Opinion ID: 1250892
Heading Depth: 2
Heading Rank: 3

Heading: directory-advertising revenue imputation

Text: 12. The first issue is whether the Commission correctly calculated the amount of the imputation from USWD to U S WEST. The amount of the imputation before these proceedings commenced was $8,368,000. U S WEST initially proposed continuing at this rate, but, during the hearings, it adjusted its proposal to $12,647,000. Staff proposed an imputation of $14,784,000, and the AG proposed an imputation of $19,284,000. However, the parties were not merely arguing about dollar amounts. Each party presented expert testimony regarding the proper formula or formulae that the Commission should use to calculate the imputation. The Commission ultimately adopted the amount of $12,647,000, using the methodology in U S WEST's adjusted proposal. The AG argued that its method of computing the imputation was the only method that the Commission could properly select. 13. The New Mexico Constitution, Article XI, Section 7 requires that the Commission consider the earnings, investments, and expenditures derived from or related to the sale of directory advertising and other directory listing services. Consideration involves deliberation, pondering, and judgment, but does not prescribe any specified conclusion. See United Bhd. of Carpenters & Joiners v. Industrial Comm'n (In re School Bd.), 363 S.W.2d 82, 90-91 (Mo.Ct. App.1962) (per curiam) (holding that statute requiring labor commission to consider wage rates established by collective bargaining agreement did not require commission to follow or adopt those wage rates). In this case, the record indicates that the Commission did consider these earnings, investments, and expenditures. 14. The Commission imputed $12,647,000 of directory-advertising revenue. Section 7 does not require the Commission to impute all or any certain amount of these earnings, investments, and expenditures. The Commission [is] not bound to the use of any single formula or combination of formulae in determining rates. . . . It is the result reached, not the method employed, which is controlling. Mountain States 1977, 90 N.M. at 338, 563 P.2d at 601; see also State Corp. Comm'n v. Mountain States Tel. & Tel. Co., 58 N.M. 260, 267, 270 P.2d 685, 689-90 (1954) (concluding that the Constitution does not impose upon the Commission the use of any one formula in determining rates). The determination of the proper formula or formulae for calculating the directory-advertising imputation is a discretionary function of the Commission. 15. The AG urged us to adopt the California approach, approved in several other states. Under the California approach, the Commission would treat U S WEST and USWD as a unitary enterprise for purposes of computing a reasonable rate of return. See City of L.A. v. Public Util. Comm'n (Pacific Tel. & Tel. Co.), 7 Cal.3d 331, 102 Cal.Rptr. 313, 323, 497 P.2d 785, 795 (1972) (in bank). However, the California approach has not been universally accepted; rather, courts and commissions in other jurisdictions have used a wide variety of approaches in determining the contribution that directory advertising should make towards supporting local telephone service. See, e.g., Alabama Pub. Serv. Comm'n v. South Cent. Bell Tel. Co., 130 Pub.Util.Rep.4th (PUR) 92, 94, 1992 WL 486391 (Ala.P.S.C.1992) (fixing an imputation of 52% of directory-advertising gross revenues). 16. Moreover, the New Mexico Commission is not required to select a particular methodology for directory imputation merely because another jurisdiction has chosen that methodology, particularly since there are many different and competing approaches. See Mountain States 1977, 90 N.M. at 338, 563 P.2d at 601. The Commission properly exercised its discretion in selecting the method for calculating the directory-advertising imputation. Furthermore, the imputation selected by the Commission amounted to an increase of more than fifty percent over the prior imputation. The prior imputation was already enough to equal over one month's basic local service for every residential customer in New Mexico. After reviewing the record we cannot say that the result reached by the Commission was not just and reasonable.
