Background .gov

?COM/MGA/gp2Date of Issuance: 4/21/2021Decision 21-04-005 April 15, 2021BEFORE THE PUBLIC UTILITIES COMMISSION OF THE STATE OF CALIFORNIAOrder Instituting Rulemaking into the Review of the California High Cost Fund-A Program.Rulemaking 11-11-007DECISION ADOPTING BROADBAND IMPUTATION IN THE GENERAL RATE CASES OF THE SMALL INDEPENDENT LOCAL EXCHANGE CARRIERS TABLE OF CONTENTSTitlePage TOC \o "1-6" \h \z \u DECISION ADOPTING BROADBAND IMPUTATION IN THE GENERAL RATE CASES OF THE SMALL INDEPENDENT LOCAL EXCHANGE CARRIERS PAGEREF _Toc66090998 \h 1Summary PAGEREF _Toc66090999 \h 21.Background PAGEREF _Toc66091000 \h 32.Discussion PAGEREF _Toc66091001 \h 52.1.Pub. Util. Code Section 275.6 PAGEREF _Toc66091002 \h 52.2.Federal-State Authority PAGEREF _Toc66091003 \h 112.3.Due Process PAGEREF _Toc66091004 \h 162.4.Broadband Imputation Adoption PAGEREF _Toc66091005 \h 172.5.Broadband Imputation Implementation PAGEREF _Toc66091006 \h 182.5.1.Revenue Requirement, Rate Base, and Rate Design PAGEREF _Toc66091007 \h 182.5.2.Reasonableness of Revenues and Expenses and Net Negative Broadband Revenues PAGEREF _Toc66091008 \h 202.5.3.Applicability to Small ILECs and ISP Affiliates PAGEREF _Toc66091009 \h 212.5.4.Areas Outside Small ILECs’ Service Territories and Alternative Service Platforms PAGEREF _Toc66091010 \h 212.5.5.Wholesale Broadband Revenues PAGEREF _Toc66091011 \h 212.5.6.No Imputation Changes Through Annual Advice Letter PAGEREF _Toc66091012 \h ments on Proposed Decision PAGEREF _Toc66091013 \h 224.Assignment of Proceeding PAGEREF _Toc66091014 \h 23Findings of Fact PAGEREF _Toc66091015 \h 23Conclusions of Law PAGEREF _Toc66091016 \h 23ORDER PAGEREF _Toc66091017 \h 24DECISION ADOPTING BROADBAND IMPUTATION IN THE GENERAL RATE CASES OF THE SMALL INDEPENDENT LOCAL EXCHANGE CARRIERS SummaryBy this decision, we adopt the imputation of net positive retail broadband Internet access service revenues of 10 Small Independent Local Exchange Carriers (Small ILECs) and their Internet service provider (ISP) affiliates in the calculation of California High Cost Fund A (CHCF-A) support in the Small ILECs’ general rate cases. Broadband imputation reflects Public Utilities Code Section 275.6’s legislative mandate that CHCF-A Fund support for the Small ILECs not be excessive so that the burden on contributors to the CHCFA fund is limited. Imputation of broadband revenues of the Small ILECs and their ISP affiliates is reasonable given their integrated operational connections, including the substantial sharing of personnel, equipment, and facilities in the provision of customer services. This decision does not regulate broadband Internet access service or the broadband rates charged by the Small ILECs and their ISP affiliates, and it does not compel any entity to operate at a loss. Instead, we act to appropriately account for broadband-related revenues and expenses derived from the Small ILECs’ facilities infrastructure that has substantially benefited from CHCF-A Fund support by California ratepayers. This decision properly reflects the dual federal-state authority over telephone companies set forth in the Telecommunications Act of 1996 and the 2019 Mozilla decision that vacated those portions of the Federal Communications Commission (FCC) order that barred the Commission from addressing broadband imputation. This decision is limited to the broadband imputation issues identified in the Fourth Amended Assigned Commissioner’s Scoping Memo and Ruling. The remaining outstanding issues in this proceeding, including the issue of discounted broadband, will be addressed in subsequent decisions. This proceeding remains open. BackgroundThe California High Cost Fund A (CHCF-A or A-Fund) program was established in 1987 to provide universal service rate support to small independent telephone corporations serving rural areas in California. The 10?small independent telephone corporations (Small ILECs) that are parties to this proceeding have qualified for and received support from the A-Fund. This Rulemaking (R.) 11-11-007 was opened in 2011 to review the CHCF-A program in response to market, regulatory, and technological changes since the program’s introduction. In Decision 14-12-084 concluding Phase I of this proceeding, the Commission addressed the issue of whether broadband revenues, including revenues from Internet service provider (ISP) affiliates of the Small ILECs, should be imputed to the Small ILECs in their general rate case proceedings that in turn determine the amount of CHCF-A support that they receive. The Commission found that it had the authority to order broadband imputation but that it was premature to adopt imputation at that time. As a result, the Commission deferred a decision on imputation to Phase II of this proceeding. In September 2018, the Commission’s Communications Division released the Broadband Internet