1 2 3 4 5 BEFORE THE PUBLIC UTILITIES COMMISSION 6 OF THE STATE OF CALIFORNIA 7 8 9 In the Matter of Application of Calaveras Telephone Company (U 1004 C) to Review A. _____________ 10 Intrastate Rates and Charges, Establish a New Intrastate Revenue Requirement and Rate 11 Design, and Modify Selected Rates 12 13 OPENING TESTIMONY OF 14 DALE E. LEHMAN ON BEHALF OF CALAVERAS TELEPHONE COMPANY 15 October 3, 2016 16 17 18 19 20 21 22 23 24 25 26 27 28 1081425.1 1 1 Q.1. Please state your name and business address. 2 A.1. My name is Dale E. Lehman and my business address is 5 Whitetail Ct., Galena, IL 3 61036. 4 Q.2. By whom and in what capacity are you employed? 5 A.2. I am a Professor of Business Administration and Associate Director of the Center 6 for Business Analytics at Loras College in Dubuque, Iowa. However, my testimony reflects my 7 personal views, not those of Loras College. 8 Q.3. Please summarize your education, background, and experience in the 9 telecommunications industry. 10 A.3. I have a B.A. in Economics from SUNY Stony Brook, and a Master’s degree and 11 Ph.D in Economics from the University of Rochester. I have published extensively in the areas of 12 telecommunications regulation, demand, and cost modeling. I served as Member of Technical 13 Staff at Bellcore for two years and was Senior Economist at Southwestern Bell Telephone 14 Company for one year. I directed the MBA in Telecommunications Management program at 15 Alaska Pacific University for 12 years. My curriculum vitae is attached to my testimony as 16 Exhibit A. 17 Q.4. Have you previously testified before the California Public Utilities 18 Commission? 19 A.4. Yes, I filed Opening and Reply testimony in docket R-11-11-007, the proceeding 20 addressing potential adjustments to the California High Cost Fund A ("CHCF-A") program. I also 21 sponsored rebuttal testimony in A.11-12-011, the rate case for Kerman Telephone Co., and offered 22 opening and rebuttal testimony in the rate cases for Siskiyou Telephone Company (A.15-12-001) 23 and Volcano Telephone Company (A.15-12-002) during 2015 and 2016. 24 Q.5. What is the purpose of your Opening Testimony? 25 A.5. I address two specific ratemaking issues to be resolved in Calaveras Telephone 26 Company’s (“Calaveras”) rate case: first, the setting of basic residential rates within a pre-defined 27 “range of reasonableness” from $30.00 to $37.00 derived from D.14-12-084, and second, the 28 application of the FCC cap on corporate operations expense to Calaveras. 1081425.1 2 1 Regarding the reasonable rate level, the Commission has determined that the basic 2 residential rate for companies receiving California High Cost Fund A (“CHCF-A”) support should 3 be in the range of $30 to $37 per month, inclusive of certain fees and surcharges. However, the 4 Commission relies on the record in individual company rate cases to determine where end user 5 rates should fall within that range. With reference to affordability factors, income data, and 6 information to put the proposed rates in perspective nationally, I explain why the lower end of this 7 range is appropriate for the area served by Calaveras. 8 Regarding the application of the FCC cap on corporate operations expense, the 9 Commission adopted the FCC Cap as “a rational mechanism for calculating and determining a 10 reasonable level of corporate expenses” for those Small Incumbent Local Exchange Carriers 11 receiving funds from the CHCF-A (D.14-12-084, pages 28-29). The Commission provided 12 carriers with the opportunity in their General Rate Case applications to rebut the presumption that 13 the FCC cap should apply to their intrastate corporate expenses, and further, the Commission 14 declined to prescribe the factors used to rebut that presumption. While Calaveras’s projected 2018 15 test year corporate operations expense, including rate case expense, does not exceed the FCC’s 16 cap, I believe my testimony on this topic is still relevant in this proceeding. I provide a number of 17 factors that demonstrate that the unmodified FCC cap provides an unreasonably low benchmark 18 with which to compare Calaveras’s actual corporate operations expense. I then provide the 19 modifications necessary to make the FCC cap a more realistic benchmark, indicating that 20 Calaveras’s projected corporate operations expenses, including rate case expenses, are even 21 further below the FCC’s cap as modified. 