OR95-0526

ORDER NO. 95-0526

ENTERED 5/31/95

THIS IS AN ELECTRONIC COPY

BEFORE THE PUBLIC UTILITY COMMISSION

OF OREGON

UP 96

In the Matter of the Joint Application of U S WEST COMMUNICATIONS, INC., and TELEPHONE UTILITIES OF EASTERN OREGON, INC., dba PTI COMMUNICATIONS, for an order authorizing the sale and purchase of certain telephone exchanges.

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ORDER

DISPOSITION: APPLICATIONS DENIED UNLESS COMPANIES ACCEPT CONDITIONS.

On May 14, 1994, U S WEST Communications, Inc. (USWC), and Telephone Utilities of Eastern Oregon, Inc., dba PTI Communications (PTI), filed a joint application with the Public Utility Commission of Oregon (PUC) requesting that the Commission authorize USWC’s sale of 23 exchanges to PTI. The exchanges are indicated on Attachment A to this order.

On June 15, 1994, Allen Scott, a Hearings Officer for the Commission, presided over a prehearing conference in this matter. A schedule for the proceeding was established and other procedural matters resolved.

During August 1994, the Hearings Officer conducted five public forums relating to this sale in Burns, John Day, Heppner, Merrill, and Roseburg, Oregon. PUC staff,

representatives of the applicant companies, and other interested persons attended. Staff and the applicants made presentations. Comments from members of the public were received.

An evidentiary hearing was held on January 17, 1995, in Salem. The parties briefed the issues. The record was closed on March 1, 1995.

Parties

In addition to applicants and PUC staff, the following parties were granted intervenor status:

AT&T Communications of the Pacific Northwest, Inc. (AT&T)

Grant County

GTE Northwest, Incorporated

MCI Telecommunications Corporation

United Telephone Company of the Northwest

USDA Forest Service

Western Radio Services Company, Inc. (Western Radio)

Mountaineer Long Distance, Inc., dba Thrifty Call

City of Echo, Oregon

Appearances for these parties are set out in Attachment B to this order.

Background

PTI has agreed to buy 23 Oregon exchanges from USWC for $82.4 million, with the exact amount subject to adjustments for additions and retirements of plant and depreciation. The 23 exchanges are located in rural areas of Oregon, mostly east of the Cascade Mountains, and contain approximately 15,600 access lines.

PTI serves 400,000 access lines in 12 western and midwestern states, mostly in rural areas. It owns and operates two telecommunication utilities in Oregon: Telephone Utilities of Eastern Oregon (TUEO) and Telephone Utilities of Oregon (TUO). TUEO and TUO presently have about 45,800 access lines. The proposed purchase would increase PTI’s total Oregon access lines by about 35 percent.

This purchase is consistent with PTI’s focus on serving rural areas. PTI has made commitments to the Commission in its application and during this proceeding to make capital improvements in the sale exchanges if the sale is approved, including conversion to one-party service, digital toll connectivity, elimination of open wire, and deployment of certain other services. The specific plans for upgrading and modernizing are discussed below and set out in Attachment C. PTI and USWC agree that if the sale is consummated, it is likely that some customers in the sale exchanges will receive network upgrades and new services sooner than they would if the exchanges remained with USWC.

USWC has about 13.6 million access lines in 14 states, including 1.1 million in Oregon. The sale will reduce USWC’s Oregon access lines by 1.4 percent. USWC is selling more than 200,000 access lines in 314 exchanges in 11 states. PTI has entered into agreements to purchase exchanges from USWC in Colorado, Oregon, and Washington.

The sale is consistent with USWC’s needs. USWC faces increased competition, especially in metropolitan areas of the state. It wishes to concentrate its resources and energies on those areas and other areas which have strategic competitive value, rather than on rural areas. It believes this sale will help it meet this challenge by ridding it of high-cost rural exchanges and allowing it to focus on areas where it faces competitive pressures.

Public Comment Meetings

Staff and company representatives made presentations to members of the public who appeared at the five public comments meetings in the sale exchanges. Several members of the public, including local political, business, and education leaders, spoke at the meetings. Most comments were favorable to the sale. However, many participants emphasized that modern telecommunications technology is of particular importance to remote rural areas, many of which have lost business and industry in recent years. The availability of good telecommunications technology may help them avoid additional losses. Moreover, up-to-date telecommunications technology may allow these areas to attract new businesses which have now become free to locate wherever good telecommunications facilities are available. In addition, the quality of educational opportunity in remote areas may depend on the availability of technology which allows access to distant educational centers.

