephone assumed a tax rate of 34%on each dollar of revenue earned in
its request,whereas Staff assumed a 0%tax rate in its recommendation.Staff reasoned that a 0%
tax rate was more appropriate in this case for calculating the gross-up factor for the following
reasons:
a)Any corporation that is a Subchapter S Corporation has no legal tax obligation
to pay any income taxes on either the federal or state level.(Subchapter S
Corporations [S Corporation]are companies that are organized and taxed
under Subchapter S of the Internal Revenue Code.Under this provision of the
tax code,income earned by the S Corporation is "passed through"to their
shareholders who pay taxes on their pro-rata share of the S Corporation gross
income at each individual shareholder's tax rate.)Income earned by the
Company will be passed through to the Company's shareholders and the
income will then be taxed as part of each of the individual shareholder's
income at the shareholder's personal income tax rate.Each individual
shareholder's tax rate may range between 0%and the maximum individual
rate of 46.9%(maximum federal rate -39.1%;maximum Idaho rate -7.8%).
b)At the time of the Sub-Chapter S election,Rural Telephone showed a deferred
future tax liabilityin the amount of $484,000.If the Company had not elected
the Subchapter S status,the ratepayers could expect to have the benefit of tax
expense for the Company being offset against the deferred tax liabilityto the
extent of $484,000.Therefore,at a minimum,the tax rate for the Company's
income should not reflect any tax burden for the first $484,000 of any
Attachment No.1theoreticaltaxliability.Case No.RUR-T-01-l
Comments/Staff Audit Report
RURAL TELEPHONE COMPANY 1/29/02 Page 6 of 9
STAFF AUDIT REPORT 5 JANUARY 29,2002
c)Tax treatment under the provisions of Subchapter S of the Internal Revenue
Code was a voluntaryelection made by Rural Telephoneand its shareholders;
therefore,Staff assumes that the shareholders were motivated to make such
election because of benefits that would flow to them from the election.Any
gross-up factor must acknowledge the reality of the following:If the assumed
tax rate is greater than the actual tax rate,then a higher gross-up factor will
result in a larger revenue requirement,thus the shareholders are granted a
benefit and the ratepayers are being penalized.
After discussions with Rural Telephone,Staff determined that it was a more fair and
reasonable position to assume a tax rate based upon the effective tax rate paid by Rural
Telephone's shareholders and then weighted to reflect only Rural Telephone's income in each
shareholder's individual tax return.Attachment E-2 (confidential)showed the method of
calculation to determine the assumed state and federal tax rate.
Based upon these assumptions,Rural Telephone and Staff agreed that the assumed tax
rate to calculate the gross-up factor in this case would be 24.97%for federal taxes and 5.64%for
state taxes.Attachment E-1 is a calculation of the gross-up factor using all the agreed upon
numbers and results in a gross-up factor of 1.412655.
E.Grossed-up Revenues
Rural Telephone,using its weighted cost of capital of .0474 and a gross-up factor of
1.6469,computed a grossed-up revenue requirement of $49,428.44.Staff using a weighted cost
of capital of .042986 and a gross-up factor of 1.00014 computed a grossed-up revenue
requirement of $29,862.79.Grossed-up revenues based upon the agreed upon weighted cost of
capital of .0474 and the agreed upon gross-up factor of 1.412655 equals $38,705.64.(See
calculations in Attachments A-1 and A-2.)
III.Total Annual Depreciation
The amount of depreciation is agreed upon based upon the agreed upon adjusted amount
of allowable capital costs and expenses.Annual depreciation for the additional capital costs and
expenses is $29,646.39.Attachment No.l
Case No.RUR-T-01-1
Comments/Staff Audit Report
RURAL TELEPHONE COMPANY 1/29/02 Page 7 of 9
STAFF AUDIT REPORT 6 JANUARY 29,2002
IV.Annual Case Costs
Staff agrees that the Company should recover the Company's case costs over three years.
