Title: GTE South Inc. v. AT&T

State: virginia

Issuer: Virginia Supreme Court

Document:

Present:  Carrico, C.J., Compton,1 Lacy, Keenan, Koontz, and 
Kinser, JJ., and Poff, Senior Justice 
 
GTE SOUTH INCORPORATED 
 
 
 
 
v.  Record No. 991964     OPINION BY JUSTICE ELIZABETH B. LACY 
 
 
 
March 3, 2000 
AT&T COMMUNICATIONS OF  
VIRGINIA, INC., ET AL. 
 
FROM THE STATE CORPORATION COMMISSION 
 
In this appeal of right, GTE South Inc. (GTE) assigns a 
number of errors to the decision of the Virginia State 
Corporation Commission reducing GTE's gross operating income 
by approximately $27,000,000. 
I. 
 
In 1993, the General Assembly enacted Code § 56-235.5 
allowing the Commission to adopt ratemaking methods to replace 
the traditional rate based, rate of return analysis specified 
in § 56-235.2.  The alternative forms of ratemaking had to 
protect the affordability and continued availability of 
quality local exchange service, not prejudice or disadvantage 
any class of telephone customers or providers, and be in the 
public interest.   
Pursuant to this statute, the Commission approved four 
alternative regulatory plans in 1994.  One of those 
alternative ratemaking plans was approved for use by GTE in 
                     
1 Justice Compton participated in the hearing and decision 
of this case prior to the effective date of his retirement on 
February 2, 2000. 
Case No. PUC930036 and became effective January 1, 1995.  1994 
S.C.C. Ann. Rep. at 263.  Paragraph 11(A) of the alternative 
plan required GTE to file a rate application conforming to the 
rules contained in Case No. PUE850022 governing a general rate 
case if it sought an increase in overall regulated operating 
revenues.  For revenue neutral rate changes, Paragraph 11(B) 
authorized a procedure that did not require an investigation 
or evaluation of overall costs and revenues for changes in 
basic local exchange telephone service.  Paragraph 18 of the 
plan specifically excluded access charges from basic local 
exchange telephone service for purposes of pricing.   
 
On April 6, 1995, GTE gave notice of "its intent to file 
a general rate case application, pursuant to the requirements 
of . . . PUE850022."  At a June 2, 1995 meeting with the 
Commission staff to discuss the pending application, GTE 
indicated that it intended to file a revenue neutral rate 
application.  Staff witness William Irby testified that during 
the meeting, GTE was told that its filing could only be done 
pursuant to general rate case rules because the extensive rate 
restructuring proposed by GTE was not contemplated by the 
rules applicable to revenue neutral rate changes governed by 
Paragraph 11(B).  In its subsequent application filed June 9, 
1995, GTE sought an increase in the price of many basic local 
exchange telephone services with a concomitant decrease in 
 
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access charges and intraLATA long distance rates totaling over 
$18,000,000.  GTE's application stated that it sought these 
revisions "pursuant to the Commission's Rules . . . adopted in 
Case No. PUE850022."  The accompanying schedules and testimony 
complied with the requirements for a general rate case.   
 
The record shows that in the following months GTE was 
made aware on several occasions that the Commission's staff 
considered the application to be a general rate case and that 
the proposed new rates were subject to review and change under 
the "just and reasonable" standard of § 56-235.2.  Responding 
to the Commission's staff, GTE asserted that its application 
was filed under the rate case rules as required under its 
alternative regulatory plan and that it believed its rates 
were just, reasonable, and affordable to its customers. 
Pursuant to GTE's request, the hearing on its application 
was postponed and GTE filed an amended application in November 
1995.  The hearing before a hearing examiner was reset for 
June 17, 1996 and the parties prefiled their testimony.   
On June 11, 1996, one week before the scheduled hearing 
date, GTE moved to exclude all evidence and testimony "that 
recommends or purports to support a reduction in GTE's overall 
jurisdictional operating revenues."  GTE asserted that its 
amended filing, as well as its original filing, was revenue 
neutral and entitled to consideration under Paragraph 11(B) of 
 
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its alternative regulatory plan.  The assertion that the 
application was revenue neutral was premised on decreases in 
access charges.  Even though GTE acknowledged that under the 
alternative regulatory plan access charges were not included 
as basic local exchange telephone service for purposes of 
pricing, it argued that changes in access charges could 
properly be considered in its overall proposal under Paragraph 
11(B). 
The hearing examiner denied GTE's motion, finding that 
the application was not revenue neutral and that "every single 
document filed by GTE in this case, with the exception of its 
Motion to Exclude and certain limited portions of its rebuttal 
testimony, indicated its application was filed as a general 
rate case."   
The Commission adopted the recommendations of the Hearing 
Examiner, finding that GTE had not filed a revenue neutral 
application because the alternative regulatory plan did not 
allow offsetting increases in regulated revenue with changes 
to access prices under Paragraph 11(B).  The Commission also 
held that any increase in revenues, even to offset costs, must 
be made pursuant to the provisions of Paragraph 11(A).  And 
finally, the Commission held that any application under either 
Paragraph 11(A) or (B) is subject to the Commission's review 
of proposed rates under the "just and reasonable" standard.  
 
