Ducor Telephone Co. v. Public Utilities Commission CA5

Filed 11/3/26 Ducor Telephone Co. v. Public Utilities Commission CA5 NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication or ordered published for purposes of rule 8.1115. IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA FIFTH APPELLATE DISTRICT DUCOR TELEPHONE COMPANY, F091283 Petitioner, (Dec. Nos. 25-08-010 & v. 26-02-028) PUBLIC UTILITIES COMMISSION, OPINION Respondent; PUBLIC ADVOCATES OFFICE OF THE PUBLIC UTILITIES COMMISSION OF THE STATE OF CALIFORNIA, Real Party in Interest. ORIGINAL PROCEEDINGS; petition for writ of review. BRB Law, Patrick M. Rosvall, Chan Q. Vu and Grace A. Amato for Petitioner. Christine Hammond, Sophia J. Park and Tovah Trimming for Respondent. No appearance for Real Party in Interest. -ooOoo- Petitioner Ducor Telephone Company (Ducor) filed this original proceeding to obtain judicial review of the final decision by the Public Utilities Commission (Commission) on its 2023 general rate case application. Ducor contends the Commission committed several legal errors when it used an original cost methodology, rather than a fair market value methodology, to determine the value of the assets in Ducor’s rate base. Rate base is a component used in determining Ducor’s annual intrastate “revenue requirement.” (Pub. Util. Code, § 275.6, subd. (b)(5).) 1 Ducor contends the understatement of its rate based caused a $129,627 shortfall in its revenue and that shortfall should be offset by increased subsidies from the California High Cost Fund A program (A-Fund). The Commission argues the original cost methodology was appropriate under the circumstances because the fair market value methodology artificially increased the value of the assets included in the rate base. The Commission regards the increase as artificial because it is due solely to accounting adjustments made after a transfer of the control and ownership of Ducor and not a change in the plant or other assets dedicated to public use. We conclude the Commission’s use of the original cost methodology did not (1) violate its own rules, (2) misinterpret or misapply the applicable statutory provisions, or (3) take Ducor’s property in violation of its constitutional rights. Also, the Commission did not act contrary to the weight of the record evidence. We therefore deny Ducor’s petition for a writ directing the Commission to nullify its decision in Ducor’s general rate case. BACKGROUND Ducor does business as Varcomm and serves approximately 650 access lines in its three telephone exchanges: Ducor (Tulare County), Rancho Tehama (Tehama County), and Kennedy Meadows (Tulare County). Ducor’s internet service provider affiliate, Varcomm Broadband, Inc., supplies retail broadband service throughout Ducor’s territory 1 Undesignated statutory references are to the Public Utilities Code. 2. and other areas within California. 2 Ducor, Varcomm Broadband, Inc., and five other companies are owned by the same holding company. Ducor is a “telephone corporation” as that term is defined in section 234 and, thus, is a “public utility” (§ 216, subd. (a)(1)) subject to the jurisdiction and regulation of the Commission. As a carrier of last resort, Ducor “is required to fulfill all reasonable requests for service within its service territory.” (§ 275.6, subds. (b)(1).) In addition, Ducor is one of 10 “small incumbent local exchange carriers or small ILECs” (Calaveras Telephone Co. v. Public Utilities Com. (2019) 39 Cal.App.5th 972, 976 (Calaveras ‘19)) that participate in the A-Fund. The A-Fund is a state subsidy program developed to defray some of the cost of providing affordable telephone service in rural and sparsely populated areas. (See Calaveras Telephone Co. v. Public Utilities Com. (2022) 87 Cal.App.5th 793, 797, 799 (Calaveras ‘22); § 275.6.) The program’s purpose is “to promote the goals of universal telephone service and to reduce any disparity in the rates charged by those companies.” (Stats. 2008, ch. 342, § 2, p. 2646.) California’s universal service goal is to provide affordable, safe, and reliable basic telephone service to at least 95 percent of all households in the state. (Calaveras ’19, supra, 39 Cal.App.5th at p. 976.) The money in the A-Fund is from surcharges authorized by the Commission and assessed to all California telephone customers. (§ 275, subd. (b); Calaveras ’22, supra, at p. 797.) Change of Ownership In 2021, Ducor submitted an application to the Commission requesting approval of a transfer of ownership and control. In November 2021, the Commission approved the transfer, stating it “will retain the same regulatory authority over [Ducor’s parent corporation] and Ducor that it currently possesses.” In December 2021, the transaction 2 This proceeding addresses issues relating to Ducor’s intrastate telephone service and does not involve issues relating to the broadband service provided by its affiliate. 