DECISION ADOPTING INTRASTATE RATES AND CHARGES, …



ALJ/CR2/EW2/ilzPROPOSED DECISION Agenda ID?#?17324?(Rev 1)Ratesetting4/25/2019 Items #24Decision PROPOSED DECISION OF ALJ WILDGRUBE AND ALJ RIZZO(Mailed 03/25/2019)BEFORE THE PUBLIC UTILITIES COMMISSION OF THE STATE OF CALIFORNIAIn the Matter of Application of Foresthill Telephone Co. (U1009C) to Review Intrastate Rates and Charges, Establish a New Intrastate Revenue Requirement and Rate Design, and Modify Selected Rates.Application 17-10-004DECISION ADOPTING INTRASTATE RATES AND CHARGES, INTRASTATE REVENUE REQUIREMENT AND RATE DESIGN, AND MODIFYING SELECTED RATES FOR FORESTHILL TELEPHONE COMPANYTABLE OF CONTENTSTitlePage TOC \o "1-5" \h \z \t "main,1,mainex,1,dummy,1" DECISION ADOPTING INTRASTATE RATES AND CHARGES, INTRASTATE REVENUE REQUIREMENT AND RATE DESIGN, AND MODIFYING SELECTED RATES FOR FORESTHILL TELEPHONE COMPANY PAGEREF _Toc3539623 \h 2Summary PAGEREF _Toc3539624 \h 21. Factual Background and Procedural History PAGEREF _Toc3539625 \h 32. Issues Before the Commission PAGEREF _Toc3539626 \h 42.1. Revenue Requirement PAGEREF _Toc3539627 \h 42.2. End-User Rates PAGEREF _Toc3539628 \h 52.3. Rate Design PAGEREF _Toc3539629 \h 52.4. Change in Tax Rate PAGEREF _Toc3539630 \h 63. Legal and Policy Framework for this GRC PAGEREF _Toc3539631 \h 64. Discussion PAGEREF _Toc3539632 \h 94.1. Foresthill Service Territory and its Affiliated Businesses PAGEREF _Toc3539633 \h 94.2. Position of Parties PAGEREF _Toc3539634 \h 114.3. Revenue from Basic Services PAGEREF _Toc3539635 \h 154.3.1. Residential Service Rates PAGEREF _Toc3539636 \h 154.3.1.1. Determination PAGEREF _Toc3539637 \h 184.3.2. Basic Business Rate PAGEREF _Toc3539638 \h 194.3.2.1. Determination PAGEREF _Toc3539639 \h 214.4. Revenue from Optional Services PAGEREF _Toc3539640 \h 224.4.1. Custom Calling Features PAGEREF _Toc3539641 \h 224.4.1.1. Determination PAGEREF _Toc3539642 \h 234.4.2. Inside Wire Maintenance PAGEREF _Toc3539643 \h 234.4.2.1. Determination PAGEREF _Toc3539644 \h 254.4.3. Price Elasticity of Demand to Forecast Unit Counts in 2019 PAGEREF _Toc3539645 \h 254.4.2.1. Determination PAGEREF _Toc3539646 \h 264.5. Imputation of Revenue Generated from the Sale of Wholesale Broadband Access PAGEREF _Toc3539647 \h 274.5.1. Determination PAGEREF _Toc3539648 \h 284.6. Corporate Expense Cap PAGEREF _Toc3539649 \h 284.6.1. Estimated Corporate Expenses PAGEREF _Toc3539650 \h 304.6.1.1. Determination PAGEREF _Toc3539651 \h 334.7. Common Cost Allocations to Regulatedand Nonregulated Expenses PAGEREF _Toc3539652 \h 344.7.1. Determination PAGEREF _Toc3539653 \h 354.8. Non-Corporate Operation Expenses PAGEREF _Toc3539654 \h 374.8.1. Executive Labor Expense PAGEREF _Toc3539655 \h 374.8.1.1. Determination PAGEREF _Toc3539656 \h 374.8.2. Executive Bonus Expense PAGEREF _Toc3539657 \h 384.8.2.1. Determination PAGEREF _Toc3539658 \h 384.8.2.2. Rate Case Expense PAGEREF _Toc3539659 \h 384.8.2.3. Determination PAGEREF _Toc3539660 \h 394.9. Affiliate Transactions PAGEREF _Toc3539661 \h 404.9.1. Foresthill’s Affiliate Transactions with Audeamus and Kertel PAGEREF _Toc3539662 \h 424.9.2. Foresthill’s Burden of Proof PAGEREF _Toc3539663 \h 444.9.2.1. Foresthill Has Not Met Its Burden of Provingits Affiliate Transactions Did Not Burden California Consumers. PAGEREF _Toc3539664 \h 454.9.2.2. Determination PAGEREF _Toc3539665 \h 474.10. Plant Investments PAGEREF _Toc3539666 \h 514.10.1. Determination PAGEREF _Toc3539667 \h 534.11. Depreciation PAGEREF _Toc3539668 \h 534.11.1. Determination PAGEREF _Toc3539669 \h 544.12. Rate Base PAGEREF _Toc3539670 \h 554.12.1. Determination PAGEREF _Toc3539671 \h 564.13. Taxes PAGEREF _Toc3539672 \h 564.13.1. Determination PAGEREF _Toc3539673 \h 584.4. Safety PAGEREF _Toc3539674 \h 594.14.1. Determination PAGEREF _Toc3539675 \h 604.15. Service Quality PAGEREF _Toc3539676 \h 624.15.1. Determination PAGEREF _Toc3539677 \h 634.16. Potential Revenue Shortfall PAGEREF _Toc3539678 \h 645. Conclusion PAGEREF _Toc3539679 \h 656. Comments on Proposed Decision PAGEREF _Toc3539680 \h 667. Assignment of Proceeding PAGEREF _Toc3539681 \h 67Findings of Fact PAGEREF _Toc3539682 \h 67Conclusions of Law PAGEREF _Toc3539683 \h 74ORDER PAGEREF _Toc3539684 \h 79DECISION ADOPTING INTRASTATE RATES AND CHARGES, INTRASTATE REVENUE REQUIREMENT AND RATE DESIGN, AND MODIFYING SELECTED RATES FOR FORESTHILL TELEPHONE COMPANYSummaryThis decision authorizes a revenue requirement for Foresthill Telephone Company (Foresthill), as summarized in the following table, and as discussed in greater detail throughout this decision in Appendix A, and Appendix B:Rate Case ItemForesthill’s Proposal Amount Adopted by this DecisionOperating Revenues$5,612,863$5,026,106Operating Expenses$4,663,191$4,064,746Average Rate Base$10,563,655$10,693,689Rate of Return8.99%8.99%This decision adopts an overall intrastate revenue requirement of $5,026,106 for Test Year (TY) 2019 including a subsidy draw of $1,986,864 from the California High Cost Fund-A (CHCF-A). Further, this decision, among other things, specifically: (1) adopts new rates for residential and business customers of Foresthill that are reasonably comparable to the rates urban customers pay, pursuant to Public Utilities (Pub. Util.) Code § 275.6(c)(3); (2) authorizes a revenue requirement for Foresthill based on sound analysis of the infrastructure and operational needs, revenue sources and income, costs and expenses, and deductions of Foresthill; (3) affirms rules regarding interactions with its affiliates; and (4) adopts requirements relating to safety and project reporting for Foresthill.Upon adoption of this decision, the tariffed basic residential rates for Foresthill will be set at $25 (exclusive of surcharges, fees and taxes), business rates at $35 (exclusive of surcharges, fees and taxes), and new rates for other Foresthill services will be set as identified in this decision. There will be no further adjustments in its residential or business rates until the next Foresthill General Rate Case (GRC).We stress that Foresthill is placed on notice that it will be held firmly to the Commission’s affiliate transaction compliance rules in its future GRCs. Foresthill will be required to maintain and produce, at a minimum, specific and detailed documentation, as well as fully executed and competitively sourced contracts for equipment and services, in order to justify its claims for the recovery of these and other expenses. If Foresthill expects to receive Commission authorization for the recovery of these expenses in future GRCs, it must satisfy its burden of proof by producing specific documents relevant to the critical review of a GRC.We adopt the Public Advocates Office (Cal Advocates) affiliate transaction proposals. This provides safeguards to ensure that the engagement between Foresthill and its affiliates is at arm’s?length, which is in the interest of California consumers and investors. With the adopted Cal Advocates proposals, we will be better positioned in future ratemaking proceedings to identify and disallow excessive and unreasonable payments between Foresthill and its affiliated corporations, and to determine which expenses are reasonable for California consumers to bear. Application 17-10-004 is closed.1. Factual Background and Procedural History Foresthill Telephone Company (Foresthill) is a regulated telephone corporation, an Incumbent Local Exchange Carrier (ILEC), and a carrier of last resort. It serves a rural service territory in Placer County, California and is regulated by the Commission on a traditional rate-of-return basis. Foresthill’s sister company is Kerman Telephone Company (Kerman), which serves a rural agricultural area of Fresno County, California. Foresthill seeks to adjust its rates, which the Commission set in A.10-12-012 through Decision (D.) 11-12-001, its last rate case that was resolved in 2011.On October 2, 2017, Foresthill filed the current General Rate Case Application with the Commission for review of its intrastate rates and charges for regulated intrastate telecommunications services, for updates to its intrastate revenue requirement, and for establishment of a rate design that will give Foresthill a reasonable opportunity to meet its revenue requirement. Cal?Advocates filed a protest to the Application on November 1, 2017. The instant proceeding included a prehearing conference (PHC), scoping memo, various discovery disputes, a public participation hearing in Foresthill, California, evidentiary hearings, closing briefs, and a final oral argument. 2. Issues Before the CommissionBased on the Application, the Protest, the parties’ PHC statements, and the discussion at the PHC, the following issues were determined as within scope of this proceeding:2.1. Revenue RequirementWhat level of revenue requirement is necessary to provide Foresthill with revenues and earnings sufficient to allow it to operate in a manner to deliver safe, reliable, high-quality voice communications service, and is consistent and complies with all requirements listed in Pub. Util. Code § 275.6:Revenue requirement: Whether Foresthill’s proposed revenue requirement (including, but not limited to, planned plant additions to rate-base, operational expenses, depreciation, taxes, forecasting methodologies, etc.) is just and reasonable?Corporate expenses: Whether Foresthill’s corporate operating expenses, including compliance with the Federal Communications Commission’s (FCC) Corporate Operating expense cap adopted in Commission D.14-12-084, and requested to treat rate case expenses outside the Commission’s adopted FCC corporate cap, are just and reasonable? If Foothill’s proposed Corporate Operations expenses are not within the FCC corporate expense cap, has Foothill demonstrated that its corporate expenses are reasonable?Safety: Whether Foresthill’s public safety procedure related to the 9-1-1 network, emergency preparedness, and safety procedures are sufficient and reasonable?Affiliate transactions: Whether Foresthill’s affiliate transactions, allocations, and affiliate business relationships, including current business practices, are in compliance with the Commission’s Affiliate Transaction Rules and FCC regulations in Title 47 C.F.R. Part 32, 64, and 36?2.2. End-User RatesWhat end user rates are just and reasonable for Foresthill’s customers and reasonably comparable to rates charged to customers of urban telephone corporations per Pub. Util. Code § 275.6(c)(3)?2.3. Rate Design What is the appropriate mix of revenue sources required to afford Foresthill’s with a reasonable opportunity to meet its revenue requirement? Whether Foresthill’s proposed rate design, including its proposed CHCF-A subsidy/draw amount is just and reasonable?2.4. Change in Tax RateWhat is the appropriate method to calculate the impact of the tax change under the Tax Cut and Jobs Act on Foothill’s revenue requirement for TY 2019?3. Legal and Policy Framework for this GRCUnder the Public Utilities Act, our primary purpose is to ensure the public adequate service at reasonable rates without discrimination.Under Pub. Util. Code § 451, public utilities may demand and receive only just and reasonable charges, and they must provide “adequate, efficient, just and reasonable service” in a way that promotes the “safety, health, comfort, and convenience of [their] patrons, employees, and the public.” Under Pub. Util. Code § 454, public utilities must make a showing to the Commission that any proposed rate change is justified, and receive a finding by the Commission to that effect before making such a change. Under Pub. Util. Code §§ 701 and 728, the Commission has the authority to determine what is just and reasonable, and to disallow costs not found just and reasonable. In particular, the Commission “has the power to prevent a utility from passing on to the ratepayers unreasonable costs for materials and services by disallowing expenditures that the Commission finds unreasonable.” Pub. Util. Code § 275.6 requires the Commission to minimize telephone rate disparities between rural and metropolitan areas to keep rates affordable in areas with lower population densities. Specifically, Pub. Util. Code § 275.6(c)(2) requires that the Commission:Employ rate of return regulation to determine a small independent telephone corporation’s revenue requirement in a manner that provides revenues and earnings sufficient to allow the telephone corporation to deliver safe, reliable, high-quality voice communication service and fulfill its obligations as a carrier of last resort in its service territory, and to afford the telephone corporation a fair opportunity to earn a reasonable return on its investments, attract capital for investment on reasonable terms, and ensure the financial integrity of the telephone corporation.The CHCF-A provides a source of supplemental revenues to small ILECs – like Foresthill – whose basic exchange access line service rates would otherwise be increased to levels that would threaten universal service. As stated in D.14-12-084, “[u]niversal, reliable, affordable, service is critical to public safety and benefits that state as a whole.” The CHCF-A currently supports 10 of the eligible 13 small independent telephone companies to allow rural residents to stay connected to essential services to maintain public health and safety.The CHCF-A program is funded by a surcharge assessed on revenues collected from end users of intrastate telecommunications services subject to surcharge. The Commission periodically reviews the program fund levels and adjusts the surcharge rate to ensure the program is sufficiently funded. All telecommunications carriers and interconnected Voice Over Internet Protocol?