HomeMy WebLinkAbout28420.docBEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
IN THE MATTER OF THE JOINT APPLICATION OF MIDVALE TELEPHONE EXCHANGE, INC. AND SAWTOOTH TELEPHONE, INC. FOR AUTHORITY TO INCREASE RATES AND DISBURSEMENTS FROM THE IDAHO USF. )
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CASE NOS. MID T 99 1
SAW-T-99-1
ORDER NO. 28420
On September 28, 1999, Midvale Telephone Exchange, Inc. and Sawtooth Telephone, Inc. filed a Joint Application requesting authority for Midvale and Sawtooth (hereinafter referred to collectively as “Midvale”), to increase local exchange rates and receive increased distributions from the Idaho Universal Service Fund (“USF”) effective November 1, 1999. In addition to proposing a general rate increase, Midvale proposed to implement two toll-free extended area service (EAS) routes, increase the rates for local services to partially pay for EAS in those exchanges, and bring long-distance access charges to the statewide average. On December 10, 1999, Midvale filed revised testimony that substantially changed its revenue deficiency calculation and USF request.
Commission Staff and U S WEST filed direct testimony on April 5, 2000. Staff filed Supplemental Direct Testimony on May 10, 2000. Staff and Midvale filed a Stipulation and Joint Motion to Adopt Stipulation and Settlement Agreement on May 11, 2000.
Public hearings were held in Midvale and Stanley on May 2, 2000 and May 4, 2000, respectively. A technical hearing was held in Boise on May 16, 2000.
Based on the hearings, the record and the Stipulation, the Commission grants the Joint Application in part and denies it in part, as more fully described below.
BACKGROUND
On September 28, 1999, Midvale filed a Joint Application requesting that the Commission authorize an increase in basic rates to one-hundred and twenty-five percent (125%) of the statewide average as required by state law for continued USF participation and requesting that Midvale’s disbursement from the USF be increased to $479,519. In addition to proposing a general rate increase, Midvale proposed to implement toll-free extended area service (EAS) for two of its exchanges, Midvale and Stanley. For Midvale, it proposed to create an EAS mini-region that was comprised of its Midvale exchange, the U S WEST Payette and Weiser exchanges, and Cambridge’s Cambridge, Council, Indian Valley and Cuprum exchanges. This would create a Midvale mini-region. Midvale also proposed that Farmers Mutual Telephone Company’s Fruitland and Nu Acres exchanges be included in this “mini-region.” For Stanley customers, Midvale proposed to implement EAS between Stanley and U S WEST Ketchum and Hailey exchanges. It did not propose implementing EAS for any other Midvale exchanges.
To partially pay for these EAS proposals, Midvale also proposed to increase the rates for local services in those exchanges receiving EAS, Midvale and Stanley, to $24.10 for residential rates and $42.00 for business lines. In addition, Midvale planned to bring switched access charges to the statewide average.
On October 19, 1999, the Commission suspended the proposed rates for a period of thirty (30) days plus five (5) months from the proposed effective date of November 1, 1999, pursuant to Idaho Code § 61-622. Order No. 28179. On December 10, 1999, Midvale filed revised testimony that substantially changed its calculation of its revenue deficiency and USF request proposing to increase its annual USF draw of $195,020 by $123,128 per year. In response, on January 13, 2000, the Commission continued the suspension for an additional period of sixty (60) days, or until such time as the Commission may issue an Order accepting or rejecting or modifying the Application in this matter. Order No. 28249.
The Commission Staff and U S WEST filed direct testimony on April 5, 2000. U S WEST recommended EAS be granted for the Midvale exchange into the entire U S WEST Treasure Valley EAS Region. Staff recommended Midvale’s EAS request to the “mini-region” be granted but requested the Commission deny EAS for Stanley into Ketchum and Hailey. Staff further argued that EAS to the entire U S WEST Treasure Valley EAS Region should be denied.