22 I then address the issue of cost recovery for rate case expenses, and explain why these 23 expenses are not included within the FCC cap. Rate case expenses are analytically separate from 24 the general corporate expenses that inform the corporate expense cap. It would be inappropriate 25 for the Commission to foreclose or limit these expenses by treating them as subject to any 26 corporate expense cap. 27 Q.6. Please summarize your Opening Testimony. 28 A.6. I offer evidence concerning income levels in the area served by Calaveras, and 1081425.1 3 1 these data demonstrate that Calaveras is in a low-income area in which rates should be as low as 2 reasonably possible. Median household income in Calaveras’s territory is approximately 44% 3 lower than the rest of California, and poverty rates are 39% higher. More detailed tax return data 4 shows that the average tax return filed in Calaveras’s territory has adjusted gross income barely 5 over half of the average for the State. Given these comparisons, the $30 benchmark rate is itself 6 above reasonable standards of affordability, so even the bottom of the “range of reasonableness” 7 may not be reasonable for Calaveras’s customer base. The $37 rate would place Calaveras’s rates 8 among the highest in the nation. I recommend that the $30 rate be adopted for Calaveras, 9 inclusive of the fees and surcharges used to calculate the FCC’s Residential Rate Ceiling, which is 10 the benchmark used to determine the level of the federal Access Recovery Charge (“ARC”). 11 I explain why the unmodified FCC corporate expense cap is not an appropriate benchmark 12 for Calaveras – it is unrealistically low. The FCC has acknowledged some errors in its original 13 cap, and as a result, I show that several errors remain in the FCC cap. These can be corrected and 14 I provide these corrections. Briefly, the unmodified cap is partially based on erroneous data due to 15 inclusion of a number of acquired study areas that report arbitrary splits of corporate operations 16 expenses as if there were two separate study areas, inappropriate comparisons with a number of 17 study areas operated by large national carriers (who have centralized corporate operations), and 18 failure to adjust for occupational wage levels and regulatory intensity that are relevant to 19 Calaveras’s operations and should be included within the cap. As a result, the unmodified cap of 20 $35.14 per loop per month should be $49.99. Calaveras’s projected actual corporate operations 21 expenses for 2018 are $33.90 per loop per month – just below the FCC cap, but far below the 22 more appropriate corrected cap. 23 Further, I explain why the FCC cap does not include rate case expenses. The FCC cap is 24 based on data from rural study areas in the country,1 the vast majority of which did not have rate 25 cases in 2009 (the year the FCC model is based on). This account data (FCC Part 32 account 26 1 As I explain in Exhibit B, not all rural study areas are included and some study areas are counted 27 twice. 28 1081425.1 4 1 6720) is then related to the number of loops in order to derive a “reasonable” relationship of 2 corporate operations expense per loop to the number of loops. So, the relationship that is 3 established does not account for rate case expenses. These necessary and unavoidable expenses 4 need to be recovered separately. 5 Q.7. What guidance does the Commission provide for determining the benchmark 6 local rate to be used in a rate case? 7 A.7. The Commission has determined that, in their next rate cases, companies who rely 8 on CHCF-A support must seek adjustments to their basic residential rates to place those rates 9 within a predetermined range of reasonableness from $30 to $37 per month, inclusive of federal 10 and state fees and surcharges.2 The Commission found the historical benchmark of 150% of 11 AT&T rates could not be used to determine reasonable rates because AT&T’s rate design is no 12 longer subject to a regulatory reasonableness review. Instead, the Commission established the 13 range of $30 to $37 per month, with the exact rate applicable to each company to be decided in 14 their rate cases. The range was to balance two objectives: it “avoids excessive draws on the A- 15 Fund and meets the urban/rural rate comparability criterion.”3 The Commission did note that the 16 $30 floor is equivalent to the ceiling adopted by the FCC as reasonable. Beyond this, the 17 Commission cites the unique role played by rural carriers in achieving universal service goals, 18 their important role in addressing wildfire danger, and the higher cost to provide service in rural 19 areas, some of which must be borne by their customers.