and Wireline Voice Competition Study (Study). On March 22, 2019, assigned Commissioner Guzman Aceves issued the Fourth Amended Assigned Commissioner’s Scoping Memo and Ruling that invited the parties to comment on, among other issues, the following:1.c. In light of the Study and subsidies for broadbanddeployment, should the Commission imputebroadband revenues towards the intrastate revenuerequirement?d. What impact does the FCC’s recent reclassification ofbroadband as an information service have on theCommission’s authority to impute broadbandrevenues for intrastate revenue requirement?At the Prehearing Conference conducted on July 31, 2019, parties discussed with the Assigned Commissioner and assigned Administrative Law Judges whether evidentiary hearings were needed. The assigned Administrative Law Judges issued a Ruling on September 12, 2019 setting dates for evidentiary hearings regarding the imputation of broadband revenues and other issues, and evidentiary hearings were held from January 27, 2020 through February 5, 2020.The Small ILECs, the Public Advocates Office at the California Public Utilities Commission (Public Advocates Office), The Utility Reform Network (TURN), and Stephen Kalish filed Opening Briefs on April 21, 2020 and Reply Briefs on May 19, 2020 regarding broadband imputation and other issues. On December 14, 2020, an Administrative Law Judge’s Ruling (December 14, 2020 Ruling) directed the parties to provide comments regarding a straw proposal concerning broadband imputation and other issues. The Small ILECs, the Public Advocates Office, TURN, and Stephen Kalish filed Opening Comments to the December 14, 2020 Ruling on January 22, 2021 and Reply Comments on January 29, 2021. DiscussionPub. Util. Code Section 275.6Pub. Util. Code Section 275.6 directs the Commission to exercise its regulatory authority to maintain the CHCF-A Fund program to provide universal service rate support to small independent telephone corporations. Pub. Util. Code Section 275.6 applies to the Small ILECs because they are rural incumbent local exchange carriers subject to Commission regulation who meet the statutory requirements and have elected to participate in and receive support from the A-Fund. The amount of A-Fund rate support that a Small ILEC receives under Pub.?Util. Code Section 275.6 is determined by application of the interrelated categories of revenue requirement, rate base, and rate design. Revenue requirement is the amount necessary for a Small ILEC to recover its reasonable expenses and tax liabilities and earn a reasonable rate of return on its rate base. Rate base means the value of a Small ILEC’s plant and equipment that is reasonably necessary to provide regulated voice services and access to advanced services, with the Small ILEC entitled to a fair opportunity to earn a reasonable rate of return on that value. Rate design is the mix of end user rates, high-cost support, and other revenue sources that are targeted to provide a fair opportunity to meet a Small ILEC’s revenue requirement. Rate support to the Small ILECs through the A-Fund must be in amounts sufficient to meet the revenue requirements established by the Commission through rate-of-return regulation in furtherance of the state’s universal service commitment to the continued affordability and widespread availability of safe, reliable, high-quality communications services in rural areas of the state. In administering the CHCF-A Fund, the Commission shall determine the Small ILECs’ revenue requirement in a manner that provides revenues and earnings sufficient to afford them a fair opportunity to earn a reasonable return on their investments, attract capital for investment on reasonable terms, and ensure their financial integrity. A-Fund support to the Small ILECs is limited to the portion of the revenue requirement that cannot reasonably be provided by the customers of the Small ILECs after receipt of federal universal service rate support. The California Legislature has directed the Commission to promote customer access to advanced services and deployment of broadband-capable facilities in rural areas that is reasonably comparable to that in urban areas, consistent with federal communications policy. The Commission must include all reasonable investments necessary to provide for the delivery of high-quality voice communication services and the deployment of broadband-capable facilities in the rate base of the Small ILECs. The Commission shall ensure that CHCF-A Fund support is not excessive so that the burden on all contributors to the CHCF-A Fund program is limited.Pub. Util. Code Section 275.6 is a legislative mandate for the Commission to implement reasonable rules in the administration of the CHCF-A Fund program and the determination of revenue requirement, rate base, and rate design of those telephone corporations, including