ORDER NO. 98-388

ENTERED SEP 28 1998

UT 141

DISPOSITION: STIPULATION AND AMENDMENT ADOPTED;

REVENUES REDUCED $25 MILLION ANNUALLY.

SUMMARY

In this order, the Commission adopts a stipulation and amendment reducing the Oregon intrastate revenues of GTE Northwest Incorporated (GTE-NW) by $25 million per year, or about 11 percent. The revenue reductions will be spread across several major services, including extended area service, toll, and custom calling features. The new rates will become effective on October 1, 1998. Under the stipulation, GTE-NW will also make a one-time refund of approximately $2.4 million for its deferred 1995 and 1997 tax kickers. The refund will equal $3.84 per line for residential customers, and $8.78 per line for business customers.

INTRODUCTION

The origin of this case traces back to docket UM 351, In the Matter of the Investigation into the Cost of Providing Telecommunications Services. In Order No. 96-188, we directed GTE-NW to file a general rate case by January 1997 to allow a review of the company’s existing retail rate levels. GTE-NW initially challenged our authority to order such a filing, but later promised to file a general rate case by September 1997. In September 1997, however, the company changed the filing date to December 1997. Two weeks later, it proposed delaying the filing date to April 1998.

Given GTE-NW’s reluctance to make a general rate filing, the Commission Staff (Staff) recommended that we open an investigation on our own motion under ORS 756.515. Staff stated that opening a docket would ensure that GTE-NW’s earnings are reviewed and rates are adjusted appropriately, as Order No. 96-188 had intended. Staff also recommended that the investigation examine whether the company should refund the 1995 state tax refund, an issue which had been deferred in docket UM 799. We adopted Staff’s recommendation at our September 30, 1997, Public Meeting. See Order No. 97-429.

On February 20, 1998, Michael Grant, an Administrative Law Judge (ALJ) for the Commission, held a prehearing conference in this matter in Salem, Oregon. Benny Won, Assistant Attorney General, appeared on behalf of the Staff. Richard Potter, attorney, and Fred Logan, authorized representative, appeared on behalf of GTE-NW. Kirk Gibson, attorney, appeared on behalf of Telecommunications Ratepayers for Cost-Based and Equitable Rates (TRACER). Penny Bewick, authorized representative, appeared on behalf of Electric Lightwave, Inc. (ELI). Laurene Wilson, authorized representative, appeared on behalf of AT&T Communications of the Pacific Northwest, Inc. Bob Jenks, authorized representative, appeared on behalf of the Citizens’ Utility Board (CUB). John Glascock, authorized representative, appeared on behalf of the American Association of Retired Persons (AARP). Don Mason, authorized representative, appeared on behalf of U S WEST Communications, Inc. (U S WEST).

STIPULATION

Pursuant to the schedule adopted at the Prehearing Conference, Staff published a settlement proposal on May 29, 1998. Staff subsequently held settlement discussions with GTE-NW and other parties from June 17, 1998, through June 24, 1998. Based on additional information provided by GTE-NW, Staff agreed to modify its settlement proposal on five primary subjects: (1) rate of return; (2) affiliated interest transactions; (3) yellow pages; (4) dialing parity; and (5) access line growth.

Following continued settlement discussions on rate design, Staff and GTE-NW reached general agreement on all issues. The two parties subsequently entered into a stipulation designed to resolve all outstanding issues, subject to our approval. The stipulation, attached as Appendix A and incorporated by reference, is supported by the testimony of Terry Lambeth, James Stanage, and Thomas Turner of Staff. The ALJ admitted the stipulation and supporting testimony into the record as evidence pursuant to OAR 860-014-0085(1).

No party requested an evidentiary hearing in this matter. On August 25, 1998, TRACER and CUB filed written comments regarding the stipulation. On September 1, 1998, Staff filed a reply.

Amendment

On September 24, 1998, Staff and GTE-NW submitted an amendment to the stipulation regarding the refund of the company’s deferred tax kickers. During billing system conversion activities, GTE-NW discovered that the refund methodology set forth in the stipulation was much more complex than originally thought. Furthermore, due to limitations within the company’s billing system, the proposed methodology, if used, would prevent GTE-NW from being able to respond to customer inquiries about the refund.

Accordingly, Staff and GTE-NW submitted a minor amendment to Section IV of the stipulation. The amendment, which specifies a new refund methodology, is designed to allow a straightforward, easy to explain credit per line on customer bills. The amendment is attached as Appendix B and incorporated by reference.