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II. 
GTE first claims that the Commission failed to follow 
GTE's alternative regulatory plan because it improperly 
converted GTE's application under Paragraph 11(B) into a 
general rate case. 
This record does not support GTE's contention that the 
Commission "converted" its application into a general rate 
case.  Rather, the record indicates that the Commission 
concluded that the application was filed as a general rate 
case, not as a revenue neutral proceeding under Paragraph 
11(B).  
 
While the Commission's conclusion regarding the nature of 
GTE's application is not strictly a ratemaking decision, it 
incorporates consideration of ratemaking principles that are 
within the specialized expertise of the Commission.  The 
Commission operates as an expert tribunal and its orders are 
presumed to be just, reasonable, and correct.  Central Tel. 
Co. v. State Corp. Comm'n, 219 Va. 863, 874, 252 S.E.2d 575, 
582 (1979).  Accordingly, this decision of the Commission will 
be sustained unless not supported by the record.  Hopewell 
Cogeneration Ltd. Partnership v. State Corp. Comm'n, 249 Va. 
107, 115, 453 S.E.2d 277, 281-82 (1995).   
The record as set out above provides ample support for 
the Commission's conclusion both under the terms of GTE's 
 
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application and its alternative regulatory plan, PUC930036.  
Accordingly, the Commission's holding that GTE's application 
was a general rate case application under Paragraph 11(A) is 
affirmed. 
III. 
 
GTE also cites as error certain adjustments made by the 
Commission to the rate base.  These adjustments are clearly 
part of the Commission's legislative function in setting rates 
that are just and reasonable, and will be set aside only if 
the Commission "has exceeded its reasonably wide area of 
legislative discretion."  Anheuser-Busch Cos. v. Virginia 
Natural Gas, Inc., 244 Va. 44, 46, 418 S.E.2d 857, 858 (1992) 
(citations omitted).  If the record supports the Commission's 
determinations, there is no abuse of discretion.  Hopewell 
Cogeneration, 249 Va. at 115, 453 S.E.2d at 281-82.  
A.  Affiliate Charges 
 
The Commission required that the charges to GTE for goods 
and services provided by two of its affiliates, GTE Data 
Services and GTE Supply, be based on the affiliates' actual 
cost of those goods and services, including a reasonable 
return, rather than on the prices these affiliates charged 
GTE.  GTE claims that this adjustment is in error because the 
prices charged by the affiliates were at market rates or lower 
and that in applying these adjustments, the Commission was 
 
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adopting a new policy for determining affiliate charges which 
had not been applied to GTE's purchases from affiliates in 
prior proceedings. 
 
The Commission's adjustments were based on its conclusion 
that there was no true market price for these goods and 
services.  GTE introduced evidence that the prices paid to 
affiliates were no higher than those paid to non-affiliates.  
There was also evidence that a high percentage of the 
affiliates' sales were to other affiliates and that some of 
these sales were made at "cost" rather than "market" price.  
While there was evidence that the prices charged GTE were 
competitive and reflective of the market, it was not 
uncontradicted.  The Commission was entitled to weigh and 
reject GTE's evidence.  Apartment House Council, Inc. v. 
Potomac Elec. Power Co., 215 Va. 291, 297, 208 S.E.2d 764, 768 
(1974).   
Furthermore, the adjustments chosen by the Commission 
represent an accounting adjustment, not a retroactively 
applied change in a rule or administrative interpretation of a 
statute as GTE contends.  Roanoke Gas Co. v. State Corp. 
Comm'n, 225 Va. 186, 190, 300 S.E.2d 785, 788 (1983).   
Accordingly, there is no error in the Commission's 
adjustment to the charges by the affiliates. 
B.  Parental Debt Adjustment  
 
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The Commission applied a parental debt adjustment that 
allocated tax benefits received by GTE's parent company, GTE 
Corporation, to GTE and in turn to GTE's ratepayers.  This 
adjustment is based on tax savings resulting from the parent 
corporation capitalizing on its equity investment in a 
regulated subsidiary.  The tax savings is available if the 
parent company chooses to file a consolidated tax return.  GTE 
complains that this adjustment was a departure from the 
Commission's previous policy of determining a utility's taxes 
on a "stand alone" basis and that the Commission's assumption 
that debt incurred by GTE Corporation is proportionally 
invested in its subsidiaries is inaccurate.  
 
GTE does not assert that this adjustment is per se 
improper for ratemaking purposes, only that it should not have 
been used in this case.  The Commission has applied 
adjustments to a consolidated tax return in other cases and, 
like other state regulatory bodies, has applied this specific 
adjustment in at least one other case.  Application of 
Virginia-American Water Co., Case No. PUE950003, 1997 S.C.C. 
Ann. Rep. 333.  This adjustment, like the adjustment discussed 
above, is an accounting adjustment which, although a departure 
from the approach used in previous cases, is within the 
discretion of the Commission to impose. 
 
