Opinion ID: 1187953
Heading Depth: 1
Heading Rank: 5

Heading: License Contract Expenses

Text: AT & T (primarily Bell Labs) does research and development for all the Bell operating Companies, which, as licensees, pay AT & T up to 2.5% of local and toll revenues. Historically, AT & T only required payment of 1% of the specified revenues. In recent years, however, this percentage has increased and now approaches the 2.5% limit. Since the revenues to which the percentage applies have also increased significantly, the Bell operating companies, including Mountain Bell, pay a substantial and a rapidly growing fee to AT & T. For 1981, Mountain Bell's license contract expenses were estimated at $4.051 million. The Commission, deeming itself incapable of carefully analyzing these expenses, applied a formula based on historical growth and disallowed $1.188 million of these expenses. Mountain Bell claims it proved that New Mexico ratepayers have received benefits from AT & T's services in excess of these expenses, and that they should be fully allowed unless imprudent or wasteful. This difficult problem has arisen in other states. The Commission pointed out the difficulty it faces in making a line-by-line evaluation of the license fees paid to AT & T. However, we think the use of a formula based on historic trends has no relation to current needs and neither protects against improper expenditures nor allows adequate flexibility for managerial decisions relating to research and development. Instead, we adopt the approach taken by the Illinois Supreme Court in Illinois Bell Tel. Co. v. Illinois Commerce Com'n., 55 Ill.2d 461, 303 N.E.2d 364 (1973). There, the court stated: We have considered the contentions of the parties, the testimony, the exhibits, and the authorities, and conclude that it is improper to permit Bell to include in its operating expenses for rate-making purposes a license fee to AT & T based on a percentage of revenues, and that the amount of the payment of the license fee must be directly related to, and include only, such expenditures as would be permissible if made by Bell. 303 N.E.2d at 375. Accordingly, the burden is on Mountain Bell to show that the license contract expenses it claims include only payments for services which Mountain Bell itself could claim if it paid for such services independent of AT & T. Once proven, such expenses should be allowed by the Commission.