California

? ASK Initials "Enter your initials in all CAPS (e.g. ATTY)" [/d "ATTY"]Initials \* MERGEFORMAT Decision 20-11-051November 19, 2020 ASK AgendaNo "Enter the agenda item number (e.g. CA-4)" [/d "Agenda Item No."] \* MERGEFORMAT BEFORE THE PUBLIC UTILITIES COMMISSION OF THE STATE OF CALIFORNIAApplication of The Ponderosa Telephone Co. (U 1014 C) For Rehearing of Resolution T-17618.Application 18-09-007ORDER GRANTING REHEARING OF Resolution T-17618In this Order, we dispose of the Application for Rehearing of Resolution T-17618 (Resolution) by The Ponderosa Telephone Company (U 1014 C) (Ponderosa). We have determined that good cause exists to grant rehearing of the Resolution, as outlined below. The Application for Rehearing asserts Resolution T-17618 raises “a discrete legal error” by failing to properly calculate Ponderosa’s tax liabilities in its Test Year 2018 revenue requirement due to the reduction in the federal tax rate established in the Tax Cuts and Jobs Act of 2017 (TCJA) which took effect on January 1, 2018. Ponderosa argues the Resolution improperly includes the annual amortized excess deferred income tax debit as a tax deduction in the forecast of federal and state income taxes. As a result, the Application for Rehearing asserts the revenue requirement and California High Cost Fund - A (CHCF-A) support both fall short by $64,471, affecting Ponderosa’s additional tax obligation in 2018 and every year going forward so long as the amortization expense debit remains part of its ratemaking calculations. Ponderosa claims the error in calculation is not supported by the findings and contrary to record evidence, renders the Resolution “arbitrary and capricious” and an abuse of discretion, and that denying Ponderosa a reasonable cost recovery mechanism for its reasonable tax liabilities constitutes an unlawful taking of Ponderosa’s property without just compensation.Ponderosa’s Application for Rehearing raises concerns that merit reconsideration of Resolution T-17618. In particular, the Resolution’s findings and conclusions are inconsistent with the reasoning and approach adopted in prior decisions that similarly approved TCJA-related revenue adjustments for other Commission regulated companies entitled to a reasonable rate-of-return. Therefore, we hereby vacate Resolution T-17618. Within 45 calendar days of this Order, Ponderosa shall submit additional workpapers to the Communications Division in a Tier 3 advice letter that demonstrate the effect of the excess tax reserve resulting from the TCJA tax rate change. We also direct Communications Division to prepare a new draft resolution for comment consistent with this Order and other Commission decisions approving revenue requirement adjustments under the TCJA.BACKGROUNDThe Commission administers the CHCF-A program pursuant to Public Utilities Code section 275.6. The CHCF-A fund is intended to further the state’s universal service commitment to affordable and widespread safe, reliable, high-quality communications services in rural areas by providing rate support to small independent telephone corporations (Independent Small LECs) in amounts sufficient to meet their Commission authorized revenue requirements under rate-of-return regulation. To implement the statute and administer the program, the Commission adopted various program rules and ratemaking practices. Generally, the Commission approves program funding for the Independent Small LECs in their respective General Rate Cases (GRCs), and may be updated by post-GRC Cost of Capital proceedings. On November 30, 2017, the Commission approved an all-party Settlement Agreement in Ponderosa’s GRC that established a revenue requirement and rate design to be effective January 1, 2018. Part of that rate design was an annual draw from the CHCF-A. Furthermore, Ordering Paragraph (OP) 11 of D.17-11-013 required Ponderosa to submit a Tier 2 advice letter informing the Commission of any income tax change within 45 days of its effective date.On December 22, 2017, the TCJA was signed into law and became effective on January 1, 2018. Among other things, the TCJA reduced the top corporate income tax rate from 35% to 21%. On February 1, 2018, Ponderosa filed a Tier 2 Advice Letter (AL) 465 proposing an adjustment in its revenue requirement applicable to taxable operating revenue to reflect the impact of the TCJA. Ponderosa’s AL proposed a $535,647 decrease from the approved revenue requirement of $10,936,666 and an equal $535,647 decrease from the CHCF-A support of $3,616,969 approved in D.17-11-013, resulting in a revenue requirement of $10,401,319 and CHCF-A support of $3,081,322 for 2018. On August 9, 2018, the Commission issued Resolution T-17618, which recalculated Ponderosa’s 2018 revenue requirement to account for the change in excess deferred taxes, adding the amount as a debit to the federal tax obligation. Ultimately, the Resolution adjusted Ponderosa’s 2018 revenue requirement, resulting in a decrease of the previously authorized amount by $292,535 and a corresponding reduction of $292,535 in CHCF-A support