Rural Telephone originally asked for case costs in the amount of $9,643.41 as the annual
recovery for three years.Staff recommends that the annual case cost recovery be $8,604.92 for
three years.Rural Telephone subsequently reported total case costs of $53,841.40 subject to a
yearlyseparation percentage.This amount reflects actuals through 2001 and estimates to finalize
this case in 2002.After reviewing the claimed case costs,Staff and Rural Telephoneagree that
the fair and reasonable case costs to be recovered by Rural Telephoneover three years are
$30,804.00.Thus the annual recovery over three years would be $10,268.00 per year for three
years.
V.Access Revenue Reduction
Rural Telephone has calculated that it has reduced revenues in the amount of $45,750.27
resulting from the EAS extensions.Staff reviewed Rural's calculations of this amount and
recommends that the Commission accept this number.
VI.Shift in Federal Support
Rural Telephonehas calculated that it has a shift in federal support in the amount of
$14,760.00 resulting from the EAS extensions.Staff reviewed Rural's calculations of this
amount and recommends that the Commission accept this number.
VII.Revenue Increase from Local Rates
Rural Telephonehas calculated that it has increased revenues from the increase in local
rates in the amount of $70,856.40resulting from the EAS ordered by the Commission.Staff
reviewed Rural's calculations of this amount and recommends that the Commission accept this
number.This amount should be deducted from the revenue requirements in calculating the
additional USF payment.
Attachment No.1
Case No.RUR-T-01-1
Comments/Staff Audit Report
RURAL TELEPHONE COMPANY 1/29/02 Page 8 of 9
STAFF AUDIT REPORT 7 JANUARY 29,2002
LETTER AGREEMENTS
Rural Telephone sent two letters detailing the agreement between the Staff and the
Company.The first is related to deferred taxes and tax rates to be used in this case and going
forward (Attachment F-1).The second is the agreement on the annual revenue requirement
associated with the first-year EAS revenue requirement of $68,274.23 (Attachment F-2).
Rural also states its position on the effective date for USF payments to begin in
Attachment F-2.However,this issue was not resolved and is discussed in Staff Comments.
Attachment No.1,A-F
i:umisc/auditrpt and umisc comments/rurt01.1wsjlte
Attachment No.1
Case No.RUR-T-01-1
Comments/Staff Audit Report
RURAL TELEPHONE COMPANY 1/29/02 Page 9 of 9
STAFF AUDIT REPORT 8 JANUARY 29,2002
RURAL TELEPHONE COMPANY
Application for EAS Funding
Determination of EAS Costs and Revenue Requirements
Total per Total per
Request Staff Stipulated
Line #Description Ex-1;Rev-2 Adjustments Amount
1 Actual Capital Costs/Expenditures
6 Total Actual Capital Costs $511,467.73 $461,707.05 $469,227.98
7 Less:Retirements $-$-
8 Less:Accumulated Depreciation $32,317.18 $29,414.11 $29,646.39
9 Less:Deferred Taxes $17,474.36 $17,474.36 $15,823.85
10 Total Subtractions:$49,791.54 $46,888.47 $45,470.24
11 Net Capital Costs (Ln 6 -Ln 10)$461,676.19 $414,818.58 $423,757.74
Grossed up Return
12 Rural's Request (Ln 11 x10.71%ROR)$49,428.47
Staffs Recommendation(Ln 11 x7.1992%ROR)$29,863.62
Stipulated Amount(Line 11 x 8.9724%ROR)$38,705.64
(See Attachment A-2)
18 Total Annual Deprecation $32,317.18 $3,414.11 $29,646.39
19 Other Revenues/Expenditures:
20 Lost Access Revenue $45,750.27 $45,750.27 45750.27
Federal support Lost
21 (shift in IIS to State)$14,760.00 $14,760.00 $14,760.00
22 Annual Case Cost $9,643.41 $8,604.92 $10,268.33
Total Annualized EAS Costs
23 (Lns 12+18+20+21+22)$151,899.33 $128,392.92 $139,130.63
