Home / Fulltext Opinions / Supreme Court of Virginia / GTE SOUTH INCORPORATED V. AT&T COMMUNICATIONS OF VIRGINIA, INC., et al.


NOTICE: The opinions posted here are
subject to formal revision. If you find a typographical error or
other formal error, please notify the Supreme Court of Virginia.




March 3, 2000

Record No. 991964





Present: Carrico, C.J., Compton,[1] Lacy, Keenan, Koontz, and Kinser,
JJ., and Poff, Senior Justice


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.


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

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 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 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 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.


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

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 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


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
, 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 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

Accordingly, there is no error in the
Commission’s adjustment to the charges by the affiliates.

B. Parental Debt Adjustment

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.

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 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.

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

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 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.




[1] Justice Compton participated in
the hearing and decision of this case prior to the effective date
of his retirement on February 2, 2000.

[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.

[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