(VoIP) service providers are required to assess the CHCF-A surcharge rate of 0.35%.In administering the CHCFA program, the Commission must “ensure that rates charged to customers of small independent telephone corporations are just and reasonable and are reasonably comparable to rates charged to customers of urban telephone corporations.” Historically, “comparable” has meant that target rates for residential customers are no more than 150 percent of basic service rates for California’s urban telephone customers. The “150 percent formula” was originally established in D.9109042, and the formula has been used in part to evaluate the reasonableness of rates charged to customers. In D.1002016, the Commission modified the 150 percent formula so that the small ILECs were no longer required to charge 150 percent of the basic urban rate to qualify for CHCFA support, instead setting the basic service rate for residential customers at $20.25 per month. This requirement remained in effect until the Commission adopted D.1412084 in its CHCFA rulemaking, that deemed presumptively reasonable and non-rebuttable a rate range of $30.00 to $37.00, for basic residential service, inclusive of additional charges such as federal and state fees and surcharges.In this GRC, as in all others, we seek to promote the public interest. Promoting the public interest in this case requires that we carefully review the revenue requirement request of Foresthill with an eye toward protecting not only Foresthill’s ratepayers and customers, but also all other carriers’ customers that pay into the CHCF-A from which Foresthill is requesting funding. In carrying out this responsibility, we must comply with Pub. Util. Code §?275.6(c)(7) to ensure that CHCF-A support for Foresthill is “is not excessive so that the burden on all contributors to the CHCFA program is limited.” Similarly, Pub. Util. Code § 275.6(f) states, “the Commission shall structure the CHCF-A program so that any charge imposed to promote the goals of universal service reasonably equals the value of the benefits of universal service to contributing entities and their subscribers.” Here, we assess whether Foresthill has justified its revenue increase proposals and disallow those proposals to the extent that they have not been justified. Finally, pursuant to Pub. Util. Code § 309.5, consumer interests in this GRC are represented by Cal Advocates. Cal Advocates’ statutory mandate requires it to pursue the lowest possible rates for ratepayers consistent with safe and reliable service. Despite Cal Advocates’ participation in the case, the burden of presenting evidence of the need for its request never shifts from Foresthill to Cal Advocates. The scope of our proceeding must include all relevant information necessary to determine whether the applicant’s proposed revenue requirement and other requests are just and reasonable and permit the utility to fulfill its duties under Pub. Util. Code § 451.4. Discussion 4.1. Foresthill Service Territory and its Affiliated BusinessesForesthill’s service territory spans 240 square miles in a rural area east of Sacramento. Foresthill’s service territory is sparsely populated with low population density and rural terrain. Foresthill serves predominantly residential households, spread out through a sparsely populated area. According to Foresthill’s testimony, most residents are middle income to low income, and many residents are on fixed incomes. Foresthill serves a few local businesses, including an auto repair and service station facilities, a retail store, a grocery store, a hardware store, two large wedding venues and guest accommodations, several small restaurants, and a large veteran’s memorial facility used for community functions. Foresthill serves a large number of home-based businesses that rely heavily on broadband connections. Foresthill also serves an array of anchor institutions including government, educational, healthcare, and public safety institutions such as the Placer County Library, the Fire Protection District, the State of California Department of Forestry, the Foresthill Public Utility Districts, and a number of local schools.Foresthill is a wholly owned subsidiary of Sebastian Enterprises, Inc.?(SEI). Foresthill does business as “Sebastian.” SEI owns other companies including, Kerman, a regulated telecommunications carrier that receives CHCF-A subsidies, and Foresthill’s other principal affiliates include Audeamus and KerTel Communications, Inc. (Kertel). Audeamus and Kertel are not rate regulated by this Commission. Audeamus provides long distance service, alarm security services, and serves as an Internet Service Provider (ISP) in and around the service territories of Foresthill and Kerman. Kertel serves as a construction company dedicated to providing wiring and non-telecommunications related services. Both Audeamus and Kertel operate under the business name “Sebastian.” The business office building in Foresthill, California, is the business address of Foresthill and Audeamus, branded with the business name of Sebastian on the exterior. This business office and employee apartment is used to provide services to Audeamus’ and Foresthill’s subscribers. 4.2. Position of Parties In its initial Application, Foresthill proposed a revenue requirement of $5,769,522. This incorporated costs such as $4,383,438 in anticipated intrastate regulated expenses and property taxes, return on rate base of $906,357 based on a total rate base of $10,081,836 and a rate of return of 8.99 percent, and forecasted tax liabilities of $479,728. Foresthill’s rate design proposal included $824,241 in local network service revenues derived from end users, $160,089 in intrastate access and inter-carrier compensation revenues, $103,861 in intrastate miscellaneous and uncollectible revenues, $1,327,618 in federal High Cost Loop Support (HCLS), and $3,353,714 in CHCF-A support.On May 21, 2018, Foresthill provided supplemental adjustments to its request in its application. Foresthill proposes a revenue requirement of $5,612,863. This incorporated costs such as $4,663,191 in anticipated intrastate regulated expenses and property taxes, return on rate base of $949,672 based on a total rate base of $10,563,655 and a rate of return of 8.99 percent and forecasted tax liabilities of $297,079. Foresthill’s revenue requirement proposal included $824,241 in local network service revenues derived from end users, $160,089 in intrastate access and inter-carrier compensation revenues, $103,861 in intrastate miscellaneous and uncollectible revenues, $1,266,949 in federal HCLS, and $3,257,723 in CHCF-A support.On November 27, 2018, Foresthill filed a response to a November 2, 2018 Administrative Law Judge (ALJ) ruling with updated Results of Operations numbers provided by Foresthill, including $1,859,361 in HCLS, while revising its CHCF-A subsidy to $2,360,978 resulting from the HCLS amount. In a January?3, 2019 reply, Cal Advocates agreed to this adjustment while contesting other issues within its reply.Foresthill proposes to set its residential basic rates at $24.00, exclusive of the subscriber line charge and other surcharges and fees. Foresthill proposes its inclusive residential rate between January 1, 2019 and June 30, 2019 at $33.81. This inclusive rate incorporates the access recovery charge at $2.93, which will be eliminated by operation of law reducing the inclusive rate to $30.88 on July?1,?2019. Foresthill proposes to increase its single-line business rate to $32.35.On November 1, 2017, Cal Advocates filed a protest to Foresthill’s Application. For its part, Cal Advocates recommends that the Commission should set Foresthill’s total intrastate revenue at $4,329,439 for TY 2019 which is $1,283,424 or 23 percent less than Foresthill’s proposal of $5,612,862 in its Supplemental Testimony filed on May 21, 2018. Cal Advocates’ recommendation and Foresthill’s authorized rate of return at 8.99% results in a CHCF-A draw of $1,873,825 for test year 2019. Cal Advocates proposes to set Foresthill’s residential basic rates at $25.00, exclusive of the subscriber line charge and other surcharges and fees and recommends an all-inclusive residential rate at $33.50. Cal Advocates proposes to increase Foresthill’s basic business rate to $38, exclusive of surcharges and fees.4.3. Revenue from Basic Services 4.3.1. Residential Service RatesOrdering Paragraph 9 of D.14-12-084 provides as follows:The Small Incumbent Local Exchange Carriers’ Basic Residential Service Rates must be in a range of $30, inclusive of additional charges, to $37, inclusive of additional charges. This rate range of $30 to $37 will be presumptively reasonable and non-rebuttable. Actual rates will be set in the individual General Rate Cases of the Small Incumbent Local Exchange Carriers.Foresthill recommends a change to its local residential service rate from $20.24 to $24 and conforms its basic residential rate of $24 to D.14-12-084 by recommending an inclusive rate of $33.81 on January 1, 2019. Foresthill states that this inclusive rate includes an access recovery charge (ARC) of $2.93. However, Foresthill states that on July 1, 2019, the ARC would be reduced to $0 and the inclusive rate of $24 would be adjusted to $30.88. Foresthill states that while the $30.88 rate is a reasonable rate for Foresthill’s customers $33.81 is not, and would lead to customer confusion as customers would see a substantial increase in their bill followed by a reduction in July. Therefore, Foresthill recommends that the Commission adopt a corresponding sur-credit in the amount of $2.93 from January 1, 2019 through June 30, 2019. According to Foresthill, the effect of this sur-credit would ensure that the customer does not experience significant rate swings. Thus, under Foresthill’s recommendation, the customer would pay a $30.88 “inclusive” rate during the six month period from January through July. Foresthill maintains that given the low-income demographic of its service area, the lower end of the D.14-12-084 band is reasonable. For its part, Cal Advocates recommends that the Commission should set Foresthill’s basic residential monthly rate, exclusive of surcharges and fees, at $25.00. Cal Advocates’ proposed $25.00 monthly rate results in an “all-inclusive” rate of $33.50, which they contend is within the Commission’s presumptively reasonable band of $30.00 to $37.00. Cal Advocates argues that $25.00 monthly rate is comparable to the average rates that other incumbent local telephone companies charge in California’s urban areas. Specifically, Cal?Advocates states that the basic urban residential rate for AT&T customers is $27, $22 for California Frontier customers, $21 for Frontier/Citizens customers, $22 for Frontier Southwest customers, and $21.99 for Consolidated. Cal Advocates’ proposed $25.00 monthly basic residential rate results in an all-inclusive rate of $33.50, excluding ARC. Cal Advocates maintains that the $33.50 all-inclusive rate is within the Commission’s $30.00 to $37.00 all-inclusive range of reasonableness outlined in D.14-12-084. Thus, according to Cal?Advocates, Foresthill’s customers would receive a $2.20 increase to their current “all-inclusive”monthly bills.Cal Advocates argues that the Commission should not approve Foresthill’s proposed sur-credit on ARC because its customers will not be charged an ARC beginning July 1, 2019. Instead, Cal Advocates recommends that the Commission should order Foresthill to continue to impose ARC for the first six months of 2019 until ARC is officially reduced to $0 on July 1, 2019. Cal?Advocates asserts that Foresthill proposes an ARC sur-credit to reimburse Foresthill from the CHCF-A for a six month loss – January 1, 2019 to June?30,?2019 – in ARC revenues resulting from their proposed rate increase. Finally, Cal Advocates argues that increasing Foresthill’s basic residential rate reduces the strain on the CHCF-A fund and complies with our statutory responsibilities.In rebuttal, Foresthill asserts that Cal Advocates’ reliance on what urban customers are paying has significant flaws. Foresthill argues that Cal?Advocates proposed rates fail to account for the economic conditions in Foresthill’s service territory. Specifically, Foresthill contends that: (1)?Cal?Advocates compares basic service rates and not the rate components that make up the $30 to $37 range that the Commission specified as reasonable in D.14-12-084; (2) Cal Advocates excluded the rate of competitive local exchange carriers (LECs); (3) Cal Advocates did not address AT&T’s customers’ migration from regulated wireline service to its non-regulated services; and (4)?Cal Advocates does not accurately compare AT&T lower-priced version of its voice service through VoIP option. Furthermore, Foresthill argues that a cost benefit evaluation between the significantly higher amounts that Foresthill customers would pay under Cal Advocate’s proposal as compared to minimal increased surcharge that all state customers would pay heavily suggests rates should be lower than Cal Advocate’s proposal.4.3.1.1. Determination We adopt Cal Advocates position of a basic residential rate of $25 and an all-inclusive rate of $33.50 as reasonable. We have an obligation under Pub. Util. Code § 275.6(c)(7) to ensure that CHCF-A support for Foresthill “is not excessive so that the burden on all contributors to the CHCFA program is limited.” We disagree with Foresthill’s assertion that Cal Advocates’ “sole focus is on reducing Foresthill’s CHCF-A support to the detriment of Foresthill’s customers.” In reality, Foresthill’s proposal creates an excessive burden on the CHCF-A. Foresthill’s proposed “sur-credit” essentially passes along an additional charge to the CHCF-A fund from its residential customers to other California consumers across the state. This proposal does not comport with our obligations to minimize burdens on the fund pursuant to Pub. Util. Code?§?275.6(c)(7) and so, we decline to adopt a temporary customer sur-credit. Second, Cal Advocates’ basic residential rate of $25 is reasonably comparable to rates charged by carriers in urban areas and furthers the statutory objectives of Pub. Util. Code § 275.6(f). Cal Advocates $25 basic residential rate is below the $27 rate charged by AT&T and above the rate charged by Frontier California.We find that increasing Foresthill’s basic residential service rates at $25 and the “all-inclusive” to $33.50 is reasonable as established by D.14-12-084. Indeed, it comports with our statutory obligations imposed upon us by the Legislature, codified in Pub. Util. Code §§ 275.6(c)(7) and 275.6(f). Accordingly, we adopt Cal Advocates’ position. The new residential basic service rate will increase Foresthill’s Local Network Services by a forecasted $129,219. 4.3.2. Basic Business RateIn its direct testimony, Foresthill recommended that the basic business service rate should be $32.35 per month. Foresthill takes issue with Cal?Advocates’ proposal to increase business rates by the same percentage as residential rates. Foresthill argues that Cal Advocates’ proposal is unreasonable because adopting a higher rate for business services is at odds with cost of service principles. Foresthill argues that a business line costs no more than a residential line: given that Foresthill’s business lines tend to be closer to the central office and are more clustered together, the average cost of a business line is less than that of an average residential line. Foresthill asserts that Cal?Advocates’ proposal will hurt small “mom and pop” businesses that are struggling to survive as higher phone bills will put continued pressure on Foresthill’s small business community. Additionally, Foresthill did not propose increases to its custom calling feature. Foresthill argued that increasing the custom calling feature would create a dramatic reduction in demand for these services. Alternatively, Cal Advocates argues that Foresthill’s basic business rate should be set at $38, exclusive of surcharges and fees. Cal Advocates states that the range of reasonableness adopted by the Commission in D.14-12-084 is only applicable to the basic residential rate, not the basic business rate. Cal?Advocates proposes a $7.20 increase over Foresthill’s current rate which, it contends, represents the same percentage increase to the basic business rate as the basic residential rate: 23.46 percent. Moreover, Cal Advocates also argues that pursuant to Pub. Util. Code § 275.6(c)(3), Foresthill’s basic business rate should increase so that it is reasonably comparable to the rates charged to urban customers. Cal Advocates contends that a $38 basic business rate is reasonably comparable to urban companies such as AT&T, which charges $128, Frontier?California, which charges $34.65-$37.90, Frontier Citizens, which charges $42.50, Frontier Southwest, which charges $33.00, and Consolidated/Surewest, which charges $41.35.4.3.2.1. Determination We adopt $35 as a basic business rate for Foresthill. We believe that this basic business rate appropriately balances our obligations under Pub. Util. Code § 275.6(c) to increase Foresthill’s business rate so that the rate is reasonably comparable to the rates urban customers pay, while still preserving an understanding of Foresthill’s position as rural community which is served by small, rural local businesses. We find that this consideration, in totality, strikes the balance between the Commission’s and Legislature’s policy goals with respect to the CHCF-A program and protecting ratepayer money from waste, fraud, and abuse. Therefore, the new basic business rate will increase Foresthill’s revenue for 2019 by a forecasted $12,298. 