24 Less revenue increase from change in Local Rates $70,856.40 $70,856.40 $70,856.40
25 Increase in Idaho USF (Ln 23 -24)$81,042.93 $57,536.52 $68,274.23
ATTACHMENT A -1
Attachment No.1
Case No.RUR-T-01-1
Comments/Staff Audit Report
1/29/02 Page Attachment A-1
I
RURAL TELEPHONE COMPANY
USF Funding for EAS -Boise River,Tipinuk,Prairie
Calculation of Grossed-up Rate of Return-Comparison
A B C D E
Grossed-up
Weighted Weighted Weighted Total Grossed -upGross-up Cost of Cost of Cost of Weighed CostFactorEquityEquityDebtofCapital
A×B C+D
Per Rural Telephone [phone].07806306 0.029 0.107063
Per Staff 1.00014 0.042986 0.042992018 0.029 0.071992
Per Stipulation 1.412655 0.042986 0.060724388 0.029 0.089724
See Attachment E
ATTACHMENT A-2
Attachment No.1
Case No.RUR-T-01-1
Comments/Staff Audit Report
1/29/02 Page Attachment A-2
RÀL TELEPHONE COMPANY
Application for USF Funding--EAS
Adjusted Costs for all Work
Orders as Rer Staff
Account Account
Number Description W/O #10022 W/O #10023 W/O #10024 Totals
Transmission/Circuit
2230 Equipment $21,114.51 $2,002.52 $78,060.36 $101,177.392410FiberandOther$1,277.14 $295,758.13 $297,035.272410Conduit$288.32 $63,206.07 $63,494.39
$22,679.97 $2,002.52 $437,024.56 $461,707.05
ATTACHMENT B-1
Attachment No.1
Case No.RUR-T-01-1
Comments/Staff Audit Report
1/29/02 Page Attachment B-1
RURAL TELEPHONE COMPANY
Application for USF Funding--EAS
Adjusted Costs for WlO
0022
Account Account Specific General Totals by Total byNurnberDescriptionMaterialsLaborOverheadOverheadDescriptionAccount
Trans./Circuit
2230 Equipment $19,433.15 $839.97 $-$841.38 $21,114.50 $21,114.502410Fiber$801.65 $34.65 $-$34.71 $871.012410OtherFiber$-$-$-$-
2410 Other $373.80 $16.16 $-$16.18 $406.14 $1,277.152410Conduit$265.36 $11.47 $-$11.49 $288.32 $288.32
$20,873.96 $902.25 $903.76 $22,679.97
I
ATTACHMENT B-2
Attachment No.1
Case No.RUR-T-01-1
Comments/Staff Audit Report
1/29/02 Page Attachment B-2
RURAL TELEPHONE COMPANY
Application for USF Funding--EAS
Adjusted Costs for W/O |
10024
Account Account S General tais b Total byNumberDescriptionMaterialsLaborOverheadOverheadDescriptionAccount
Trans./Circuit
2230 Equipment $52,582.01 $9,489.67 $15,988.68 $78,060.36 $78,060.362410Fiber$97,199.00 $42,184.99 36.542410OtherFiber$13,076.51 $4,503.33 $4,012.84 $21,592.682410Other$4,753.09 $1,633.70 $1,442.12 $7,828.91 $295,758.132410Conduit$38,324.97 $13,218.77 $11,662.33 $63,206.07 $63,206.07$205,935.58 $71,030.46 $97,357.82 $62,700.70 $437,024.56
H B-
Attachment No.1
Case No.RUR-T-01-1
Comments/Staff Audit Report
1/29/02 Page Attachment B-3
MATERIALS
No adjustments are proposed.
LABOR EXPENSE
Rural Telephone asked for labor expenses for W/O #10024 in the amount of $82,169.83.After review of the labor charges the followingadjustments are proposed:
W/O 10024 Adjustment
Labor Expense Amount
Total Re uested $82 gAdiustment1$
Ad ustment 2 $987.
Adjustment 3 $(34.00)Total Adjustments
Total Ad¡usted Amount $71,030.46
Adjustment#1
Employee Steve Ireland on the 10/17/00 to 10/31/00 time sheet,recorded 63.5 hours oflaborchargedtoW/O #100024 that should not have been charged to this work order.HistimesheetshowedthathewasinNevadafor47.5 hours during this pay period;and herecordedanadditional16hoursofworktimewithoutdocumentinghisactivitiesduringthis16hours.Therefore W/O #10024 should not be charged with any of this time.
For this 63.5 hours,Mr.Ireland received a his normal wage rate for 59 hours and apremiumovertimeratefor4.5 hours;and his gross compensation was $1,117.75.Therefore,the labor charges for this work order should be reduced by $1,117.75.
