Opinion ID: 2454404
Heading Depth: 1
Heading Rank: 4

Heading: payments by gte to affiliated companies

Text: The PUC and GTE argue that the PUC's findings of fact were sufficient to support its determination that certain payments by GTE to affiliated companiesspecifically GTE Service Corporation and GTE Directories were reasonable and necessary operating expenses. We agree concerning payments to GTE Service Corporation, but we disagree concerning payments to GTE Directories. One of a utility's reasonable and necessary operating expenses may include payments to affiliated companies. Section 41(c) of the PURA states that the PUC shall determine expenses and revenues in a manner consistent with the following: (1) Transactions with Affiliated Interests. Payments to affiliated interests for costs of any services, or any property, right or thing, or for interest expense shall not be allowed either as capital cost or as expense except to the extent that the regulatory authority shall find such payment to be reasonable and necessary for each item or class of items as determined by the commission. Any such finding shall include specific findings of the reasonableness and necessity of each item or class of items allowed and a finding that the price to the utility is no higher than prices charged by the supplying affiliate to its other affiliates or divisions for the same item or class of items, or to unaffiliated persons or corporations. This court has stated that appellate courts have neither the right nor the authority to lay out a precise form of findings to be made by the Commission. Texas Health Facilities Comm'n v. Charter Medical-Dallas, Inc., 665 S.W.2d 446, 452 (Tex.1984). Furthermore, this court has consistently stated that appellate courts are not [to] subject an agency's order to some `hypertechnical standard of review' concerning the sufficiency of findings of fact. Goeke v. Houston Lighting & Power Co., 797 S.W.2d 12, 15 (Tex. 1990); State Banking Board v. Allied Bank Marble Falls, 748 S.W.2d 447, 448-49 (Tex. 1988). What is important is that the findings serve the overall purpose evident in the requirement that they be madei.e., they should inform the parties and the courts of the basis for the agency's decision so that the parties may intelligently prepare an appeal and so that the courts may properly exercise their function of review. Goeke v. Houston Lighting & Power Co., 797 S.W.2d at 15. See Texas Health Facilities Comm'n v. Charter MedicalDallas, Inc., 665 S.W.2d at 452. See generally Hume Cofer, Judicial Review of Agency Law Decisions on Scope of Agency Authority, 42 BAYLOR L.REV. 255, 283-85 (1990). The reviewing court, in determining whether the administrative agency has adequately articulated its findings of fact and conclusions of law, is to give appropriate consideration to such statements in the reports that were adopted by the commission in its final order. Public Util. Comm'n v. AT & T Communications, 777 S.W.2d 363, 366 (Tex.1989). Although appellate courts do not have the authority to impose a precise form of findings of fact to be made by the PUC, the legislature does have such authority and it exercised that authority concerning payments to affiliated companies. In section 41(c)(1), the legislature required that each finding by the PUC that a payment to an affiliate is reasonable and necessary for each item or class of items must include specific findings (1) that each item or class of items allowed is reasonable and necessary and (2) that the price paid by the utility is no higher than prices charged by the supplying affiliate to its other affiliates or divisions for the same items or class of items, or to unaffiliated persons or corporations. See generally Railroad Comm'n v. Rio Grande Valley Gas Co., 683 S.W.2d 783, 785-87 (Tex. App.Austin 1984, no writ).