the Small ILECs, that have willingly chosen to receive A-Fund support. In crafting those rules, the Commission must balance the A-Fund’s benefits in furthering safe, reliable, and high-quality communications services to rural areas with the statutory imperative of limiting the financial burden on California ratepayers who contribute to the A-Fund program. That balancing is entirely in keeping with Pub. Util. Code Section 275.6’s directives that the Small ILECs’ customers provide reasonable support for the revenue requirement, that the Small ILECs earn a reasonable return on their investments and attract capital for investment on reasonable terms, and that all reasonable investments in broadband-capable facilities be included in the Small ILECs’ rate base. Thus, the Commission is empowered to use measured discretion to arrive at a fair and equitable treatment of the components of the revenue requirement, rate base, and rate design. Given that the Small ILECs benefit from the inclusion of “all reasonable investments” in determining their rate base, it reasonably follows that all revenues, including broadband revenues, that derive from those investments should be recognized in establishing the rate components that determine CHCFA support. Broadband imputation is both reasonable and consistent with Pub. Util. Code Section 275.6’s requirement that A-Fund support not excessively burden ratepayers who contribute to the fund. As originally drafted, Pub. Util. Code Section 275.6 provided for the inclusion of reasonable investments in broadband-capable facilities in calculating the rate base but did not explicitly reference broadband revenues. In 2012, however, Pub. Util. Code Section 275.6 was amended in two significant respects. First, the Commission is now explicitly required to ensure that CHCF-A support “is not excessive so that the burden on all contributors to the CHCF-A program is limited.” Second, Pub. Util. Code Section 275.6(e) now provides: “Upon request from the commission, a small independent telephone corporation that receives support from the CHCF-A program shall provide information regarding revenues derived from the provision of unregulated Internet access service by that corporation or its affiliate within that corporation’s telephone service territory.” Reasonably construed, the two changes to Pub. Util. Code Section?275.6 are responsive to the concern that CHCF-A support would become excessive if broadband expenses and investments were considered in the determination of the amount of such support but broadband revenues were not. Broadband imputation can be accomplished only if the Small ILECs provide broadband revenue information, and it follows that Pub. Util. Code Section 275.6(e)’s requirement to provide such information stems from a legislative intent that the Commission should consider broadband revenues in the determination of the amount of CHCF-A support. Otherwise, the broadband revenue information requirement becomes devoid of significance and contrary to the fundamental principle that statutes should be interpreted to avoid a construction that renders them meaningless or extraneous. Viewed reasonably and holistically, Pub. Util. Code Section 275.6 directs the Commission to apply broadband imputation.In their briefs, the Small ILECs contend that Pub. Util. Code Section 275.6 should not be read to apply to their ISP affiliates, pointing out that the ISP affiliates are not “small independent telephone corporations” as defined in Pub.?Util. Code Section 275.6(b)(6). However, broadband imputation does not depend on affiliates falling within the definition of a small independent telephone corporation. Although Pub. Util. Code Section 275.6 requires an entity that receives CHCF-A support to be a rural incumbent local exchange carrier subject to Commission regulation, the statute neither expressly limits the elements of revenue requirement, rate base, and rate design to amounts solely attributable to the Small ILECs nor otherwise prohibits consideration of affiliate revenues. As set forth above, Pub. Util. Code Section 275.6(e) explicitly recognizes that the Small ILECs must provide information regarding Internet access service revenues, whether those revenues are generated by the Small ILECs or their affiliates. That specific reference to a telephone corporation affiliate runs contrary to the Small ILECs’ claim that revenue requirement under Pub. Util. Code Section 275.6 should be narrowly construed to mean only telephone corporation revenues. It is notable that the California Legislature specifically chose to exempt broadband revenues sourced from outside the Small ILECs’ service territories from the information reporting requirement but elected to include affiliate broadband revenues within the Small ILECs’ service territories, thereby demonstrating a purpose to apply Pub. Util. Code