Because of the importance of telecommunications to these areas, many members of the public asked that the customers in the sale exchanges be given some assurance that the proposed sale would enhance their communities’ prospects for obtaining improved telecommunications facilities. Some of the attendees conditioned their support for the sale on such assurances and asked that the Commission require PTI to fulfill the promises it has made to the public to provide upgrades in the sale exchanges.

The Positions of the Parties

The general position of the parties is set out here. The issues are discussed in more detail throughout the order.

Staff. PUC Staff concludes that only with the addition of certain conditions will the sale be consistent with the public interest.

Applicants. USWC and PTI agree to some of the conditions recommended by staff. They object to three conditions, however, and ask that the Commission approve the sale without imposing them.

AT&T. AT&T argues that the sale is contrary to the public interest and should be rejected by the Commission. In the alternative, it argues that the Commission should approve the sale only with the addition of a condition relating to access charges.

Western Radio. Western Radio, a radio common carrier providing local exchange services in Central and Eastern Oregon, opposes the sale unless the Commission imposes conditions eliminating what Western Radio views as an improper price increase affecting its business and requiring USWC to enter into a service contract with Western Radio.

City of Echo. Echo is located in Umatilla County, about eight miles from Hermiston. It asks that four conditions be placed on the sale.

The Commission’s Conclusion

This case involves the sale and purchase of property by telecommunications utilities. ORS 759.375 and 759.380 require Commission approval of these transactions but set out no specific standard for approval. However, OAR 860-27-025 requires sale applicants to provide facts showing that the transfer is "consistent with the public interest." The transaction also involves the transfer of allocated territory. ORS 759.560 allows such transfers upon approval by the Commission based on a finding that the transfer is not contrary to the public interest.

In determining whether a sale and transfer of allocated territory meet the public interest standard set out above, the Commission looks at the impact of the transaction on the customers in the areas transferred, its effect on the other customers of the companies, and its consequences for the companies themselves and for the industry as a whole. Other factors may be considered as the facts of the sale dictate.

We have reviewed these factors. The evidence and argument persuade us that this sale will be in the public interest if certain conditions proposed by staff are appended. The conditions we impose include those agreed to by the applicants and discussed in Attachment D to this order. We also impose two of the three conditions proposed by staff but opposed by the applicant companies. We discuss these three conditions in detail below. We also conclude that we will not impose the conditions proposed by other parties to this case. These proposals are discussed below.

Our conclusion that the sale will be in the public interest with the conditions appended is based on the following analysis. First, the evidence indicates that the customers in the sale exchanges will benefit from the transaction. PTI’s rates are generally lower than USWC’s and most customers will realize a rate reduction. There is no reason to believe that the customers of either company outside the sale exchanges will suffer any disadvantage from the transaction. Moreover, the service provided to customers in the sale exchanges will improve because of the modernization program to be undertaken by PTI. The two applicant companies have represented, and we believe, that PTI will provide these service improvements more rapidly than would USWC if the exchanges were not transferred.

The companies themselves will also benefit from the sale. USWC will rid itself of high cost exchanges. It will thus be in a better position to respond to the competitive pressures it now faces. The sale also fits PTI’s strategy of concentrating on rural areas. The matching of area served to company focus will also benefit the customers of each company by assuring responsive treatment.

We recognize that the sale has drawbacks. PTI’s interstate and intrastate access charges are generally higher than USWC’s. Access customers will therefore experience rate increases. The extent to which this may translate into higher toll charges is uncertain. We discuss the access charge issue in more detail below. We note also that the sale will increase federal Universal Service Fund (USF) demand and thus reduce availability of funds to other local exchange companies in the near term. The risk of rate increases for PTI customers resulting from possible reduction of the USF is another potential drawback. We conclude, however, that the benefits described above more than offset these potential disadvantages and that the sale, on balance, is in the public interest.

Partial Stipulation and Agreements

During the pendancy of this case, staff and USWC entered into a stipulation resolving most of the issues between those two parties. USWC accepted most of the conditions proposed by staff, either in their original form or as modified. The conditions agreed upon are discussed in Attachment D to this order. The stipulation itself is attached as Attachment E.

Staff and PTI did not enter into a stipulation. However, in its application and testimony, PTI accepted some of the conditions proposed by staff. The conditions agreed to by PTI are set out in Attachment D to this order.