GTE Service Corporation is a subsidiary of GTE Corporation. Among other things, GTE Service Corporation provides planning, support and centralized service functions related to telephone operations and home-office functions for all GTE Corporation subsidiaries such as consolidation accounting, tax return filing and treasury functions. GTE pays GTE Service Corporation for these services. The PUC included GTE's payments to GTE Service Corporation in GTE's operating expenses. The PUC's final order included Finding of Fact 13 which stated: GTE Service Corp provides to GTE Southwest [GTE] the classes of services described in section III.D.3.a of the [Examiner's] Report. [17] The testimony of the GTE witnesses summarized in section III.D.3 of the Report established by a preponderance of the evidence that (1) the allocation formula properly reflects differences between the purchasing affiliates; (2) the prices charged for each class of service are reasonable relative to the cost of obtaining them from alternative sources; and (3) the services are reasonable and necessary for the provision of utility service. The testimony of Mr. Gillespie establishes that $258,000 should be deducted as a disallowance of legislative advocacy expenses and $268,000 should be deducted for Signaling System 7, which is related to services that are not being provided. (Footnote added). Section III.D.3 of the Examiner's Report [18] stated in pertinent part: d. GTE Southwest's [GTE's] position.  GTE witness Quentin Bredeweg, an employee of GTE Service Corp, explained the rationale for allocating the costs of GTE Service Corp to GTE Southwest [GTE] and the other GTE subsidiaries. In his opinion, the method based on the general allocation rule is nonarbitrary and consistently applied. With respect to the different treatment for the nontelephone companies and the nondomestic telephone companies, Mr. Bredeweg testified that there are significant differences between the domestic telephone companies and the other companies, so it would not be proper to use the same rule for the other companies. For example, the nontelephone operating companies are too dissimilar to use the general application rule. By contrast, the domestic telephone companies are very homogeneous. Mr. Bredeweg noted also that for certain services, such as auditing, direct billing is more accurate than allocation, and for such services, the subsidiary companies are billed directly.       GTE witness Thomas Flaherty, a partner in Touch[e] Ross & Co., testified about the cost studies he had conducted to assess the reasonableness of the GTE Service Corp costs allocated to GTE Southwest [GTE]. According to Mr. Flaherty, the vast majority of the functions performed by GTE Service Corp are nondiscretionary, fundamental activities for a large telecommunications company; they are therefore necessary. Mr. Flaherty's two major conclusions with respect to the reasonableness of the charges were: One, if GTE Southwest [GTE] performed the functions in-house, it would incur almost $40 million to accomplish what it obtains from GTE Service Corp for a total of $20.4 million (the amount includes charges related to GTE labs). Two, for the functions that could be performed by outside contractors, it would cost GTE Southwest [GTE] about $11.9 million to obtain them from the outside; GTE Southwest [GTE] could perform these functions in-house for about $6.1 million. GTE witness Scott Hanle, financial vice president and treasurer for GTE Southwest [GTE], described the process by which the GTE telephone companies guide the activities and monitor the services of GTE Service Corp. The control is exerted both formally through management committees and informally through continual meetings and communications. In Mr. Hanle's opinion, GTE Southwest [GTE] adequately monitors and influences the GTE Service Corp services it receives and is billed for. e. Discussion and recommendation.       The ALJ [Administrative Law Judge] agrees with the GTE witnesses and believes that their testimony adequately supports the allocation method as required by the Rio Grande [ Railroad Comm'n v. Rio Grande Valley Gas Co., 683 S.W.2d 783 (Tex.App.Austin 1984, no writ)] court. The court did not require that the same allocation rule be used for all affiliates, but rather that any differences be explained. Mr. Bredeweg[`s] testimony more than adequately supports the differential treatment of the affiliates; indeed, his testimony demonstrates that under the circumstances, any allocation method that did not allow for the differences among the affiliates would be open to challenge. Accordingly, Mr. Bredeweg's testimony establishes that the prices charged to GTE Southwest [GTE] were no higher than prices charged to the other subsidiaries. Mr. Flaherty's testimony established that the prices charged are reasonable relative to the cost of obtaining them from alternative sources. His testimony and that of Mr. Hanle established that the services obtained were necessary. Finally, Mr. Moffatt's audit determined that the allocated amounts reasonably approximate the actual costs of the services received. There remains the testimony of Mr. Gillespie that the allocated amounts may include unallowable expenses and expenses that may be recovered when Signaling System 7 is placed in service. The ALJ therefore recommends that the Commission adopt Mr. Gillespie's alternative recommendation, which would allow the requested amount of GTE Service Corp expenses allocated to GTE Southwest [GTE], but would deduct $258,000 of legislative advocacy costs and $268,000 of Signaling System 7 costs.... Finding of Fact 13 and section III.D.3 of the Examiner's Report which was adopted and incorporated by reference in the PUC's final order state that (1) the prices charged for each class of service are reasonable relative to the cost of obtaining them from alternative sources, (2) the services are reasonable and necessary for the provision of utility service, (3) the prices charged to GTE Southwest [GTE] were no higher than prices charged to the other subsidiaries, (4) the prices charged are reasonable relative to the cost of obtaining them from alternative sources, (5) the services obtained were necessary, and (6) the allocated amounts reasonably approximate the actual costs of the services received. Although the finding of fact as supplemented by the Examiner's Report is not in the exact form stated in section 41(c)(1), it constitutes sufficient findings (1) that each item or class of items allowed is reasonable and necessary and (2) that the price paid by GTE is no higher than prices charged by the supplying affiliate to its other affiliates or divisions for the same items or class of items, or to unaffiliated persons or corporations. Consequently, we conclude that the PUC's finding of fact as supplemented by the Examiner's Report was sufficient to support its determination that payments by GTE to GTE Service Corporation were reasonable and necessary operating expenses.