Section 275.6 to the Small ILECs’ ISP affiliates. Thus, consideration of broadband imputation does not turn on an artificial distinction of whether the revenues are tallied on the financial ledger of one entity (a Small ILEC telephone corporation) or another (a Small ILEC ISP affiliate). Rather, the Commission should consider broadband revenues from both the Small ILECs and their ISP affiliates.The Small ILECs also argue that broadband revenues should not be imputed to them under Pub. Util. Code Section 275.6 because the statute applies only to broadband-capable facilities and not to broadband services. That argument fails for two reasons. First, as set forth above, Pub. Util. Code Section?275.6(e)’s information reporting requirement is tied to revenues from Internet access service. Second, the argument draws a line between facilities and service revenues that is not reflected in the language of Pub. Util. Code Section?275.6. Broadband-capable facilities generate broadband-based revenues, and nothing in Pub. Util. Code Section 275.6 states or suggests that the Commission should take account of facilities but ignore broadband revenues derived from those same facilities in determining the components of rate support. To the contrary, Pub. Util. Code Section 275.6(c)(6)’s requirement that “all reasonable investments” necessary for the deployment of broadband-capable facilities must be considered in the determination of rate base supports an expansive view of the revenue categories that the Commission should consider. Beyond the actual language of Pub. Util. Code Section 275.6, the hearings in Phase II of this proceeding established that the Small ILECs and their affiliates share common family ownership and investors. In addition, there is a substantial overlap in personnel, with the same persons performing duties for both the Small ILECs and their affiliates. The Small ILECs and the ISP affiliates provide voice and broadband services over shared loop facilities and often use the same equipment and offices. The testimony established that the Small ILECs and their ISP affiliates operate as one entity, including the use of joint customer billing. The functional interchangeability of the Small ILECs and their affiliates in the many aspects of their operations supports the conclusion that ISP affiliate broadband revenues should be imputed to the Small ILECs.The Small ILECs speculate that broadband imputation will “likely” result in the Small ILECs selling their ISP affiliates to entities that will not be subject to the rate-of-return regulatory process. The Small ILECs fail to show how they determined that the probability of “disaffiliation” would be greater than 50 percent if broadband imputation were to be adopted. Moreover, the decision to sell any business typically involves multiple factors, and the Small ILECs do not make any attempt to list or weigh all the factors that might be considered in the sale of an ISP affiliate. Speculation about possible ISP affiliate sales sometime in the future should not be the basis for rejecting broadband imputation when the reasonable construction of Pub. Util. Code Section 275.6 set forth above strongly supports the conclusion that imputation should be adopted.Federal-State AuthorityUnder the federal Communications Act of 1934 (Communications Act), the Federal Communications Commission (FCC) has regulatory authority over interstate communications but not intrastate communications. In Part 36 of Title 47 of the federal Code of Regulations, the FCC has set forth in extensive detail separation procedures to allocate telecommunications companies’ property costs, revenues, expenses, taxes, and reserves between intrastate and interstate jurisdictions. Thus, under longstanding federal law and federal regulations, both the federal government and state governmental authorities play significant roles in regulating telecommunications. Under the federal Telecommunications Act of 1996 (Telecommunications Act), a service classified as an information service under Title I is exempted from common carrier status and is not subject to FCC regulation, whereas a service classified as a telecommunications service under Title II can be regulated. The FCC has veered in opposing directions regarding the categorization of broadband Internet access service as an information service or telecommunications service. In 1998, the FCC classified broadband over phone lines as a telecommunications service subject to regulation under Title II of the Telecommunications Act. However, in 2002, the FCC found that cable broadband was an information service. In 2005 and 2007 orders, the FCC declared that wireline and wireless broadband services were also information services. Switching course again in 2015, the FCC opined that broadband Internet access service is a telecommunications service that can be