ORDER NO. 96-275

ENTERED OCT 17 1996

This is an electronic copy.

BEFORE THE PUBLIC UTILITY COMMISSION

OF OREGON

UT 127

DISPOSITION: STIPULATION ADOPTED; TARIFFS APPROVED

Procedural Background

On March 12, 1996, Cascade Utilities, Inc. (Cascade), filed Advice No. 115, a general tariff revision designed to increase local exchange rates to its Oregon customers, to be effective May 1, 1996. The proposed rate increase would increase Cascade’s local annual revenues approximately $381,000, or 16 percent.

Cascade is a small telecommunications utility with less than 15,000 access lines and is generally exempt from regulation under ORS 759.040. After publication of the proposed rate increase, however, Cascade’s customers petitioned the Commission to investigate the proposed tariff changes pursuant to ORS 759.040(6). At the April 30, 1996, public meeting, the Commission suspended Cascade’s tariffs for a period of six months beginning May 1, 1996. See Order No. 96-110.

Prehearing Conference

On June 12, 1996, the Commission held a prehearing conference to identify parties and interested persons, and establish a procedural schedule. The Citizens’ Utility Board of Oregon (CUB) filed a timely notice of intervention.

Public Comment Hearings

On October 8 and 10, 1996, Michael Grant, an Administrative Law Judge (ALJ) for the Commission, held public comment hearings in Elkton and Estacada, respectively. At each hearing, Dave Booth, a member of the Commission Staff (Staff), made an informal presentation explaining the Commission’s role in the proceeding, as well as the terms of the proposed rate schedules and other aspects of the filing. Other representatives from Staff and Cascade also appeared to answer questions from the public.

Stipulation and Evidentiary Hearing

After an extensive review of Cascade’s filing and a series of settlement discussions, Staff entered into a stipulation with Cascade to resolve all outstanding issues of this proceeding, subject to Commission approval.

Staff and the company presented the stipulation and supporting testimony at an evidentiary hearing on October 11, 1996, before ALJ Grant. At the hearing, the following appearances were entered: Paul A. Graham, Assistant Attorney General, on behalf of Staff; Richard A. Finnigan, Attorney at Law, on behalf of Cascade; and Jason Eisdorfer, Attorney at Law, on behalf of CUB. All stipulations and supporting testimony were entered into the record of this proceeding as evidence pursuant to OAR 860-014-0085(1).

FINDINGS OF FACT AND DISCUSSION

Cascade Utilities, Inc.

Cascade serves approximately 8,900 access lines in nine local exchanges located throughout the state. Its current residential access line rates vary from one exchange to another. Single-party flat-rate residential rates with Touch-tone service are $8.65 in the Corbett and Estacada exchanges, $8.70 in the Elkton and Scottsburg exchanges, $8.75 in the Ash Valley,

Mt. Hood Meadows and Ripplebrook exchanges, and $12.52 in the Haines and Medical Springs exchanges. The company’s current basic business service with Touch-tone similarly varies between exchanges, ranging from a low of $18.15 per month in Ash Valley, Elkton, Mt. Hood Meadows, Ripplebrook and Scottsburg, to a high of $23.75 per month in Corbett and Estacada.

Proposed Rate Schedules and Staff Review

In this proceeding, Cascade requests a revenue increase of $380,803 per year. The company calculated its proposed rate increase based on a 1996 test year, utilizing financial data from its 1996 Oregon Customer Access Filing. Staff has reviewed the test year projections and examined, among other things, cost of capital, officer compensation, depreciation expense, affiliated interest transactions, changes in extended area service, plant investment, and tax issues.

Staff concluded that Cascade’s total revenue projections were reasonable. The company properly excluded a portion of officers’ compensation to comply with the Commission’s guidelines for small telecommunications utilities. It also used depreciation rates that meet the Commission’s guidelines in Order 95-614. Moreover, the company used reasonable billing practices for affiliated transactions.

Staff did, however, make five normalizing adjustments to the 1996 test year:

Interest Deduction. Staff substituted interest coordination for Cascade’s interest and debt refinancing costs for income tax purposes. The interest coordination adjustment substitutes for recorded taxable income adjustments (IRS Schedule M) for interest and other debt costs. Staff’s adjustment is based on Staff’s proposed capital structure. To compute the amount of allowable interest, Staff multiplied net rate base by its proposed weighted cost of debt of .496 percent.

