Opinion ID: 1250892
Heading Depth: 2
Heading Rank: 4

Heading: allocation of residual revenue requirement

Text: 27. We next consider the AG's objections to the Commission's decisions regarding the second phase of the proceedings, the rate-design phase. The Commission ruled first on U S WEST's proposed tariffs for individual services, approving some and rejecting others. Tariffs are documents filed by the regulated utility with the Commission, detailing the rates to be charged for services. Once approved by the Commission, the tariffs become law. See First Cent. Serv. Corp. v. Mountain Bell Tel., 95 N.M. 509, 511, 623 P.2d 1023, 1025 (Ct.App.1981). After ruling on the proposed tariffs, the Commission had approved specific rates totalling only $4,489,000 of the $7,731,000 total revenue requirement allowed by the Commission. Thus, U S WEST had a revenue shortfall, or residual revenue requirement, of $3,242,000. 28. The Commission, in its rate-design order of May 7, 1993, decided to spread the residual revenue requirement equally across the dial tone line rate of all residential and business customers, except Low Income Telephone Assistance Program customers. The resulting increase was approximately forty-nine cents or less per customer for the first year. The AG challenged, as improper and unsupported by the evidence, that portion of the order that spread the residual revenue requirement. In essence, the AG argued that the Commission improperly allocated common costs for local services, because, it claimed, U S WEST's cost studies were inadequate. 29. Common costs are costs that belong to two or more services or to the business as a whole. Common costs are not directly traceable to individual services. Phillips, supra, at 233 n. 27. Regulated monopolies use the total cost of a service as an important factor in determining its price. However, the total cost of a service is difficult to compute when components of the total cost cannot be traced to the service being priced. Consequently, allocating common costs among services is a significant problem. This problem is exacerbated for capital-intensive businesses like utilities, because common costs often represent a large percentage of total costs. Id. at 171. 30. U S WEST incurs the common costs at issue here in connection with the local loop, which consists of telephone lines between customers and U S WEST's local central office, and the local switching equipment. The parties agree that these are common costs, because they are not directly traceable to particular users or services. This raises the question of who should bear these costs. The AG argued that the cost of the local loop should be attributed to the loop's users, which include virtually everyone who uses the telephone system, because all users benefit from the existence of the loop. U S WEST argued that local residential and business customers should bear these costs because they are the parties who require U S WEST to add new lines as these customers link in to the loop. Neither approach is patently unreasonable or universally accepted. 31. In fact, in attempting to deal with the thorny issue of common costs, regulators have used a variety of allocation methods. [3] Id. at 172. In this case, the AG argued that only fully-distributed cost studies are appropriate and that the Commission should have ordered these additional cost studies. These studies are designed to determine how much a particular service costs to provide, including the service's share of common costs. The provider then charges the customer accordingly. The AG criticized U S WEST's cost studies for not allocating common costs among multiple users of the telephone system. 32. However, the AG missed the point. In Mountain States 1977, 90 N.M. at 339, 563 P.2d at 602, we held that the Commission is not limited to considering only cost-of-service evidence during the rate-design phase. As a practical matter, it would be neither feasible nor desirable to price all services based solely on their cost. Id. at 338, 563 P.2d at 601. For example, basic telephone service for rural communities is often priced below cost to further the goal of universal service. 33. Although the Commission should consider cost during rate design, it is not required to rely on any one rate-design method. See id. at 338-39, 563 P.2d at 601-02. The Commission may additionally consider factors other than cost, examples of which are the universal service objective, the value of the service to the user, and the existence and extent of competition. Although the Commission noted that fully-distributed cost studies would have been helpful, it did not hold or find that these studies were necessary. The Commission could make rate-design decisions without requiring fully-distributed common cost studies to supplement U S WEST's cost studies. See id. 34. In its answer brief, the Commission argued that the AG impermissibly raised before this Court new arguments that the AG did not raise before the Commission. The Commission pointed out that the AG did not request below that the Commission order U S WEST to perform new cost studies and that the Commission enter an interim rate design pending these new cost studies. Consequently, the Commission urged us not to consider the AG's request for relief on this issue. The Commission and U S WEST also contended that the interim rate design requested by the AG would result in pricing anomalies. However, because we decide that the cost studies upon which the Commission based its decision were adequate, we need not address these arguments. 35. Lastly, we review the Commission's residual revenue allocation to determine if it is reasonable and sufficiently supported. See id. at 338, 563 P.2d at 601. There is a zone of reasonableness between confiscation and extortion in which the commission's jurisdiction to make rates should be confined. State v. Mountain States Tel. & Tel. Co., 54 N.M. 315, 338, 224 P.2d 155, 170-71 (1950). We cannot say that an increase of forty-nine cents per customer is extortionate. The AG challenged the sufficiency of the evidence supporting the Commission's order. We concluded, however, that the Commission could rely on U S WEST's cost studies without ordering additional fully-distributed cost studies; the cost information before the Commission therefore was sufficient to support the Commission's order. Overall, this Court cannot say that there is not satisfactory and substantial evidence to support the Commission's rate-design order. We also cannot say that the order more likely than not is unjust or unreasonable.