regulated. Then, in 2017, the FCC issued a notice of proposed rulemaking to return to its pre-2015 position to classify broadband Internet access service as an information service and subsequently adopted the order (2018 Order) classifying broadband Internet access service as an information service under Title I of the Telecommunications Act rather than a telecommunications service under Title II. In the 2018 Order, the FCC issued a Preemption Directive that barred states from imposing any rule that the FCC had repealed or that was more stringent than the 2018 Order. On appeal of the 2018 Order to the District of Columbia Court of Appeals, the court in Mozilla v. FCC (Mozilla) vacated the FCC’s Preemption Directive, finding that the FCC did not have the express statutory authority to preempt the states because it had placed broadband outside of its regulatory jurisdiction by classifying it as an information service. Citing several provisions of the Communications Act that recognize the role of the states in regulating broadband, the court noted that the FCC’s “effort to kick the States out of intrastate broadband regulation also overlooks the Communications Act’s vision of dual federal-state authority and cooperation in this area specifically.”The Small ILECs argue that broadband imputation “oversteps the jurisdictional boundaries” set out by the FCC for broadband Internet access service. We disagree. The FCC had created uncertainty by traveling a long and winding road regarding federal regulation of broadband service. However, the Mozilla decision has now clarified the applicable scope of the FCC’s authority over broadband Internet access service and ability to preempt state law. As the court in Mozilla made clear, by reclassifying broadband as an information service, the FCC placed broadband outside of its Title II jurisdiction. Thus, “Where the Commission lacks authority to regulate, it equally lacks the power to preempt state law.”ISP affiliate broadband revenues are not regulated by the federal government and therefore are not counted in the determination of interstate revenue requirement. Further, broadband imputation does not set broadband rates, leaving the Small ILECs and their ISP affiliates to freely set retail broadband prices. Thus, this decision does not infringe on any purported federal jurisdiction. We accordingly find no impediment to this Commission’s legal authority to adopt and implement broadband imputation rules set forth in this decision.In their opening comments responsive to our December 14, 2020 ruling, the Small ILECs argue that the doctrines of conflict preemption and field preemption bar the Commission from adopting broadband imputation. Conflict preemption applies to state law that under the circumstances of the particular case stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress. Field preemption applies when Congress intended federal law to occupy the field based upon a federal interest so dominant that state laws on the same subject are precluded. The Small ILECs assert that conflict preemption applies here because broadband imputation is directly contrary to the FCC’s classification of broadband Internet access as an information service. However, the Small ILECs fail to identify with specificity what the conflict is. As the court in Mozilla explained, the recognition of the FCC’s interpretive authority to classify broadband as an information service does not automatically result in conflict preemption. Rather, FCC preemption here requires a showing of a congressional delegation of authority to preempt or regulate, a showing that the Small ILECs fail to make. Further, Congress clearly did not intend federal law to occupy the field. Instead, Congress expressly fenced off intrastate matters from the FCC’s reach or regulation. As reflected in Section 2.5.5 below, we are mindful of the distinction to be drawn between intrastate revenues and interstate revenues, such as wholesale broadband revenues, that fall on the federal side of the jurisdictional separation rules. That distinction, however, does not alter our conclusions that the FCC cannot be regarded as “dominant” and that Congress did not intend that the FCC “occupy the field” of broadband imputation. Thus, neither conflict preemption nor field preemption prevents the Commission from adopting broadband imputation.Due ProcessCiting the Brooks-Scanlon 1920 U.S. Supreme Court case, the Small ILECs contend that broadband imputation violates due process under the 14th Amendment of the U.S. Constitution. In a related argument, the Small ILECs claim that imputation will “impose operational regulations or price controls on affiliated ISPs.” However, the facts in Brooks-Scanlon are markedly different from those in this proceeding. Brooks-Scanlon concerned a state commission that attempted to require a railroad to operate at a loss