Three significant issues proposed by staff remain in dispute. We discuss these below and explain our conclusions. We will first discuss the two conditions we adopt and then the condition we decline to impose.

Condition Relating to Plant Upgrades and Modernization

In its application, PTI filed a schedule outlining modernization plans for the sale exchanges. The plans include matters such as conversion to one party service, digital interoffice toll routes, elimination of open wire, SS7/ISUP trunk signaling, and deployment of a service called CLASS. The schedule contains dates for completion of the upgrading. During this proceeding, PTI offered additional plans for upgrades to local services, remote switches, interoffice facilities, and tandem toll routes. A listing of the various modernization and upgrading plans is in Attachment C to this order. Some aspects of the modernization plan require participation by USWC, notably the upgrade of interoffice facilities in the John Day exchange.

Staff and PTI are in agreement that PTI’s commitment to make these improvements should be a condition of the sale. However, staff further proposes that failure by the companies to meet the modernization schedule should result in the assessment of a financial penalty. Both PTI and USWC object strenuously to the inclusion of a potential financial penalty in the condition.

Staff’s proposed penalty condition with respect to PTI operates as follows. Attachment C lists only a year in which the various projects are to be completed. Staff’s proposal would establish a specific date for each project. For 1995 projects, the due date would be nine months after the quarter in which final regulatory approval is granted. That is, if final approval comes by June 30, 1995, then the due date for 1995 projects will be March 31, 1996. Due dates for projects set for later years would be March 31 of the year following that listed

in Attachment C. On the other hand, if regulatory approval comes in the quarter ending September 30, 1995, the due date for 1995 projects would be June 30, 1996, and the due date

for succeeding years’ projects would by June 30 of the year following the year listed in Attachment C.

If PTI fails to meet the deadlines for modernization, a fiscal penalty would be

assessed on an annual basis. The penalty amount would be charged to shareholders and distributed to PTI customers. The annual penalty would be equal to a downward adjustment of PTI’s return on equity (ROE) by up to 50 basis points. Staff estimates the current impact of a 50-basis-point adjustment would be $436,473. If a penalty is determined and imposed, staff will recommend a method for distributing it to customers.

Staff also proposes that USWC be subject to the penalty condition. If USWC fails to meet its obligations relating to the modernization plan, it would be required to share in the penalty imposed on PTI by paying PTI a percentage of the penalty. Staff would propose a sharing of the penalty based on an assignment of responsibility for failure to meet the modernization plans.

Disposition

The Commission concludes that the proposed conditions are appropriate and will be attached to our approval of this transaction. In reviewing this transaction, we are attempting to represent the interests of the ratepayers. As staff correctly points out, the most credible argument in favor of a finding that this transaction is in the public interest lies in PTI’s ability and willingness to upgrade the services in the sale exchanges. PTI and USWC both aver that PTI, because of its rural focus, will work more quickly to provide upgraded facilities to the rural outlying areas than would USWC, which is engaged in vigorous competitive battles in more populated areas. PTI made specific representations that it would carry out particular projects by a certain date. If those proposals are carried out as proposed, the customers in the sale exchanges will have benefited significantly. However, if they are not carried out, the public interest claim would be put in serious question.

We note that the comments offered at the public forums make clear that the modernization and upgrades promised by the companies are a major basis for the general support voiced by the public for this transaction. It is therefore appropriate that the Commission do what it can to make certain the plans are carried out as proposed and that the public benefits as promised by applicants. Without a provision such as that proposed by staff, we would have no recourse in the unlikely event the applicants failed to perform as they have represented.

PTI and USWC present several arguments against the imposition of this condition. PTI points out, for example, that completion of the plans on schedule is to some extent subject to external factors. We agree. Staff, on brief, acknowledges that the companies should have the opportunity to demonstrate that any failure to meet the schedule is a result of factors beyond the company’s control. Although that refinement of the condition is not contained in staff’s testimony, we view it as appropriate and incorporate it in our condition.

PTI argues that it has not had an adequate opportunity to examine all of the physical facilities involved and thus cannot guarantee the time frame set out in the proposals. We do not find this a sound argument. PTI was responsible for making the specific proposals, including the time frame involved. These are part of its application and proposal in this matter and constitute an important basis for granting the application. We see nothing wrong with holding it to the representations that it made.

