Title: In re Investigation into Existing Rates of Shoreham Telephone Co., Inc.

State: vermont

Issuer: Vermont Supreme Court

Document:

In re Appeal of Investigation into Existing Rates of Shoreham Telephone
  Co., Inc. (2005-077)

2006 VT 124

[Filed 17-Nov-2006]


       NOTICE:  This opinion is subject to motions for reargument under
  V.R.A.P. 40 as well as formal revision before publication in the Vermont
  Reports.  Readers are requested to notify the Reporter of Decisions,
  Vermont Supreme Court, 109 State Street, Montpelier, Vermont 05609-0801 of
  any errors in order that corrections may be made before this opinion goes
  to press.


                                 2006 VT 124

                                No. 2005-077


  In re Appeal of Investigation into             Supreme Court
  Existing Rates of Shoreham 
  Telephone Company, Inc.
                                                 On Appeal from
                                                 Public Service Board

                                                 January Term, 2006

  Michael H. Dworkin, Chair

  Paul J. Phillips and Elijah D. Emerson of Primmer & Piper, P.C., St.
    Johnsbury, for Appellant.

  June E. Tierney, Department of Public Service, Montpelier, for Appellee.


  PRESENT:  Reiber, C.J., Dooley, Johnson, Skoglund and Burgess, JJ.


       ¶  1.  REIBER, C.J.   Shoreham Telephone Company, Inc. appeals from
  a Public Service Board order requiring that it reduce its revenues from
  intrastate telephone service by over $1.2 million. Shoreham contends: (1)
  the Board violated state and federal law by employing a methodology that
  impermissibly uses interstate revenues to subsidize intrastate rates; (2)
  the order will produce intrastate rates that are confiscatory; (3) the
  Board's disallowance of income tax expense from Shoreham's intrastate cost
  of service is unsupported by the evidence, unjust, and unreasonable; and
  (4) the order to establish a liability account for Shoreham's accumulated
  deferred income taxes (ADIT) was improper.  We affirm.
   
       ¶  2.    Shoreham is a small telecommunications company that
  provides telephone services to approximately 3700 customers in several
  towns in Addison County.   After reviewing Shoreham's 2002 supplemental
  financial reports, the Board found that there was "a significant
  possibility that Shoreham's intrastate revenues are higher than a just and
  reasonable level."  Accordingly, the Board opened an investigation into
  Shoreham's existing rates and related issues, including the "benefits (and
  costs) of establishing Shoreham's rates using a total company (or residual)
  methodology." See 30 V.S.A. § 227(b) (Board may order investigation into
  justness and reasonableness of rates).  The Department of Public Service
  participated in the proceedings as public advocate.  Id. § 217 (Department
  of Public Service, through the Director of Public Advocacy, shall represent
  the public at hearings on rates).

       ¶  3.  Following the submission of substantial prefiled testimony by
  both parties and three days of technical hearings, the hearing officer
  filed a proposal for decision in August 2004 containing extensive findings
  and recommendations.  Critical among these were his findings that in 2002
  Shoreham's net profit of $1.2 million resulted in an overall rate of return
  of 38.8%, well in excess of industry standards; that application of a
  "total company" or "residual ratemaking" methodology would ensure that
  Shoreham - an "average schedule" company since 1982 - received no more than
  100% of its intrastate costs, plus a reasonable rate of return; that
  Shoreham is a Sub-chapter S corporation which pays no direct income tax,
  and therefore should reduce its expenses attributed to income taxes; and,
  finally, that Shoreham should be required to establish a regulatory
  liability account equal to the difference between its current ADIT balance
  of $611,143 and the ADIT balance that would have been produced had Shoreham
  been taxed at the actual corporate income tax rate since 1999. In total,
  the hearing officer recommended that Shoreham's intrastate rates be
  adjusted to reduce its intrastate income by $1,126,725. 
   
       ¶  4.  In  November 2004, the Board issued its ruling adopting the
  proposed decision largely in its entirety, subject to several specific
  modifications, including a total elimination of the income tax expense from
  the calculation of Shoreham's legitimate expenses.  This resulted in a
  required reduction of $1,268,459 from Shoreham's intrastate rates. The
  Board authorized Shoreham to reduce its intrastate rates in three equal
  stages over a seventeen-month period, and allowed it either to keep the new
  regulatory account on its books until the liability for which it was
  collected occurred or return it to taxpayers in the form of amortizations
  over a reasonable period of time.   In response to Shoreham's subsequent
  motion to alter or amend, the Board modified its decision in several
  relatively minor respects, but otherwise denied the motion.  This appeal
  followed. 

                                     I.


       ¶  5.  A brief review of the regulatory backdrop is essential to a
  proper resolution of Shoreham's several claims on appeal.  Shoreham is a
  local exchange carrier (LEC) under state and federal law, subject to
  separate regulation by the state and federal governments.  See Crockett
  Tel. Co. v. FCC, 963 F.2d 1564, 1566 (D.C. Cir. 1992) (reviewing historical
  basis of federal regulation of interstate common carrier services and state
  regulation of intrastate services).  The Federal Communications Commission
  (FCC) regulates interstate and foreign telecommunications services, while
  states retain jurisdiction to regulate intrastate services.  47 U.S.C. §§
  151, 152(b).  In Vermont, the Board exercises local jurisdiction to ensure
  that Shoreham's intrastate rates are "just and reasonable."  30 V.S.A. §
  218.  
   
       ¶  6.  To implement this dual scheme of regulation, "a utility's
  'revenues, investment, and expenses must be apportioned between the
  interstate and intrastate jurisdictions.' "  Pine Tree Tel. & Tel. Co. v.
  Pub. Utils. Comm'n,