4.4. Revenue from Optional Services4.4.1. Custom Calling FeaturesForesthill offers certain telecommunications services which are not part of basic telephone service, including inside wire maintenance service, caller ID service and call waiting. In its testimony, Foresthill argued that the Commission should be conservative in adopting rate increases for custom calling features because an overall increase to these services may cause customers to flee the system. The result, Foresthill contends, would fail both the customers and the ratemaking system. For its part, Cal Advocates argues that Foresthill’s custom calling feature service rates should increase at the same percentage rate as basic residential service, resulting between $0.20 and $0.75 increases depending on the feature. Cal Advocates proposes the following rate increases: (1) caller ID for residential services should be increased to $4.95 from $4.00; (2) call waiting for residential services should be increased to $3.70 from $3.00; (3) call forwarding for residential services should be increased to $2.45 from $2.00; (4) caller ID for business services should be increased to $7.40 from $6.00; (5) call waiting for business services should be increased to $6.15 from $5.00; (6) call forwarding for business services should be increased to $3.70 from $3.00. Cal Advocates supports its proposed rate increases for custom calling features by arguing that the rates should increase at the same percentage rate as basic residential and business rates, consistent with Pub. Util. Code § 275.6 and such feature rates should increase reasonably comparable to urban rates. In its rebuttal testimony, Foresthill argues that Cal Advocates offers no support for its proposal to increase custom calling features based on the relative increase in residential rates. Foresthill asserts that an increase in price for these services when their cost is minimal and alternative providers offer them free or at very small charges as part of their bundles will result in significantly decreased demand and ultimately, decreased revenues for these custom calling features.4.4.1.1. Determination We agree with the reasoning and support evidenced by Cal Advocates as incremental increases for such services and features have not been adjusted in a number of years. Indeed, these services and features share the burden of added costs and reflect a consistent, across-the-board adjustment, while modifying the responsibility of the subsidy support all Californians give to ensure the continuity of the CHCF-A Fund. The new rates for custom calling features will increase Foresthill’s local network revenue projections by a forecasted $19,286. 4.4.2. Inside Wire Maintenance Foresthill’s tariff covers inside wire maintenance service. Generally, inside wire refers to the wires and cables inside the customer’s premises that enable service to the customer. Generally, it does not include customer equipment but only the wires themselves. Currently, Foresthill’s inside wire maintenance plan rates for both residential and business are $2.99. Again, Cal Advocates points out that Pub. Util. Code § 275.6 requires that Foresthill’s customers must pay rates that are reasonably comparable to the rates charged of urban telephone companies. Cal Advocates claims that Foresthill’s current inside wire maintenance rates are less than half of AT&T’s and Frontier/Southwest’s urban rates. Cal Advocates recommends that Foresthill’s inside wire maintenance monthly rate should be set at $3.90, which increases the charge $0.71, in proportion to the same percentage rate increase as basic residential, basic business, and basic custom calling rates. Cal Advocates states that inside wire maintenance plans are optional services that both business and residential customers may subscribe to on a month to month basis in lieu of being charged individually for maintenance on the customer’s inside wire. Thus, Cal?Advocates states that a rate increase from Foresthill’s current $2.99 inside wire maintenance service to $3.70 for both residential and business customers brings Foresthill’s inside wire maintenance closer to urban rates. 4.4.2.1. Determination We find that Foresthill’s rate for inside wire maintenance is not “reasonably comparable” to the rates that urban customers pay, as required by Pub. Util. Code § 275.6(c)(3). Foresthill has not made a persuasive argument about the inside wire maintenance in their testimony. Cal Advocates has persuasively demonstrated that its proposed rate increase comports with the Legislature’s objective to keep Foresthill’s rates reasonably comparable to urban rates. For illustrative purposes, a review of Commission documents from Communications Division – which the Commission takes official notice of pursuant to Rule 13.9 of the Commission’s Rules of Practice and Procedure – reveals that Frontier charges $9.00 and AT&T charges $8.00 for inside wire maintenance. Cal Advocates’ proposed $3.70 inside wire maintenance rate is beneath but reasonably comparable to the urban carriers inside wire maintenance charged by AT&T and Frontier. Therefore, the Commission finds that increasing rates for inside wire maintenance to $3.70 per month for both residential and business customers is reasonable. The new rates for custom calling features will increase Foresthill’s local network revenue projections by a forecasted $3,186. 4.4.3. Price Elasticity of Demand to Forecast Unit Counts in 2019To project any changes in demand for Foresthill’s service, Foresthill applied a price elasticity of demand metric derived from its affiliate, Kerman. Foresthill argues that using Kerman as a proxy is reasonable because the proposed basic rate increases here are larger than what was adopted for Kerman in D.16-06-053. Cal Advocates argues that the Commission should not accept Foresthill’s projection for unit/customer counts of local services based on Kerman’s data. Cal?Advocates argues that Foresthill should use its own data rather than data from an affiliate because of demand differences and variable preferences that distinguish Foresthill’s customer base and demographics from Kerman’s customer base and demographics. Additionally, Cal Advocates states that Foresthill objected to providing Cal Advocates with any historic monthly data from Kerman outside the 14 months of data filed with its testimony. This is problematic because Foresthill must be transparent with the data it uses to establish its testimony. In other words, Foresthill cannot selectively choose which data to rely upon and then withhold data it does not wish to release or extrapolate upon. 4.4.2.1. Determination Given the state of the record, the challenges presented by Foresthill, and to further our efforts to promote greater transparency, we decline to adopt Foresthill’s price elasticity of demand analysis and adopt Cal Advocates methodology as reasonable. 4.5. Imputation of Revenue Generated from the Sale of Wholesale Broadband AccessIn D.14-12-084, we determined that neither state nor federal law prohibits broadband revenue imputation and the decision of whether to do so is left to the Commission’s judgement based on the record. Furthermore, we held that broadband revenue imputation is a ratemaking mechanism within the Commission’s authority to regulate telecommunications companies. Cal Advocates asserts that the Commission should impute revenues from the sale of broadband onto Foresthill in its next GRC in 2020. Cal Advocates contends that the imputation of broadband revenues would significantly reduce Foresthill’s reliance on the CHCF-A program. According to Cal Advocates, both the revenue Foresthill receives from the sale of wholesale broadband, and the revenue Audeamus receives from the sale of retail broadband are not imputed in determining CHCF-A draw. This means that these revenues are not factored into the calculation of Foresthill’s annual CHCF-A subsidy. Therefore, Cal?Advocates recommends that the Commission should impute Foresthill’s wholesale and Audeamus’ net broadband revenues in Foresthill’s next GRC. For its part, Foresthill asserts that it would be improper for the Commission to consider the imputation of Foresthill’s broadband access revenues as the issue is part of the Phase II portion of the industry wide CHCF-A proceeding, R.11-11-007. Foresthill asserts that the matter is already being addressed in a separate rulemaking and the Commission should not prejudice the outcome of that proceeding by adopting a Foresthill specific decision on the issue in this proceeding. 4.5.1. Determination We agree with Foresthill that the resolution of this disputed issue will be resolved in R.11-11-007. The outcome of that proceeding will have a determinative effect over Foresthill’s next GRC cycle. 4.6. Corporate Expense CapIn D.14-12-084 the Commission found that it was necessary to adopt a uniform standard for determining a reasonable level of corporate expenses for carriers that receive subsidies from the CHCF-A program. Adopting a uniform standard “allows the program to achieve its goals while ensuring that the level of support is not excessive or wildly disparate across companies, and avoids imposing an undue burden on California ratepayers who contribute to the fund.” We held that small ILECs, which receive funds from the CHCF-A, must adhere to the FCC’s standards for corporate expense limits in their GRCs. We found that adopting and applying the FCC Corporate Expense Caps will “cap the amount of corporate expenditures that can be recovered from the CHCF-A program,” and “create incentives to align expenditures with the cap to reduce rate case litigation costs.” The Commission also found that applying the FCC Corporate Expense Cap will not limit the amount of a company’s corporate expenditures but rather, will limit the amount of corporate expenditures that can be recovered from the CHCF-A program. D.14-12-084 determined that there is a rebuttable presumption “that any amount above the FCC’s Corporate Expense Cap is unreasonable.” Carriers have the opportunity to demonstrate that a different level of corporate expenses is reasonable. The FCC used state averages in its calculation of the national corporate expense cap formulas, therefore some states are below California and some are above. Effective January 1, 2012, the FCC in FCC 11-161232 modified the limitation on corporate expenses using the following formulas: For Study areas with 6,000 or fewer total working loops the monthly amount per loop shall be –$42.337 - (.00328 x number of total working loops), or$63,000 / number of total working loops, whichever is greater.For study areas with more than 6,000, but fewer than 17,887 total working loops, the monthly amount per loop shall be –$30.07 + (117,990/number of total working loops); andFor study areas with 17,887 or more total working loops, the monthly amount per loop shall be $9.56.4.6.1. Estimated Corporate ExpensesForesthill states that the FCC formula from Title 47 CFR §?54.1308(a)(4)(ii)(A) and (D) applies to it, using the below formula: (A) For study areas with 6,000 or fewer total working loops the amount monthly per working loop shall be $42.337 ? (.00328 × the number of total working loops), or, $63,000/the number of total working loops, whichever is greater; and(D) Beginning January 1, 2013, the monthly per-loop amount computed according to paragraphs (a)(4)(ii)(A), (a)(4)(ii)(B), and (a)(4)(ii)(C) of this § shall be adjusted each year to reflect the annual percentage change in the United States Department of Commerce's Gross Domestic Product-Chained Price Index (GDP-CPI).In completing this formula, Foresthill argues that it is allowed the higher of the methods identified in § (A). Foresthill states that the higher method is the $42.337 – (.00328 x the number of working loops). Foresthill’s projected working loops (lines) in 2019 after the rate change affects are applied is 2,534. When applying the formula, Foresthill asserts that the allowed corporate operations expense is $34.0255 per line per month. When this is multiplied by the number of lines it results in an overall expense cap of $1,034,647. Foresthill states that an inflationary adjustment is allowed in accordance with subparagraph (D). Thus, Foresthill applies the National Exchange Carrier Association (NECA) identified inflationary factor for 2016 of 1.097290 and growing by inflation for 2016 through 2019 results in a factor of 1.160826 in 2019. Foresthill took this factor multiplied by the allowed amount from the algorithm in § (A) which, according to Foresthill, resulted in a total company basis corporate operations amount of $1,201,045 (or $39.51 per line per month), before incorporating the intrastate allocation percentage, therefore resulting in a proposed intrastate corporate expense cap of $797,636. Foresthill states that this is the number allowed using a strict adherence to the FCC formula. Foresthill does not agree that setting corporate expense levels based on a comparison to companies across the country is appropriate because it fails to account for the actual cost of serving customers in California. Foresthill argues that the costs of operation in California are higher than in other states. Furthermore, Foresthill argues that rate case expenses are transactional in nature, and not within the scope of the methodology that produced the cap. Foresthill argues that recovery of these expenses is critical because the expenses are directly attributable to a required regulatory process for which there is no other recovery mechanism, and which is not accounted for by the cap. Foresthill proposed an intrastate cap of $938,192. Foresthill’s proposal to adjust the corporate cap would allow for $797,636 in intrastate corporate expenses. Therefore, this amounts to a disallowance of $140,556. For its part, Foresthill argues that it costs more to operate in California. Second, Foresthill argues that for at least the regulatory costs of operation, California companies have more regulatory “units” necessary to run their regulated businesses than companies in other states. California has more proceedings and more involved proceedings than other states. The costs of these proceedings, Foresthill argues, are real and they should be normalized for this difference. Cal Advocates argues that Foresthill’s test year intrastate corporate operations expense should be capped at $764,839. Cal Advocates argues that Foresthill’s Corporate Operations Expense is $173,353 in excess of its corporate cap. Additionally, Cal Advocates argues that exceeding its corporate cap while three positions remain vacant is unreasonable. The three positions that are vacant are: (1) a chief financial officer; (2) a controller; and (3) a regulatory specialist. Cal Advocates concludes that we “must presume $173,353 of Foresthill’s intrastate Corporate Operations Expense in excess of its Corporate Cap unreasonable as Foresthill has not met the requirement of the rebuttable presumption by demonstrating that a different level of Corporate Operations Expense is reasonable.” For its part, in rebuttal, Foresthill adjusted its corporate operations expenses to reflect the retirement of two individuals and argued that Cal?Advocates incorrectly calculated the corporate cap limitation amount. Foresthill asserts that Cal Advocates calculations fail to account for the two-year lag between when costs are reported to NECA for HCLS and the inflation factor that NECA provides for calculation of the cap. In summary of its rebuttal, Foresthill argues that the correct calculation of the corporate cap limit should be $797,636 and the disallowed corporate expense would only be $140,556 not $173,353. 