Staff also testified that if the Commission does not authorize any EAS for Midvale’s exchanges, Midvale’s USF draw should be decreased $23,148 annually to $171,871. If EAS for the “mini region” is granted, Staff recommended Midvale’s USF draw be increased to $357,916 and increased to $389,624 if EAS for the Stanley exchange into Ketchum and Hailey is also granted.
On April 24, 2000, at the request of the parties, the Commission vacated the technical hearing that had been scheduled to begin April 25, 2000, and vacated the date for filing rebuttal testimony. Order No. 28350. Settlement negotiations ensued. Midvale and Staff exchanged underlying data and arrived at a Stipulation and Settlement of some issues in the case on May 2, 2000, leaving several issues for the Commission to resolve. U S WEST did not participate in the Stipulation. On May 10, 2000, Staff filed supplemental testimony explaining the basis for the Settlement.
COMMISSION FINDINGS
Currently, Midvale draws $195,020 from the Idaho USF and is requesting that its draw be increased even if no EAS proposal is approved. In part, Midvale justifies its request for additional funding on the fact that since its last revenue requirement determination nearly eleven (11) years ago, it has extended new service to the relatively remote communities of Yellow Pine, Warm Lake and Warren. Tr. at 57:12-18; Tr. at 59-65. This proved very expensive and time intensive. Id. In addition, even though Midvale extended service to these relatively remote areas, Midvale’s draw from the federal USF was capped and these projects do not currently receive federal support. Tr. at 67-69. Midvale expects it may receive support when the cap is removed and calculates that support as an additional $137,800 annually. Tr. at 69. Mr. Williams testified that this amount was included in Midvale’s pro forma adjustment. Id. Moreover, Midvale converted to digital switching and backbone fiber optic cable designed to increase service quality. Tr. at 58. All of these improvements and expansions increased costs for Midvale and form the basis for Midvale’s request for increased revenue.
In addition, all parties propose the Commission authorize some EAS. Midvale and Staff propose EAS for the Midvale exchange into a “mini region.” Midvale also requests the Commission authorize EAS for its Stanley exchange into U S WEST’s Hailey-Ketchum exchanges; Staff opposes this request. U S WEST urges the Commission to expand the Midvale exchange local calling area to include its Treasure Valley EAS region. Both Midvale and Staff oppose this request.
EAS for Midvale.
Midvale and Staff stipulated that the evidence supported a finding that there is a community of interest which would justify granting EAS for a “mini-region.” They also request this “mini region” be consistent with the Commission’s decision regarding EAS for the Cambridge exchange in CAM T 99-2/COU-T-99-2. Stipulation at 4. This “mini-region” consists of Midvale’s Midvale exchange, U S WEST’s Payette and Weiser exchanges, and Cambridge’s Cambridge, Cuprum, Indian Valley and Council exchanges. Moreover, because Midvale also proposed Farmers Mutual Telephone Company’s Fruitland and Nu Acres exchanges be included in the “mini-region” and the Commission has no authority to order Farmers to accept EAS into its exchanges, Midvale and Staff agreed that Midvale should be authorized to include Farmers Mutual Telephone Company’s Fruitland and Nu Acres exchanges provided Farmers agrees. Consistent with its statutory authority, the Commission agrees that Midvale should be authorized to include Farmers Mutual Telephone Company’s Fruitland and Nu Acres exchanges provided Farmers agrees.
Staff witness Cooley testified that EAS between the Midvale exchange and the “mini region” met the Commission’s criteria for EAS. Tr. at 196-206. More specifically, witness Cooley testified that the Midvale exchange is geographically located within the Weiser drainage, among Cambridge’s exchanges, Council and Cambridge, and U S WEST’s Weiser and Payette exchanges, and acts as a main thoroughfare for traffic and commerce among these communities. Tr. at 197. Midvale has no medical services and its residents rely on facilities in Cambridge, 8 miles away, or those in Payette, Weiser or Ontario, Oregon. Tr. at 199. Moreover, Cooley testified that the calling data clearly supported a finding of community of interest. Tr. at 200-201; Ex. 108. Midvale exchange customers placed thirteen (13) calls per line per month to Weiser, nine (9) calls per line per month to Cambridge, two (2) calls per line per month to Payette and one (1) call per line per month to Fruitland. Tr. at 202. The Commission agrees with Staff and Midvale that the data supports a finding of a community of interest among the “mini region” and with the Midvale exchange.
