Present: Carrico, C.J., Compton, 1 Lacy, Keenan, Koontz, and
Kinser, JJ., and Poff, Senior Justice
GTE SOUTH INCORPORATED
v. Record No. 991964 OPINION BY JUSTICE ELIZABETH B. LACY
March 3, 2000
AT&T COMMUNICATIONS OF
VIRGINIA, INC., ET AL.
FROM THE STATE CORPORATION COMMISSION
In this appeal of right, GTE South Inc. (GTE) assigns a
number of errors to the decision of the Virginia State
Corporation Commission reducing GTE's gross operating income
by approximately $27,000,000.
I.
In 1993, the General Assembly enacted Code § 56-235.5
allowing the Commission to adopt ratemaking methods to replace
the traditional rate based, rate of return analysis specified
in § 56-235.2. The alternative forms of ratemaking had to
protect the affordability and continued availability of
quality local exchange service, not prejudice or disadvantage
any class of telephone customers or providers, and be in the
public interest.
Pursuant to this statute, the Commission approved four
alternative regulatory plans in 1994. One of those
alternative ratemaking plans was approved for use by GTE in
1
Justice Compton participated in the hearing and decision
of this case prior to the effective date of his retirement on
February 2, 2000.
Case No. PUC930036 and became effective January 1, 1995. 1994
S.C.C. Ann. Rep. at 263. Paragraph 11(A) of the alternative
plan required GTE to file a rate application conforming to the
rules contained in Case No. PUE850022 governing a general rate
case if it sought an increase in overall regulated operating
revenues. For revenue neutral rate changes, Paragraph 11(B)
authorized a procedure that did not require an investigation
or evaluation of overall costs and revenues for changes in
basic local exchange telephone service. Paragraph 18 of the
plan specifically excluded access charges from basic local
exchange telephone service for purposes of pricing.
On April 6, 1995, GTE gave notice of "its intent to file
a general rate case application, pursuant to the requirements
of . . . PUE850022." At a June 2, 1995 meeting with the
Commission staff to discuss the pending application, GTE
indicated that it intended to file a revenue neutral rate
application. Staff witness William Irby testified that during
the meeting, GTE was told that its filing could only be done
pursuant to general rate case rules because the extensive rate
restructuring proposed by GTE was not contemplated by the
rules applicable to revenue neutral rate changes governed by
Paragraph 11(B). In its subsequent application filed June 9,
1995, GTE sought an increase in the price of many basic local
exchange telephone services with a concomitant decrease in
2
access charges and intraLATA long distance rates totaling over
$18,000,000. GTE's application stated that it sought these
revisions "pursuant to the Commission's Rules . . . adopted in
Case No. PUE850022." The accompanying schedules and testimony
complied with the requirements for a general rate case.
The record shows that in the following months GTE was
made aware on several occasions that the Commission's staff
considered the application to be a general rate case and that
the proposed new rates were subject to review and change under
the "just and reasonable" standard of § 56-235.2. Responding
to the Commission's staff, GTE asserted that its application
was filed under the rate case rules as required under its
alternative regulatory plan and that it believed its rates
were just, reasonable, and affordable to its customers.
Pursuant to GTE's request, the hearing on its application
was postponed and GTE filed an amended application in November
1995. The hearing before a hearing examiner was reset for
June 17, 1996 and the parties prefiled their testimony.
On June 11, 1996, one week before the scheduled hearing
date, GTE moved to exclude all evidence and testimony "that
recommends or purports to support a reduction in GTE's overall
jurisdictional operating revenues." GTE asserted that its
amended filing, as well as its original filing, was revenue
neutral and entitled to consideration under Paragraph 11(B) of
3
its alternative regulatory plan. The assertion that the
application was revenue neutral was premised on decreases in
access charges. Even though GTE acknowledged that under the
alternative regulatory plan access charges were not included
as basic local exchange telephone service for purposes of
pricing, it argued that changes in access charges could
properly be considered in its overall proposal under Paragraph
11(B).
The hearing examiner denied GTE's motion, finding that
the application was not revenue neutral and that "every single
document filed by GTE in this case, with the exception of its
Motion to Exclude and certain limited portions of its rebuttal
testimony, indicated its application was filed as a general
rate case."
The Commission adopted the recommendations of the Hearing
Examiner, finding that GTE had not filed a revenue neutral
application because the alternative regulatory plan did not
allow offsetting increases in regulated revenue with changes
to access prices under Paragraph 11(B). The Commission also
held that any increase in revenues, even to offset costs, must
be made pursuant to the provisions of Paragraph 11(A). And
finally, the Commission held that any application under either
Paragraph 11(A) or (B) is subject to the Commission's review
of proposed rates under the "just and reasonable" standard.
