ORDER NO. 96-179

ENTERED JUL 16 1996

THIS IS AN ELECTRONIC COPY

BEFORE THE PUBLIC UTILITY COMMISSION

OF OREGON

UM 753

DISPOSITION: LEASE RATES MODIFIED; STIPULATION APPROVED

BACKGROUND

Procedural History. On April 17, 1995, the Commission initiated this consolidated proceeding to review all affiliated lease activity of U S WEST Communications, Inc. (USWC). Order No. 95-383. The purpose of this review is to determine the reasonableness of leases for the purpose of including the lease amounts in USWC's pending rate case, docket UT 125.

On September 29, 1995, the Commission expanded the scope of this docket to include “flow-through” leases and “sale and lease-back” arangements. Order No. 95-972. “Flow-through” leases allocate costs back to USWC ratepayers through leases that indirectly involve affiliated interests. In a “sale and lease-back” arrangement, an affiliated interest sells USWC building space to an independent third party, and then leases the property back.

Parties to this case are USWC, GTE Northwest, Inc., the Citizens' Utility Board, and Commission Staff.

Hearings and briefs. On February 28, 1996, a hearing was held in this matter before Thomas G. Barkin, Administrative Law Judge. At the hearing, the parties agreed to remove from consideration in this docket a number of leases referred to as “build-to-suit” leases. Three of those leases will be addressed in the revenue requirement portion of UT 125.

On March 27, 1996, USWC and Staff filed briefs that included a summary of positions. On May 16, 1996, USWC submitted a clarification of the summary of positions and a set of proposed documentation standards for future affiliated interest leases. The documentation standards were filed on behalf of both parties.

On June 6, 1996, USWC and Staff filed a stipulation detailing the leases under consideration in this docket and identifying each of the parties’ positions with respect to the proper lease rates.

This order has two parts. The first section provides an overview of the issues in this case and addresses the policy issues on a generic basis. The second section applies the policy decisions to the facts surrounding particular leases.

LEASE TRANSACTIONS AND GENERIC ISSUES

Findings of Fact

Leases Subject To This Proceeding

As part of its corporate operations, USWC leases building space throughout its service territory. The lease payments are included in the company’s operating expenses for ratemaking purposes. Oregon customers are charged for the leases through USWC's rent compensation process which allocates building costs throughout the fourteen states based on the services or project costs assigned or allocated to USWC.

When USWC enters into lease agreements with companies with which it has an affiliated interest relationship, the company must, under ORS 759.390, file with the Commission a copy of the lease contract. After investigating the contract, the Commission must determine if the contract is fair and reasonable and not contrary to the public interest. Approved contracts may be recognized in a rate valuation or other hearing or proceeding.

Leases with affiliates raise a number of issues that affect ratepayers. A general concern is the ability of the company to negotiate the best terms for the ratepayers in less-than-arm’s-length transactions. Oregon law recognizes the possibility that the regulated entity will pay above market rates to the unregulated affiliate. ORS 759.390.

In this proceeding, USWC requested approval of leases with other U S WEST companies such as U S WEST, Inc. (USWI), U S WEST Communications Services, U S WEST Real Estate, Inc., and U S WEST Business Resources, Inc. (BRI). These companies are all affiliates of USWC. USWC requests approval of the lease contracts so that it may include in rates for Oregon customers the lease costs associated with services or project costs directly assigned or allocated to USWC Oregon operations. Staff intends to include the rates determined in this proceeding in its opening testimony in UT 125.

The affiliated interest application filings associated with this docket are as follows:

UI 39--U S WEST Communications Services

UI 53--U S WEST Business Resources, Inc.

UI 56--U S WEST, Inc.

UI 96--U S WEST Federal Services, Inc.

UI 111--U S WEST Real Estate, Inc.

 

Issues Resolved by Stipulation

The parties presented the Commission with two sets of agreements. The first set dealt with the 72 leases under consideration in this docket. The stipulation, attached as Appendix A (with Attachments A through D), resolves 56 of the 72 leases. The Attachments categorize the stipulated leases, as follows:

Attachment A--These 32 leases have expired since the date USWC filed the leases. USWC is not requesting that the lease amounts be included in rates. Staff and USWC agree that USWC may include the amounts in the books of account, but the Commission will not be asked to consider whether the leases are reasonable for rate case or accounting puposes.