3. was completed, and Eric N. Votaw, Ducor’s chief executive officer, and Jenifer Vellucci, its chief financial officer, became Ducor’s new owners. They controlled 55 percent and 45 percent of the parent corporation, respectively. The Commission’s approval of the transfer made no determination regarding the ratemaking treatment of Ducor’s rate base. The transfer of control changed how Ducor’s federal regulator, the Federal Communications Commission (FCC), valued the assets in Ducor’s rate base, which affected the amount of Ducor’s federal subsidy. In its role of regulating interstate telecommunications carriers, the FCC has adopted a Uniform System of Accounts (USOA), which is contained in part 32 of title 47 of the Code of Federal Regulations. In 2017, the FCC made significant revisions to the USOA to align its asset accounting rules with generally accepted accounting principles (GAAP). (See 82 Fed.Reg. 20833–20843 (May 4, 2017).) The revisions significantly streamlined the requirements applied to ILEC’s and reduced their accounting burdens. The FCC stated it did “not anticipate any significant rate effects resulting from these efforts to further align the USOA with GAAP principles.” (82 Fed.Reg., supra, at p. 20837.) The USOA provision of interest in this case states: “Property, plant and equipment acquired from an entity, whether or not affiliated with the accounting company, shall be accounted for at original cost, except that property, plant and equipment acquired from a nonaffiliated entity through an acquisition or merger may be accounted for at market value at the time of the acquisition or merger.” (47 C.F.R. § 32.2000(b)(1), italics added.) Accordingly, as a result of the transfer of control, the exception in the foregoing regulation permitted—but did not require—Ducor to revalue its assets using the fair market value methodology. Ducor elected to use that methodology in the rate base 4. calculations for its 2021, 2022, and 2023 National Exchange Carrier Association’s (NECA) 3 cost studies and the NECA accepted that election. The financial statements prepared by Ducor’s independent accountants for the years ended December 31, 2022, and 2021, included a note describing the change of control and the accounting election made by Ducor. Note 2 to the financial statements reads in part: “Upon the change in control of [Ducor’s] Parent, [Ducor] elected to apply pushdown accounting as a wholly owned subsidiary, establishing a new basis of accounting using the Parent’s basis under the acquisition method of accounting. A bargain purchase was recorded in connection with the transaction as Additional Paid in Capital and represents the fair value of assets and liabilities in excess of the fair value of the Parent’s investment in [Ducor].” A table in “Note 2” listed the fair value of the parent company’s investment in Ducor ($10,544,616) and the fair value (assets acquired minus liabilities assumed) of Ducor at the acquisition date ($12,014,070). The difference between the two—that is, the resulting bargain purchase—was $1,469,454. Ducor’s General Rate Case Application The Commission’s basic approach to rate making takes a test year and estimates the revenues, expenses, and investment for that year. (Calaveras ’19, supra, 39 Cal.App.5th at p. 977.) In accordance with the Commission’s rules, a small ILEC’s general rate case (GRC) application is filed two years before the test year. (Ibid.) Rate 3 The NECA is an independent organization established by the FCC “ ‘to prepare and file access charge tariffs on behalf of all telephone companies that do not file separate tariffs.’ ” (National Exchanges Carrier Association, Inc. v. F.C.C. (D.C.Cir. 2001) 253 F.3d 1, 2, quoting 47 C.F.R. § 69.601(a).) The Commission describes the NECA as “an independent association that performs certain administrative, tariffing, and interstate ratemaking functions on behalf of the Federal Communications Commission. [Citations.] Among other duties, NECA collects cost information from rural telephone companies for use in computing interstate revenue requirements and determining the extent of a company’s needs for federal high-cost support. (See 47 C.F.R. § 54.1305; GRC Matters at 33-34.)” 