4
II.
GTE first claims that the Commission failed to follow
GTE's alternative regulatory plan because it improperly
converted GTE's application under Paragraph 11(B) into a
general rate case.
This record does not support GTE's contention that the
Commission "converted" its application into a general rate
case. Rather, the record indicates that the Commission
concluded that the application was filed as a general rate
case, not as a revenue neutral proceeding under Paragraph
11(B).
While the Commission's conclusion regarding the nature of
GTE's application is not strictly a ratemaking decision, it
incorporates consideration of ratemaking principles that are
within the specialized expertise of the Commission. The
Commission operates as an expert tribunal and its orders are
presumed to be just, reasonable, and correct. Central Tel.
Co. v. State Corp. Comm'n, 219 Va. 863, 874, 252 S.E.2d 575,
582 (1979). Accordingly, this decision of the Commission will
be sustained unless not supported by the record. Hopewell
Cogeneration Ltd. Partnership v. State Corp. Comm'n, 249 Va.
107, 115, 453 S.E.2d 277, 281-82 (1995).
The record as set out above provides ample support for
the Commission's conclusion both under the terms of GTE's
5
application and its alternative regulatory plan, PUC930036.
Accordingly, the Commission's holding that GTE's application
was a general rate case application under Paragraph 11(A) is
affirmed.
III.
GTE also cites as error certain adjustments made by the
Commission to the rate base. These adjustments are clearly
part of the Commission's legislative function in setting rates
that are just and reasonable, and will be set aside only if
the Commission "has exceeded its reasonably wide area of
legislative discretion." Anheuser-Busch Cos. v. Virginia
Natural Gas, Inc., 244 Va. 44, 46, 418 S.E.2d 857, 858 (1992)
(citations omitted). If the record supports the Commission's
determinations, there is no abuse of discretion. Hopewell
Cogeneration, 249 Va. at 115, 453 S.E.2d at 281-82.
A. Affiliate Charges
The Commission required that the charges to GTE for goods
and services provided by two of its affiliates, GTE Data
Services and GTE Supply, be based on the affiliates' actual
cost of those goods and services, including a reasonable
return, rather than on the prices these affiliates charged
GTE. GTE claims that this adjustment is in error because the
prices charged by the affiliates were at market rates or lower
and that in applying these adjustments, the Commission was
6
adopting a new policy for determining affiliate charges which
had not been applied to GTE's purchases from affiliates in
prior proceedings.
The Commission's adjustments were based on its conclusion
that there was no true market price for these goods and
services. GTE introduced evidence that the prices paid to
affiliates were no higher than those paid to non-affiliates.
There was also evidence that a high percentage of the
affiliates' sales were to other affiliates and that some of
these sales were made at "cost" rather than "market" price.
While there was evidence that the prices charged GTE were
competitive and reflective of the market, it was not
uncontradicted. The Commission was entitled to weigh and
reject GTE's evidence. Apartment House Council, Inc. v.
Potomac Elec. Power Co., 215 Va. 291, 297, 208 S.E.2d 764, 768
(1974).
Furthermore, the adjustments chosen by the Commission
represent an accounting adjustment, not a retroactively
applied change in a rule or administrative interpretation of a
statute as GTE contends. Roanoke Gas Co. v. State Corp.
Comm'n, 225 Va. 186, 190, 300 S.E.2d 785, 788 (1983).
Accordingly, there is no error in the Commission's
adjustment to the charges by the affiliates.
B. Parental Debt Adjustment
7
The Commission applied a parental debt adjustment that
allocated tax benefits received by GTE's parent company, GTE
Corporation, to GTE and in turn to GTE's ratepayers. This
adjustment is based on tax savings resulting from the parent
corporation capitalizing on its equity investment in a
regulated subsidiary. The tax savings is available if the
parent company chooses to file a consolidated tax return. GTE
complains that this adjustment was a departure from the
Commission's previous policy of determining a utility's taxes
on a "stand alone" basis and that the Commission's assumption
that debt incurred by GTE Corporation is proportionally
invested in its subsidiaries is inaccurate.
GTE does not assert that this adjustment is per se
improper for ratemaking purposes, only that it should not have
been used in this case. The Commission has applied
adjustments to a consolidated tax return in other cases and,
like other state regulatory bodies, has applied this specific
adjustment in at least one other case. Application of
Virginia-American Water Co., Case No. PUE950003, 1997 S.C.C.