GTE Directories is a subsidiary of GTE Corporation. GTE Directories publishes and prints directories for the GTE telephone companies and unaffiliated telephone companies. Under a joint venture agreement between GTE and GTE Directories, GTE Directories publishes and prints GTE's subscriber directories for the right to sell yellow page advertising to the business subscribers and GTE provides the subscriber listings and bills and collects the yellow page advertising revenues. As payment for the listings, and the billing and collection, GTE retained 52.5% of the revenues it collects and GTE Directories received 47.5% of the revenues. The PUC included GTE's payments to GTE Directories of 47.5% of the revenues in GTE's operating expenses. [19] The PUC's final order included Finding of Fact 16 which stated: The testimony of GTE witness Keys refutes the conclusion that GTE Directories' agreement with GTE Southwest [GTE] is unfavorable in comparison with its other customers. It would not be appropriate to adjust GTE Directories' prices for return and tax components. Because the matching principle would require ignoring the revenues from the arrangement with GTE Directories if the expenses are not allowed, the customers benefit from recognizing the arrangement for rate-making purposes. Accordingly, expenses of $19,400,000 and revenues of $47,416,000 should be included in the cost of service. Section III.D.6 of the Examiner's Report stated in pertinent part: e. Discussion and recommendation.  The ALJ [Administrative Law Judge] disagrees with the company's [GTE's] position [that payments to GTE Directories are not an expense subject section 41(c)(1)]; the expenses incurred as a result of the agreement with GTE Directories are subject to scrutiny as an affiliate transaction. The ALJ agrees with the General Counsel and staff, however, that the expenses should be allowed because disallowance would cause a net reduction of revenues. Adopting Mr. Arndt's [a witness for Intervenors/Cities] recommendation of disallowing all the expense would require not recognizing the revenues. The ALJ agrees with the direct and rebuttal testimony of GTE Southwest [GTE] witness Keys that Mr. Arndt's analysis does not demonstrate that GTE Directories' agreement with GTE Southwest [GTE] is unfavorable in comparison with its other customers. With respect to Mr. Allen's [a witness for Intervenor Office of Public Utility Counsel] recommendation, the ALJ is of the opinion that it is not appropriate to adjust an affiliate's prices for return and tax components on the basis of the assumptionmade by Mr. Allen that such components would be adjusted if the utility were providing the services for itself. Accordingly, the ALJ recommends that the Commission allow in cost of service $19,940,000 of expenses associated with the directories; $47,416,000 of revenues should be recognized. Finding of Fact 16 and section III.D.6 of the Examiner's Report which was adopted and incorporated by reference in the PUC's final order state that (1) the testimony of GTE witness Keys refutes the conclusion that GTE Directories' agreement with GTE Southwest [GTE] is unfavorable in comparison with its other customers, (2) GTE's customers benefit from recognizing the [joint venture] arrangement [between GTE and GTE Directories] for rate-making purposes and (3) the analysis [of a witness for Intervenors/Cities] does not demonstrate that GTE Directories' agreement with GTE Southwest [GTE] is unfavorable in comparison with its other customers. The finding of fact is missing at least one essential finding required by section 41(c)(1)that each item or class of items allowed is reasonable and necessary. Consequently, we conclude that the PUC's finding of fact as supplemented by the Examiner's Report was not sufficient to support its determination that payments by GTE to GTE Directories were reasonable and necessary operating expenses.