 

PUC Fee. Staff made an adjustment to reflect a change in the Commission fee assessed on utilities. Staff believes that the fee will increase by .05 percent (from .20 to .25 percent) for assessments due on and after April 1, 1997.

 

Income Taxes. Staff included the effects of periodic state income tax refunds under ORS 291.349, the so-called "2 percent tax kicker" provision. The state has issued such refunds for the years 1983-89 and 1994-95. The average annual refund has been 4.97 percent, which reduces the effective tax rate from 6.6 to 6.27 percent.

 

Switching Costs. Staff allocated specific central office switching and outside plant expenses from Cascade to Trans-Cascades Telephone Company. These costs relate to recent plant conversions for centralized switching through Estacada.

 

EAS Conversion. Staff included an adjustment for the EAS conversion that occurred October 5, 1996.

 

Staff also compared Cascade’s total Oregon operations with: (1) six Oregon companies with a similar number of access lines; and (2) PTI Communications, Inc. Compared to these seven utilities, Cascade’s revenues, costs and rate base were reasonable, while its earned rate of return was low.

Stipulation

Staff and Cascade engaged in a number of settlement conferences, which resulted in the submission of a stipulation and supporting exhibits. These documents are attached to this

order as Appendix A and incorporated by reference. CUB did not enter into the stipulation, but does not object to its filing.

Under the terms of the stipulation, Staff and Cascade agree that the company should be entitled to increase its local annual revenues approximately $380,800, based on an adjusted 1996 test year. The overall rate of return produced by this increase will be approximately 7.12 percent.

Staff and Cascade also stipulated to the rate design proposed by the company, with minor adjustments. Under the stipulated design, single party residential rates would increase to a consolidated uniform rate of $13.00 per month. Basic business rates would increase to a consolidated uniform rate of $25.40 per month. Both rates would incorporate the separate fee previously charged for Touch-tone service. The stipulated rate design also increases off-premises extension rates and reduces the Public Access Line (PAL) rates. These pricing adjustments better reflect the economic cost of providing these services.

Regulatory Status

ORS 759.040 exempts small telecommunications utilities, such as Cascade, from rate regulation and procedures set forth in ORS 759.180 and 759.190. The Commission, however, may revoke such an exemption upon petition of 10 percent or 500, whichever is the lesser, of the utility’s customers requesting regulation. See ORS 759.040(6).

In this case, Cascade’s customers petitioned the Commission to investigate the proposed tariff changes. After its review, however, Staff does not believe that the Commission should retain regulatory oversight of Cascade’s local rates. The company’s recorded results appear reasonable, and it has been following Commission rules. It does not appear from the investigation that continued regulation of Cascade is required by the public interest.

CONCLUSIONS

The Commission has reviewed the stipulation and finds that the stipulated revenue requirement adjustments fair and reasonable. Based on the evidence presented, it is clear that Cascade should be allowed to increase rates for telephone service to recover an additional $380,800 annually. The stipulated return on common equity of 7.53 percent and an overall rate of return of 7.12 percent are reasonable. The rates developed in accordance with the findings expressed herein are fair, just, and reasonable. The stipulation is adopted in its entirety.

We also agree with Staff’s recommendation that the public interest does not require continued regulation of Cascade. The company’s recorded results are reasonable, and it has been following Commission rules and guidelines.

ORDER

IT IS ORDERED that:

The revised tariff schedules filed by Cascade Utilities on March 12, 1996, are permanently suspended.

 

Cascade Utilities may file revised tariffs increasing its annual revenues in Oregon by $380,800, effective November 1, 1996. The rates and schedules shall conform to the terms and conditions of the Stipulation and of this Order.

 

The Stipulation offered by the parties is accepted and the rate spread proposed is adopted.

 

Cascade Utilities shall remain an exempt telecommunications utility under ORS 757.870.

 

 

Made, entered, and effective _________________________.

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 service of this order. The request must comply with the requirements of OAR 860-014-0095. A copy of any such request must also be served on each party to the proceeding as provided by OAR 860-013-0070. A party may appeal this order to a court pursuant to ORS 756.580.