because it had a profitable lumber affiliate whose materials were carried on the railroad. In this case, we are not requiring the Small ILECs or the affiliates to operate at a loss, and the evidence failed to establish that broadband imputation would necessarily result in net losses for the Small ILECs. Indeed, Pub. Util. Code Section 275.6 requires us to allow the Small ILECs to earn a reasonable rate of return, and the Small ILECs will have every reasonable opportunity in their GRCs to present evidence regarding what is a reasonable rate design that takes account of broadband imputation. Further, imputation neither imposes price controls on the ISP affiliates nor imposes any additional regulations affecting the operations of the Small ILECs or their ISP affiliates. The Small ILECs’ constitutional rights to due process are not placed in any jeopardy by this decision and will not be denied during the GRCs when broadband imputation is implemented.Broadband Imputation AdoptionIn light of the analysis set forth above, we adopt broadband imputation of net positive retail revenues to be applied in the Small ILECs’ GRCs. As set forth in Ordering Paragraph 1, each Small ILEC must submit with its GRC application a financial statement detailing the broadband-related revenues and expenses of the Small ILEC and its ISP affiliate. In Section 2.5 below, we set forth the principles to be applied in GRCs to implement broadband imputation. Both the decision to adopt broadband imputation and the articulation of specific imputation principles to implement the decision reflect the Commission’s measured and reasonable approach to achieve the desired balance between full broadband deployment and modernization and fair CHCF-A support levels for California ratepayers.The evidence in this proceeding highlights and reflects an ongoing and substantial “digital divide” in the availability of robust, reliable, and affordable broadband services in many rural parts of California. In R. 20-08-021 the Commission proposes to adopt rules to maximize broadband infrastructure deployment and in R. 20-09-001 the Commission has instituted a proceeding for the core purpose of accelerating the deployment of and access to quality, affordable internet for all Californians. As evidenced by these recent Rulemakings, the Commission continues to seek solutions and prioritize incentives to address the divide in affordable broadband services in many rural parts of California. The adoption of broadband imputation in this decision is not contrary to the Commission’s broadband goals. Broadband imputation at its core reflects the basic notion that Small ILEC affiliate broadband revenues must be considered as one part of the overall mix of fund sources to effectuate broadband deployment and bridge the digital divide. Broadband Imputation ImplementationRevenue Requirement, Rate Base, and Rate DesignWe now consider the implementation of broadband imputation through the determination of revenue requirement, rate base, and rate design in the Small ILECs’ GRCs. TURN argues that it is just and reasonable for the Commission to take the ISP affiliates’ operations into consideration when determining intrastate revenue requirement. Although the language of Pub. Util. Code Section 275.6 as a whole supports imputation of broadband revenues of the Small ILECs and their ISP affiliates, the definition of revenue requirement in Pub. Util. Code Section 275.6(b)(5) includes only the specific components of the Small ILECs’ reasonable expenses, tax liabilities, and reasonable rate of return on rate base. As a result, we decline to consider ISP affiliate operations in the determination of the Small ILECs’ revenue requirements.Rate base is the value of a telephone corporation’s plant and equipment that is reasonably necessary to provide regulated voice services and access to advanced services. The Small ILECs are allowed to include reasonable investments in broadband-capable facilities as part of the calculation of rate base. Although broadband revenues and expenses can reflect the value of the Small ILECs’ plant and equipment and prior investments in facilities, adjustments to the rate base do not necessarily translate to equivalent adjustments in CHCF-A support. Therefore, broadband imputation should not be implemented through rate base. Additionally, because the ISP affiliates are not subject to rate regulation, we exclude any investments by the ISP affiliates from the Small ILECs’ rate base. Therefore, CHCF-A support shall not be used to enable an ISP affiliate to earn a return on their investment.Rate design is the mix of end user rates, high-cost support, and other revenue sources that are targeted to provide a fair opportunity to meet the revenue requirement. Retail broadband revenues net of related expenses are properly categorized as an “other revenue source,” and