Adjustment#2
Rural Telephonewas asked to produce time sheets showing all the employees and theirrespectivehourschargedtoW/O #10024 for the months of July,August,September andOctoberintheyear2000.From the time sheets Rural produced,the followinglaborexpensewaschargedtoW/O #10024 that was not supported by a time sheet.
Pay Period Employee Labor Expense Charged7/14/00 Michael Martell $2,256.94WaylonSullivan$704.00
7/31/00 Michael Martell $1,538.838/31/00 Matthew Martell $1,670.98
Waylon Sullivan $770.00
10/13/00 Michael Martell $1,354.16
10/31/00 Michael Martell $1,692.71
$9,987.62
Attachment No.l
1 Case No.RUR-T-01-1
Comments/Staff Audit Report
1/29/02 Page Attachment C-1,1 of 4
Since the Company was unable to document the above labor expense,$9,987.62 shouldbeexcludedfromthelaborexpense.
Adjustment#3
During the pay period of September 16 to 30,2000,Steve Ireland received 4.0 hours ofovertimepremiumthatwaschargedtoW/O #10024.Mr.Ireland did not exceed the 40hoursperworkweekthresholdforanovertimepremiumfromSeptember16toSeptember24,therefore no overtime premium from this time period should be allocated to W/O #10024.Therefore,Mr.Ireland's overtime premium of $34.00 should not be charged tothisjob.
SPECIFIC OVERHEAD
For W/O #10024,Rural Telephonecharged a total of $120,631.07 to the specific
overhead account.Staff proposes only one adjustment proposed to this:
Adjustment#4
On October 31,2000,the specific overhead account for W/O #10024 was charged$23,273.25 as a reclass rental.The invoice documented this as a purchase of an aircompressor.The purchase of an air compressor should not have been charged to anyspecificoverheadaccount,but to an equipment account.Therefore the specific overheadforW/O #10024 should be reduced by $23,273.25.
GENERAL OVERHEAD
For W/O #10024,Rural Telephonecharged a total of $76,571.49 to the general overheadaccount.Each of the reported charges was checked to verify the amount and relevance totheproject.Based upon that examination the followingadjustments are proposed:
Total Other Overhead Charged to WlO 10024
Adj_ustment #5 12._16)
Adjust ent #6 $2_&O1 94)
Adjustment #7 ($2,332.05
Adjustment #8 ($5,662.44)
Adj_ustment #9 $1,715.05)Adjustment #10 ($807.16)
Total Adjustments $13,870.80
Total Ad usted Allocation $62,700.69
Attachment No.1
2 Case No.RUR-T-01-1
Comments/Staff Audit Report
1/29/02 Page Attachment C-1,2 of 4
Adjustment#5
Employer FICA/Medicare contributions on the labor expense charged to this project were
charged to this account.Pursuant to the proposed adjustments to labor expense thefollowingadjustmentistheFICA/Medicare portion of those labor expense adjustments:
Total wage adjustment (see Labor Expense Adjustment #1,2,3)
Adjustment #1 ($1,117.75)
Adjustment #2 ($9,987.62)
Adjustment #3 ($34.00)
Total ($11,139.37)
Employer contribution portion is 7.65%of the total labor expense:
7.65%x ($11,139.37)=($852.16)
Adjustment#6
The followingthree charges were charged to this account by the Company:
7/31/00 Nester's Mtn Mart &Polaris $1,089.48
8/31/00 Nester's Mtn Mart &Polaris $1,133.45
10/31/00 Nester's Mtn Mart &Polaris $279.01
Documentation for these charges was requested;all that was provided by the Company
was a runningledger sheet not showing any detail supporting any of the charges to therunningtotal.The Company indicated that it did not have any supporting documentationforanyofthecharges.Therefore,the total S 2,501.94 should not be charged to this workorder.
Adjustment#7
On October 31,2000,the Company purchased a 3M EMS II Locator and a duct-proofingtoolfor$2,332.05.The Company responded to Staff's request for additional information
on this purchase that this should not be charged as "other overhead"to
W/O #10024;but should be charged to "Other Work Equipment"in the general ledger.(See Confidential Attachment C-2,¶7,Rural Telephone letter dated 10/16/01.)