Ann. Rep. 333. This adjustment, like the adjustment discussed
above, is an accounting adjustment which, although a departure
from the approach used in previous cases, is within the
discretion of the Commission to impose.
8
We also reject GTE's assertion that the adjustment should
not have been applied because it was based on improper
assumptions such as fictional jurisdictional interest and
fictional jurisdictional tax savings. The ratemaking process
is not a matter of scientific precision and must incorporate a
number of assumptions. The Commission's judgments in fixing a
reasonable rate of return are judged by a "zone of
reasonableness." Commonwealth of Virginia v. Virginia Elec. &
Power Co., 211 Va. 758, 769, 180 S.E.2d 675, 683
(1971)(citations omitted). There was testimony that GTE
Corporation supports all subsidiary investments and that such
support is not directly limited to cash flow between
affiliates. Therefore, according to Commission staff, it
would be improper to limit this allocation to specific debt or
equity issuances of GTE Corporation to GTE. Thus, the record
supports the Commission's decision to apply the parent company
debt adjustment and there is no error in that decision.
C. Separations Studies
The Commission rejected GTE's separations factor for
allocating the local dial switching equipment costs between
interstate and intrastate use because it found that the
separations procedures did not comply with separations
procedures promulgated by the Federal Communications
Commission (FCC). GTE's separations factor was based on an
9
actual use measurement of seven days per office rather than
overall traffic volumes throughout the period. In the absence
of a current valid separations study, the Commission utilized
1988 and 1990 separations studies which were the last properly
calculated separations factors. 2
GTE contends that its separations factor complied with
the FCC separations procedures and that the Commission erred
in rejecting it. However, the record shows that the FCC has
not approved GTE's separations procedure. GTE's witness
testified that he was unaware of any state proceeding that had
either approved the procedure or determined that it was in
violation of the FCC procedure. Furthermore, GTE's
separations factor is based on a limited period rather than
traffic volume over the course of a year, ignoring traffic
occurring at any other time. The Commission's staff testified
that this procedure undermines the accuracy of a separations
factor for overall traffic volumes. The Commission's decision
to reject GTE's separations factor is supported by the record
and was not an abuse of discretion. Hopewell Cogeneration,
249 Va. at 115, 453 S.E.2d at 281-82.
D. Rate Base and Depreciation
2
In 1994, Contel of Virginia, Inc. and GTE Southwest
merged to form GTE South. The 1988 study was of GTE
Southwest's service territory and the 1990 study covered
Contel's service territory.
10
GTE's final assignments of error are also without merit.
GTE complains that its application was based on a December 31,
1994 rate base, but that the Commission erroneously adopted a
rate base as of September 30, 1995. GTE's primary complaint
is that, although the rate base was adjusted by increased
revenues reflecting increased customer levels, no adjustments
were made for the expenses necessary to support those
increased customer levels. However, GTE offered no evidence
of its increased expenses. The Commission's decision to rely
on a current, updated rate base is consistent with this
Court's determination that "the Commission, in exercising its
legislative function of fixing utility rates for the future,
should not be blind to the future. It may adjust the results
of the test year by allowing for known changes to make the
test year representative of the future." Virginia Power, 211
Va. at 771, 180 S.E.2d at 685.
Finally, GTE asserts that the Commission erred in
refusing to consider GTE's new depreciation rates. These
rates were offered in the rebuttal testimony of a GTE witness.
The Hearing Examiner granted the Attorney General's motion to
exclude this testimony because the GTE witness admitted he was
not an expert on GTE's depreciation rates, and that while he
could not support those rates in this proceeding, they would
be supported by experts from other GTE departments in a
11
companion proceeding. The Hearing Officer also determined
that the depreciation testimony was untimely and did not rebut
any issues raised by the Commission staff or any other party.
In fact, neither GTE, the Commission staff, nor any other
party in this proceeding had previously raised the issue of
depreciation rates. Similarly, the Hearing Examiner refused
to adopt GTE's January 1997 suggestion to "take judicial
notice" of new depreciation rates that had been approved
pursuant to another Commission procedure. 3 The Commission
adopted the Hearing Examiner's decision to refuse evidence of
new depreciation rates.
Based on this record, the Commission's order was not an
abuse of discretion. GTE's attempt to have the Commission
incorporate new depreciation rates at that point in the
proceeding was untimely.
For the above reasons, the judgment of the Commission is
affirmed.
Affirmed.
3
The new depreciation rates had been filed with the
Commission's Communications Division Director two days before
they were included in the rebuttal testimony in this case.
The new rates were approved by the Director effective January
1, 1996, in accordance with the Commission's Rules of
Procedure.
12