Furthermore, the Commission finds that the testimony at the public hearing held in Midvale overwhelmingly demonstrated that a community of interest does exist among those exchanges described as the “mini region.” Tr. at 4-30. Ten persons testified at the public hearing in Midvale. Eight indicated that they supported EAS in the “mini region.” Several indicated they would be willing to pay the $24.10 and $42.00 proposed by the Company. Moreover, the Commission received seven (7) letters from Midvale exchange customers, most supporting EAS to the “mini region.” Tr. at 235. Therefore, the Commission finds there is a community of interest justifying authorizing EAS for the Midvale exchange to the “mini region.”
On the other hand, U S WEST contends that EAS for Midvale should be expanded beyond the “mini-region” to include the entire U S WEST Treasure Valley EAS. Tr. at 141. It argues that if the Commission finds that a community of interest exists between an exchange located outside a U S WEST EAS region and one or more exchanges within the U S WEST EAS region, the Commission should grant EAS between the requesting exchange and the entire U S WEST EAS region. Tr. at 143. It contends that if the Commission does not expand EAS requests to include entire U S WEST EAS regions, U S WEST would be subject to arbitrage. Tr. at 144. Finally, it contends that it is “just human nature for petitioning customers to feel that . . .they should have the ‘whole thing’ . . .” Tr. at 145.
Commission Staff and Midvale do not support EAS to the entire U S WEST Treasure Valley EAS region. Neither believes that a strong community of interest exists between the Midvale exchange and the entire region justifying the use of USF to support rates. See Tr. at 75-76; Tr. at 202-203. Staff witness Cooley testified that while there is some calling into a few of the U S WEST regional exchanges, like the Nampa and Boise exchanges, even those calling patterns are not strong. Tr. at 202-203; Ex. 108. Witness Cooley testified that if no USF is used to support the increased costs associated with providing EAS to the entire U S WEST Treasure Valley EAS Region, customer rates would increase by $23.00 over the proposed $24.10/$42.00 rates. Tr. at 213-214; Tr. at 225-226. The testimony at the public hearing in Midvale did not support a broader EAS region at higher rates. Several customers wrote to the Commission indicating they did not support expanded toll-free calling to the larger area. Tr. at 235. The Commission finds that the record does not support a finding that there exists a community of interest between the Midvale exchange and the entire U S WEST Treasure Valley EAS Region.
In addition, the Commission rejects U S WEST’s contention that if the Commission finds that a community of interest exists between an exchange located outside a U S WEST EAS region and one or more exchanges within the U S WEST EAS region, the Commission should grant EAS between the requesting exchange and the entire U S WEST EAS region. This ignores the fact that EAS is never cost free. All customers, whether in the requesting or requested exchange, pay the costs associated with implementing EAS. Those costs may include capital improvements necessary to implement EAS and lost revenue from long distance or access charges. The Commission will not impose EAS to a larger area than warranted under the existing EAS criteria used to examine whether there is a community of interest. To do otherwise, imposes additional costs on all customers that are not justified.
Even if a community-of-interest had been established for EAS to the entire U S WEST Treasure Valley Region, the Commission would still have to weigh the need for EAS against its costs. In this case, the costs for implementing EAS for the entire region are significant. Midvale customers indicated they did not support the higher rates necessary to fund implementation of EAS to the larger region. Moreover, approving EAS to the entire region could increase Midvale’s revenue requirement and thus, its USF draw by $290,981. Stipulation at 4. It would also increase costs to U S WEST customers.
Furthermore, the Commission rejects U S WEST’s contention that the specter of potential arbitrage in this case justifies expanding the EAS area. The Commission agrees with Midvale witness Williams that it has the authority to meet those problems if they occur. Tr. at 75; See Order Nos. 19717 and 25885 (Case Nos. U-1000-73 and GNR-T-94-1, respectively).
