GTE South Inc. v. AT&T Communications of Virginia, Inc.

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

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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

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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.

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 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.

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 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

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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.

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