Attachment B--The rent amounts in these 18 leases are undisputed. Staff and USWC agree to support these lease rates for rate case purposes. They also recommend that the lease amounts should be approved for accounting purposes.

Attachment C--These 6 leases have expired, but Staff and USWC agree the lease amounts are reasonable and should be included in rates. The lease expenses were incurred in the UT 125 test year. Staff and USWC agree that USWC may include the amounts in its books of account and support the lease rates in rate proceedings.

Attachment D--This attachment includes 16 leases in dispute.

 

Appendix B contains a set of guidelines agreed to by Staff and USWC for documenting the reasonableness of less-than-arm’s-length lease transactions in future proceedings. The adequacy of USWC's documentation was a principal issue in this case.

USWC's Analysis of the Leases

USWC's company policy is that the only lease expenses that should be incorporated into rates for regulated services are those that are consistent with market conditions. USWC offered testimony from BRI and the consulting firm, Arthur Andersen, to demonstrate that its leases met that standard.

USWC has given responsibility to its affiliate, BRI, to insure that lease transactions, whether with affiliates or non-affiliates, are consistent with market conditions. BRI examines competitive properties and availability of similar space, market forecasts, construction costs of builidings, terms of the lease, cost of tenant improvements paid by the landlord, landlord stability, and amenities of the property such as parking, stores, and restaurants. In addition to looking at market comparables, BRI compares the cost of moving and the cost of constructing a building to meet company specifications.

In 1993, USWC commissioned Arthur Andersen to study affiliated lease arrangements to determine the applicable market rents for leased property. Arthur Andersen used methods commonly employed in the real estate industry to evaluate the market comparability of commercial real estate. As a result of this process, USWC adjusted lease rates that Arthur Andersen found to be above market. USWC claims that further adjustments are not necessary. While Staff disagrees with some of the conclusions reached by Arthur Andersen and has recommended further adjustments, it has no concerns over the independence of the study.

Arthur Andersen used the following methods to determine whether the USWC leases were comparable to market.

Comparable Leases. Arthur Andersen identified commercial leases that were comparable to USWC leases under review in this proceeding. The study evaluated comparable leases in terms of date of execution, size, location, lease term, building characteristics, specialized features, amenities, and other characteristics.

 

Comparable Lease Extensions. If Arthur Andersen identified a market lease that was generally comparable to the USWC lease, but had a shorter initial term, it assumed that the leases were renewed at either the option rate in the lease or at market rates at the end of the term. Arthur Andersen applied forecasted escalation factors to make the adjustment.

 

Hypothetical Market Renewals. If there were an insufficient number of comparable lease transactions for an extended lease analysis, Arthur Andersen calculated hypothetical renewal rates of the original lease from the expiration of the original term to the end of the extended term. Hypothetical renewals were based on forecasts of prevailing market rates at the time of renewal.

 

Build-To-Suit Analysis. If a comparable lease analysis could not be performed, either because a lease was for a special purpose building or the size of the lease was uncommon for the market, Arthur Andersen performed a build-to-suit analysis. Arthur Andersen calculated the average annual rental rate required by a third-party investor to build a facility that would meet the company’s requirements. The required rent was determined by applying a range of investor yield requirements to the estimated total development costs.

 

Staff agrees with USWC that these methodologies are consistent with accepted real estate practice and can produce reasonable estimates of market rates. As discussed below, Staff is unable to accept some of the assumptions and data used by Arthur Andersen when it applied the methodologies.

Arthur Andersen relied, to the extent possible, on comparable leases. Arthur Andersen reviewed data from general real estate sources and the brokerage community on 400 lease transactions in key markets. Market conditions were evaluated in terms of lease rates, office demand, inventory characteristics, available inventory, and likely future additions to supply.