Based on these findings, the Commission authorizes EAS between the Midvale exchange and the “mini region.” Finally, the Commission agrees with Midvale and Staff that it is just and reasonable to set the rates for local exchange service for the Midvale exchange at $24.10 per month for residential service and $42.00 per month for business service. The Commission also adopts Midvale’s and Staff’s recommendation that the cost for implementing EAS from the Midvale exchange to the “mini region” increases Midvale’s revenue requirement, and thus the Commission finds that Midvale’s USF draw should be increased by $186,044 per year.
2. Stanley EAS.
Midvale proposed implementing EAS between its Stanley exchange and the U S WEST Hailey and Ketchum exchanges. Staff opposed this proposal. U S WEST did not oppose it. If the Commission approves EAS for the Stanley exchange to the U S WEST Hailey and Ketchum exchanges, Midvale and Staff agree that the cost for implementing EAS is $31,709 per year which will increase its revenue requirement by the same amount. Stipulation at 4.
Essentially, Midvale supports its proposal by arguing that implementing EAS will minimize customer objections to the necessary rate increases. Tr. at 73; 77-78; 80-82. While this may be true, as it is in every rate case, the Commission finds that this alone is not sufficient justification for implementing EAS. The Commission finds that nothing exempts a proponent of EAS from demonstrating there is a community-of-interest. Midvale does not offer evidence demonstrating a strong community-of-interest between Stanley and the Hailey-Ketchum communities.
Midvale witness Williams testified that Stanley is mainly a recreation and summer home community. Tr. at 77. He also testified that the community-of-interest to Challis, Stanley’s county seat, is at least as strong. Tr. at 77-78. However, providing EAS to Challis would be technologically more difficult and more expensive. Id.
Staff witness Cooley testified that the community-of-interest is weak between Stanley and the Hailey-Ketchum areas. Stanley is somewhat isolated, located about sixty (60) miles north of Ketchum on Highway 75. Tr. at 197. Galena Summit which has an elevation of 8,701 feet, creates a geographic barrier between these communities. While customers in Stanley do have limited access to grocery stores and gas stations, most shopping is done in Boise or Twin Falls. Tr. at 200. Calling patterns to the Hailey-Ketchum exchanges are very weak. Tr. at 201; Ex. 108. Staff used summer calling data (July, August and September) when the population would be largest and it showed that Stanley exchange customers made an average of approximately three (3) calls per line per month to Hailey and Ketchum combined or 1.4 calls per line per month to Hailey and 1.8 calls per line per month to Ketchum. Tr. at 203; Ex. 108. Moreover, Cooley testified that approximately eighty percent (80%) of the customers made no calls to either U S WEST exchange. Tr. at 203: 18-22. The cost for providing EAS between Stanley and the Hailey-Ketchum exchanges is $31,709 annually. Tr. at 226.
Significantly, there was no public support expressed for EAS to Hailey-Ketchum. At the public hearing in Stanley, only three (3) individuals testified. Tr. at 37-47. Only one person testified regarding EAS and she testified she would not like to pay more fore EAS. Tr. at 43:8-14.
While the Commission is sensitive to Midvale’s concerns about “rate shock” and customer acceptance of rate increases, this cannot be the sole basis for authorizing EAS. The Commission finds that the community-of-interest is simply too weak to justify authorizing EAS to Hailey and Ketchum. In particular, this is consistent with the Commission’s recent decision denying EAS to customers in Yellow Pine, Warren and Warm Lake under similar circumstances. See Order No. 28263. Therefore, the Commission denies the request to implement EAS between Stanley and the U S WEST exchanges of Hailey and Ketchum.
3. Midvale’s Revenue Requirement.
While initially Staff and Midvale were very far apart in their revenue recommendations, after exchanging data and information, relevant to the general rate increase and USF draw, they stipulated as follows:
A two percent (2%) allocation for non-regulated activities is appropriate.