5. cases are submitted every five years. (Volcano Telephone Co. v. Pub. Utilities Com. (2025) 109 Cal.App.5th 701, 710.) The term “general rate case application” may suggest that a small ILEC’s most important income source is the rates the Commission authorizes it to charge its customers. However, in Ducor’s case, the much larger sources of income (almost 90 percent) are its federal and A-Fund subsidies. (See fn. 8, post.) In October 2023, Ducor filed a GRC application with a 2025 test year (Application). The Application asked the Commission to review and adjust Ducor’s intrastate revenue requirement and rate design. In November 2023, the Public Advocates Office (Cal Advocates), an independent organization within the Commission, filed a protest raising a variety of issues. 4 Administrative proceedings on a GRC application and protest are overseen by the commissioner assigned to lead the case (including setting its scope and schedule) and by an administrative law judge, who serves as the hearing officer for the formal proceedings and prepares a draft decision. Here, the administrative law judge held a prehearing conference in January 2024, the assigned commissioner issued a scoping memo and ruling in March 2024, and the public participation hearing was held later that month. After a further exchange of information, the assigned commissioner released an amended scoping memo and ruling that enumerated 12 issues. One issue was the level of revenue requirement necessary to provide Ducor with sufficient revenue and earnings allowing its operations to deliver safe, reliable, high-quality voice communication services. Components of the revenue requirement included corporate and operating expenses, tax liabilities, depreciation expenses, and a reasonable return on the rate base. Other issues involved the sources of income for meeting the revenue requirement (i.e., covering the 4 Cal Advocates’ responsibilities are set forth in section 309.5, which directs it “to represent and advocate on behalf of the interests of public utility customers and subscribers” and states Cal Advocates’ goal “shall be to obtain the lowest possible rate for service consistent with reliable and safe service levels.” (Id., subd. (a).) 6. business’s costs and providing a reasonable return on its investment). The income-source issues included the rates Ducor would be authorized to charge its customers and the amount of Ducor’s A-Fund subsidy. After the amended scoping memo and ruling was issued, the proceedings included evidentiary hearings before the administrative law judge, rulings on Ducor’s motions to strike testimony of Cal Advocate’s witnesses, and the submission of opening and reply briefs. Ducor’s 76-page opening brief argued, among other things, that the value of the assets in its rate base must reflect the updated fair market value from its recent bargain purchase, consistent with Financial Accounting Standards Board Accounting Standard Codification (ASC) 805. Ducor asserted (1) the 2021 transfer of control was between nonaffiliates at a mutually agreed price; (2) the transfer triggered a revaluation of assets and corresponding bargain purchase adjustment; (3) two accounting firms had acknowledged these updates in asset valuation were appropriate under ASC 805; and (4) the NECA had accepted the valuation updates. Ducor argued that to ensure compliance with D.21-06-004, which mandated the use of the NECA rate base amount, “the Commission must recognize the impact of the ASC 805 update in its rate base, depreciation, and tax calculations for Ducor’s 2025 test year.” Ducor’s opening brief described testimony and documents supporting the ASC 805 update and referred to a particular provision in ASC 805 that permitted an acquired entity “to ‘apply pushdown accounting in its separate financial statements’ to reflect the updated market value of the assets, which Ducor did.” In September 2024, the Commission issued a decision establishing a new cost of capital (i.e., rate of return) to be applied GRC applications of all small ILEC’s for test years 2023 through 2025. The new rate of return was 7.16 percent, down from the previously authorized rate of return of 9.09 percent. As a result, the parties filed updated papers incorporating the new rate of return into their ratemaking calculations. Ducor has not challenged the use of the 7.16 percent rate of return. 7.  