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HomeMy WebLinkAbout11 - Attachment 2A - ATT Case emailFrom: RHINEHART, DAN [mailto:dr3539@att.com] Sent: Thursday, June 4, 2015 1:04 PM To: Bob Mescher Cc: Michael Holley; Stephen Hollabaugh; Steven C. Gross; DI BENE, JOHN (Legal); Sullivan, Michael T.; PETERS, MARK A; KNEUSEL, GREG; RAY, TIM Subject: AT&T's Protest of $19 Pole Attachment Rate Adopted March 18, 2015 Bob Mescher Treasurer and Administrative Services Manager Truckee Donner Public Utility District 11570 Donner Pass Road Truckee, CA 96161 Dear Mr. Mescher, Thank you for the opportunity to provide you and the Board with an advance copy of materials I will cover at the June 8 Board of Directors meeting. Per our conversation, I understand I likely will be given approximately 15 minutes to make my presentation after which I may expect questions from the Board. The information below summarizes AT&T’s disputes with the development of the $19 pole attachment rate adopted by the Board on March 18, 2015. Please also find an Excel spreadsheet demonstrating AT&T’s analysis. I’m also including two PDF prints: 1) of the relevant FCC Pole Attachment rate formula and 2) the Excel spreadsheet. We would request that a copy of this message and the two PDFs be included in the Board pre -meeting packet. Finally, I am also including a PowerPoint deck that I would appreciate being able to present to the Board on Monday evening. Sincerely, Dan Rhinehart Director - Regulatory Dallas, TX 75202 (214) 782-7110 Background The pole attachment agreement of 1937 between AT&T and the District was terminated effective October 31, 2014. On December 18, 2014, the District informed AT&T that the annual rate per foot of pole attachment would be $28.84. On February 9, 2015 AT&T identified certain issues with the development of the $28.84 rate and the District subsequently prepared a revised rate of $19 per foot of pole per year. AT&T filed its statutorily required Notice of Protest and first request for documents on April 15, 2015. AT&T requested additional documents on May 12 and May 27. Responses to our document requests were received on April 24, April 28, May 22 and May 29. It is AT&T’s position that the $19 rate does not comply with California Public Utilities Code Section 9512 and we propose an alternative rate that does conform to statute. It is AT&T’s sincere hope that we will be able to resolve our disputes about the appropriate pole attachment rate. Points of Agreement We have several points of agreement in this matter. First, AT&T and the District agree on the basic formula to be used in developing the pole attachment rate. The formula comes from an FCC pole attachment order from 2001. [See: Decision FCC 01-170 in CS Docket 97-98, Appendix D-2, Adopted May 22, 2001, Released May 25, 2001] The FCC formula utilizes the Federal Energy Regulatory Commission (FERC) accounting structure which is used by the District. AT&T and the District also agree that the books of account should be the starting point for rate computations and that Sections 9510 to 9519 of the California Public Utilities Code apply to setting pole attachment rates by the District. The FCC Formula Components The FCC formula has four fundamental components – an Occupied Space Factor, a Net Pole Investment element, an Adjustment Factor, and the Carrying Charge Rate. The Occupied Space Factor is developed on the rebuttable presumptions that an attachment will occupy one foot out of a total of 13.5 feet of usable space. These presumptions are also in the California Public Utilities Code. There is no dispute over this item. The Net Pole Investment reflects gross pole investment in Account 364 less accumulated depreciation from Account 108 and a reduction for Accumulated Deferred Income Taxes (when applicable). The majority of the disagreement between AT&T and the District relates to this item. The Adjustment Factor is used to recognize that the cost of crossarms and other non -pole investment is recorded in the pole account and is therefore excluded from the rate development for pole attachments. There is no dispute over this item. The final component of the pole attachment rate development is the Carrying Charge Rate which is itself made up of: an Administrative Element, a Maintenance Element, a Depreciation Element, a Taxes Element and a Return Element. There is no dispute between AT&T and the District with respect to the expense components (numerators) of the first three items. The Tax Element is not applicable to the District. There is disagreement between us regarding the investment denominators of the Administrative Element, the Maintenance Element, and the Depreciation Element. We also differ on the correct components of the Return Element. Points of Disagreement Pole Investment – GASB 33 Implementation / GASB 34 Restatement Our first area of concern is with the modification of booked pole investment. The simplest approach would be to use the books of account as recorded and reported in the financials of the District. However, in its March 18, 2015 rate development the District computations restate the value of poles