The use of a three year amortization of rate case expenses is reasonable in this case.
For consistency, two-thousand dollars ($2,000) for the effects of measured service buy-up if the Commission approves measured service is appropriate.
Raising rates to the USF threshold rates, currently $21.28 per month for residential service and $39.77 per month business service, is reasonable for those exchanges that do not have EAS.
Access rates for long distance service should be set at the statewide average.
Stipulation at 4. Staff witnesses Cooley and Lansing testified in support of the Stipulation and explained the financial implications of adopting it. Tr. at 179-180; 181-184; 185 186; 222-228.
Staff witness Lansing testified that after exchanging information and data, Midvale agreed with Staff’s direct testimony with respect to Midvale’s increased NECA USF revenue, Staff’s proposed acquisition adjustment for Sawtooth, the separations factors relating to rate base and expenses proposed by Staff, and Staff’s proposed gross-up and interest synchronization. Tr. at 180-181. Based on the record, the parties’ testimony and Stipulation, the Commission accepts Staff’s position on separations, the Sawtooth acquisition adjustment, the NECA USF revenue amount and Staff’s proposed gross-up and interest synchronization and finds these positions reasonable.
Witness Lansing also testified that while Staff initially recommended rate case expenses be amortized over a five (5) year period while Midvale requested a one (1) year amortization, a compromise to three (3) years is acceptable. Tr. at 181:15-23. The Commission agrees and finds that a three (3) year amortization in this case is acceptable. This compromise creates an increase of $2,897 to Midvale’s revenue requirement.
With respect to the Stipulation regarding non-regulated assets, witness Lansing testified that Staff originally recommended using a ten percent (10%) cost allocation which was an estimate derived from its experience with other companies. Tr. at 183. However, subsequent to Staff’s direct filed testimony, Midvale provided information that indicated ten percent (10%) was too high. Id. While the exact allocation is still not known and would require an allocation study, Staff witness Lansing testified that a compromise of two percent (2%) is reasonable. Tr. at 183-184. The Commission agrees.
Staff and Midvale also agreed that there should be an annual adjustment to local revenues of $2,000 for the anticipated migration to measured service if measured service is approved by the Commission. Tr. at 227. Staff witness Cooley testified that based on the required software changes and the impact of customer migration, Staff agreed to allow Midvale $2,000 annually as lost revenue and to compensate Midvale for the cost for implementing measured service. Id. The Commission finds this amount reasonable.
Staff and Midvale did not agree on the return on equity the Commission should adopt. Staff recommended the Commission use 11.75% return on equity and Midvale recommended a return on equity of 13%. However, even though they did not agree on what return on equity should be adopted, nonetheless, they stipulated what effect either return on equity would have on Midvale’s USF draw as follows:
Assuming the Commission does not approve EAS for any Midvale exchange, and adopts Staff’s proposed 11.75% return on equity, Midvale’s existing Idaho USF draw should be decreased by $23,148 per year, assuming the two percent (2%) allocation for non-regulated activities, reflecting $2,000 for the effects of measured service buy-up and the proposed local service rates and access rates being implemented.
Assuming the Commission does not approve EAS for any Midvale exchange, and adopts Midvale’s proposed 13% return on equity, Midvale’s existing Idaho USF draw should be decreased by $18,698 per year, assuming a two percent (2%) allocation for non-regulated activities, reflecting $2,000 for the effects of measured service buy-up and the proposed local service rates and access rates being implemented.
Stipulation at 4; Tr. at 184; Exhibit 106A.
Both Staff and Midvale testified regarding what return on equity would be appropriate. Staff witness Lansing testified that the proper return on equity is 11.75% citing settlements reached with Cambridge Telephone Company, Albion Telephone Company and Rural Telephone Company. Tr. at 176-177; 184. Staff also stated that the return on equity authorized by the Commission for U S WEST is 11.2%. Id.