4.6.1.1. Determination We adopt a $768,448 corporate cap limit. Foresthill’s methodology in its rebuttal testimony utilized a GDP-CPI adjusted price per loop of 1.1160826, resulting in total non-intrastate allocated corporate expenses of $1,201,045. However, after careful consideration of comments, the National Exchange Carrier Association (NECA) published Gross Domestic Product (GDP)-Consumer Price Index (CPI) factor of 1.118356 is the appropriate number to use, resulting in an intrastate allocation of $1,157,104. When incorporating the FCC’s intrastate allocation of 66.41128 percent, the updated proposed intrastate corporate cap amounts to $768,448. Foresthill’s higher adjusted price per loop is appropriate for the test year- as it accounts for the two-year lag between when costs are reported to NECA for HCLS and a NECA-provided inflation factor- is reasonable. 4.7. Common Cost Allocations to Regulated and Nonregulated ExpensesCal Advocates recommends that the Commission disallow $118,995 of Foresthill’s plant specific rent expense to protect ratepayers from cross-subsidization between Foresthill’s regulated activities and its affiliates, Audeamus and Kertel, nonregulated activities. First, Cal Advocates asserts that the business office at 23990 Foresthill?Road, in Foresthill, California is the business address of Foresthill and its affiliate, Audeamus. The business office is branded with the business name “Sebastian” on the exterior and the business office and the employee apartment are shared by both Foresthill and Audeamus to provide services to Audeamus and Foresthill’s customers. Cal Advocates further claims that the reconciliation of Foresthill’s 2016 lease agreements and workpapers show their total rent expense was assigned as a wholly regulated expense to Foresthill. Cal?Advocates argues that an unreasonable assignment of rent was disproportionately allocated to Foresthill, rather than distributed reasonably between Foresthill and its affiliate, Audeamus. Second, Cal Advocates asserts that the plant specific expenses booked for 2016 are unrelated to Foresthill’s telephone operations and should not be included in Foresthill’s test year expenses. Cal Advocates further claims that Foresthill has not explained why it incurs building costs for Kertel’s unrelated operations, over 400 miles away in Fresno, California, or how Kertel’s expense allocations to Foresthill are related to providing safe, reliable, and high-quality, telecommunications service over a broadband-capable network to Foresthill’s customers. For its part, Foresthill argues that it provided Cal Advocates with an explanation of how it completes its allocations, expresses concerns about Cal?Advocates belief that a different allocation between Foresthill’s buildings, lands, and general support assets should be allocated based on subscribership, and stated that the business office of Foresthill is not the central office nor is it the official office for Audeamus. 4.7.1. DeterminationWe adopt Cal Advocates position that Audeamus and Foresthill’s shared rent expenses for the business office at 23990 Foresthill Road, Foresthill, California has been unreasonably assigned in whole to Foresthill. It does not make a difference to us whether or not this is the official headquarters of Audeamus or not. If Audeamus staff is using a shared space with Foresthill staff, then costs should be appropriately allocated. We also adopt Cal Advocates position that Foresthill has not persuasively demonstrated why it incurs building costs for Kertel’s unrelated operations – which are more than 200 miles away in Fresno, California. As discussed in more detail below, a review of the transactions and relationships between Foresthill and its affiliates is of paramount importance to this Commission in order to protect ratepayers from bearing the costs of unregulated activities. Based on the record, Foresthill does not appear to have normal checks and balances in place to demonstrate compliance with the Commission’s Affiliate Transaction Rules. Ratepayers appear to be exposed to the potential for self-dealing and cross-subsidization as a result of the existing structure between Foresthill and its affiliates. Foresthill is expected to comply with the uniform Affiliate Transaction Rules of the Commission and conduct itself in a manner that is non-discriminatory – so no preference is given to affiliates or customers of affiliates – and that no advantage or disadvantage accrues to a player simply because of a particular corporate structure. The forecasted TY 2019 intrastate plant specific rent expense amount for these items is $77,808. Therefore, we disallow 25 percent or $19,452 of this expense to protect ratepayers from cross-subsidy between Foresthill’s regulated activities and its affiliates’ unregulated actions. After careful consideration of parties’ comments, this disallowance has been increased to $22,837 based on 25% or $91,346 in intrastate plant specific rent expense. Foresthill should be aware that we contemplated a full disallowance of the total rental expense amount, but we find that may be excessive. We reserve the exercise of a total disallowance for Foresthill’s next GRC cycle, should Foresthill continue to disobey our Affiliate Transaction Rules. In order for any rental expense to be included in future GRCs, we require Foresthill to provide a fully executed written lease or rental agreement, including provisions for future rate escalations. 4.8. Non-Corporate Operation Expenses4.8.1. Executive Labor ExpenseIn its testimony, Cal Advocates argues that Foresthill’s executive labor expense must be appropriately booked in the appropriate Corporate Operations expense accounts, as noted in 47 CFR § 32.6720. Cal Advocates recommends a disallowance because of this misappropriation to the incorrect expense account. For its part, Foresthill asserts that the executive and corporate secretary positions have been eliminated which reduces its executive labor expenses. 4.8.1.1. Determination We adopt Cal Advocates’ position that Foresthill incorrectly booked executive labor expense in the wrong accounts – plant operations and customer service. We agree with Cal Advocates that Foresthill must appropriately book these expenses in the correct Corporate Operations expense accounts, as stated in 47 CFR § 32.6720. Therefore, we disallow 25 percent or $49,035 under Customer Operations expense for TY 2019 because Foresthill should have accounted for this expense within the appropriate corporate expense accounts. After careful consideration of parties’ comments, this disallowance has been increased to $65,222 from $49,035 for Customer Operations due to positions eliminated by Foresthill, and we have made an additional disallowance of $39,280 in executive labor expenses from plant specific operating expenses. California ratepayers should not subsidize labor costs that are incorrectly booked and tenuously relate to the appropriate expense account. This amount already has been considered in the corporate expense cap. 4.8.2. Executive Bonus ExpenseCal Advocates asserts that Foresthill’s executives were paid bonuses that were fully expensed to two regulated companies – Foresthill and Kerman. Cal?Advocates points out that: It is unclear why bonuses based on generating profits would be provided to executives when the nonregulated affiliated companies are not generating profit. Furthermore, Foresthill and Kerman are regulated and derive profits based on their respective authorized rate of return; Foresthill has not indicated that it has exceeded its authorized rate of return to allocate excess profits in the form of bonuses to its executives. Foresthill receives CHCF-A support to provide safe, reliable and high-quality telephone service to its customers. Ratepayers should not subsidize expenses such as executive bonuses. This argument is persuasive. 4.8.2.1. Determination We agree with Cal Advocates and adopt their position that ratepayers should not subsidize executive bonuses. Shareholders shall bear this expense. 4.8.2.2. Rate Case ExpenseIn its application, Foresthill seeks to amortize its total rate expense of $500,000 over a three-year period, which results in an additional $166,667. Foresthill argues that its revenue requirement must include “reasonable?expenses,” and the cost of participating in this “mandatory regulatory proceeding is an unavoidable expense.” Foresthill continued to state that the rate case expense is not properly subject to the corporate expense cap, and it submitted responses to Cal Advocates’ data requests concerning rate case expenses, summaries and forecasts of its rate case expenses, legal and expert invoices. Foresthill claims that rate case costs of $500,000, or $166,667 amortized over a three-year period, are legitimately outside of the corporate cap mechanism and should be recovered over a three-year timeframe as proposed. For its part, Cal Advocates recommends that the Commission disallow any recovery of Foresthill’s litigation costs, which amount to $166,667 amortized over a three-year period. Cal Advocates asserts that the Commission adopted the FCC’s corporate expense caps in D.14-12-084 to specifically reduce the burden of litigation costs on ratepayers, stating: “[a]dopting and applying the FCC Corporate Expense Caps will cap the amount of corporate expenditures that can be recovered from the CHCF-A program, and create incentives to align expenditures with the cap to reduce rate case litigation costs.” 4.8.2.3. Determination This holding from D.14-12-084 was most recently applied to D.16-06-053 where the Commission included rate case expense in the corporate expense cap. In that case, we determined that that the applicant’s rate case expense should be included within the corporate expense cap. Consistent with D.14-12-084 and D.16-06-053, we find that Foresthill’s rate case expense should be included within the corporate expense cap. 4.9. Affiliate TransactionsThe Commission adopted its Affiliate Transaction Rules to mitigate the potential for transfer of market power and cross-subsidy of its regulated entities with their unregulated affiliates. The goals of the Affiliate Transaction Rules are: (1) to ensure that regulated utilities meet their public service obligations at the lowest reasonable cost; and (2) to ensure that the regulated utilities do not favor or otherwise engage in preferential treatment of their affiliates. Here, contrary to Foresthill’s arguments, we find that Foresthill has not complied with the Commission’s Affiliate Transaction Rules and therefore, we deny 25 percent of the total disallowance Cal Advocates recommends, because Foresthill’s operations appear enmeshed with its affiliates that it precludes the appearance of transparent, arms-length transactions. The disallowance is based on TY 2019 forecasts. As we stated above, we contemplated a full disallowance, but we found that may be excessive. We reserve the exercise of a full disallowance for Foresthill’s next GRC cycle, should Foresthill continue to disobey our Affiliate?Transaction Rules. Furthermore, we direct Foresthill to comply with the following Affiliate Transaction requirements we articulated in D.16-06-053: (1)?affiliates be held in separate legal entities; (2) maintain separate books for all transactions; (3) maintain separate bank accounts for all transactions; (4) have no joint advertising or marketing;; (5) have no joint events, sponsorships, fundraisers, or charitable donations; (6) not transfer any physical assets without first obtaining the necessary approvals from the Commission; (7) conduct financial transactions with each other at arms-length; (8) ensure that affiliate transactions are conducted at rates and upon terms no less advantageous than those otherwise available to from unaffiliated third parties for similar transactions. Recently, in D.16-06-053, we established that both affiliate scrutiny and the responsibility to take prophylactic measures are embedded in this proceeding by virtue of settled Commission authority. In D.16-06-053, we stated that a “special burden must be borne by the applicant in a rate case to demonstrate conclusively not only that affiliated intercompany transactions are reasonable in that they do not create a burden on the consumer but, that the affiliated relations afford the maximum gains in efficiency or productivity and the greatest savings in costs to the consumer.” We determined that the Commission has a duty to analyze affiliate relationships in order to protect ratepayers from having to pay higher service rates to subsidize excessive payments to nonregulated affiliates. In D.16-06-053, we determined that Kerman – an affiliate of Foresthill – had not met its burden of proving that its affiliate transactions did not create a burden on California consumers. We adopted Cal Advocates’ affiliate transaction proposal as consistent with the Commission’s duty pursuant to Pub. Util. Code § 728 to “fix, by order, the just, reasonable, or sufficient rates, classifications, rules, practices, or contracts to be thereafter observed and in force.” Consistent with statute, Commission regulation and most recently, D.16-06-053, we review Foresthill’s compliance with the Commission’s Affiliate Transactions Rules.4.9.1. Foresthill’s Affiliate Transactions with Audeamus and KertelCal Advocates recommends that the Commission enforce its Affiliate Transaction Rules by disallowing a total of $317,315 of Foresthill’s 2016 affiliate transactions expenses from the calculations used to forecast it 2019 expenses. First, Cal Advocates recommends that the Commission disallow $216,706 of Foresthill’s payments to Audeamus for services provided to Foresthill pursuant to oral agreements and price lists. The forecasted expenditure for TY?2019 is $141,698. Cal Advocates recommends that we apply the Affiliate Transaction requirements from D.16-06-053 here, and direct Foresthill to provide fully executed written contracts for its related expenses. Cal Advocates states that Foresthill and Audeamus’ relationship burdens California consumers. For example, Cal Advocates argues that Foresthill and Audeamus do business under the same name Sebastian, issue a single combined bill to their customers, and exchange services where Foresthill provides regulated telephone service which Audeamus installs and repairs on behalf of Foresthill.Second, Cal Advocates recommends that the Commission disallow $100,609 of Foresthill’s 2016 expenses from Foresthill’s service payments to Kertel. The forecasted expenditure for TY 2019 is $65,785. In its testimony, Cal?Advocates claims that this expense was from an oral agreement and price list instead of a written contract, and asks the Commission to apply the Affiliate Transaction requirements in D.16-06-053. In essence, Cal Advocates requests that the Commission direct Foresthill to provide “fully executed written contracts” in this GRC for all its affiliate related expenses.Cal Advocates testimony states that Foresthill did not obtain bids from other companies before purchasing specific services from Kertel via oral agreements. The services include: (1) Construction services; (2) Labor IT services; (3) Cable Locates; and (4) Miscellaneous labor services. For its part, Foresthill argues that D.16-06-053 does not apply here because Foresthill was not a party to that proceeding. Furthermore, Foresthill argues that Cal Advocates fails to recognize the nature of the agreements that Foresthill has with its affiliates, ignores the necessary work performed regardless of how the service agreement was memorialized, and without recovery of these reasonable and necessary costs, Foresthill would be in danger of not providing safe and reliable service. 