Adjustment#8
The November statement for the Pitney Works credit card showed a charge to Full
Compass System LTD on October 12,2000 for the purchase of camcorder camera in theamountof$5,662.44.The Company responded to Staff's request for additionalinformationonthispurchasethatthisshouldnotbechargedas"other overhead"to W/O
#10024,but should be charged to "Other Work Equipment"in the general ledger.(SeeConfidentialAttachmentC-2,¶3,Rural Telephone letter dated 10/16/01)
Adjustment#9
The Company charged the "other overhead"account for a monthly allocation of Account6110.00-Vehicle and Other Work Equipment.The monthlyallocation of this account to
a specific work order is based upon a percentage of monthly labor expense charged to the
Attachment No.13CaseNo.RUR-T-01-1
Comments/Staff Audit Report
1/29/02 Page Attachment C-1,3 of 4
specific work order as compared to the total monthlylabor expense for the Company.Therefore the monthlypercentage changes for each month's allocation.Staff has
reviewed all the expenses originally charged to the account and had determined that the
expenses detailed in Attachment A should not have been charged to the 6110.00 account
and therefore not allocated to "other overhead".Attachment C-3 is a table showing a
comparison of the Company's allocation and the Staff's adjusted allocation.
Adjustment#10
The Company charged the "other overhead"account for a monthly allocation of Account
8200.00-Benefits.The monthlyallocation of this account to a specific work order is
based upon a percentage of monthlylabor expense charged to the specific work order as
compared to the total monthly labor expense for the Company.Therefore the monthly
percentage changes for each month's allocation.Staff has review all the expensesoriginallychargedtotheaccountandhaddeterminedthattheexpensesdetailedin
Attachment A should not have been charged to the 8200.00 account and therefore not
allocated to "other overhead".Attachment C-4 is a table showing a comparison of the
Company's allocation and the Staff s adjusted allocation.
Attachment No.1
Case No.RUR-T-01-1
4 Comments/Staff Audit Report
1/29/02 Page Attachment C-1,4 of 4
AT"ACI-21HT,C-2 IS CONFIDITTTIAL
Attachment C-3
Allocation of Account #6110.00-Vehicle and Other Work Equipment
Below is a table showing a comparison of the amount of Account 6110.00 that was allocatedbytheCompanyandtheallocationasrecommendedbyStaffforW/O #10024.SpecificexpensesthatweredisallowedbyStaffareinStaff's workpapers.
Total Monthly
Expenses Allocation Allocation AdjustedMonthAllocatedAdjustmentsAdjustedTotalPercentagePerCompanyAllocation
Jan.$7,627.09 $-$7,627.09 3.40353%$259.59 $259.59Feb.$10,618.43 $-$_10,618.43 1.98400%$210.67 $210.67'March $9,621.90 $114.02 $9,507.88 0.00000%$-$-
Ap $16,076.73 $834.20 $15,242.53 0.00000%$-$-
May $¾8.32 $875.96 $12,142.36 0.00000%$-$June $15,284.81 $849.20 $14,435.61 39.05119%$5,968.90 $5,637.28July$7,508.16 $849.20 $6ß58.96 38.76955%$2,910.88 $2,581ß5August$15,030.58 $1,087.70 $13,942.88 27.10534%$4,074.09 $3,779.27Sept.$20,312.69 $5,455.29 $14,857.40 9.08403%$1,845.21 $1,349.65Oct.$15 22.65 $849.20 $14,773.45 27.98232%$4,371.58 $4,133.95Nov.$17,639.10 $2,172.20 $15,466.90 1.20539%$212.62 $186.44Dec.$20,809.58 $849.20 $19,960.38 0.00000%$-$-TOTALS $169,170.04 _$13,936.17 $155,233.87 $19,853.54 $18,138.49
Difference Mtwo INai and Adjusted Allocat $(7 5 05)
Attachment No.1
Case No.RUR-T-01-1
Comments/Staff Audit Report
1/29/02 Page Attachment C-3
Attachment C-4
Allocation of Account #8100.00-Benefits
Below is a table showing a comparison of the amount of Account 8100.00 that was allocatedbytheCompanyandtheallocationasrecommendedbyStaffforW/O #10024.SpecificexpensesthatweredisallowedbyStaffareinStaff's workpapers.