The companies also allude to their good "track records" for doing work that they propose. They imply that the condition will somehow reflect negatively on them and may, in PTI’s view, constitute an "insult" to the company. The Commission has no reason to doubt the sincerity of the companies or their ability to perform as they have represented. Our imposition of this condition is not intended to reflect negatively on either company. We are not persuaded, however, that the prior track record of the companies is a significant argument against this condition. The simple fact is that if they perform in consonance with their track records and do what they have proposed, the penalty provisions will never come into play.

USWC raises a legal issue. It questions whether the Commission actually has the authority to impose a penalty for failure by a utility to provide modernization or upgrading. We are convinced, however, that consummation of the deal by the companies with this condition attached will constitute an enforceable agreement between the companies and the Commission regarding the penalty provision. We are hopeful, of course, that the issue will never be tested because the companies meet their obligations and promises under the agreement.

The companies raise some issues relating to procedural matters which we need to address. First, they note that in staff’s briefs, the term "joint and several" liability for the penalties is used. They point out that that concept seems to be at odds with staff’s testimony, which suggests that any penalty should be shared by the companies in proportion to their actual fault. We agree that the original proposals by staff for a sharing based on blame is sound and an appropriate basis for imposition of a penalty under these circumstances. We conclude that the term "joint and several" was not meant in any technical sense and we do not incorporate it in the condition we adopt.

The companies also raise procedural issues relating to determination and apportionment of fault. It is the Commission’s conclusion that if our staff believes that a significant deviation from the schedule as set out in this order has occurred, staff will file a request with the Commission to impose a penalty on PTI (and USWC as necessary). We say a "significant" deviation because it is our belief that nothing would be served by imposing a penalty for a very minor departure from the schedule. We also conclude that any penalty imposed would be proportionate to the magnitude of the deviation. Staff suggests as much in its testimony when it calls for a penalty of "up to" the 50 basis point maximum.

If staff makes a request for a penalty, the company or companies would have the opportunity for an administrative hearing which would provide a record upon which the Commission could make its determination of a penalty. The companies point out that this process could be cumbersome and expensive. That may indeed be true in some circumstances. In others it might not be such a difficult task. Of course, any contested case is potentially complex and difficult, especially where a penalty is involved. We do not view that potential difficulty as a basis for abandoning worthwhile policies. Moreover, the companies have it within their power to avoid any such process by meeting the schedule that they have proposed.

Rate Consolidation

Staff proposes that the following condition be placed on the transaction:

The Commission should require PTI: to consolidate rates for each of its services and, within 30 days after the Commission’s approval

order, file revised tariffs to be effective on the date of transfer; to use PTI’s existing tariffs for services in the acquired exchanges; to offer local measured service, which is not currently tariffed by PTI, at rates approved by the Commission if billing arrangements can be made; if PTI plans to offer local measured service, PTI must make that service available to all its customers.

The major item in contention here is staff’s proposal that PTI use its existing rates in the sale exchanges. The condition applies to basic local service and to other services, such as private line and special access services. PTI argues against this condition. It asks that it be allowed to retain USWC’s local rates when the sale is consummated and phase in its own rates by means of three annual changes. USWC’s existing rates are mostly higher than PTI’s. For example, USWC’s business rate is $31 per month; PTI’s is $19 per month. There are about 3,000 business lines in the sale exchanges. A voice grade private line circuit is now $12.25; PTI’s rate is $6.40. PTI’s residential rates are also lower than USWC’s, although by a smaller margin.

PTI claims that a gradual three-year phase in will avoid erratic price signals to customers. It bases this assertion on the fact that several on-going PUC dockets, including

UM 351 and others, may result in price increases for local service. PTI notes that in other states in which it has acquired exchanges from USWC, it has been allowed to gradually phase in its own rates rather than undertake what it describes as the "flash cut" method requested by staff.

Disposition

The Commission concludes the staff’s proposed condition is appropriate. We can see no good basis for allowing PTI to charge existing USWC rates to its newly acquired customers in the sale exchanges. Those customers will become PTI customers when the sale is completed. They should be charged PTI rates, not USWC rates. The effect of requiring PTI to use its own rates would be to give lower rates to nearly all customers in the exchanges. That by itself is a substantial reason for concluding that this condition is in the public interest. Moreover, adopting staff’s position avoids a situation in which PTI customers are subject to rate discrimination depending on whether they are in the sale exchanges or in some other PTI exchange. PTI notes that it already is involved in one situation in which such rate discrimination exists. That fact does not impress the Commission as a reason to do it in other exchanges. Similarly, we do not regard the fact that other jurisdictions have permitted PTI to retain USWC’s rates to be of importance to our consideration of the issue.