4.9.2. Foresthill’s Burden of ProofMost recently, in D.16-06-053, a 2016 Commission Decision on the GRC for Kerman, an affiliate of Foresthill, we affixed the appropriate burden of proof rests upon the applicant of the GRC to prove that its affiliate transactions are of such a reasonable nature where the ratepayer is concerned that the Commission would not need to consider any additional affiliate transaction proposals. In referencing D.81896, we stated: A special burden must be borne by the applicant in a rate case to demonstrate conclusively not only that affiliate intercompany transactions are reasonable in that they do not create a burden on the consumer, but that the affiliated relations afford the maximum gains in efficiency or productivity and the greatest savings in costs to the consumer. Here, as in D.16-06-053, Foresthill bears the burden of proving that its affiliate relations are of such a reasonable nature where the ratepayer is concerned that the Commission would not need to consider any additional affiliate transaction proposals.4.9.2.1. Foresthill Has Not Met Its Burden of Provingits Affiliate Transactions Did Not BurdenCalifornia Consumers.From the record, there are multiple examples that demonstrate, at the least, an appearance of a lack of separation between Foresthill and its affiliates. First, the corporate structure of the company is not characterized to reflect a market of increasing competition and mitigation of ratepayer cross-subsidization. Foresthill is wholly owned by SEI and operates under the fictitious business name “Sebastian.” The testimony of David Clark extrapolates upon this corporate structure and states that Foresthill, Kerman, Kertel, Audeamus, CVIN, the Barcus Family limited partnership, and S&K Moran Limited Partnership are all affiliates under the parent company of Sebastian Enterprises. Second, its corporate operations are stratified across each of the SEI affiliates. Foresthill and Kerman are rural incumbent local exchange phone companies that provide regulated local exchange telephone service and related services. Audeamus serves as Sebastian’s ISP and long-distance service provider under SEI’s ownership. Kertel is a construction company under the SEI subsidiary operating group. Third, Foresthill’s corporate designation, along with its other subsidiaries, is Sebastian. Fourth, the business office at 23990 Foresthill Road in Foresthill,?California is the business address of Foresthill and Audeamus and is branded with the business name “Sebastian” on the exterior. This business office and employee apartment are used to provide access to Audeamus’ and Foresthill’s subscribers yet, according to Cal Advocates, the reconciliation of Foresthill’s 2016 lease agreements and workpapers show their total $139,700 rent expense was assigned as a wholly regulated expense to Foresthill. The question becomes whether Foresthill and its connectedness to its affiliates is creating a burden on the consumer that would warrant the adoption of Cal Advocates’ recommendation. It its testimony, Cal Advocates concludes that Foresthill has failed to demonstrate its affiliate transactions are reasonable because it failed to document and provide records for $317,315 of its affiliate transactions expense. The total forecasted TY 2019 amount for Audeamus and Kertel is $207,483. As examples, Cal Advocates cites to oral contracts and price lists in place of fully executed written contracts as required in D.16-06-053. Cal?Advocates states Foresthill did not obtain bids from other companies before purchasing the following services from Kertel via oral agreements: (1)?construction services; (2) labor IR services; (3) cable locates; and (4)?miscellaneous services. Additionally, Cal Advocates asserts that according to Foresthill, no written contracts for services provided by Audeamus exist, which (for 2016) total $216,706. For its part, Foresthill counters that the lack of a written contract does not make the expense any less reviewable and that all the components of a contract necessary to identify the hours, price, and service provided were given to Cal Advocates. Foresthill continues to state that it is unaware of any requirement that contracts must be in writing. 4.9.2.2. Determination Foresthill failed to meet its burden of proof. It is up to Foresthill to demonstrate that the affiliate transactions do not impose a burden on consumers in the form of cross-subsidization and higher rates. It is unclear how Cal?Advocates’ conclusions, requiring Foresthill to execute competitive written contracts for the services it must seek out in the marketplace, preclude Foresthill from providing safe and reliable services. The Commission has a responsibility to ensure that a utility and its affiliate’s operations be separate to prevent cross-subsidization by utility customers. It is in the public interest, and especially in the interests of California consumers who subsidize the CHCF-A, that the Commission ensure utility affiliates do not gain an unfair advantage over other market players, and to ensure utility ratepayers are not subsidizing unregulated activities. In GRCs, this obligation is highlighted to ensure that utility and affiliate action comports with the public interest so that utility affiliates do not gain an unfair advantage over other market players, and to ensure that utility ratepayers are not somehow subsidizing unregulated activities. Utilities and their affiliates must face uniform rules to ensure continuity, inspire confidence among market players that competitors have equal opportunities to gain market share, and that utility customers obtained the most competitive price for quality, reliable service. A record has not been clearly established that Foresthill obtained competitive bids from other companies before purchasing a variety of services from Kertel via oral agreements. Nor did Foresthill execute written contracts for services provided by Audeamus. While, indeed, Foresthill was not a party to the outcome of D.16-06-053, general affiliate transaction law still applies here. Therefore, as we stated in D.92399, it is “axiomatic that one who enters into a regulated business is presumed to know the applicable law and assumes all the risks and responsibilities.” The record does not indicate that Foresthill tried to calibrate its business performance to comply with Commission affiliate transaction regulation. The Commission has a duty, pursuant to Pub. Util. Code § 275.6, to ensure affordable high-quality communications services in rural areas of this state. Determining if services are affordable will require the Commission to decide if CHCF-A is subsidizing the expenses and operations of unregulated non-telephone companies. It is clear from § 2.1(d) of the Scoping Memo that the relationship between Foresthill and its affiliates is part of the scope of this proceeding. Furthermore, the Commission has a duty under Pub. Util. Code § 728 to “fix by order, the just, reasonable, or sufficient rates, classifications, rules, practices, or contracts to be thereafter observed and in force.” In R.92-08-008, we extrapolated upon our duty to review Affiliate Transaction Rules in a GRC, such as in the instant proceeding: The utility-affiliate relations of almost all utilities that the Commission regulates are already subject to some form of review through either Commission established reporting requirements or as part of Commission rate-making proceedings…Additionally, the Commission almost always examines affiliate transactions in each utility’s general rate case and in reasonableness and prudency reviews.As part of its review of GRCs, and in recognition of the need to protect ratepayers, the Commission has noted that part of its evaluation of the application for a rate increase “has been the development of sufficient accounting, financial, and procedural safeguards to ensure that there is no abuse of the utility-affiliate relationship.” The consumer interests we seek to protect go hand in hand with promoting competition. The Commission’s Affiliate Transaction Rules aim to prevent cross-subsidization, so that a utility’s customers will not subsidize the affiliate’s operation. This is especially important in our review here, of Foresthill’s engagement with its affiliates Kertel and Audeamus. Foresthill and its affiliate share much of the same advertising and are marketed to customers as “Sebastian.” As product promotion and advertising become increasingly more intense, we must be more vigilant to prevent customer confusion, such as the representation or implication that the affiliate assumes all the attributes of the Commission-regulated utility, merely because of corporate connection. As Cal?Advocates makes clear in its testimony, Foresthill and Audeamus issue a single, combined bill to their customers where Foresthill provides regulated telephone services which Audeamus installs and repairs on behalf of Foresthill. Audeamus also sells retail broadband services to Foresthill’s customers. Consumer-specific information is quite valuable in a competitive environment, and we wish to protect Foresthill’s customer information, especially between it and its ISP, Audeamus. Accordingly, we adopt Cal Advocates’ recommendations to include the affiliate transaction compliance mechanism adopted in D.16-06-053, here. We take affiliate transaction compliance seriously, and this serves as notice to Foresthill. We cannot allow ratepayers to be exposed to cross-subsidization, anticompetitive behavior that advantages one player over another, a preference accorded to customers of affiliates, or requests for service from affiliates, relative to nonaffiliated suppliers and their customers. Our rules promote the separation of utility and affiliate operations to prevent cross-subsidization of the market affiliate by the utility. Records, accounts, and operations all should transparently be maintained to achieve the aims of our rules. Therefore, in order for service or maintenance contract expenses to be considered in future rate cases, Foresthill shall provide fully executed written contracts for services. The contracts for services shall include a description of the materials and services provided and the charges for such materials and services. Additionally, Foresthill shall keep records of all materials provided under the contracts, the number of hours worked, services performed and the charges for those services so that the reasonableness of the service contract expenses can be verified. In this instant application, we disallow 25 percent or, $51,871 of Cal?Advocates recommended disallowance, and apply this disallowance to the $207,484 Affiliate Transaction expense (associated with Plant Specific expense) for Audeamus and Kertel forecasted for TY 2019. We remind Foresthill that we contemplated a full disallowance. We reserve the exercise of a full disallowance for Foresthill’s next GRC cycle, should Foresthill continue to disobey our Affiliate Transaction Rules. Our determination puts Foresthill on notice for its next GRC cycle and aims to: (1)?achieve greater transparency; (2) ensure no advantage or disadvantage accrues to a market player simply because of differing regulations; (3) promote a level playing field which is vital for competition to flourish; and (4) ensure adequate corporate separation and cost accounting to overcome an incumbent provider’s advantage. In an ideal world, the utility would treat the affiliate as it would other, nonaffiliated firms. Our actions here move toward creating that more perfect environment for ratepayers. 4.10. Plant Investments Among many of its investments, Foresthill proposes an extension of fiber facilities to its Arrowhead and Cold Springs Area. Foresthill contends that expansion of fiber facilities in the Arrowhead and Cold Springs areas are necessary to complete fiber projects that have preceded the test year proposals in this area. Foresthill, as a recipient of CHCF-A subsidies, includes this expansion in the instant application for CHCF-A support. Foresthill contends that its customers want faster speeds and that the proposed projects are consistent with federal and state policy for access to advanced services. Cal Advocates counters Foresthill’s request for CHCF-A subsidy support of the Arrowhead and Cold Springs Area contending that they are premature projects and should be disallowed at this time. Cal Advocates contends that Foresthill should focus such attention and funding on efforts to improve its network related route diversity and redundancy to benefit a greater number of customers than the amount of customers who would benefit from the Arrowhead and Cold Springs plant investments. The CHCF-A provides a source of supplemental revenues to entities like Foresthill for the purpose of ensuring basic access to universal service. The program is funded by a surcharge assessed on revenues collected from end-users across the state. The Commission has a duty to ensure that the fund levels are solvent and adjusts the surcharge rate to ensure the program is sufficiently funded. Our duty to the CHCF-A fund requires us to ensure that support for any recipient, here Foresthill, comports with Pub. Util. Code § 275.6(c): that it is not excessive so that the burden on all contributors to the CHCF-A fund becomes limited. We balance Pub. Util. Code § 275.6(c) against the requirements of Pub. Util. Code 275.6(f), where we are obligated to structure the CHCF-A program so that any charge imposed to promote the goals of universal service reasonably equates the value of the benefits of universal service to contributing entities and their subscribers. 