therefore the rate design portion of the GRC is the proper time for consideration of broadband imputation. Because CHCF-A support calculated in the GRC’s rate design phase is the remainder amount necessary to fulfill the revenue requirement after consideration of other revenue sources, each dollar increase in the broadband imputation amount will result in a corresponding dollar decrease in CHCF-A support.Reasonableness of Revenues and Expenses and Net Negative Broadband Revenues In drafting Pub. Util. Code Section 275.6, the California Legislature repeatedly directed us to apply a reasonableness standard when exercising our regulatory authority to administer the CHCF-A program. Pub. Util. Code Section 275.6 references “reasonable” eight times and “reasonably” five times. Given that direction, the same standard should apply to broadband imputation: all reasonable broadband-related revenues and expenses should be considered. To enforce the reasonableness standard, the Commission may exercise its discretion to conduct a reasonableness review and/or an audit to ascertain the completeness and accuracy of broadband-related revenues and expenses.The Public Advocates Office argues against the allowance of net negative broadband revenues, contending that their inclusion would create an incentive to not control expenses and be less efficient. Imputing negative net retail revenues would result in increased CHCF-A support to those ISP affiliates (or divisions) earning net negative revenues. We share the concern that a blanket allowance of negative imputed revenues could result in the submission of unmerited expense claims solely for the purpose of increasing CHCF-A funding, a purpose that would be contrary to the statutory mandate that A-Fund support not be excessive. Therefore, we establish that the consideration of net negative broadband revenues as the basis for CHCF-A support is unreasonable. Providing additional CHCF-A support to entities that are not rate-regulated and have chosen to offer service would be contrary to the requirement in Pub. Util. Code Section 275.6 that the Commission ensure that support is not excessive to limit the burden on all contributors. As a result, we will not consider net negative broadband revenues as the basis for CHCF-A support. Applicability to Small ILECs and ISP AffiliatesAs noted above, nine of the 10 Small ILECs have ISP affiliates, and one Small ILEC offers broadband services through a separate company division. The same implementation principles shall apply to each Small ILEC whether or not the Small ILEC has an ISP affiliate.Areas Outside Small ILECs’ Service Territories and Alternative Service PlatformsThe Small ILECs’ ISP affiliates provide broadband service to customers within the telephone service territories of the Small ILECs and in areas where the Small ILECs do not have facilities and do not provide voice services. Some ISP affiliate broadband services are provided on alternative service platforms, including fixed wireless, where the affiliates do not rely on Small ILEC local exchange facilities. Our decision to impute broadband revenues of the ISP affiliates is based in substantial part on the many functions, operations, and facilities, including shared loop facilities, that are utilized by both the Small ILECs and their ISP affiliates. As a result, broadband imputation will not apply to revenues derived from areas outside of the Small ILECs’ telephone service territories or to revenues resulting from alternative service platforms that are not based upon the Small ILECs’ local exchange facilities.Wholesale Broadband RevenuesThe Public Advocates Office argues that the Commission should impute the wholesale broadband revenues that the Small ILECs receive from their ISP affiliates. TURN disagrees. Unlike retail broadband revenues, the FCC treats wholesale broadband revenues as interstate revenues under its Part 36 jurisdictional separation rules. As a result, wholesale broadband revenues are set in accordance with National Exchange Carrier Association (NECA) Tariff No.?5. Thus, imputation of wholesale broadband revenues in a Small ILEC’s GRC would result in the double counting of those revenues in interstate and intrastate rate design. Therefore, we decline to impute wholesale revenues derived from the Small ILECs’ broadband sales to their ISP affiliates.No Imputation Changes Through Annual Advice Letter The broadband imputation amount established in a GRC will not be changed in the annual advice letter process. Instead, the GRC-established imputation amount shall apply until a new imputation amount is established in the subsequent GRC. The imputation amount shall be held constant until a subsequent GRC regardless of changes to the NECA Tariff No. 5 rates or other ISP expenses. Small ILECs may not request adjustments to annual CHCFA support as a result of change to ISP