PTI’s argument that staff’s position would lead to erratic price signals is not persuasive. It is speculation as to whether other dockets will lead to price increases for local customers and, if so, when that might occur. But it is certain that PTI’s proposal to phase in its rates over a three-year period would result in annual changes. If, as PTI predicts, other regulatory events cause additional changes during the next few years, the total number of fluctuations could be accentuated by PTI’s phase-in proposal, not diminished. Thus, a concern about erratic price changes and signals leads, if anywhere, to adoption of staff’s position.

Staff acknowledges that the use of PTI’s rates may increase some private line and special access rates over existing USWC rates. It points out, however, that the number of customers purchasing these services is very small. For example, only six of the 23 exchanges have customers who subscribe to interoffice special access and within those six exchanges there are only 12 interoffice circuits. Moreover, these two services have many rate elements. Existing local private line customers will see rate decreases for most if not all of the service elements. Subscribers to special access services may see some rate increases if converted to PTI’s special access tariffs.

We agree with staff that the overall rate impact for USWC’s private line and special access customers is minimal. Furthermore, PTI may request authority to enter into special contracts with special access customers who face any significant rate hikes. Staff has indicated a willingness to favorably consider such requests. Thus, the impact on those few customers who may face a rate hike may be reduced. We conclude that the private line and special access services should be included in this condition.

The Commission concludes that staff’s proposed condition is in the public interest.

Sharing of Risk

Staff asks that the Commission impose a condition on the sale which would require PTI’s shareholders to assume some of the risk caused by the potential loss of revenue from the federal USF subsidy. Staff’s proposed condition is worded as follows:

The Commission should, if the USF or its successor interstate revenue falls below $11.2 million annually, assign PTI’s shareholders with 54 percent of the difference between $11.2 million and the new amount.

Staff’s rationale is that the customers in the sale exchanges are being put at risk by the sale because PTI is eligible for USF revenues. Staff asserts that a reduction in this federal subsidy is a real possibility in the near future because of pressures being placed on the Federal Communications Commission (FCC) to reduce or terminate the fund. Staff notes that any significant reduction in the federal subsidies may reduce PTI’s rate of return to an "unhealthy" figure as low as 6.16 percent. If that occurred, PTI may seek a rate increase to offset the loss of revenue. Staff’s condition is designed to protect the ratepayers from having to absorb the entirety of the risk of a rate increase.

To decide upon an appropriate allocation of the risk, staff determined that PTI’s USF revenues from the sale exchanges ($6.1 million) will represent about 54 percent of the company’s total Oregon USF revenues ($11.2 million). From this computation, staff concluded that the company’s shareholders should assume that proportion, 54 percent, of the risk. Thus, if USF revenues fall below the expected $11.2 million, shareholders would assume 54 percent of the difference between the actual revenue from USF (or any replacement mechanism) and the expected $11.2 million in revenues from that source.

PTI strenuously objects to this condition. It asserts several arguments designed to demonstrate that the condition is illegal, unnecessary, and bad policy.

The Commission declines to adopt this condition. We do not know what changes may occur in the USF in the near or long term. Whatever changes do occur, however, will affect many customers of various companies throughout Oregon and around the country. It is not appropriate for us to attempt to shield one group of customers from the impact of those changes. Moreover, the condition would single out one company for potential denial of recovery of a revenue loss occasioned by a cause outside the company’s control. Again, we do not believe it appropriate to discriminate in that manner under the circumstances involved in this case.

We also believe that the two conditions we have adopted earlier in this order, relating to modernization and rate consolidation, provide substantial and appropriate protection to ratepayers in the sale exchanges. Most will see some reduction in rates because of the sale, with the decreases large in many instances, minor in others. Perhaps more important, given the significance to the sale exchanges of good telecommunications service, is the fact that the sale will result in a substantial and rapid upgrade and modernization of the facilities available to the customers. We have imposed a condition designed to assure these customers that the improvement in facilities will occur at a faster pace than it would have without the sale. These concrete and substantial rate and service benefits establish that the sale is in the public interest. The possibility that the rates will eventually increase as a result of a reduction in PTI’s USF revenue is not a significant enough threat to counterbalance these certain benefits. We conclude that the public interest does not dictate that this condition be added to the sale.