4.10.1. DeterminationOn balance, we are persuaded by Foresthill that strong public policy supports the need for broadband capable facilities. We conclude, that the Cold Springs and Arrowhead projects are necessary to meet future demand. We believe that the need for these fiber projects will only increase over time. Requiring Foresthill to resubmit a request for these projects during its next GRC cycle, we believe, will more likely than not, further conditions in which rural customers are left farther behind their urban peers. State public policy supports the need for these projects as our government seeks to close the gap between the so-called “digital-divide” that exists between geographic and economic sub-groups of California’s population. We seek to promote the full participation of all Californians in our state and national economy in the 21st century. For rural Californians, access to sufficient deployment of telecommunications remains a real socio-economic challenge. These projects will further our goal to equalize telecommunications options for all Californians, and in particular, the low-income Foresthill customers who reside in a rural area of the state. We adopt $479,757 in plant additions for telephone network maintenance and upgrades for 2019. 4.11. Depreciation Cal Advocates took issue with Foresthill’s depreciation methodology. Specifically, Cal Advocates asserts that Foresthill fully depreciated new plant assets in a single year. Cal Advocates points out that a basic objective of depreciation is to recover the original cost of fixed capital (adjusted for the cost of removal, disposal, and estimated salvage value) over the useful life of the property. Cal Advocates proposes to reduce Foresthill’s depreciation expenses for three asset categories: (1) general purpose computers; (2) digital switching; and (3) underground metallic cable. In rebuttal of Cal Advocate’s focus on these three accounts, Foresthill contends that if it is assumed that it will continue to invest in these accounts over the five-year period covered by the rate case, Cal Advocates’ proposed methodology will result in a significant under-recovery of the plant by the end of the five years. Foresthill contends that it is not reasonable to modify depreciation rates for one-year investment for accounts with low balances because it would result in significant under-depreciation over time. 4.11.1. Determination Foresthill’s depreciation arguments are unpersuasive. We agree with Cal?Advocates that fully depreciating a new plant or new plant addition within a single year is unreasonable. Indeed, our review of Foresthill’s testimony reveals that Foresthill’s depreciation calculations result in taking the full depreciation of the plant additions within one year. This is unreasonable. Therefore, we reject Foresthill’s depreciation methodology and accordingly, we reject Foresthill’s proposed depreciation expenses for general purpose computers, digital switching, and underground cable. We direct Foresthill to prepare and submit a depreciation study following the methodology described in Standard Practice U-4, Determination of Straight Line Remaining Life Depreciation Accruals, published by the Commission, along with its next GRC filing. We adopt Cal Advocate’s methodology and a recommended depreciation adjustment. Upon careful consideration of parties’ comments, we have determined that by incorporating the appropriate intrastate jurisdictional allocation, the disallowance amount should be $175,916. 4.12. Rate BaseRate Base represents the amount of investment less depreciation reserve, deferred taxes, and customer deposits that is necessary for the company to provide safe, reliable, voice service and access to broadband-capable network to its customers. Foresthill’s revenue requirement includes a rate of return on the Rate Base of 8.99%. Cal Advocates proposes to adjust three components of Foresthill’s rate base: (1) materials and supplies; (2) working cash; and (3)?deferred taxes. Foresthill and Cal Advocates disagree on the intrastate factor that should be applied to these rate base amounts and disagree on how the factors should be applied to the rate base amounts. Foresthill argues that 2019 factors should be applied to the material and supplies rate base item, not factors from three years prior as Cal Advocates recommends. Jurisdictional allocation factors for interstate and intrastate operations are developed and approved by NECA. The factors are approved by NECA on the basis of fully recorded year data. These factors are applied to the test year estimated expenses and rate base to derive test year interstate and intrastate results of operations. Foresthill’s projection of the latest 2016 NECA approved jurisdictional allocation factors does not conform to the methodology employed by NECA to develop the factors. We approve the use of NECA developed jurisdictional allocation factors and therefore, reject Foresthill’s proposed allocation factors. 4.12.1. Determination We adopt Cal Advocates’ use of the 2016 NECA approved jurisdictional allocation factors to determine the intrastate portion of the rate base. As such, we adopt Cal Advocates’ recommended adjustments of: (1) $4,846 for materials and supplies; (2) $97,800 for working cash; and (3) $56,763 for deferred taxes to be adjusted from Rate Base.4.13. TaxesOn December 22, 2017, federal legislation was passed, formally titled “To provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018, H.R. 1 (Tax Act).” This federal legislation results in comprehensive changes to Foresthill’s financial statements. The most notable impact is the reduction in the federal corporate tax rate to 21 percent from 35 percent, effective January 1, 2018. We note the small LECs have historically filed their GRCs with a 34 percent tax rate calculated for their revenue requirement. In addition, the change in the federal corporate tax income rates results in excess net deferred income tax liabilities, which must be normalized for ratemaking purposes. Here, we apply the new federal rate of 21% to forecast federal corporate income tax expenses for TY 2019. Cal?Advocates recommends that the savings realized in the lower income tax expense flow through to the revenue requirement calculation. Deferred income tax reserves are the accumulation of differences between regulatory tax expense and federal tax liabilities. Deferred tax reserves are ratepayer funds collected by the utility to account for future tax expenses. According to Cal Advocates, Foresthill collected deferred tax for future tax expenses sufficient to pay a 34% federal income tax rate. Cal Advocates contends that the reduction to the federal income tax rate to 21% from 34% decreases Foresthill’s future federal tax liabilities. As a result, Cal Advocates states that the current deferred tax reserves are no more than the utility’s future federal tax liabilities, creating excess deferred tax reserves. Cal Advocates argues excess tax reserves must flow through back to ratepayers, consistent with prior Commission action taken during the 1986 Tax Act where we ordered the utilities to flow excess tax reserves back to ratepayers. Foresthill argues that Cal Advocates’ proposal violates the prohibition against retroactive ratemaking and further asserts that the excess deferred income taxes should not be returned to ratepayers because they do not belong to ratepayers. Foresthill claims that deferred tax reserves are accruals made by the company for liabilities incurred in a given year, but which are not payable in a future year. Foresthill claims that tax reserve amounts belong to the company, just as the other assets of the company belong to it. 4.13.1. Determination We adopt Cal Advocates’ position that excess deferred income taxes should be returned to ratepayers. We are not persuaded by Foresthill’s arguments that normalizing excess deferred income tax constitutes retroactive ratemaking. To be sure, retroactive ratemaking occurs when rates approved at present or in the future are given an effective date from the past. Normalizing excess deferred tax for future rate determination does not constitute retroactive ratemaking; rather, this is prospective ratemaking. The deferred income tax reserve in Foresthill’s case is a fund that has been established by ratepayers in excess of Foresthill’s actual, lower future tax liability. This excess deferred income tax reserve is distinguished from the rate base for ratemaking purposes, year after year. Carrying this reserve, as Foresthill has, is neither considered nor is constituted as retroactive ratemaking. Therefore, the normalization of the excess income tax reserve that resulted from the federal tax cut of 2017 for future ratemaking does not constitute retroactive ratemaking. In various resolutions including Resolution No. T-17617, T-17617, T-17618, T-17619, and T-17626, we authorized normalization of excess income tax reserve that resulted from the federal tax cut of 2017. In Resolution T-17617, we held: “[d]eferred income taxes for ratemaking represents funds that ratepayers have provided to the utility for income taxes presumably to be paid in the future, due to timing differences between straight line depreciation for ratemaking and accelerated depreciation for income tax filing.” Cal Advocates has accurately reflected our position in calculating the income tax and the resulting revenue requirement. Cal Advocates correctly asserts that excess tax reserves must flow through back to ratepayers, consistent with prior Commission action taken during the 1986 Tax Act where we ordered the utilities to flow excess tax reserves back to ratepayers. We therefore order Foresthill to flow excess tax reserves back to ratepayers. To be consistent with Commission policy and NECA guidelines, we adopt Cal Advocates’ recommended adjustment of $54,193 for Excess Tax Reserve Offset. 4.4. SafetyCal Advocates presents recommendations to the Commission regarding Foresthill’s emergency preparedness and response. We take these recommendations very seriously. California experienced a record-breaking fire season during the summer and fall of 2018. These fires burned more than 820,000 acres across the state. As Foresthill explains in its testimony, its service territory spans rugged, mountainous, and forested area. Foresthill, California is located in an area with a high wildfire risk during warm weather and is subject to snow and storms during the winter. Such disaster conditions necessitate proactive enforcement by this Commission, as it works together with its sister agencies in coordinated action across our government to address the adverse impacts of disasters, like wildfires. 4.14.1. Determination We agree with Cal Advocates that telecommunications companies play a critical role in ensuring public safety. Telecommunications companies provide access to vital voice, broadband and 911 services for customers and the community at large, and provide much needed communications services to emergency responders during an emergency. We agree with Cal Advocates that Foresthill must be required to perform and document all of its emergency training and exercises. This is especially necessary since California is now prone to a year-long fire season and Foresthill is a particularly vulnerable community, as it is situated in a fire-prone geographic area. Cal Advocates offered the following recommendations to ensure a strong emergency plan is in place for Foresthill: (1) establishing a formal Mutual Aid Agreement (MAA) with other utilities, emergency responders, and local organizations; (2) perform and document all emergency training and exercise; (3) perform and document all equipment testing and maintenance; (4) invest in network improvements to improve network redundancy and reliability; and (5) require Foresthill to prepare a cost study evaluating options for enhancing route diversity and network redundancy to be filed with its next GRC. Cal Advocates observes that Foresthill has designed its network to provide reliability for 911 emergency services by providing backup power to network equipment and two routes for interconnection with AT&T and found no issues at this time with Foresthill’s 911 Emergency Services. Based on the data Cal Advocates provided the Commission with its assessment of Foresthill’s 911 Emergency Services, we agree with Cal Advocates’ conclusions that no issues are present at this time with Foresthill’s 911 Emergency Services. Additionally, we agree with Cal Advocates that Foresthill should establish an MAA with other utilities, emergency responders, and local organizations. This will serve two public interest purposes. First, this will help entities like the California Department of Forestry and Fire Protection (CalFIRE) and the California Governor’s Office of Emergency Services (CalOES) promote a greater public safety response in areas like Foresthill, which are increasingly susceptible to wildfires. Second, it will support the residents of Foresthill, to whom the applicant serves a customer base. We agree with Cal Advocates that this will help build a relationship between Foresthill and other emergency response organizations that furthers information sharing, coordination, planning, and preparation for a disaster. Should costs become an issue in this regard for Foresthill, Foresthill shall make a cost recovery request in its next GRC filing and prepare an analysis justifying the costs it seeks to recover with an accompanying analysis. Additionally, we adopt Cal Advocates recommendations to require Foresthill to perform and document all emergency training and exercises, perform and document all equipment testing and maintenance, and invest in network improvements to improve network redundancy and reliability. Foresthill shall report compliance to the Commission’s Communications Division via a Tier 1 Advice Letter (AL) within 30 days of the effective date of this decision. 