17. A principal controversy between the parties is whether the Commission may consider market competition when fixing a directory-advertising imputation. The AG argued that it is improper for the Commission to consider competition; U S WEST and the Commission argued that it is proper and appropriate. Competition increases business risk, and, as noted above, risk and rate of return are directly related. So, as competition increases, business becomes riskier; expected rate of return also increases to compensate investors for the higher level of risk. 18. U S WEST generally faces diminished competition in most of its areas of business; on the other hand, USWD's broad area of business, advertising, is competitive. If the Commission properly considered competition with regard to USWD and correctly concluded that competition existed, it could reasonably conclude that USWD should not transfer all of its profits to U S WEST. Therefore, the Commission could impute less than 100% of USWD's profits to U S WEST, and USWD could keep a portion of its profits. 19. In Mountain States 1977, 90 N.M. at 339, 563 P.2d at 602, we noted that, during the rate-design phase, the Commission may consider, in addition to cost-of-service evidence, various other types of evidence, including the existence of competition. Cf. New Mexico Telecommunications Act § 2, NMSA 1978, § 63-9A-2 (Repl.Pamp.1989) ([I]t is further the policy of this state to encourage competition in the telecommunications industry. . . .); Mountain States Tel. & Tel. Co. v. New Mexico State Corp. Comm'n (In re Mountain States Tel. & Tel. Co.), 109 N.M. 504, 507, 787 P.2d 423, 426 (1990) (holding that Commission could consider any relevant factor in determining whether effective competition existed to warrant detariffing of pay telephone services under New Mexico Telecommunications Act). We likewise conclude that market competition is a proper factor for the Commission's consideration during the revenue requirement phase. 20. Courts in other jurisdictions have also approved the consideration of competition. In Turpen v. Oklahoma Corp. Commission, 769 P.2d 1309, 1326-27 (Okla.1988), the Supreme Court of Oklahoma upheld a challenge to the Oklahoma Corporation Commission's calculation of imputed revenues and expenses from the Yellow Pages affiliate of Southwestern Bell Telephone Company. The court determined that the commission properly considered evidence of competition in the area of Yellow Pages advertising. Id. Likewise, in MCI Telecommunications Corp. v. Public Service Commission, 108 A.D.2d 289, 488 N.Y.S.2d 840, 845, appeal withdrawn, 66 N.Y.2d 760, 497 N.Y.S.2d 1033, 488 N.E.2d 134 (1985), the New York Supreme Court, Appellate Division held, similarly to Mountain States 1977, that the public service commission could validly set differential utility rates on considerations other than relative costs, such as competitive effects. 21. Finally, ignoring competition is contrary to logic in light of the divestiture of the Bell operating companies from AT & T. The divestiture resulted from an antitrust lawsuit against AT & T and was intended to promote competition in the formerly monopolistic telecommunications industry. See United States v. AT & T, 552 F.Supp. 131 (D.D.C.1982), aff'd sub nom. Maryland v. United States, 460 U.S. 1001, 103 S.Ct. 1240, 75 L.Ed.2d 472 (1983). The divestiture order permitted the local operating companies and their affiliates to continue publishing the Yellow Pages, because restricting them from this activity would have been anticompetitive. Id. at 193-94. Although segments of the telecommunications industry remain regulated and monopolistic, other segments are becoming highly competitive. Considering the rapidly evolving nature of this industry, it would be inappropriate to foreclose the Commission from considering such relevant factors as the existence and extent of competition in various market segments.
22. Having concluded that competition is a proper factor for the Commission to consider, we next determine whether the Commission made adequate findings regarding competition, and whether there was satisfactory and substantial evidence supporting these findings. See Mountain States 1982, 99 N.M. at 6, 653 P.2d at 506. We conclude there was satisfactory and substantial evidence to support the Commission's decision concerning the issue of directory-advertising revenue imputation and, specifically, concerning the issue of competition. 23. When deciding whether the Commission's decision was supported by substantial evidence, this Court said: Although the Commission cannot arbitrarily reject the testimony of any particular witness, neither is it required to accept testimony. It must weigh the conflicting evidence of witnesses, using its discretion to ultimately reach a decision within its mandate. When it weighs the evidence, accepting certain testimony while rejecting other, the Commission's decision nevertheless may be supported by substantial evidence. [E]vidence of two conflicting opinions in the record does not mean that the decision arrived at is unsupported by substantial evidence. New Mexico Indus. Energy Consumers v. New Mexico Pub. Serv. Comm'n (In re Public Serv. Co.), 111 N.M. 622, 635-36, 808 P.2d 592, 605-06 (1991) (citation omitted) (quoting Attorney Gen. v. New Mexico Pub. Serv. Comm'n, 101 N.M. 549, 553, 685 P.2d 957, 961 (1984)). 24. In this case, U S WEST, through the testimony of its expert witness, Ann M. Koehler-Christensen, introduced evidence that USWD faces competition in New Mexico. Koehler-Christensen testified that Yellow Pages advertisers, such as USWD, compete with each other and with other advertising businesses, such as newspapers, television, and direct mail. Koehler-Christensen's testimony included a list of Yellow Pages competitors throughout New Mexico. The AG's expert witness, Michael D. Dirmeier, did not testify regarding competition. 25. The Staff's expert witness, James P. Marquart, advised the Commission that, in light of increasing competition in telecommunications, USWD could in the future be at a competitive disadvantage in relation to competitors that do not have to make contributions to U S WEST's revenue requirement. Likewise, Koehler-Christensen urged the Commission to consider competition when fixing the imputation, because ignoring competition and imputing all of USWD's profits would act as a disincentive for USWD to increase its investment and expand its business in New Mexico. 26. The Commission weighed the conflicting evidence and rejected the AG's recommendation of a directory-revenue imputation of $19,284,000 on the basis that adoption of that recommendation might deprive USWD of any incentive to be profitable. USWD, as a rational investor trying to get maximum returns on its investments, could shift investment away from New Mexico if the Commission suppressed its ability to earn a profit. In addition, USWD would have no reason to improve its efficiency and competitive position if it could not benefit from its efforts by keeping the resulting profits. The Commission's findings were adequate and were supported by satisfactory and substantial evidence. Under the rule in New Mexico Industrial Energy Consumers, 111 N.M. at 635-36, 808 P.2d at 605-06, the Commission properly exercised its discretion in rejecting the AG's recommendation and in accepting U S WEST's and the Staff's evidence on this issue.