In July 2025, the Commission issued a proposed decision (1) rejecting Ducor’s proposal to adjust its assets to their fair market value following the 2021 transfer of control and (2) adopting the original value approach for determining the value of Ducor’s assets within its rate base. After the parties submitted comments, the Commission issued a revised proposed decision. On August 22, 2025, the Commission formally issued Decision Approving Revenue Requirement, Rate Design and Selected Rates for Ducor Telephone Company for Test Year 2025 (Aug. 14, 2025) Cal.P.U.C. Decision No. 25-08-010 (D.25-08-010). It determined Ducor needed $2,544,993 in revenue to recover its operating expenses and taxes ($2,431,713) and to receive a reasonable return ($113,280) on its investment. Restated in statutory terms, the Commission determined Ducor’s reasonable operating “expenses and tax liabilities” were $2,431,713 and “a reasonable rate of return on its rate base” was $113,280. (§ 275.6, subd. (b)(5).) These amounts, when added together, established Ducor’s “ ‘revenue requirement’ ” was $2,544,993. (Ibid.) One component of operating expenses is depreciation of the assets constituting the telephone plant-in-service. The Commission noted the parties agreed on the methodology for calculating depreciation expense but disagreed on the value of the telephone plant-in-service. Ducor used fair market value, with a bargain purchase adjustment,5 for its proposed rate base value and to calculate its proposed depreciation expense. The Commission determined the original cost methodology “more appropriate” than Ducor’s fair market value methodology and valued Ducor’s rate base at $1,582,124, not the approximately $6.2 million proposed by Ducor. The Commission multiplied its rate base figure by the authorized rate of return of 7.16 percent, which generated the 5 Ducor asserts the bargain purchase adjustment ensures the assets were valued at the level they were purchased, not higher, and notes a market study showed the assets were worth more. 8. return on rate base of $113,280. Based on this and other calculations, the Commission concluded Ducor’s A-Fund “subsidy should be $1,661.087.” In September 2025, Ducor applied for a rehearing of D.25-08-010. In February 2026, the Commission issued Order Modifying Decision 25-08-010 and Denying Rehearing of the Decision, as Modified (Feb. 5, 2026) Cal.P.U.C. Decision No. 26-02- 028 (D.26-02-028). The Commission made minor modifications to D.25-08-010 and confirmed its use of the original value methodology to determine the value of Ducor’s rate base. Writ Petition In March 2026, Ducor initiated this original proceeding by filing a petition for writ review of D.25-08-010 and D.26-02-028. The petition requested a writ directing the Commission to annul the decisions and properly calculate the rate base governing Ducor’s going forward rates and subsidies. After the Commission filed an answer and Ducor filed its reply, we issued a writ of review stating the decisions would be reviewed by this court and a hearing would be set in a later order. The hearing was held and the matter submitted on October 14, 2026. DISCUSSION I. JUDICIAL REVIEW OF COMMISSION DECISIONS The Commission is a state agency of constitutional origin with far-reaching duties, functions and powers. (Cal. Const., art. XII, §§ 1–6; Center for Biological Diversity, Inc. v. Public Utilities Com. (2025) 18 Cal.5th 293, 301 (Center for Biological Diversity).) The Commission’s primary purpose is to supervise and regulate every public utility in California. (§ 701.) To perform this function, the Constitution has given the Commission broad authority, which includes the power to establish rules and procedures, fix rates, hold various types of hearings, and award reparations. (Center for Biological Diversity, supra, at p. 301; Cal. Const., art. XII, §§ 2, 4, 6.) The Legislature may grant the Commission “additional authority and jurisdiction” and may “establish the manner 9. and scope of review of commission action in a court of record.” (Cal. Const., art. XII, § 5; Center for Biological Diversity, supra, at p. 301.) A party aggrieved by the Commission’s final decision “may petition for a writ of review in the court of appeal or the Supreme Court” to have the lawfulness of the decision determined. (§ 1756, subd. (a).) Such a petition is the only means of obtaining judicial review of a decision by the Commission. (Pacific Bell Wireless, LLC v. Public Utilities Com. (2006) 140 Cal.App.4th 718, 728.) Before seeking judicial review, the aggrieved party must complete the administrative process by filing an application for rehearing and obtaining a final decision. (§ 1756, subd. (a).) The application for rehearing must raise each issue that the party intends to raise in its writ petition. (§ 1732.) In other words, the aggrieved party must exhaust its administrative remedies. Because the Commission is a constitutional body with broad legislative and judicial powers, its decisions are presumed valid. (The Ponderosa Telephone Co. v. Public Utilities Com. (2019) 36 Cal.App.5th 999, 1012 (Ponderosa).) This presumption of correctness means a petitioner challenging a Commission decision has the burden of establishing the existence of both an error and prejudice. 