4.15. Service Quality In its testimony regarding service quality, Cal Advocates makes a number of recommendations. In summary, the recommendations include the following:Foresthill must report data on its compliance with the Answer Time standard to the Commission. Foresthill must provide all historical data regarding its compliance with the Answer Time standard and include information on its compliance with the Answer Time standard in future G.O.?133-D reports;Foresthill should retain and report information on all service outages lasting at least 30 minutes in duration regardless of the number of user-minutes impacted;Foresthill should retain information on times when its network exceeds 100% bandwidth usage to create a record of how the network is performing under daily use and traffic loads;Foresthill should track the average Latency, Packet Loss, and Jitter of its network during the prime use hours of 7:00?p.m. to 11:00 p.m. on a monthly basis;The Commission should direct Foresthill to monitor, gather, and report broadband service quality data on a regular basis, as discussed in Attachment B to this testimony;The Commission should order Foresthill to submit data on the broadband service quality that customers experience as set forth in Cal Advocates DR CR5-001 questions 1.18, 1.19, 1.20, 1.21, and 1.36 (c); andThe Commission should convene a workshop chaired by the Communications Division and attended by Cal Advocates and the small ILECs to develop standards and a reporting format for data measuring service quality and reliability of CHCF-A subsidized broadband-capable networks.4.15.1. DeterminationFirst, we decline to adopt Cal Advocates recommendation to require Foresthill to report data on its compliance with the Answer Time standard to the Commission. § 3.5(d) of General Order (GO) 133-D requires answering time reports from carriers with traffic offices that handle 10,000 lines or more. §?3.5(d) states: Reporting Unit. Each traffic office serving 10,000 or more lines and handling calls to the business office for billing and non-billing inquiry calls and to the repair office for trouble report calls. The requirements of § 3.5(d) are not applicable to Foresthill because they have fewer than 10,000 lines and therefore, are not subject to this reporting requirement under GO 133-D. Second, we decline to adopt Cal Advocates recommendation to require Foresthill to retain and report information on all service outages lasting at least 30?minutes in duration regardless of the number of user-minutes impacted. §?4(c)(iv) of GO 133-D already requires submission of data on all service outages lasting at least 30 minutes. § 4(c)(iv) states:ETCs, concurrent with their FCC filing, shall submit the annual outage report that provides detailed information on any outage lasting at least 30 minutes and potentially affecting 10 percent of their customers in a designated service area. Adopting Cal Advocates recommendation would be duplicative of the existing requirements of GO 133-D, and accordingly, we will not create duplicative reporting requirements here. Finally, we decline to adopt the remainder of Cal Advocates recommendations because they are more appropriately considered in the ongoing second phase of R.11-11-007. 4.16. Potential Revenue ShortfallThis decision addressing Foresthill’s GRC is not effective as of January?1,?2019, and we recognize that the revenue requirement is based on a full year of data. We anticipate a revenue shortfall could result in Foresthill not being able to recover its full revenue requirement. In light of this, we authorize Foresthill to submit a Tier 2 AL to the Commission’s Communications Division within 30 days of the effective date of this decision to request revenue differential between January 1, 2019 and the first day of the next month following the adoption of this decision (effective date), through the CHCF-A Fund. The AL should provide a calculation to “true-up” the revenue differential. 5. ConclusionIn conclusion, this decision authorizes a revenue requirement for Foresthill, as summarized in the following table, and as discussed in greater detail throughout this decision, Appendix A, and Appendix B: Rate Case ItemForesthill’s Proposal Amount Adopted by this DecisionOperating Revenues$5,612,863$5,026,106 Operating Expenses$4,663,191$4,064,746 Average Rate Base$10,563,655$10,693,689Rate of Return8.99%8.99%This decision adopts an overall intrastate revenue requirement of $5,026,106 for TY 2019 including a subsidy draw of $1,986,864from the CHCF-A. Further, this decision, among other things specifically: (1)?adopts new rates for residential and business customers of Foresthill that are reasonably comparable to the rates urban customers pay pursuant to Pub. Util. Code § 275.6(c)(3); (2) authorizes a revenue requirement for Foresthill based on sound analysis of the infrastructure and operational needs, revenue sources and income, costs and expenses, and deductions of Foresthill; (3) affirms rules regarding interactions with its affiliates; and (4) adopts requirements relating to service quality, safety and project reporting for Foresthill. Upon adoption of this decision the tariffed basic residential rates for Foresthill will be set at $25.00 (exclusive of surcharges, fees or taxes), business rates at $35.00 (exclusive of surcharges, fees or taxes), and new rates for other Foresthill services will be set as identified in this decision. There will be no further adjustments in its residential or business rates until the next Foresthill GRC.In its future rate cases, we will hold Foresthill accountable to the Affiliate Transaction requirements we adopt here.6. Comments on Proposed DecisionThe proposed decision of ALJ Wildgrube and ALJ Rizzo in this matter was mailed to the parties in accordance with Section 311 of the Public Utilities Code and comments were allowed under Rule 14.3 of the Commission’s Rules of Practice and Procedure. Comments were timely filed on April 15, 2019, and reply comments were filed on April 22, 2018. We have carefully considered the suggested changes proposed by Foresthill and Public Advocates in their comments. The proposed changes that we have accepted are reflected in this revised document.Public Advocates seeks three expense-related modifications. The first modification addressed the calculation methodology of NECA’s GDP-CPI, which has been updated, with the resulting corporate cap being recalculated. The second modification addresses executive compensation issues related to elimination of positions, with one disallowance being increased from $49,035 to $65,222 and another not previously recognized, which should equal $39,280. The third modification addresses the affiliate transaction disallowance of 25% related to plant-specific expense based on a figure of $91,346 rather than $77,708, which would change the disallowance from $19,452 to $22,837.In each case, the Commission recognizes the reasonableness of these comments, and has made changes to this decision and the Appendix A Results of Operations to reflect such changes.Foresthill provided comments addressing a number of issues. First, Foresthill asks for clarification on the effective date of new rates and the CHCF-A amount implementation. After consideration this request for clarification, we determine that the new rates and CHCF-A amounts shall be implemented on June 1, 2019. Such changes are reflected here. Second, we have corrected the affiliate transaction requirements to allow the use of “overlapping of employees or responsibilities.” We do not prohibit Foresthill from the use of overlapping employees or responsibilities. Third, we remove the directive for Foresthill to invest in network improvements to improve network redundancy and reliability. Fourth, we authorize Foresthill to recover reasonable costs relating to the establishment of mutual aid agreements in its next general rate case filing based on the submission of an analysis justifying the costs incurred. Finally, we have updated the depreciation disallowance by incorporating the intrastate jurisdictional allocation, with a resulting disallowance amount of $175,916. 7. Assignment of ProceedingLiane M. Randolph is the assigned Commissioner and Eric Wildgrube and Colin Rizzo are the assigned Administrative Law Judges in this proceeding.Findings of FactOn October 2, 2017, Foresthill filed this GRC application requesting review of its intrastate rates and charges for regulated intrastate telecommunications services, for updates to its intrastate revenue requirement, for establishment of a rate design and proposed a revenue requirement of $5,769,522, which equated to a CHCF-A draw of $3,353,714. On May 21, 2018, Foresthill updated its revenue and expense estimates, forecasting intrastate revenue requirements of $5,612,863 for the 2019?TY, and a CHCF-A subsidy amount of $3,257,723. On November 1, 2017 Cal Advocates protested Foresthill’s GRC?application. Cal Advocates recommends that the Commission authorize an intrastate revenue requirement totaling $4,329,429 for TY 2019. When combined with its forecast of other revenues, Cal Advocates calculates a total CHCF-A subsidy of $1,873,825 from the CHCF-A in TY 2019. Pursuant to D.16-12-035 Foresthill was authorized an 8.99 percent rate of return. Applying the FCC Corporate Expense Cap will cap the amount of corporate expenditures that can be recovered from the CHCF-A program but will not limit the amount of a company’s corporate expenditures. Foresthill did not book its executive labor expense properly pursuant to 47?CFR § 32.6720. California ratepayers should not subsidize labor costs that are incorrectly booked in Customer Operations, and the disallowance of $65,222 is reasonable for ratemaking purposes. Foresthill fully expensed executive bonuses. Foresthill’s projected legal expense is $500,000. Foresthill seeks to amortize its total legal expense over a three-year period which results in an additional $166,667. Cal Advocates recommends the disallowance of any recovery of Foresthill’s litigation costs because the FCC’s corporate expense cap as adopted in D.14-12-084 aims to reduce the burden of litigation costs on California ratepayers. Cal Advocates argues that Foresthill should not exceed its corporate cap while its chief financial officer, controller, and regulatory specialist positions remain vacant. Cal Advocates recommends that the Commission disallow $317,315 of Foresthill’s 2016 affiliate transaction expenses from the calculations used to forecast its 2019 expenses because Foresthill’s business operations are so enmeshed with its affiliates, that it exposes California ratepayers to cross-subsidization. Cal Advocates recommends the Commission adopt the Affiliate Transaction requirements of D.16-06-053. D.16-06-053 contained eight affiliate transaction compliance requirements: (1) affiliates be held in separate legal entities; (2) maintain separate books for all transactions; maintain separate bank accounts for all transactions;(3) maintain separate bank accounts for all transactions (4) have no joint advertising or marketing; (5) have no joint events, sponsorships, fundraisers, or charitable donations; (6) not transfer any physical assets without first obtaining the necessary approvals from the Commission; (7) conduct financial transactions with each other at “arms-length;” and(8) ensure that affiliate transactions are conducted at rates and upon terms no less advantageous than those otherwise available to from unaffiliated third parties for similar transactions.Foresthill is wholly owned by SEI and operates under the fictitious business name Sebastian. SEI is the parent company of four affiliates: Kerman, Foresthill, Audeamus, and Kertel. Foresthill’s affiliates are SEI, parent company, Kerman Telephone Co., Kertel Communications, Inc., Audeamus, CVIN, LLC, S&K Moran Limited Partnership, and Barcus Family Limited Partnership.Foresthill and Kerman are rural incumbent local exchange telephone companies that provide regulated local exchange telephone service and related services. Foresthill and Audeamus do business under the same name, Sebastian. Foresthill and its affiliates issue a single combined bill branded as “Sebastian” to their customers and exchange services where Foresthill provides regulated telephone service which Audeamus installs and repairs on behalf of Foresthill. Audeamus provides toll service and a range of what it terms non-regulated services such as video, Digital Subscriber Line, and alarm system services. Kertel is a construction company that provides electrical and low voltage construction and non-telecom-related services. Foresthill was not able to provide Cal Advocates with fully executed written contracts for expenses between it and its affiliate, Audeamus. Foresthill was not able to provide Cal Advocates with fully executed written contracts for expenses between it and its affiliate, Kertel. Foresthill has not met its burden of compliance with the Commission’s affiliate transactions rules and for ratemaking purpose, a plant specific disallowance of $51,871 or 25 percent of the forecasted TY 2019 expenses associated with Audeamus and Kertel, is appropriate. Cal Advocates recommends disallowing $118,995 of Foresthill’s plant specific rent expense to protect ratepayers from cross-subsidization between Foresthill and its non-regulated affiliates. Reconciliation of Foresthill’s 2016 lease agreements and workpapers show their total rent expense was assigned as a wholly regulated expense to Foresthill and no rent expense was assigned to its affiliate, Audeamus, for the shared use of the Foresthill and Audeamus business office building at 23990 Foresthill Road, Foresthill, California. Foresthill has not justified why it incurs building costs to for its affiliate’s, Kertel’s operations, over 400 miles away in Fresno, California or how Kertel’s expense allocations to Foresthill are related to providing safe, reliable, and high-quality telecommunications service. Disallowing $22,837 of Foresthill’s plant specific rent expense for TY?2019 is appropriate in order to protect ratepayers from cross-subsidy between Foresthill’s regulated activities and its affiliates’ unregulated actions for ratemaking purposes.Disallowing $39,280 of Foresthill’s plant specific expense associated with executive compensation is appropriate.Total plant specific disallowances of $51,871, $22,837 and $39,280 equal $113,988.A intrastate-allocated depreciation and amortization disallowance of $175,916 related to depreciating new plant items within one year is reasonable. Raising the basic residential rate to $25 and the all-inclusive rate to $33.50 is reasonable and will increase Foresthill’s local revenue by $129,219. Raising the basic business rate to $35 is reasonable and will increase Foresthill’s revenue by $12,298. Cal Advocates recommends that the ARC should be imposed on Foresthill ratepayers for the first six months of 2019 until the ARC is officially reduced to $0 on July 1, 2019. Cal Advocates’ recommended rates for Foresthill’s custom calling features are reasonable. Foresthill charges $2.99 per month for inside wire maintenance service. AT&T and Frontier charge $8.00 and $9.00, respectively, for inside wire maintenance. Raising Foresthill’s rates for inside wire maintenance to $3.70 per month for residential and business customers is reasonable and complies with Pub. Util. Code § 275.6(c)(3). Imputation of revenue generated from the sale of wholesale broadband access will be resolved in R.11-11-007. It is unreasonable for Foresthill to fully depreciate a new plant or new plant addition within a single year. On December 22, 2017, federal legislation was passed, formally titled “To provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018, H.R.?1?(Tax?Act).” The most notable impact of the new federal legislation is the reduction in the federal corporate tax rate to 21 percent from 35 percent, effective January 1, 2018. California’s small LECs have historically filed their GRCs with a 34?percent tax rate calculated for their revenue requirement. The change in the federal corporate tax income rates results in excess net deferred income tax liabilities, which must be normalized for ratemaking purposes. Deferred income tax reserves are the accumulation of differences between regulatory tax expense and federal tax liabilities. Deferred tax reserves are ratepayer funds collected by the utility to account for future tax expenses. The deferred income tax reserve in Foresthill’s case is a fund that has been established by ratepayers in excess of Foresthill’s actual, lower future tax liability. Normalizing excess deferred income tax does not constitute retroactive ratemaking. Retroactive ratemaking occurs when rates approved at present or in the future are given an effective date from the past. In Resolutions No. T-176, T-17618, T-17619, and T-17626 we authorized normalization of excess income tax reserve that resulted from the federal tax cut of 2017. Foresthill should establish a Mutual Aid Agreement with other utilities, emergency responders, and local organizations. This will help entities like California Department of Forestry and Fire?