for 2018. This Application for Rehearing, A.18-09-007, filed on September 12, 2018, requests that the Commission reconsider the excess deferred income tax of $165,916 as a tax-deductible expense. Due to this alleged improper treatment, Ponderosa states the Resolution denies the company $64,471 in revenue requirement and corresponding CHCF-A support to cover the additional tax obligation. Ponderosa requests the Resolution T-17618 be modified on rehearing to incorporate the revenue credit as part of Ponderosa’s taxable income in the tax “gross up” that is used to inform the revenue requirement and CHCF-A support amount for 2018. DISCUSSIONRehearing of T-17618 should be granted.We find merit in the Application for Rehearing’s arguments that the Commission erred in reaching the conclusions in Resolution T-17618. Specifically, we recognize that the adjustments to Ponderosa’s revenue requirement and CHCF-A support approved for 2018 require modification to address any potential legal error regarding the treatment of annual amortized excess deferred income tax debit as a tax deduction in the forecast of federal and state income taxes. Prior decisions involving our other rate-of-return regulated entities illustrate a different method in calculating the effects of the lower corporate tax rate and other changes—including amortization of excess deferred income tax reserve—required by the TCJA. For the reasons stated above, good cause exists to grant rehearing on the anticipated tax liabilities for the test year to reflect a 21% corporate tax rate and its impact on Test Year 2018 revenue requirement and the CHCF-A support amount. Therefore, we vacate Resolution T-17618. We will reject AL 465 without prejudice and order Ponderosa to submit a new Tier 3 advice letter to Communications Division within 45 days of this Decision, following the directives in D.17-11-013 with the exception of requiring a Tier 3 rather than a Tier 2 AL. Ponderosa’s new AL should include the following information:(1) Revised Results of Operations (RO) table for Test Year 2018 incorporating the effect of 2017 the TCJA relating to federal income tax rate change and excess deferred income tax reserves.(2) An income tax table showing calculation of state and federal income tax amounts that appear in the RO table. The calculation must show the amortized excess deferred income tax reserve as a tax credit for federal income tax calculation; and(3) Detailed work papers in support of Items (1) and (2) above; and(4)Any additional information, as required by Communications Division, to recalculate the correct tax credit based on the TCJA.Since we are granting rehearing to correct the legal error identified by Ponderosa, all other legal arguments set forth in the Application for Rehearing of Resolution T-17618 are denied. CONCLUSIONFor the reasons stated above, we determined that good cause exists to grant rehearing of Resolution T-17618 and vacate the Resolution. The scope of this rehearing is described below. THEREFORE, IT IS ORDERED that: 1.Resolution T-17618 regarding the treatment of excess deferred income tax and recalculation of Ponderosa’s Tax Year 2018 revenue requirements and CHCF-A support related to The Ponderosa Telephone Company’s (Ponderosa) Advice Letter 465 is vacated.2.We grant rehearing of Resolution T-17618 for the Communications Division to reconsider the requested adjustments in Ponderosa Advice Letter 465, in accordance with the direction given herein.3. AL 465 is rejected without prejudice.4.Within 45 days of this Order, Ponderosa shall submit a new Tier 3 advice letter to Communication Division per the directives in D.17-11-013—with the exception of requiring a Tier 3 rather than a Tier 2 AL—and include the following information:(a) Revised Results of Operations (RO) table for Test Year 2018 incorporating the effect of 2017 TCJA relating to federal income tax rate change and excess deferred income tax reserve.(b) An income tax table showing calculation of state and federal income taxes that appear in the in the RO table. The calculation must show the amortized excess deferred income tax reserve as a tax credit for federal income tax calculation; and(c) Detailed work papers in support of Items (a) and (b) above; and(d)Any additional information, as required by the Communications Division, to recalculate the correct tax credit based on the TCJA.4.Since we are granting rehearing to correct the legal error identified by Ponderosa, other legal arguments set forth in the Application for Rehearing of Resolution T-17618 are denied.4.Following its reconsideration of the tax credit consistent with the direction given in this order and the information in the new Ponderosa Tier 3 AL, Communication Division is directed to prepare a draft resolution for comment. 5.This proceeding remains open.This order is effective today.Dated November 19, 2020, at San Francisco, California.MARYBEL BATJER PresidentLIANE M. RANDOLPHMARTHA GUZMAN ACEVESCLIFFORD RECHTSCHAFFENGENEVIEVE SHIROMA Commissioners ................
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