AT&T’s Position

AT&T filed testimony and briefs contesting the application. It asks that the Commission either deny the application, or, alternatively, impose conditions additional to those proposed by staff. Its request is based primarily on the fact that interstate and intrastate access charges in the sale exchanges will increase under PTI ownership because PTI’s access rates are higher. AT&T claims that the sale will result in as much as a doubling of access charges. The increases will have an impact on AT&T and on its customers. Recovery of the increased costs through the 26 percent Oregon Customer Access Fund (OCAF) rate increase PTI forecasts, would, in AT&T’s view, interfere with the intent of the OCAF Plan to reduce the per minute access rates. A rate additive would, in AT&T’s view, confound the plan’s intent to equalize access charges in rural areas.

If approval of the sale is granted, AT&T recommends that the Commission limit the inclusion in OCAF of PTI’s increased access costs resulting from the purchase to 10 percent as permitted by the OCAF plan. Additional relief, if permitted, should be in the form of a rate additive.

PTI challenges AT&T’s claim that the sale would raise access rates dramatically or would adversely affect customers. It claims that its existing access charges are in reality only about 1.25 cents per minute higher than USWC’s present rates. It posits a 6 percent increase because of this transaction. Thus, it views AT&T’s projection of a doubling of such charges as speculative, at best. The admitted increase in access charges if the sale is consummated is, PTI claims, merely a result of the decoupling of these high cost exchanges from USWC’s statewide average access rates. Moreover, PTI asserts that the sale will reduce USWC’s access costs for its remaining operations. It notes also that the impact of these access cost increases on the overall operations of AT&T would be very small. PTI also provided evidence indicating that the relationship between access costs and toll rates is not necessarily close. For example, PTI asserts that despite substantial access charge reductions by LECs in July of 1994, AT&T has increased prices twice in 1994. Finally, PTI notes that AT&T will be a beneficiary of the modernization program to be undertaken by PTI.

Disposition

There is no dispute that the access rates will increase if the sale is approved. USWC’s average intrastate access rate for the sale exchanges is 5.3 cents per minute. Staff’s calculations indicate that the acquisition will add $5.6 million to PTI’s switched access revenue requirement. The per access minute revenue requirement is about 8 cents. PTI participates in the OCAF pool, which charges a composite 5 cents per minute access rate. It may seek to recover the shortfall between its revenue requirement and the revenues generated by the composite 5 cent rate through an increase in the OCAF revenue requirement. OCAF is recovered by a statewide rate on all terminating access minutes. There are cost control limitations in the OCAF plan which limit a company’s cost increase to 10 percent for inclusion in the pool. PTI would be allowed to recover its remaining revenue requirement as a separate rate additive estimated to be over 3 cents per terminating minute. A rate additive would apply only to PTI’s access minutes. PTI estimates the OCAF rate, assessed on all terminating intrastate minutes of use, would increase by 26 percent if the entire additional cost is recovered from the OCAF pool.

The Commission is not persuaded that the application should be denied, however. For the reasons noted elsewhere in this order, we have concluded that the sale, with the conditions we are imposing, will be in the public interest. As PTI points out, some of these benefits, such as modernization of facilities, will directly affect AT&T. There is no indication that the impact of the increased access charges on the public will be so significant as to outweigh the benefits to the general public which we have outlined earlier.

Nor are we persuaded that the condition proposed by AT&T is appropriate. The exchanges involved are high cost exchanges. It is not reasonable to expect PTI’s shareholders to absorb these costs. The issue is how PTI may recover them. An increase in the OCAF rate spreads the impact of the additional costs widely. Although the Plan did not specifically contemplate the impact of a sale of exchanges, we believe the use of the OCAF in that context is appropriate. A rate additive, as proposed by AT&T, would focus the impact on PTI’s exchanges, and thus result in a narrower but more marked impact. We believe an additive is most appropriate where we need to limit a company’s controllable costs. That is not the situation here, as the costs involved are largely a function of location and population, not of PTI’s operations. We will thus not require that PTI use an additive to recover the costs.

PTI estimates that the OCAF rate may need to be increased by 26 percent as a result of this sale. As AT&T points out, that is beyond the general intent of the plan to limit recovery of access costs to 10 percent of the increases. However, the plan recognizes the possibility of new and unforeseen circumstances and allows the companies to petition for a cost control waiver. We conclude that a waiver should be granted to PTI in this case and the additional costs be recovered from the OCAF pool.