6 (Ponderosa, supra, at p. 1013; City and County of San Francisco v. Public Utilities Com. (2025) 108 Cal.App.5th 22, 53; Securus Technologies, LLC v. Public Utilities Com. (2023) 88 Cal.App.5th 787, 798.) The presumption of correctness and related burden of demonstrating prejudicial error is similar to that applied to trial court decisions. (See Tulare Medical Center Property 6 We note the parties’ petition, answer, and reply do not use the word “prejudice” and the word “prejudicial” appears only in the petition’s quote of Southern California Edison v. Public Utilities Com. (2006) 140 Cal.App.4th 1085. There, the court stated that the Commission’s “failure to comply with its own rules concerning the scope of issues to be addressed in the proceedings … was prejudicial.” (Id. at p. 1106.) Prompted by a focus letter from the court, the oral arguments presented by counsel addressed whether prejudice resulted from one of the errors claimed by Ducor. 10. Owners Assn. v. Valdivia (2026) 119 Cal.App.5th 967, 981 [appellant challenging a trial court order or judgment “has the burden of affirmatively demonstrating prejudicial error”].) The scope of judicial review of the ratemaking decisions challenged in this proceeding is set forth in section 1757. (See Center for Biological Diversity, supra, 18 Cal.5th at p. 301.) A court’s review “shall not extend further than to determine,” based on the entire certified record, whether the Commission (1) acted without, or in excess of, its jurisdiction; (2) did not proceed in the manner required by law; (3) issued a decision not supported by the findings; (4) made findings not supported by substantial evidence in light of the whole record; (5) abused its discretion; or (6) violated a constitutional right. (§ 1757, subd. (a).) 7 Given the statute’s phrase “shall not extend further than,” courts recognize “the scope of our review is ‘limited.’ ” (City and County of San Francisco v. Public Utilities Com., supra, 108 Cal.App.5th at p. 52, citing City and County of San Francisco v. Public Utilities Com. (1985) 39 Cal.3d 523, 530.) The issues raised in Ducor’s writ petition include (1) the interpretation of the rules set forth in Commission decisions, (2) the interpretation of the statute governing the A- Fund—namely, section 257.6, (3) the application of constitutional standards, (4) and whether the Commission abused its discretion. Accordingly, we set forth the principles governing judicial review of these issues. A. Interpretation of Rules and Statutes As a general principle, the Commission’s interpretation of its own regulations and decisions is entitled to consideration and respect by the reviewing court. Courts are more 7 This scope of review is familiar because it “parallels the inquiry prescribed under the general administrative mandamus statute, Code of Civil Procedure section 1094.5.” (Center for Biological Diversity, supra, 18 Cal.5th at p. 304.) In other words, section 1757 “borrows from the standard applicable to the decisions of other agencies.” (Center for Biological Diversity, supra, at p. 307.) 11. likely to defer to the Commission’s interpretation of its own regulations and decisions than to its interpretation of a statute because the Commission is likely to be intimately familiar with regulations and decisions it authored and sensitive to the practical implication of one interpretation over another. (Clean Energy Fuels Corp. v. Public Utilities Com. (2014) 227 Cal.App.4th 641, 649; Southern Cal. Edison Co. v. Public Utilities Com. (2000) 85 Cal.App.4th 1086, 1096.) Nonetheless, courts recognize that the interpretation of a regulation remains a question of law subject to independent judicial review. (Ibid.) In 2025, the Supreme Court clarified the deference or weight to be given the Commission’s statutory interpretations. The issue addressed was whether the Commission’s interpretation of the Public Utilities Code remained subject to “the highly deferential approach” set forth in Greyhound Lines, Inc. v. Public Utilities Com. (1968) 68 Cal.2d 406 after the legislative changes adopted in 1996 and 2000. (Center for Biological Diversity, supra, 18 Cal.5th at p. 299.) The court concluded that approach did not survive the Legislature’s revisions expanding judicial review of most Commission decisions. (Ibid.) The high court recognized that, generally, the Commission’s “ ‘interpretation of the meaning and legal effect of a statute is entitled to consideration and respect by the courts.’ ” (Id. at p. 305, quoting Yamaha Corp. of America v. State Bd. of Equalization (1998) 19 Cal.4th 1, 7.) However, the level of the deference afforded the Commission’s “ ‘interpretation of a statute or regulation is contextual: Its power to persuade is both circumstantial and dependent on the presence or absence of factors that support the merit of the interpretation.’ ” (Center for Biological Diversity, supra, at p. 305.) The factors relevant to a court’s evaluation of the weight given the Commission’s interpretation can be placed in two broad categories—those indicating the Commission has a comparative interpretive advantage over the courts and those indicating the interpretation is probably correct. (See Yamaha, supra, at p. 12.) In sum, the level of 12. deference “may vary depending on the circumstances” and “courts remain the final arbiters of statutory meaning.” (Center for Biological Diversity, supra, at p. 303.) B. Constitutional Issues In a proceeding challenging a Commission decision on the ground it violated a constitutional right, the reviewing court “shall exercise independent judgment on the law and facts, and the findings or conclusions of the [C]ommission material to the constitutional question shall not be final.” (§ 1760.) However, a reviewing court “may not substitute [its] own judgment ‘as to the weight to be accorded evidence before the Commission or the purely factual findings made by it.’ ” (SFPP, L.P. v. Public Utilities Com. (2013) 217 Cal.App.4th 784, 794.) C. Abuse of Discretion When considering the Commission’s exercise of discretion, the scope of judicial review is limited out of deference to the Commission’s authority and presumed expertise. (California Community Choice Assn. v. Public Utilities Com. (2024) 103 Cal.App.5th 845, 861.) Accordingly, courts do not reweigh the evidence or substitute their judgment for that of the Commission. The judicial inquiry generally is limited to whether the decision was arbitrary, capricious, or entirely lacking in evidentiary support. Courts, however, must ensure the Commission has adequately considered all relevant factors and has demonstrated a rational connection between those factors and the choice made. (Ibid.) Under the abuse of discretion standard, the Commission may choose its own criteria or method of arriving at its decision, even if irregular, unless the unreasonableness of its criteria or method is clearly established. (Ponderosa, supra, 36 Cal.App.5th at p. 1019.) II. SELECTION OF PROPER METHODOLOGY FOR RATE BASE VALUATION Ducor’s claims of Commission error focus on the “rate base” component of its “revenue requirement.” (§ 275.6, subds. (b)(2), (b)(5).) Specifically, it contends the Commission incorrectly valued the assets constituting its “rate base,” which understated 13. its “revenue requirement” by approximately $130,000 and that shortfall should be offset by an increase in Ducor’s A-Fund subsidy. A. A-Fund and the Statutory Text The Commission’s responsibilities in maintaining and administering the A-Fund, a state subsidy program addressing intrastate telephone service, are set forth in section 275.6. Subdivision (a) of section 275.6 provides: “The commission shall exercise its regulatory authority to maintain the [A-Fund program] to provide universal service rate support to small independent telephone corporations in amounts sufficient to meet the revenue requirements established by the commission through rate-of-return regulation in furtherance of the state’s universal service commitment to the continued affordability and widespread availability of safe, reliable, high-quality communications services in rural areas of the state.” (Italics added.) The italicized terms along with the terms “rate design” and “rate base” are defined in subdivision (b) of section 275.6. “ ‘Rate-of-return regulation’ means a regulatory structure whereby the commission establishes a telephone corporation’s revenue requirement, and then fashions a rate design to provide the company a fair opportunity to meet the revenue requirement.” (§ 275.6, subd. (b)(4), italics added.) “ ‘Rate design’ means the mix of end user rates, high-cost support, and other revenue sources that are targeted to provide a fair opportunity to meet the revenue requirement of the telephone corporation.” 8 (§ 275.6, subd. (b)(3), italics added.) 