Total Monthly
Expenses Allocation Allocation AdjustedMonthAllocatedAdustrnentsAdjustedTotalPercentagePerCompanyAllocation
Jan.$5,499.29 $2,082.73 $3,416.56 2.26993%$124.83 $77.55Feb.$3,293.38 $1,267.76 $2,025.62 1.31567%$43.33 $26.65March$35,920.09 $2,627.12 $33,292.97 0.00000%$-$-gril $5,847.23 $223.75 $5,623.48 0.00000%$-$-
May $9,085.06 $314.28 $8,770.78 0.00000%$-$June $6,760.77 $123.26 $6,637.51 26.71885%$1,806.40 $1,773.47July$83,392.44 $191.44 $83,201.00 25.18671%$21,003.81 $20,955.59gustB,240.16 $2 361.78 $3,878.38 14.93375%$931.89 $579.19Sept.$11,912.29 $1,521.93 $10,390.36 6.18143%$736.35 $642.27Oct.$7,122.73 $1,089.89 $6,032.84 18.68637%$1,330.98 $1,127.32Nov.$68,859.18 $1,481.85 $67,377.33 0.78399%$539.85 $528.23Dec.$136,833.08 $2,821.97 $134,011.11 0.00000%$-$TOTALS $380,765.70 $16,107.76 $364,657.94 $26,517.44 $25,710.28
Difference between Compa A cat n and Adjusted Allocation $07 6
Attachment No.l
Case No.RUR-T-01-1
Comments/Staff Audit Report
1/29/02 Page Attachment C-4
RURAL TELEPHONE COMPANY
USF Funding for EAS -Boise River,Tipinuk,Prairie
Determination of the Cost of Capital
As of December 2000
Capital Capital Weighted
Line Description Amount Ratio Cost Cost (CxD)#(A)(B)(C)(D)(E)
1 Long Term Debt
RUS 12010-12020 $618,489 0.0728 0.0200 0.001456RUS11080,11081,
12030-12084 $4,954,569 0.5833 0.0500 0.029165
2 TOTAL DEBT $5,573,058 0.6561 0.030621
3 Other $--0.1250 -
4 Equity $2,921,058 0.3439 0.1250 0.042986
5 TOTAL EQUITY $2,921,058 0.3439 0.042986
6 TOTAL DEBT &EQUITY $8,494,116 1.0000 0.073607
ATTACHMENT D
Attachment No.1
Case No.RUR-T-01-1
Comments/Staff Audit Report
1/29/02 Page Attachment D
\RURAL TELEPHONE COMPANY
USF Funding for EAS -Boise River,Tipinuk,Prairie
Determination of the Gross-up Factor for ROR
As of December 2000
Line
#Description
1 Rate Base (per 1997 audit)$1,115,858.00AdditionstoRateBaseperIPUCOrder
3 28114
Per Rural Telephone's Application $511,767.73
Less:PUC Staff Adjustments $42,239.76
4 Total Additions with Adjustments $469,527.97
5 TOTAL RATE BASE $1,585,385.97
6 Weighted Cost of Equity 0.042986
7 Authorized Revenue Return $68,149.40
8 Less Bad Debt (.0136%)$9.27
9 Taxable income $68,140.13
10 Less State Income Tax (5.64%)$3,843.10
11 Federal Taxable lncome $64,297.03
12 Less:Federal Tax (24.97%)
$16,054.97
13 After Tax Revenue $48,242.06
14 Investment Tax Credit 0
15 After Tax Income $48,242.06
Gross Up Multiplier:1.412655255AuthorizedRevenueReturn(Ln 6)$68,149.40AfterTaxIncome(Ln 14)$48,242.06
A ac.hment E-1
Attachment No.1
Case No.RUR-T-01-1
Comments/Staff Audit Report
1/29/02 Page Attachment E-1
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01/23/2002 12:07 FAI 12083662615 RURAL TELEPHONE 001
L 704 W.MADISON
GLENNS FERRY,IDAHO 83623TELEPH0NEC0MPANY(208)366-2614 FAX[phone]
January 17,2002
Ms Terri Carlock "SENT VIA FACSIMILE"
Audit Section Supervisor
Idaho Public Utilities Commission
P.O.Box 83720
Boise,Idaho 83720-0074
Dear Ms Carlock:
Per an agreement with the Idaho Public Utilities Commission (IPUC)staff RuralTelephoneCompanywillmaintain(off books)a deferredtax amount of $484,000.The deferred tax amount of $484,000 was adjusted to zero (on the books)in 1999duetothecompany's corporate tax status changingto an "S"Corporation.The
deferred tax amount must be allocatedbetween the company's telephone
operations in Idaho and Nevada,as this will allow the company's ratepayers in
each state to benefit from this deferred tax.The Idaho deferred tax amount would
be used to offset the company's total rate base in future IPUC revenue requirementratemakingcalculations.