If sufficient data was unavailable, Arthur Andersen relied on lease extensions, hypothetical market renewals, and hypothetical build-to-suit approaches. When using these methods, Arthur Andersen looked at current market factors and the tenant anticipation of future lease rates. Arthur Andersen assumed that when parties negotiated lease agreements, they made assumptions over time about how rates would change over the life of the lease. Lessors expecting rapid inflation would expect higher lease payments over the term of a lease than lessors expecting lower rates of inflation. Long-term leases required an analysis of anticipated changes in market rates over the term of the lease.

Arthur Andersen used the estimates of future expectations of the lease market prepared by Dr. Susan Wachter of The Wharton School of The University of Pennsylvania and the WEFA Group of consulting economists. Dr. Wachter’s study analyzed the Denver, Phoenix, and Tucson markets, separately. In the Denver market, Dr. Wachter found that market rents peaked in 1981 and 1982 and began a decline thereafter. After 1992, Dr. Wachter projected the market to recover due to increased demand for office space and the lack of new supply. Dr. Wachter found the Phoenix market showed less volatility historically than the Denver market. The peak in historic rents occurred in 1991 and then declined. The study projected that rents would begin to increase in 1995. According to the study, the Tucson and Phoenix market histories are similar and rental rates generally followed a similar pattern. The study projected the Tucson market to recover approximately two years earlier than the Phoenix market. Dr. Wachter’s study results for the Denver and Phoenix markets are found in Appendix C.

USWC claimed that the Arthur Andersen estimates of build-to-suit costs were based on actual USWC building costs for the studied facilities or cost data based on the character of the proposed facilities. Arthur Andersen confirmed its assumptions of developer returns for the 1990-1991 time period with third-party real estate professionals active in the marketplace at that time.

For the properties reviewed in this proceeding, Arthur Andersen found that leases representing 40 percent of the building space in the affected properties were below market; leases representing 50 percent of the space were at market; and leases representing 10 percent of the space were above market. Arthur Andersen concluded that USWC had achieved market comparability for its overall portfolio based on the high percentage (90 percent) of leased space that is either below or at market.

Based on the Arthur Andersen conclusions, USWC adjusted the leases under review in this proceeding. For any lease above the market range, USWC made an accounting adjustment on its books in 1994 and also amended the leases so that the expenses will be within the market range going forward beyond 1994. The leases were amended to the top of the range of market comparability determined by Arthur Andersen.

Staff's Review of the USWC Leases

Commission Staff evaluated the Arthur Andersen’s market study and the BRI analysis. Staff found the Arthur Andersen study to be more specific and more empirical than the BRI review. Where BRI and Arthur Andersen studied the same leases, Staff relied on the Arthur Andersen study. Staff agreed with the lease rates in several of the applications. However, Staff recommends adjustments in the lease rates for some of the properties for ratemaking purposes. See Appendix A, Attachment D.

Staff asserts that, in many instances, USWC did not properly document its claims that the lease rates were comparable to the market. Staff pointed out that in August 1992, an independent consultant advised USWC to prepare a full accounting of all USWC building transactions impacting ratepayers. Based on information provided by the company, the consultant was unable to determine the impact of current lease arrangements and was hindered in judging the reasonableness of some leases by the lack of documentation.

Staff proposed several ratemaking adjustments to the lease rates. Where Arthur Andersen identified market comparables and the USWC lease rate was above the range, Staff adjusted the lease rates to the midpoint of the range. This adjustment conflicted with USWC's adustment to lower the lease rates to the top of the range. Staff asserted that lease rates should not be adjusted to the most expensive lease rate that can be found in the market. Staff concluded that adjusting to the top of the range would favor the shareholders, while adjusting to the bottom of the range would favor the customers.

Where USWC was unable to provide market comparable leases or provide satisfactory documention for estimates of market comparable leases, Staff proposed more drastic adjustments. Staff observed that the majority of the Arthur Andersen study did not compare leases by direct market comparison. Rather, Arthur Andersen used methods that required manipulation of data. While Staff does not object to a build-to-suit analysis supported with sufficient underlying detail, Staff gave no weight to estimates that were not supported by actual construction cost data or documentation of construction bids that would demonstrate that the estimated lease rate was reasonable. Staff also questioned the accuracy of market hypotheticals because the assumptions underlying the forecasted rates were suspect.