AT&T originally requested that other conditions be placed on the sale. It asked that PTI be required to impute all unavailable USF subsidy payments into its revenues. Our decision not to impose staff’s proposed condition regarding sharing by shareholders of the risk of USF reduction deals with that issue. AT&T also asked that the sale price be set at net book cost. We see no good reason for it. Finally, AT&T asks that PTI be prohibited from including the amount of the sale price above book value in its rates. PTI has agreed to exclude the acquisition premium from rate base.

Western Radio’s Position

Western Radio is a radio common carrier providing local exchange services in Central and Eastern Oregon. It provides mobile and rural telephone services to 494 customers. Some of its rural customers are located in areas where land-line telephone service is not available. To them, Western Radio provides the only means of interconnecting with the telephone network. Western Radio asks that the Commission either deny the application or, in the alternative, require USWC to eliminate a disparity that will exist between the rates USWC charges Western Radio for calls terminating in USWC’s exchanges and the rates it charges Western Radio for calls terminating in the newly transferred sale exchanges.

Western Radio purchases interconnection services from USWC, as well as other services it needs. It uses USWC’s services when a call from one of Western Radio’s customers is destined for a recipient whose telephone is connected to a USWC central office. Such a call will go from Western Radio’s antenna site and switch to USWC’s lines and then to the USWC central office. From there it goes to the recipient or to another central office and then to the recipient.

USWC charges Western Radio for the service under its price list. If the call from a mobile phone terminates to a USWC central office and from there is sent to the recipient’s telephone, USWC charges a flat amount per minute for switching and a separate mileage rate per minute for transport. If, however, the call terminates to an Independent Local Exchange Carrier’s central office, the charge is a flat per minute rate. The per minute rate for calls terminating in another LEC’s exchange is more than the maximum that can ever be charged where the call terminates in a USWC exchange. For a "typical" call handled by Western Radio, the rate for a call terminating in a non-USWC exchange is about 50 percent higher than for one terminating in a USWC exchange.

If the sale is consummated, some of the calls handled by Western Radio will terminate in the sale exchanges, which will then be PTI exchanges, and thus be subject to the higher charges noted above. Western Radio asserts that it and its customers, to whom some of the higher charges may be passed on, will be harmed by this increase. Moreover, Western Radio claims that this increase is arbitrary in that nothing will be different with respect to this service except the fact of ownership of the exchanges.

USWC argues against the condition. It points out that the disparity in charges between service to the exchanges it owns and service to those owned by another company is based on actual differences in costs, such as the access charges it must pay to the independent local carriers. It notes that applying the proposed condition only to the sale exchanges, and not to other independently owned exchanges, would result in an unwarranted disparity in charges. It also claims that only 1.1 percent of the access lines that a mobile to landline call may terminate to in the Portland LATA are in the sale exchanges.

Disposition

The Commission will not deny approval of the sale based on Western Radio’s argument nor will we impose the condition sought by Western Radio. The different rate structure in USWC’s price list is not arbitrary or discriminatory, but is based on cost differences. To grant the condition sought, may, however, result in unjustified price discrimination. We also note that the number of customers affected by this change is not likely to be great and that it is unlikely that any will be harmed significantly. Western Radio has some control over the impact of the change on end users of its service, of course, through its decision as to whether or not to pass on the added costs.

Western Radio’s Request for Certification of a Ruling

In its testimony, Western Radio requested that the Commission condition the sale on USWC entering into a service contract "with us and other Part 22 carriers who desire one. The contract then should be assigned as a part of the sale." USWC filed a motion to strike this testimony as not relevant to the case. The Hearings Officer granted the motion. Western Radio asked that the ruling be certified to the Commission. The Hearings Officer did so.

We have reviewed the matter and affirm the Hearings Officer’s ruling. The request for a condition which would force USWC to enter into a contract for rates and services with Western Radio and others is in effect an attack on the price listing policy, which allows the utility some flexibility in setting rates. Granting the request for this condition would defeat the purpose of the price listing.

City of Echo

Echo asks that the Commission place the following conditions on the sale:

1. That assurance be given that Echo will continue to receive service as good as or better than that provided by USWC, including prompt response for repair calls.