(CalFIRE) Protection and California Governor’s Office of Emergency Services (CalOES) promote a greater public safety response in areas like Foresthill, which are increasingly susceptible to wildfires. The requirements of GO 133-D § 3.5(d) are not applicable to Foresthill because they have fewer than 10,000 lines and therefore, are not subject to this reporting requirement under GO 133-D. Requiring Foresthill to retain and report information on all service outages lasting at least 30 minutes in duration regardless of the number of user-minutes impacted is unnecessary because such a requirement is already contemplated in § 4(c)(iv) of GO 133-D (requiring submission of data on all service outages lasting at least 30 minutes). Cal Advocates service quality recommendations are more appropriate for the ongoing second phase of R.11-11-007. Given that this decision addressing Foresthill’s GRC is not effective on January 1, 2019, and recognizing that the revenue requirement is based on a full year of data, we anticipate that a revenue shortfall could result in Foresthill not being able to recover its full revenue requirement. Conclusions of LawForesthill’s application should be granted as modified by this decision. D.14-12-084 held that Small ILECs’ Basic Residential Service Rates must be in a range of $30, inclusive of additional charges, to $37, inclusive of additional charges. This rate range of $30 to $37 will be presumptively reasonable and non-rebuttable. Actual rates will be set in the individual GRCs of the Small ILECs. Raising the basic residential rate to $25 and an all-inclusive rate of $33.50, excluding the ARC, is reasonable and should be adopted. The new rate will increase Foresthill’s local revenue for 2019 by $129,219. Raising the basic business service rate to $35 is reasonable and should be adopted. The new rate will increase Foresthill’s local revenue for 2019 by $12,298. Cal Advocates’ recommendation for rates for custom calling features is reasonable and should be adopted. The rates increase Foresthill’s local network revenue projections by $19,286. Raising Foresthill’s inside wire maintenance rates to $3.70 for residential and business customers, comparable to Frontier and AT&T rates, is reasonable and should be adopted. Raising the rates increases Foresthill’s 2019 local network revenue projections by $3,186. Cal Advocates’ recommendations to require Foresthill to use its own data to estimate its projection for unit/customer counts of local services is reasonable and should be adopted. Foresthill’s explanation of why using Kerman as an alternative proxy from itself is unpersuasive. Imputation of revenue generated from the sale of wholesale broadband access shall be resolved in R.11-11-007 and should have an authoritative effect over Foresthill’s next GRC cycle. It is appropriate to use the 2016 NECA developed jurisdictional allocation factors. Adopting a $768,448 corporate cap limit for Foresthill is reasonable, after incorporating the National Exchange Carrier Association-updated GDP-CPI adjusted price per loop of 1.118356. Foresthill’s higher adjusted price per loop is appropriate for the test year as it accounts for the two-year lag between when costs are reported to NECA for HCLS and a NECA-provided inflation factor. Foresthill’s executive labor expenses are excessive and incorrectly booked, pursuant to 47 CFR § 32.6720 and thus, are unreasonable and should not be adopted. Cal Advocates’ price elasticity of demand is reasonable. Foresthill’s bonuses are unreasonable expenses for California consumers to bear and should not be adopted. Foresthill shareholders shall bear this expense.It is reasonable to include Foresthill’s rate case expenses within its corporate cap. Pub. Util. Code § 728 imposes a duty onto the Commission to “fix, by order, the just, reasonable, or sufficient rates, classifications, rules, practices, or contracts to be thereafter observed and in force.” The Commission’s Affiliate Transaction Rules further Pub. Util. Code?§?728 by mitigating the potential for transfer of market power and cross-subsidy of its regulated entities with their unregulated affiliates. The Commission’s Affiliate Transaction Rules ensure that regulated utilities meet their public service obligations at the lowest reasonable cost and ensure that the regulated utilities do not favor or otherwise engage in preferential treatment of their affiliates. It is appropriate to require Foresthill to comply with the following Affiliate Transaction requirements, articulated in D.16-06-053: (1) affiliates be held in separate legal entities; (2) maintain separate books for all transactions; (3) maintain separate bank accounts for all transactions; (4) have no joint advertising or marketing; (5) have no joint events, sponsorships, fundraisers, or charitable donations; (6) not transfer any physical assets without first obtaining the necessary approvals from the Commission; (7)?conduct financial transactions with each other at “arms-length;” (8)?ensure that affiliate transactions are conducted at rates and upon terms no less advantageous than those otherwise available to or from unaffiliated third parties for similar transactions. In a GRC, the appropriate burden of proof rests upon the applicant of the GRC to prove that its affiliate transactions are of such a reasonable nature where the ratepayer is concerned that the Commission would not need to consider any additional affiliate transaction proposals. Foresthill failed to meet its burden of proving that current corporate affiliations are at arms-length and have not placed a burden on the consumer. It is reasonable to disallow $51,871 in affiliate transaction costs between Foresthill and its affiliate, Audeamus and Kertel for services provided via oral agreements and lack of competitive bids. It is reasonable to disallow $22,837 of Foresthill’s plant specific rent expense to protect ratepayers from cross-subsidy between Foresthill and its affiliates, Audeamus and Kertel. Foresthill’s proposed extensions of fiber facilities to its Arrowhead and Cold Springs Area are reasonable. State public policy supports the need for the Arrowhead and Cold Springs Fiber projects as our government seeks to close gap between the so-called “digital-divide” that exists between geographic and economic sub-groups of California’s population. It is also reasonable to adopt $479,757 in plant additions for telephone network maintenance and upgrades for 2019. It is unreasonable for Foresthill to fully depreciate a new plant or new plant addition within a single year. It is unreasonable of Foresthill to take the full depreciation of plant additions within one year and Foresthill’s depreciation methodology, depreciation expenses for general purpose computers, digital switching, and underground cable are rejected. It is reasonable to require Foresthill to prepare and submit a depreciation study following the methodology described in Standard Practice U-4, Determination of Straight Line Remaining Life Depreciation Accruals, published by the Commission, along with its next GRC filing.It is reasonable to adopt Cal Advocates’ depreciation methodology and depreciation amounts.It is reasonable to adopt Cal Advocates’ use of the 2016 NECA approved jurisdictional allocation factors to determine the intrastate portion of the rate base. It is reasonable to return excess deferred income taxes to ratepayers. It is reasonable to require Foresthill to establish a Mutual Aid Agreement with other utilities, emergency responders, and local organizations. It is reasonable to require Foresthill to perform and document all emergency training and exercises, perform and document all equipment testing and maintenance, and invest in network improvements to improve network redundancy and reliability. It is reasonable to require Foresthill, within 30 days of the effective date of this decision, to submit a Tier 1 Advice Letter demonstrating compliance to perform and document all emergency training and exercises, perform and document all equipment testing and maintenance, and invest in network improvements to improve network redundancy and reliability. It is reasonable to require Foresthill, within 90 days of the effective date of this decision, to submit a Tier 1 Advice Letter documenting efforts and/or the establishment of Mutual Aid Agreements between other utilities, emergency responders, and local organizations to promote greater public safety responses in the wake natural disasters, such as wildfires. It is appropriate to authorize Foresthill to submit a Tier 2 Advice Letter to the Commission’s Communications Division within 30 days of the effective date of this decision to request any revenue shortfall resulting from this decision not being approved as of January 1, 2019 through the CHCF-A Fund. The Advice Letter should provide a calculation to “true-up” the revenue differential.Calculating Foresthill’s corporate expense based on the FCC corporate expense cap calculations, using a loop number of 2,534 is reasonable. ORDERIT IS ORDERED that:1. Foresthill Telephone Company’s application for review of intrastate rates and charges and rate of return for telephone services in California is granted as set forth below and the accompanying Appendix A and Appendix B: Foresthill Telephone Company’s operating revenues shall be $5,026,106; As part of its operating revenues, Foresthill Telephone Company’s total California High Cost Fund-A adopted support shall be $1,986,864; Foresthill Telephone Company’s operating expenses shall be $4,064,746; andForesthill Telephone Company’s rate base shall be $10,693,689. Within five days from the issuance of this decision, Foresthill Telephone Company shall file a Tier 1 compliance Advice Letter submitting modified tariffs to reflect adopted rates as reflected in Ordering Paragraph 1. The new rates and California High Cost Fund-A amounts shall be implemented on June 1, 2019.4. Foresthill Telephone Company shall modify its tariffs as set forth in the Residential Service Rate and Basic Business Rate sections to charge:Basic residential rates of $25 per month and the allinclusive rate of $33.50 per month. These rates are inclusive of the extended area service charge and access recovery charge.Basic business rates of $35.00 per month exclusive of surcharges and fees. Increased rates for custom calling features such as call waiting and caller ID, that are reasonably comparable to the rates urban customers pay, pursuant to Pub. Util. Code?§?275.5(c)(3). Increased rates for inside wire maintenance service, that are reasonably comparable to the rates urban customers pay, pursuant to Pub. Util. Code § 275(c)(3). 5. In order for service or maintenance contract expenses to be considered in future rate cases, Foresthill Telephone Company shall provide fully executed written contracts for the services. The contracts for services shall include a description of the materials and services provided and the charges for such materials and services. Additionally, Foresthill Telephone Company shall keep records of all materials provided under the contracts, the number of hours worked, services performed and the charges for those services so that the reasonableness of the service contract expenses can be verified. 6. In order for any rental expense to be included in future General Rate Cases, Foresthill Telephone Company shall provide fully executed written lease or rental agreement, including provisions for future rate escalations. 7. Cal Advocates’ proposal for revising the Affiliate Transaction Rules, consistent with Decision 16-06-053, as they relate to Foresthill Telephone Company and its affiliates is granted. Within 60 days after this decision is issued, Foresthill Telephone Company and its affiliates shall accomplish the following: (1) be held in separate legal entities; (2) maintain separate books for all transactions; (3) maintain separate bank accounts for all transactions; (4) have no joint advertising or marketing; (5) have no joint events, sponsorships, fundraisers, or charitable donations; (6) not transfer any physical assets without first obtaining the necessary approvals from the Commission; (7) conduct financial transactions with each other at “arms-length;” (8) ensure that affiliate transactions are conducted at rates and upon terms no less advantageous than those otherwise available to or from unaffiliated third parties for similar transactions. 8. In order for depreciation expenses to be considered in future rate cases, Foresthill Telephone Company shall prepare and submit a new depreciation study in its next general rate case filing.9. Foresthill Telephone Company shall flow excess tax reserves back to ratepayers.10. Within 30 days of the effective date of this decision, Foresthill Telephone Company shall submit a Tier 1 Advice Letter demonstrating compliance to perform and document all emergency training and exercises, perform and document all equipment testing and maintenance.11. Within 90 days of the effective date of this decision, Foresthill Telephone Company shall submit a Tier 1 Advice Letter to document efforts and/or the establishment of Mutual Aid Agreements between other utilities, emergency responders, and local organizations to promote greater public safety responses in the wake natural disasters, such as wildfires. Foresthill is authorized to recover reasonable costs relating to the establishment of Mutual Aid Agreements in its next General Rate Case filing based on the submission of an analysis justifying the costs incurred.12. Foresthill Telephone Company shall follow the directions from the Commission’s Communications Division in order to comply with the requirements of this decision.13. Foresthill Telephone Company is hereby authorized to submit a Tier 2 Advice Letter to the Communications Division within 30 days of the effective date of this decision to request any revenue shortfall resulting from this decision not being approved as of January 1, 2019, through the California High Cost Fund-A. The Advice Letter must provide a calculation to “true-up” the revenue differential for the Test Year 2019. 14. Application 17-10-004 is closed. This order is effective today.Dated , at San Francisco, California. Attachment 1: A1710004 ATTACHMENT A Foresthill GRC Results of OperationsAttachment 2: A1710004 ATTACHMENT B Foresthill GRC Net-to-Gross MultiplierAttachment 3: A1710004 (REDLINE) Comment Dec. WILDGRUBE RIZZO Comment Dec. Adopting Foresthill Intrasate Rates.pdf ................
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