Staff expressed concern over the assumptions relied upon by Arthur Andersen to forecast future lease rates. Of particular concern to Staff was Arthur Andersen’s reliance on the market forecast study performed by Dr. Wachter and the WEFA Group. Dr. Wachter’s study forecasted demand for office rents which would be consistent with perceptions and assumptions about economic activity that were held at that time. Staff pointed out that there are a number of seeming anamolies that, absent further explanation, undercut the credibility of the study.

For example, Dr. Wachter forecasted nominal net rents in Denver to jump 453 percent between 1990 and 2010, with only one down year. Between 1994 and 1999, rents were anticipated to increase 112 percent. Rents were expected to more than triple between 1994 and 2002. In Phoenix, Dr. Wachter expected an increase in nominal net rates of 214 percent from 1990 to 2010. In fact, after a brief decline from 1990 to 1994, the Wachter study anticipated rents to more than double in just three years from 1994 to 1997. The study also forecasted that nominal net rents in Phoenix would quadruple between 1994 and 2010. Staff considers such estimates to be unrealistic.

In those cases where Staff disagreed with Arthur Andersen’s lease extensions and hypothetical lease renewals, Staff offered proposed lease rates. Staff relied on the most recent arms-length lease rate for the particular property.

Commission Decision on Generic Issues

ORS 759.390 states, in part:

(2) When any telecommunications utility doing business in this state shall enter into any contract, oral or written, with any person or corporation having an affiliated interest relating to the construction, operation, maintenance, leasing or use of the property of such telecomunications utility in Oregon, or the purchase of property, materials or supplies, which shall be recognized as the basis of an operating expense or capital expenditure in any rate valuation or any other hearing or proceeding, the contract shall be filed with the commission ….

 

(3) When any such contract has been submitted to the commission, the commission promptly shall examine and investigate it. If, after such investigation, the commission determines that it is fair and reasonable and not contrary to the public interest, the commission shall enter findings and order to this effect …, whereupon any expenses and capital expenditures incurred by the telecommunications utility under the contract may be recognized in any rate valuation or other hearing or proceeding. If, after such investigation, the commission determines that the contract is not fair and reasonable in all its terms and is contrary to the public interest, the commission shall enter findings and order accordingly and. … it shall be unlawful to recognize the contract for the purposes specified in this section.

The Commission must make its determination on the reasonableness of the lease contracts based on the preponderance of the evidence. Hutcheson v. Weyerhaueser, 288 Or 51 (1979).

Stipulation and Inconsequential Amounts in Dispute

The Commission has considered the agreements between USWC and Staff. The treatment of the leases listed in Appendix A, Attachments A, B, and C, especially the expense amounts for rate making purposes is fair, reasonable, and not contrary to the public interest. In addition, USWC may include the lease amounts listed in Appendix A in its books of account. Including lease amounts on the books of account has no rate making effect.

Appendix A, Attachment D, lists leases that Staff and USWC were unable to resolve through stipulation. We note that the amount in dispute for several of the leases listed in Attachment D is less than $10,000 each. Staff's total proposed revenue requirement reduction for all of these leases totals $10,295. For a company, such as USWC, with a revenue requirement in Oregon of nearly $500,000,000, such amounts are inconsequential. Rather than analyze the reasonableness of each of these leases, we believe that it would be a better use of our time and resources to adopt the company’s proposed lease amounts without further comment.

By asserting our intention to ignore these small differences, we do not suggest that inside dealing is unimportant, or that our scrutiny of these transactions should be relaxed. Indeed, we believe the reason that so few differences exist is because the company is aware of our concern that ratepayers can be adversely affected by less-than-arm’s length transactions. We expect our Staff to continue careful scrutiny of these transactions. However, we also expect that future proceedings will not be burdened by disputes over insignificant sums.

Finally, the standards in Appendix B, regarding documentation, are reasonable and should be approved. These standards should provide guidance for USWC in the future and reduce unnecessary litigation.

Generic Issues

There are three issues in this case:

Were USWC's estimates of market expectations reasonable for the Denver and Phoenix markets?

Did USWC adequately document its build-to-suit analyses?

Were the Staff adjusted lease amounts reasonable?