Midvale witness, Dr. Don Reading, testified, however, that the cost of equity for Midvale was 13% because Midvale is very highly leveraged. Tr. at 97-99; 129-130. According to Dr. Reading, this increases both the financial risks and operation risks to Midvale. Id. Moreover, the Commission finds that on cross-examination, Staff witness Lansing admitted that if Midvale used a hypothetical capital structure, the revenue requirement would be significantly higher. Tr. at 186-187. The Commission accepts Dr. Reading’s analysis in this instance.
The Commission, therefore, finds that, based on facts unique to this case – Midvale’s highly leveraged position – 13% is an appropriate and reasonable return on equity for Midvale. This does not establish that 13% is always appropriate, however. This decision is confined to the facts before the Commission in this case.
Therefore, based on the Stipulation, the fact that U S WEST did not contest the Stipulation and the testimony at hearing, the Commission finds that local rates for the Yellow Pine, Warren, Warm Lake, Stanley and Lakeside exchanges should be set at the USF threshold level. The Commission finds that rates for the Midvale exchange should be increased to $24.10 per month for residential rates and to $42.00 per month for business rates to reflect its increased calling area. It further finds that Midvale’s access rates should be reduced to statewide average. Based on these findings, Midvale’s present USF draw should be increased to $362,366 to meet its increased revenue requirement once EAS is implemented.
O R D E R
IT IS HEREBY ORDERED that Midvale increase its rates for its Yellow Pine, Warm Lake, Warren, Stanley, and Lakeside exchanges to the Idaho Universal Service Fund threshold rates, $21.28 for residential rates and $39.77 for business rates.
IT IS FURTHER ORDERED that Midvale implement EAS between its Midvale exchange and the “mini-region.” The “mini-region” includes Midvale’s Midvale exchange, the U S WEST Payette and Weiser exchanges, and Cambridge’s Cambridge, Council, Indian Valley and Cuprum exchanges.
IT IS FURTHER ORDERED that Midvale is authorized to implement EAS between Farmers Mutual Telephone Company’s Fruitland and Nu Acres exchanges if Farmers agrees.
IT IS FURTHER ORDERED that when Midvale implements EAS between its Midvale exchange and the “mini-region” it set rates for that exchange to $24.10 for residential rates and $42.00 for business rates.
IT IS FURTHER ORDERED that Midvale offer measured service to its Midvale exchange customers when it implements EAS to the “mini-region.”
IT IS FURTHER ORDERED that Midvale reduce its access rates to the statewide average.
IT IS FURTHER ORDERED that the draw from the Idaho Universal Service Fund for Midvale be increased to $362,366 after EAS for the Midvale exchange is implemented.
IT IS FURTHER ORDERED that Midvale Telephone Company, Cambridge Telephone Company and U S WEST take the necessary actions to implement EAS as authorized by this Order. The parties shall advise us of the cut-over dates within fourteen (14) days of the service date of this Order.
IT IS FURTHER ORDERED that Midvale Telephone Company notify its customers of the scheduled implementation of EAS, the impending rate changes, and the available mitigation measures of ITSAP and measured service.
IT IS FURTHER ORDERED that this decision resolves the Petitions for EAS at issue in GNR-T-99-11 and, therefore, the Commission orders that case closed.
THIS IS A FINAL ORDER. Any person interested in this Order (or issues finally decided by this Order) or in interlocutory Orders previously issued in this Case Nos. MID-T-99-1/SAW-T-99-1 may petition for reconsideration within twenty-one (21) days of the service date of this Order with regard to any matter decided in this Order or in interlocutory Orders previously issued in this Case Nos. MID-T-99-1/SAW-T-99-1. 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 June 2000.
DENNIS S. HANSEN, PRESIDENT
MARSHA H. SMITH, COMMISSIONER
PAUL KJELLANDER, COMMISSIONER
ATTEST:
Myrna J. Walters
Commission Secretary
O:\midt991_sawt991_cc7ms
On December 17, 1999, the Commission approved the merger of Midvale and Sawtooth. See Order No. 28233.
Midvale’s current annual draw is $195,020.
ORDER NO. 28420 -1-
Office of the Secretary
Service Date
June 30, 2000