on the books ostensibly based on Governmental Accounting Standards Board (GASB) Statement 33 and possibly GASB 34. It is our understanding that GASB 33 requires that capital contribut ions be treated as an addition to net income and therefore an increase in net assets. The plant constructed with the contributions are to be shown on books of account at cost and are fully depreciable. The limited portions of District financial reports we have received suggest that GASB 33 has been followed by the District since at least 2001. That is, assets were recorded at cost and District profits (shown as “Change in Net Assets”) were increased by the amount of capital contributions. GASB 34 established new financial reporting requirements for state and local governments. GASB 34 went into effect for various governments for fiscal years beginning after June 15, 2001, 2002 or 2003, depending on the level of entity revenues received in the first fiscal year ending after June 15, 1999. Early implementation in concert with implementation of GASB 33 was encouraged. The introduction and summary of GASB 34 states in relevant part: Prospective reporting of general infrastructure assets is required at the effective dates of this Statement. Retroactive reporting of all major general governmental infrastructure assets is encouraged at that date. For phase 1 and phase 2 governments, [those with total annual revenues of $100 million or more, and with total annual revenues of $10 million or more but less than $100 million, respectively] retroactive reporting of all major general infrastructure assets is encouraged at that date. For phase 1 and phase 2 governments, retroactive reporting is required four years after the effective date on the basic provisions for all major infrastructure assets that were acquired or significantly reconstructed, or that received significant improvements, in fiscal years ending after June 30, 1980. Phase 3 governments [with total annual revenues of less than $10 million] are encouraged to report infrastructure retroactively, but may elect to report general infrastructure prospectively only. And paragraph 149 of the GASB 34 text states: If determining the actual historical cost of general infrastructure assets is not practical because of inadequate records, governments should report the estimated historical cost for major general infrastructure assets that were acquired or significantly reconstructed, or that received significant improvements, in fiscal years ending after June 30, 1980. The March 18 rate development was based on a retroactive upward restatement of only pole investments back to 1960. No other asset values were restated. However, if the District would have been considered to be a phase 3 government under GASB 34 (i.e., total revenues under $10 million in the first fiscal year ending after June 15, 1999) and it exercised its option to not restate historical values for all of its assets, now is not the time to selectively restate only pole investment for the sole purpose of setting attachment rates. Exclusion of the restatement of pole investments from the computation of the pole attachment rate would lower the adopted $19 rate by $11.92. Pole Investment – Recognition of Capital Contributions Beyond the concerns with a partial and untimely GASB 34 restatement, the restatement conflicts with requirements of California Public Utilities Code Section 9512(a)(3) which states in pertinent part: The basis for the computation of annual capital costs [investments] shall be historical capital costs less depreciation. The accounting upon which the historical capital costs are determined shall include a credit for all reimbursed capital costs. This part of the Public Utilities code requires, at least for poles, the exclusion of any GASB 34 restatements as well as a reduction in booked pole investments under GASB 33 equal to the amounts of Capital Contributions attributable to poles. AT&T estimates that implementation of the Section 9512(a)(3) requirement would reduce the pole attachment rate by $2.77. While not required by Code Section 9512(a)(3), an adjustment should also be made to reflect capital contribution offsets for all other classes of plant. Because of the interaction of pole investment and other investment values used in the pole attachment rate formula, this change would increase the pole attachment rate by $1.09. Construction Work In Progress Our second area of concern in the pole attachment rate development relates to the inclusion of Construction Work In Progress (CWIP) in the asset base of the Administrative Element. Utility ratemaking allows only “used and useful” plant to be included in rate base. CWIP is not generally considered to be “used and useful” and the California Public Utilities Commission does not allow CWIP in the rate base. The District’s March 18 rate development includes CWIP and thereby increases the value of the denominator of the Administrative Factor. The resulting Administrative Factor is smaller than it should be and the pole attachment rate is understated by $0.13. Required Return Element Our third area of concern is that of the