 

In this section, we first address these issues on a generic basis. In the next section, we turn to each particular lease at issue.

Estimates of market expectations

We conclude that Staff was appropriately skeptical of Dr. Wachter’s predictions. Absent corroborating evidence or further explanation, we cannot accept the assumptions underlying the study. The estimates are replete with unexplained variations. The rates of growth were extraordinary. While it is possible that these were the expectations in the early 1990s, we require more evidence to conclude that it is more likely than not that these dramatic rates of growth were expected in the market.

Required documentation for build-to-suit analyses

Staff does not disagree with the methodology of using a build-to-suit analysis to estimate market comparability. For several of the leases for which Arthur Andersen conducted a build-to-suit analysis, however, Staff was unable to verify the reasonableness of USWC studies. Staff concluded that the company did not provide actual development costs for the building. We agree with Staff that the company must provide actual development costs as part of a build-to-suit analysis.

The Commission is at a severe disadvantage in evaluating leases that are entered into on a less-than-arm’s length basis. It should come as no surprise that we have found a near perfect correlation between the conclusions of consulting experts, even independent experts, and the interests of their clients. Absent the ability for our Staff to review the actual costs of constructing the building, there is no way to confirm the consultant’s estimates. For that reason, we strongly support Staff's insistence on receiving actual construction data.

We also note that Staff has been judicious in its insistence that USWC provide actual development cost data. Staff accepted the USWC construction cost data for a 586,403 square foot lease at 20 E. Thomas, in Phoenix, Arizona. Where USWC has provided acceptable documentation and the data supports a conclusion that lease rates are comparable to market, we are willing approve the inclusion of the USWC cost in rates.

Staff adjustments

We adopt the Staff recommendation that, in the absence of reliable data, we should use the most recent arm’s-length market rate for the particular property. We do not assume that the most recent market rate is necessarily the best proxy for the actual market rate. However, less-than-arm’s-length transactions are suspect and the burden is on the regulated utility to demonstrate the reasonableness of the rate. Where reliable evidence is lacking, we will use the most recent arm’s-length rate for revenue requirement purposes.

REVIEW OF INDIVIDUAL LEASES

As a result of the stipulation and our decision on leases with an insignificant revenue requirement impact, only five leases require resolution by the Commission. These leases are:

1801 California Street, Denver, Colorado

This lease is part of a sale-lease back transaction. USWC leases 905,475 square feet of space from a third party that acquired the property in December 1991 from a USWC affiliate, Beta West Properties, Inc. When USWC renegotiated the lease in 1991, the lease term was extended 20.5 years and a higher overall rate negotiated. USWC’s current lease rate is $16.73 per square foot. Staff recommends a rate of $12.46 per square foot. At issue here is a proposed revenue requirement reduction of $175,180.

Arthur Andersen and BRI could not find direct market comparables for USWC's current lease. To estimate the market comparable rate, they used hypothetical renewals and forecasts based on estimated development costs. Arthur Andersen developed a range of $18.57 to $20.34 for the build-to-suit analysis and a range of $30.98 to $41.68 for the hypothetical renewal method. BRI developed a range of $18.43 to $20.50 for the build-to-suit method and $23.46 for the hypothetical renewal.

Staff's proposed lease rate is based on the original lease that was negotiated in 1984, as part of a buy-out of an existing lease by the owner of the building. The rate was available because the previous tenant paid a substantial buy-out penalty. The landlord used the penalty payment to provide USWC free rent for the first four years of the lease as an incentive to rent the property. The $12.46 rate represented the net rate over the life of the lease.

USWC presented the studies and presentation to the Board of Directors of Mountain Bell to show Mountain Bell was evaluating options above the $12.46 rate. USWC also presented a 1991 study by the Real Estate Research Corporation (RERC) and a 1992 study by Cushman and Wakefield to demonstrate the reasonableness of the lease rate. The RERC study indicated that $15.00 to $17.00 is the likely rent that USWC would pay for a build-to-suit alternative on a net basis. Cushman and Wakefield concluded that a build-to-suit would have a net effective lease rate of $18.43, if it was completed in 1994, the expiration date of the USWC lease.)