8 The term “high-cost support” encompasses both the state subsidies provided under the A-Fund for intrastate service and the federal subsidies provided for interstate service. (See Calaveras ’22, supra, 87 Cal.App.5th at p. 798 [as directed by Congress, the FCC established a Universal Service Fund to subsidize services provided, and infrastructure built, in rural, high-cost areas; the fund and its successor are financed by mandatory contributions from entities that provide interstate telecommunications to the public].) In 2018, 46 percent of total small ILEC revenues were from the A-Fund and 25 percent were from federal high-cost support. 14.  “ ‘Revenue requirement’ means the amount that is necessary for a telephone corporation to recover its reasonable expenses and tax liabilities and earn a reasonable rate of return on its rate base.” (§ 275.6, subd. (b)(5), italics added.) “ ‘Rate base’ means the value of a telephone corporation’s plant and equipment that is reasonably necessary to provide regulated voice services and access to advanced services, and upon which the telephone corporation is entitled to a fair opportunity to earn a reasonable rate of return.” (§ 275.6, subd. (b)(2).) The rate of return, also referred to as the cost of capital, used by the Commission in this general rate case was 7.16 percent. One way to calculate the rate base is to add up the original cost of the telephone corporation’s physical assets and subtract accumulated depreciation and deferred income tax. The revenue requirement of a small ILEC (i.e., its cost of doing business— specifically, the amount needed to pay its operating expenses and tax liabilities and also provide a reasonable return on its investment in assets) can be expressed in an equation with mathematical notation as follows: Revenue requirement = reasonable expenses + tax liabilities + (rate base x .0716). In this case, the disputed component of the revenue requirement is the rate base amount. Once the Commission has calculated a small ILEC’s revenue requirement, it proceeds to determine the rates the small ILEC is authorized to charge its customer. Those rates are used to predict the company’s local revenue. The predicted local revenue, federal subsidy, and few other items are subtracted from the company’s revenue requirement, and the difference is the amount of the A-Fund subsidy. Additional directives are set forth in subdivision (c) of section 275.6: “In administering the [A-Fund] program the [C]omission shall do all of the following: 15.  “(1) Continue to set rates to be charged by the small independent telephone corporations in accordance with Sections 451, 454, 455, and 728. “(2) Employ rate-of-return regulation to determine a small independent telephone corporation’s revenue requirement in a manner that provides revenues and earnings sufficient to allow the telephone corporation to deliver safe, reliable, high-quality voice communication service and fulfill its obligations as a carrier of last resort in its service territory, and to afford the telephone corporation a fair opportunity to earn a reasonable return on its investments, attract capital for investment on reasonable terms, and ensure the financial integrity of the telephone corporation. “(3) Ensure that rates charged to customers of small independent telephone corporations are just and reasonable and are reasonably comparable to rates charged to customers of urban telephone corporations. “(4) Provide universal service rate support from the [A-Fund] Program to small independent telephone corporations in an amount sufficient to supply the portion of the revenue requirement that cannot reasonably be provided by the customers of each small independent telephone corporation after receipt of federal universal service rate support. “(5) Promote customer access to advanced services and deployment of broadband-capable facilities in rural areas that is reasonably comparable to that in urban areas, consistent with national communications policy. “(6) Include all reasonable investments necessary to provide for the delivery of high-quality voice communication services and the deployment of broadband-capable facilities in the rate base of small independent telephone corporations. “(7) Ensure that support is not excessive so that the burden on all contributors to the [A-Fund] program is limited.” B. Ratemaking Rules In 2011, the Commission issued Order Instituting Rulemaking Regarding California High Cost Fund-A Program (Nov. 18, 2011) rulemaking 11-11-007, to begin a 16. detailed review of the A-Fund program. (Calaveras ’22, supra, 87 Cal.App.5th at p. 799.) In 2012, the Legislature amended section 275.6, declaring its intent to preserve the Commission’s discretion “in open Rulemaking 11-11-007 to establish the regulatory requirements for the [A-Fund] Program within the policy framework provided by this act.” (Stats. 