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We also reject GTE's assertion that the adjustment should 
not have been applied because it was based on improper 
assumptions such as fictional jurisdictional interest and 
fictional jurisdictional tax savings.  The ratemaking process 
is not a matter of scientific precision and must incorporate a 
number of assumptions.  The Commission's judgments in fixing a 
reasonable rate of return are judged by a "zone of 
reasonableness."  Commonwealth of Virginia v. Virginia Elec. & 
Power Co., 211 Va. 758, 769, 180 S.E.2d 675, 683 
(1971)(citations omitted).  There was testimony that GTE 
Corporation supports all subsidiary investments and that such 
support is not directly limited to cash flow between 
affiliates.  Therefore, according to Commission staff, it 
would be improper to limit this allocation to specific debt or 
equity issuances of GTE Corporation to GTE.  Thus, the record 
supports the Commission's decision to apply the parent company 
debt adjustment and there is no error in that decision. 
C.  Separations Studies 
 
The Commission rejected GTE's separations factor for 
allocating the local dial switching equipment costs between 
interstate and intrastate use because it found that the 
separations procedures did not comply with separations 
procedures promulgated by the Federal Communications 
Commission (FCC).  GTE's separations factor was based on an 
 
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actual use measurement of seven days per office rather than 
overall traffic volumes throughout the period.  In the absence 
of a current valid separations study, the Commission utilized 
1988 and 1990 separations studies which were the last properly 
calculated separations factors.2  
GTE contends that its separations factor complied with 
the FCC separations procedures and that the Commission erred 
in rejecting it.  However, the record shows that the FCC has 
not approved GTE's separations procedure.  GTE's witness 
testified that he was unaware of any state proceeding that had 
either approved the procedure or determined that it was in 
violation of the FCC procedure.  Furthermore, GTE's 
separations factor is based on a limited period rather than 
traffic volume over the course of a year, ignoring traffic 
occurring at any other time.  The Commission's staff testified 
that this procedure undermines the accuracy of a separations 
factor for overall traffic volumes.  The Commission's decision 
to reject GTE's separations factor is supported by the record 
and was not an abuse of discretion.  Hopewell Cogeneration, 
249 Va. at 115, 453 S.E.2d at 281-82. 
D.  Rate Base and Depreciation 
                     
2 In 1994, Contel of Virginia, Inc. and GTE Southwest 
merged to form GTE South.  The 1988 study was of GTE 
Southwest's service territory and the 1990 study covered 
Contel's service territory. 
 
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GTE's final assignments of error are also without merit.  
GTE complains that its application was based on a December 31, 
1994 rate base, but that the Commission erroneously adopted a 
rate base as of September 30, 1995.  GTE's primary complaint 
is that, although the rate base was adjusted by increased 
revenues reflecting increased customer levels, no adjustments 
were made for the expenses necessary to support those 
increased customer levels.  However, GTE offered no evidence 
of its increased expenses.  The Commission's decision to rely 
on a current, updated rate base is consistent with this 
Court's determination that "the Commission, in exercising its 
legislative function of fixing utility rates for the future, 
should not be blind to the future.  It may adjust the results 
of the test year by allowing for known changes to make the 
test year representative of the future."  Virginia Power, 211 
Va. at 771, 180 S.E.2d at 685.  
Finally, GTE asserts that the Commission erred in 
refusing to consider GTE's new depreciation rates.  These 
rates were offered in the rebuttal testimony of a GTE witness.  
The Hearing Examiner granted the Attorney General's motion to 
exclude this testimony because the GTE witness admitted he was 
not an expert on GTE's depreciation rates, and that while he 
could not support those rates in this proceeding, they would 
be supported by experts from other GTE departments in a 
 
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companion proceeding.  The Hearing Officer also determined 
that the depreciation testimony was untimely and did not rebut 
any issues raised by the Commission staff or any other party.  
In fact, neither GTE, the Commission staff, nor any other 
party in this proceeding had previously raised the issue of 
depreciation rates.  Similarly, the Hearing Examiner refused 
to adopt GTE's January 1997 suggestion to "take judicial 
notice" of new depreciation rates that had been approved 
pursuant to another Commission procedure.3  The Commission 
adopted the Hearing Examiner's decision to refuse evidence of 
new depreciation rates.   
Based on this record, the Commission's order was not an 
abuse of discretion.  GTE's attempt to have the Commission 
incorporate new depreciation rates at that point in the 
proceeding was untimely. 
For the above reasons, the judgment of the Commission is 
affirmed. 
Affirmed.  
                     
3  The new depreciation rates had been filed with the 
Commission's Communications Division Director two days before 
they were included in the rebuttal testimony in this case.  
The new rates were approved by the Director effective January 
1, 1996, in accordance with the Commission's Rules of 
Procedure.  
 
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