USWC could not provide data to verify the construction cost of this property. In response to a Staff discovery request, USWC was unable to provide original data showing the cost of constructing the 1801 California Building. Furthermore, the RERC and Cushman and Wakefield studies relied on estimated construction costs of a hypothetical building, not 1801 California.

Regarding the hypothetical renewal analysis, Staff concluded that the USWC methodology was not based on a direct market comparison. Rather, the rates were obtained through manipulation of data. Staff recommended a rate of $12.46 per square foot, which was the rate in effect prior to the lease back transaction and the expiration of the rent credit.

Without actual data for a build-to-suit analysis or more detailed explanation of the assumptions underlying growth rate estimates, the Commission cannot confirm the reliability of the company’s lease rate analysis. We recognize the limitations in Staff's proposed lease rate of $12.46, but, this rate reflects the last arm’s-length transaction regarding this property. Based on the limited reliable evidence that we have before us, we will adopt the Staff proposed rate.

5090 N. 40th, Phoenix, Arizona

There are two leases at issue at this building. Both leases are between USWC and BRI. The revenue requirement impact of the Staff adjustment on the 50,805 square foot lease is $21,289. The impact for the 96,347 square foot lease is $62,035. Both leases are for 17 years. These leases were renegotiated just prior to a sale and lease back transaction.

Arthur Andersen found that the lease rates for the renegotiated leases exceeded adjusted comparisons based on hypothetical renewals and build-to-suit scenarios. Arthur Andersen could not find market comparables for these leases. It used Dr. Wachter’s forecast and a build-to-suit analysis for similar buildings. Arthur Andersen did not use actual construction costs in their analysis.

To arrive at the lease rate adjustment, Staff used a 7 year 2,581 square foot lease. USWC claims that Staff's approach disregards appraisal principles regarding comparability. The lease Staff chose as most applicable was for a space five to ten percent of the size of the subject leases and for much shorter terms. Since the original leases were negotiated in 1988 and the lease Staff used was negotiated in 1991, USWC asserts that Staff is ignoring time frame, size, and term in making its adjustment. USWC offered testimony demonstrating that leases for larger sizes and longer terms tend to require higher rents.

We adopt Staff's position for the adjusted lease rate to be used for revenue requirement purposes. Staff does not represent that its proposed lease rate is closer to market comparability than the company lease rate. Staff asserts, however, that its proposed lease rate is based on the most recent arm’s-length transaction for this property. Because the company failed to provide satisfactory documentation, Staff recommends that the Commission rely on the best information available for a market based transaction. We agree.

Orchard Falls, Englewood, Colorado

There is one lease at issue at this building located in Englewood, Colorado. The lease is for 125,047 square feet. The revenue requirement difference between the company and Staff positions is $20,291. The lease began in August 1991 for 17 years at a rate of $16.09 per square foot. Staff recommends a rate of $12.02 per square foot.

Staff points out that Arthur Andersen identified one major comparable lease in a competitive building which had a lease rate of $12.02. Arthur Andersen identified this lease as a “strong comparable.” Arthur Andersen also estimated extended leases by applying growth factors to market leases with a shorter original terms. These leases provided a range of rates from $10.13 to $17.19. USWC expressed concern about using only a single lease for determining the market comparable rate.

USWC claimed that a single lease is not a sufficient basis for determining market comparability. The company noted that the variability in real estate markets due to market conditions, deal structures, time frames, and client expectations makes a single comparison less useful than an estimate based on a range of market comparable transactions. Finally, USWC pointed out that hypothetical lease extensions are designed to compare market leases that are generally comparable to the subject lease with the exception of term.

We adopt the Staff position. We have already expressed our reservations about using extended leases based on growth factors that have not been thoroughly documented.

188 Inverness, Englewood, Colorado

This lease is for 63,161 square feet with a 17 year term. The USWC lease rate is $14.21. Staff recommends a rate of $9.13. The net revenue requirement effect of the Staff adjustment is $12, 793. Arthur Andersen compared hypothetical extended leases to the USWC leases.