2012, ch. 729, § 1, subd. (c), p. 5990.) “In December 2014, the Commission concluded phase I of the rulemaking proceeding and issued Decision Adopting Rules and Regulations in Phase 1 of the Rulemaking for the California High Cost Fund-A Program (Dec. 18, 2014) Cal.P.U.C. Decision No. 14-12-084.” (Calaveras ’22, supra, at p. 800.) In 2021, the Commission issued further A-Fund rulemaking in Decision Addressing Select General Rate Case-Related Matters of the Small Incumbent Local Exchange Carriers (June 3, 2021) Cal.P.U.C. Decision No 21-06-004 (D.21-06-004 or GRC Matters). The rules established by D.21-06-004 for determining the rate base amount are the subject of Ducor’s primary claim of Commission error. The relevant rules are expressed in two conclusions of law and one ordering paragraph. Conclusion of law (COL) 9 and 10 state: “9. NECA’s most recent cost study is a reasonable starting point for forecasting [General Rate Case (GRC)] Test Year rate base, subject to adjustments for new additions, closure of plants, or other changes that have occurred since the year of the NECA cost study and the Commission will review these adjustments for reasonableness and approval. “10. The Small ILECs should use (with adjustments made for new additions, plant closures and similar expenses) the rate base amount from NECA’s most recent cost study as a proposed rate base for each GRC Test Year.” (D.21-06-004, p. 40, italics added.) Ordering paragraph 10 of D.21-06-004 (OP 10) uses language similar to COL 10, except its verb phrase is “shall use” rather than “should use.” OP 10 states: “[The small ILECs, including] Ducor Telephone Company, … shall use the rate base amount from the National Exchange Carrier 17.  Association’s most recent cost study as a proposed rate base for each General Rate Case Test Year.” (D.21-06-004, p. 44.) Ducor contends the foregoing rules require the Commission to use the rate base amount in the most recent NECA cost study, subject only to reasonable adjustments for post-study changes in the applicant’s plant. We disagree. 1. Mandatory Language and Its Scope OP 10’s single sentence adopts the familiar structure of subject-verb-object. The subject is the small ILEC’s. The verb phrase is “shall use.” The object is the NECA’s rate base amount. The Commission’s choice of “shall” in OP 10 plainly signals an intent to establish a mandatory directive. (§ 14 [shall is mandatory]; see generally, In re D.Y. (2018) 26 Cal.App.5th 1044, 1053 [“mandatory word ‘shall’ forms a verb phrase with the verb ‘terminate’ ”].) Thus, a question presented is who is bound by the directive. The answer is Ducor and the other small ILEC’s because they are the subject of the sentence. Nowhere does the sentence mention the Commission. Consequently, OP 10 does not explicitly require the Commission to adopt the NECA rate base amount (adjusted for post-study changes) as the rate base when determining a small ILEC’s revenue requirement. A second question raised is the scope of D.21-06-004. In our view, that scope is limited because D.21-06-004 does not set forth a complete framework explicitly describing all the Commission’s mandatory responsibilities and all its discretionary authority when determining the amount of the applicant’s rate base. For instance, the rules do not explicitly require the Commission to use a specific method when determining the rate base amount or to choose from a list of specified methods. The lack of a 18. complete framework is further illustrated by the absence of a COL or OP in D.21-06-004 explicitly requiring the Commission to adopt a reasonable rate base. 9 To summarize, D.21-06-004 does not explicitly require the Commission to adopt the NECA rate base amount (adjusted for post-study changes) or explicitly prohibit the Commission from using other rate base amounts. Consequently, we next consider whether the language in D.21-06-004 impliedly requires the Commission to adopt the NECA rate base amount with adjustments for any post-study changes. 2. The Indefinite Article “A” D.21-06-004 uses the indefinite article “a” in several places. That indefinite article appears in COL 9’s phrase “a reasonable starting point” and in the phrase “as a proposed rate base” contained in both COL 10 and OP 10. Generally, a legislature’s use of an indefinite article or a definite article is significant. (People v. Walts (2025) 112 Cal.App.5th 127, 142; Rapanos v. United States (2006) 547 U.S. 715, 732–733; North American Title Co. v. Superior Court (2024) 17 Cal.5th 155, 174–175; Pineda v. Bank of America, N.A. (2010) 50 Cal.4th 1389, 1396–1397 (Pineda).) Based on the principle that the basic rules governing the interpretation of statute