Required Return Element. California Public Utilities Code Section 9510(c) states that local publicly owned electric utilities should provide access to utility poles and support structures with a recovery of actual costs without subsidizing for-profit cable television corporations, video service providers, and telephone corporations. Pole Attachment rates should be set to provide the utility a reasonable opportunity to earn a fair return on its investment such that the utility’s other customers are not subsidizing attaching entities. One way of ensuring this outcome is setting an appropriate rate of return. The District’s achieved operating margin on net utility plant in 2012 and 2013, was 9.60% and 5.41%, respectively, producing a two-year average of 7.48%. Setting a rate of return for the pole attachment rate of approximately 7.50% would provide a return on investment comparable to the Operating margin earned by the District from all of its customers and attachers would not be subsidized. However, that an achieved rate of return does not necessarily equate to a reasonable required rate of return. The FCC default input for the Return Element is 11.25%. But, for states like California that have assumed jurisdiction over pole attachment rates, a rate of return based on the utility’s most recent Commission-authorized rate of return is typically used. Since the District does not have a CPUC regulated rate of return, we can look to proxy rates adopted by the CPUC for other companies. In December of 2012, the CPUC adopted 2013 rates of return for four large investor owned companies that provide power to their customers. (See decision D12 -12- 034.) The authorized rates were: PG&E 8.06%, Edison 7.90%, SDG&E 7.79%, and SoCalGas 8.02%. These rates of return incorporate the weighted average cost of debt and equity of the firms; no separate “required rate of return” and “cost of borrowing” components are necessary. Yet, the District is different from investor owned utilities in two major respects. First, the District does not have shareholders per se. Its capital needs are largely funded through rates and development or connection fees. Its cost of equity could be seen as zero. Second, the District shows no long term debt incurring interest that shows up on the income statement. Based on these facts, it could be argued that the Districts “required” rate of return is near zero. Nevertheless, and for purposes of reaching an agreement with the District, AT&T has used an 8.00% rate of return which would generate a pole attachment rate slightly above one computed based upon recent District results of operations but $1.58 below the level that would be produced using the 14% combined rate of return and cost of borrowing included in the adopted $19 rate. Rate Rounding Our fourth and final area of concern is rate rounding. The rate development computations that accompanied the adopted $19 rate actually produced an unrounded rate of $18.64. There is no basis in the statute for rounding the rate up. Indeed, California Public Utilities Code Section 9512(a)(1) states that the rate “shall not exceed” the amount determined by the rate development formula. The $19 rate is overstated by $0.16 due to rate rounding. Summary AT&T and the District have several areas of agreement. Where there are areas of disag reement AT&T recommends alternatives that meet the statutory requirements of California Public Utilities Code with particular emphasis on pole investment. Inclusion of Construction Work In Progress in the asset base is not consistent with normal ratemaking and, in fact, causes the computed pole attachment rate to be understated. Use of 8.00% for the Required Return Element would ensure that the District is not subsidizing attaching entities at the expense of its other ratepayers and is offered for purposes of reaching an agreement with the District. Rounding rates above identified cost is contrary to statute. Therefore, a revised rate should be adopted rounded only to the nearest penny. AT&T’s balanced approach cuts both ways, reducing the adopted rate in some instances and increasing it in others. AT&T’s rate development analysis provided herewith demonstrates that the correct statutory pole attachment rate offered by the District should be $3.79 per foot of space occupied and we ask that this rate be adopted. Summary Rate Development March 18, 2015 Approved Rate $ 19.00 Remove GASB 33/34 Effects $(11.92) Recognize Pole Capital Contributions $( 2.77) Recognize Other Capital Contributions $ 1.09 Remove Construction Work in Progress $ 0.13 Set Required Rate of Return to 8.00% $( 1.58) Eliminate Rate Rounding $( 0.16) Corrected Statutory Pole Attachment Rate $ 3.79 This email and any files transmitted with it are AT&T property, are confidential, and are intended solely for the use of the individual or entity to whom this email is addressed. If you are not one of the named recipient(s) or otherwise have reason to believe that you have received this message in error, please notify the sender and delete this message immediately from your computer. 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