Staff rejected the Arthur Andersen determined rate because it relies on speculative assumptions. There were no directly comparable leases for this lease. The closest leases were for three, five, and seven years. Arthur Andersen developed a forecast of lease rates for the balance of the terms to make these leases equivalent to the USWC lease and established an effective rate based on the hypothetical term. Staff uses the shorter term leases as the market for making its recommended rate case adjustment. USWC argues that Arthur Andersen used industry standard methods to estimate a comparable lease. It asserts that Staff ignored the fact that lease rates increase as the term of the lease increases.

As we described earlier, we are skeptical about the assumptions USWC employed to project hypothetical lease extensions. As a result, we adopt the Staff position, but with one modification. We will adjust USWC's lease to $10.13, the top of the range of the three shorter term leases on which Staff based its recommendation Given the evidence in the record for this lease, that is a reasonable adjustment.

CONCLUSION

Based on the evidence in the record, we adopt the following adjustments to the USWC lease rates for rate making purposes:

ORDER

IT IS ORDERED that

Leases filed in UI 39, U S WEST Communications Services; UI 53, U S WEST Business Resources, Inc.; UI 56, U S WEST, Inc.; UI 96, U S WEST Federal Services, Inc.; and UI 111, U S Real Estate, Inc. are approved as modified in this order.

 

The leases listed in Appendix A, Attachment A, are removed from this proceeding.

 

The rental amounts for the leases listed in Appendix A, Attachment B and C, are approved for ratemaking purposes.

 

The rental amounts for the leases listed in Appendix A, Attachment D, are approved for ratemaking purposes, as set forth in this order.

 

The guidelines set forth in Appendix B are adopted.

 

Made, entered, and effective ________________________. 

A party may request rehearing or reconsideration of this order pursuant to ORS 756.561. A request for rehearing or reconsideration must be filed with the Commission within 60 days of the date of this order. The request must comply with the requirements of OAR 860-14-0095. A copy of any such request must also be served on each party to the proceeding as provided by OAR 860-13-0070(2)(a). A party may appeal this order to a court pursuant to ORS 756.580.

APPENDIX A

list of leases

APPENDIX B

STANDARDS FOR DOCUMENTING MARKET COMPARABILITY

1. Information used by the company is to be maintained. Information to be maintained is that information used by the company, at the time the company entered into a lease arrangement, which demonstrates the reasonableness of the affiliated lease transaction.

2. Use of standard real estate industry information is appropriate. The information applicable to evaluate the reasonableness of lease transactions is that which is recognized and used as acceptable and standard in the real estate industry. Such information may include, but is not limited to (1) direct market comparables, when available, (2) build-to-suit analysis of market comparables, when available, (3) lease extension analysis, (4) hypothetical lease renewal analysis, (5) hypothetical build-to-suit analysis, and (6) build-to-suit documentation of company developed property. Items (1) and (2) are termed direct market comparables, items (3), (4), and (5) are termed derived market comparables, and item (6) is actual accounting records or other documents. In determining direct market comparable leases, such factors as the date of the lease transactions relative to the lease under review, location, size, term, quality of the property and other conditions of the lease arrangement need to be considered. While direct market comparables are the preferred data to use in evaluating lease transactions, there are instances when no direct market comparables are available, therefore, derived market comparables generally constitute acceptable documentation.

3. Standard real estate industry information to be obtained from real estate professionals. USWC will obtain standard real estate industry information, including studies, documentation and/or industry reports, from real estate professionals such as brokers and/or real estate industry consultants to support the affiliated lease evaluation process (excludes build-to-suit situations where an affiliated entity develops the property.)

4. Build-to-suit documentation to be provided by the company. In build-to-suit situations, where an affiliate undertakes the property development, USWC will provide documentation of construction costs, developer’s profit, investor’s return and the results of the competitive bidding process.

5. A range of market determined lease rates establishes a measure of reasonableness. A range of direct and/or derived market comparables provides a measure of reasonableness. A lease rate that falls within or below the range of market determined lease rates is deemed reasonable. If a range of direct and/or derived market comparables cannot be established, a single market comparable may be used for comparison purposes.

APPENDIX C

ASKING RENTS FOR THE DENVER AND PHOENIX MARKETS

Dollars per Square Foot