2. That Echo will continue to have extended area service to Hermiston and Stanfield as it has now.

3. That no additional access codes in addition to area code and "1" be necessary.

4. That rates be frozen for three years.

Disposition

We have dealt earlier in this order with Echo’s first proposed condition. The conditions we have imposed will provide assurance that service will not suffer, and will in fact improve, as a result of the sale. With respect to conditions two and three, PTI assures us that extended area service will not be changed because of the sale and that no additional access codes will be necessary. As to the final proposed condition, we do not believe that there is a reasonable basis for placing a three-year freeze on rates. As we have noted earlier, our decision conditions approval of the transaction on PTI’s implementing its own rates in the sale exchanges. For most customers, these rates will be lower than existing USWC rates. But, many factors may affect rates in the coming years and it would not be appropriate to require in advance that PTI maintain rates without change for three years. We have taken steps in this order to protect the ratepayers to the extent possible.

CONCLUSIONS OF LAW

1. The Public Utility Commission of Oregon has jurisdiction over this application pursuant to Oregon Revised Statutes Chapter 756, 757 and 759.

2. The sale of exchanges by U S WEST Communications, Inc. to Telephone Utilities of Eastern Oregon, Inc., dba PTI Communications, is consistent with the public interest and should be granted with the conditions set out in this order.

3. The transfer of allocated service territory by U S WEST Communications, Inc., to PTI is not contrary to the public interest and should be granted.

4. The stipulation reached by staff and U S WEST Communications, Attachment E, is approved in its entirety.

ORDER

IT IS ORDERED that the joint application of U S WEST Communications, Inc., and Telephone Utilities of Eastern Oregon, Inc., dba PTI Communications, for an order authorizing the sale and purchase of certain telephone exchanges and the reallocation of territory is denied, unless, within 30 days from the date of this order, both companies notify the Commission that the conditions set out in the order are accepted.

Made, entered, and effective .

_________________________

Joan H. Smith

Chairman

___________________________

Ron Eachus

Commissioner

___________________________

Roger Hamilton

Commissioner

A party may request rehearing or reconsideration of this order pursuant to ORS 756.561. A request for rehearing or reconsideration must be filed with the Commission within 60 days of the date of this order. The request must comply with the requirements of OAR 860-14-095. A copy of any such request must also be served on each party to the proceeding as provided by OAR 860-13-070(2)(a). A party may appeal this order to a court pursuant to ORS 756.580.

ATTACHMENT D

Issues upon which agreement was reached

The following is a summary of the conditions to the sale proposed by staff and agreed to by USWC and PTI, either in original form or as modified. The agreements between staff and USWC were worked out in the process of developing a stipulation. The agreements involving PTI are set out in PTI’s testimony and briefs. The discussion also sets out an agreement on billing and collection, a matter not the subject of a condition.

The discussion below is taken primarily from staff’s brief, supplemental staff testimony, and the stipulation.

Conditions pertaining to USWC

Condition 1(a): USWC to provide full accounting for the transaction to PUC within 90 days after the transfer.

USWC has agreed to this condition.

Condition 1(b): USWC to give 90 percent of the Oregon net intrastate gain to remaining customers of essential services as one-time credits on their bills. The credits should begin within 30 days after the date of the transfer.

Staff and USWC have agreed to a modification of this condition. USWC will reduce net intrastate rate base by an amount equal to 80 percent of the intrastate premium. USWC agrees to make a one-time $22.4 million intrastate depreciation expense accrual. The depreciation accrual shall be reasonably spread among accounts in proportion to the reserve deficiency that exists in plant accounts in the year the sale closes. This net reduction in the intrastate rate base produces an alternative way of achieving staff’s objective of ensuring that the remaining USWC customers receive a majority of the benefits of the acquisition premium.

Condition 1(c): USWC to amortize to regulated operating accounts the excess deferred taxes and unamortized investment tax credits related to the plants sold.

In the stipulation, staff and USWC have agreed to a modification of this condition. USWC will book the amounts of the taxes below the line. In addition, staff and USWC will jointly seek a private letter ruling from the Internal Revenue Service to determine if staff’s proposed above-the-line accounting would violate the IRS’s tax normalization rules.

Condition 1(d): USWC to change the AFOR benchmark to reflect the sale.

USWC has agreed to this condition in the stipulation. The effect will be that the revenue requirement will be adjusted from $454,189,000 to $443,445,433 for the calculation of revenue sharing, effective with the date of the close of the sale of the exchanges.

Condition 1(e): USWC to file new maps showing its remaining Oregon allocated territories within 30 days after the transfer.

USWC has agreed to this condition.

Conditions Pertaining to PTI

Condition 2(a): PTI to obtain the FCC’s study area waiver before the transfer and provide a copy of the approval to the PUC.