expenses. Comments on Proposed DecisionThe proposed decision of Commissioner Martha Guzman Aceves in this matter was mailed to the parties in accordance with Section 311 of the Pub. Util. Code and comments were allowed under Rule 14.3. Comments were filed on March 30, 2021 by the Small ILECs, TURN, and Mr. Stephen Kalish. Reply comments were filed on April 5, 2021 by the Small ILECs, Cal Advocates, TURN and Mr. Stephen Kalish. In Section 2.1, we have corrected the year of the referenced amendments to Pub. Util. Code Section 275.6. We have declined to incorporate other proposed changes regarding issues that have been adequately addressed in the proposed decision. .Assignment of ProceedingMartha Guzman Aceves is the assigned Commissioner and Hazlyn?Fortune and Peter Wercinski are the assigned Administrative Law Judges in this proceeding.Findings of FactThe Small ILECs are small independent telephone corporations who have elected to participate in and receive support from the CHCF-A Fund.The Small ILECs with ISP affiliates share common ownership, inventory, personnel, shared loop facilities, equipment, offices, customer billing, and operations with those affiliates.The language of Pub. Util. Code Section 275.6 reflects a legislative intent that the Commission impute broadband-related revenues and expenses of the Small ILECs and their ISP affiliates in the determination of CHCF-A support.Conclusions of LawAll reasonable net positive retail broadband-related revenues of the Small ILECs and their ISP affiliates (but excluding revenues derived from areas outside of the Small ILECs’ telephone service territories and revenues resulting from alternative service platforms that are not based upon the Small ILECs’ local exchange facilities) should be imputed in the determination of rate design and CHCF-A support in the Small ILECs’ GRCs.Wholesale broadband-related revenues derived from the Small ILECs’ broadband-related sales to their ISP affiliates are regulated by the FCC, are set in accordance with NECA Tariff No. 5 and should not be imputed in the determination of rate design and CHCF-A support in the Small ILECs’ GRCs.Claims of net negative broadband-related revenues by Small ILECs are unreasonable, and such revenues should not be the basis for CHCF-A support.ORDERIT IS ORDERED that:In a general rate case (GRC) of Calaveras Telephone Company, Cal-Ore Telephone Company, Ducor Telephone Company, Foresthill Telephone Company, Kerman Telephone Company, Pinnacles Telephone Company, The Ponderosa Telephone Company, Sierra Telephone Company, Siskiyou Telephone Company, or Volcano Telephone Company (each company individually Small ILEC), all reasonable positive retail broadband-related revenues of the Small ILEC and its Internet service provider (ISP) affiliate (if such affiliate exists) (but excluding revenues derived from areas outside of the Small ILEC’s telephone service territory and revenues resulting from alternative service platforms that are not based upon the Small ILEC’s local exchange facilities) net of all reasonable broadband-related expenses of the Small ILEC and its ISP affiliate (if such affiliate exists) for the calendar year immediately preceding the filing of the GRC application shall be imputed in the determination of rate design and California High Cost Fund-A support. In a general rate case (GRC) of Calaveras Telephone Company, Cal-Ore Telephone Company, Ducor Telephone Company, Foresthill Telephone Company, Kerman Telephone Company, Pinnacles Telephone Company, The Ponderosa Telephone Company, Sierra Telephone Company, Siskiyou Telephone Company, or Volcano Telephone Company (each company individually Small ILEC), the Small ILEC shall submit with its GRC application a financial statement in a format to be provided by the California Public Utilities Commission Communications Division staff detailing each category of revenue and expense covered by Ordering Paragraph 1 for the calendar year immediately preceding the filing of the GRC application. In a general rate case (GRC) by Calaveras Telephone Company, Cal-Ore Telephone Company, Ducor Telephone Company, Foresthill Telephone Company, Kerman Telephone Company, Pinnacles Telephone Company, The Ponderosa Telephone Company, Sierra Telephone Company, Siskiyou Telephone Company, or Volcano Telephone, a claim of net negative broadband-related revenues is unreasonable and such revenues shall not be the basis for California High Cost Fund-A support. All matters related to these Ordering Paragraphs shall be subject to a reasonableness review and/or audit by the California Public Utilities Commission. This order is effective today.Dated April 15, 2021, at San Francisco, California.MARYBEL BATJER PresidentMARTHA GUZMAN ACEVESCLIFFORD RECHTSCHAFFENGENEVIEVE SHIROMADARCIE HOUCK Commissioners ................
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