In return,the IPUC staff has agreed to include in the Company's revenuerequirementtherelatedstateandFederaltaxes,based on the shareholderscompositetaxrate,but,not to exceed maximum state and Federal rates of 8%and34%respectively.
Sincerely,
Chris J.Dennison,CPA
Controller
CC:Andy Schein,Consultant GVNW
Michael T.Richmond,General ManagerRural Telephone Company
Attachment No.l
Case No.RUR-T-01-1
Comments/Staff Audit Report
1/29/02 Page Attachment F-1
01/23/2002 12:03 FAI 12083662615 RURAL TELEPHONE 001/001
L 704 W.MADISON
GLENNS FERRY,IDAHO 83623TELEPH0NEC0MPANY(208)366-2614 FAX[phone]
January 23,2002 "SENT VIA FACS1MILE"
Ms.Terri Carlock
Audit Station SupervisorIdahoPublicUtilitiesCommission
PO Box 83720
Boise,ID 83720-0074
RE:Order #28114
EAS to Treasure Valley
Dear Terri:
The Idaho Public Utilities Commission in Order #28114 approved Rural Telephone Company exchangesofBoiseRiver,Tipanuk,and Prairie to have ExtendedArea Service Calling (EAS)to the Treasure Valley.The Order stated (pg.10)that the company must raise monthly local service rates to meet 125%of thestatewideaverageratestoreceiveIdahoUSFfunding.The Order also states that Rural TelephonecustomersreceivingEASshallhavetheirmonthlylocalserviceratesincreasedto$42.00 for businessand$24.10 for residential customers to compensate the company for EAS.The Commission stated intheOrder(pg.11)that the company after raising the local service rates as noted above shall be able torecoveranyrevenuedeficienciesfromimplementingEASbyincreasingitsdistributionsfromtheIDUniversalServiceFund(USF).
On February 14,2001,Rural Telephone and Qwest (USWC)implemented EAS and raised the monthlylocalserviceratesinaccordancewiththetermsofOrder#28114.The company implemented theCommission's EAS Order in good faith with reliance on the assurance that it would be allowed to recoveranyrevenuedeficiencycausedbytheEAS.The company calculates its revenue deficiency at$68,274.23 and respectfully submits that pursuant to the Order it is entitled to immediate recovery fromtheIdahoUSF.The company further requests that the increase in the company's USF distributions($71,118.99)be made in a special one lump sum payment for period February 14,2001 through Februanj28,2002,payable to the company by February 28,2002.This lump sum payment is for the first year andthesecondhalfofFebruary2002.The company believes this would be appropriate due to the extensivecapitaloutlayrequiredbyRuralTelephoneininstitutingEASasrequestedbytheCommission.
Joe Leckie and you have reviewed the company's supporting papers and said you concur with thecompany's revenue requirement and ID USF deficiency calculations.
1 am forwarding a copy of this letter to Conley Werd,EQ at Givens Pursley LLP and requesting that he filethisrequestbywrittencomment.
Best Regards,
Chris J.Dennison,CPAController
CC:Conley Ward of Givens,Pursley &Huntley,LLP Attachment No.1MichaelT.Richmond,General Manager Rural Telephone Company Case No.RUR-T-01-1
Comments/Staff Audit Report
1/29/02 Page Attachment F-2