Opinion ID: 2454404
Heading Depth: 2
Heading Rank: 1

Heading: GTE Service Corporation

Text: 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.