Staff and GTE-NW signed the amendment and recommend that it be adopted. CUB, TRACER, AARP, and ELI also signed the amendment indicating that, while they did not sign the original stipulation, they do not object to the amendment and waive rights under OAR 860-014-0085. U S WEST did not sign the amendment, but indicated by separate letter, attached as Appendix C, that it also waives its right to object under OAR 860-014-0085.

Based on the record in these proceedings, we make the following:

Stipulation

Staff and GTE-NW agree that the company’s intrastate Oregon revenues should be reduced in an annual amount of $25 million, effective October 1, 1998. The parties also agree that GTE should make a one-time refund of approximately $2.4 million for its deferred 1995 and 1997 Oregon Corporate Income and Excise Tax Surplus "2 Percent Tax Kicker" refund. The one-time refund would equal $3.84 per line for residential customers, and $8.78 per line for business customers.

For the test year, the parties used total Oregon and intrastate data as reported to the Commission for the twelve months from October 1, 1996, through September 30, 1997. The parties, however, did not agree upon any specific adjustments or assumptions used to develop the test year results contained in the stipulation. Because we initiated this investigation on our own motion, Staff proposed an adjusted test year. GTE-NW has accepted the results of Staff’s findings, but not necessarily the assumptions and methods Staff used to develop the components.

The table below identifies the significant adjustments to Staff’s test year, which produces an annual intrastate revenue requirement of $199 million.

After applying the $25 million revenue reduction, Staff’s adjusted test year produces a rate of return of 9.69 percent, which Staff believes is a reasonable level for setting rates in this docket.

Until a different rate of return on rate base is established for GTE-NW, the parties further agree that the Commission should use the 9.69 percent figure for an annual rate of return on rate base for: (1) affiliated interest purposes under ORS 759.375 through ORS 759.394 and related rules; and (2) deferred accounting earnings reviews under ORS 759.200 and related rules. Moreover, until a different capital structure and cost of capital are established, Staff and GTE-NW agree that the company will use a weighted cost of debt of 3.06 percent for interest coordination calculations for reporting income taxes on the company’s quarterly monitoring reports to the Commission.

As for rate design, Staff and GTE-NW agree that the $25 million reduction in the company’s annual intrastate Oregon revenues should be spread across four major service categories:

 Staff and GTE-NW believe that revenue reductions should be distributed in these categories for a variety of reasons. The rates for many of these services, including access charges, custom calling features, and directory related services, currently exceed economic costs and should be reduced. Other rates, such as toll, are excessive in comparison to similar services offered by other carriers. Finally, reducing rates in these categories, particularly EAS, will benefit a broad range of both business and residential customer classes.

Staff and GTE-NW also believe the reduction in toll rates necessitates an adjustment in access expenses. Access expenses are based on toll traffic. Because the toll rate reductions are expected to stimulate toll traffic, the parties included a $0.2 million adjustment to account for GTE-NW’s increased access expenses.

Positions of the Parties

Staff and GTE-NW support the stipulation and recommend that we adopt it in its entirety. They note that the stipulation is an integrated document that reflects considerable negotiation and compromise between the parties. They believe that the stipulation not only produces significant rate reductions, but allows these reductions to be passed on to customers in a much more timely manner than if this case had gone to hearing.

CUB supports the stipulation with one exception. CUB believes that GTE-NW should eliminate its $25 non-recurring charge for changing local service options. CUB believes that customers are not provided adequate information when selecting calling options. It notes that the information provided by GTE-NW in its phone books and telephone bills uses inconsistent terminology that leads to customer confusion. Because of this confusion, CUB contends that customers often choose an inappropriate calling plan and end up paying too much or incurring a $25 charge to change to a more appropriate plan.

CUB notes that GTE-NW offers three calling plans for residential service: (1) measured local and measured EAS; (2) flat-rate local and measured EAS; and (3) flat-rate local and flat-rate EAS. It adds, however, that the company does a poor job describing these plans and, in some cases, uses contradictory language to describe them. For example, CUB points out that, in some of its phone books, GTE-NW describes the three calling options without referring to EAS. In others it uses the phrase "local calling" to refer to different calling areas.

CUB contends that GTE-NW should not be allowed to increase its revenues for service orders by confusing and misleading customers. It argues that, as a regulated monopoly, GTE-NW has the responsibility of providing customers with the necessary information to enable them to choose the best calling plan for their needs. Accordingly, it recommends that we reject the stipulation and make a counter-offer to the company that contains an identical revenue reduction but also eliminates the non-recurring charge for changing calling options. To keep the revenue reduction the same, CUB suggests that we adjust the price reduction for certain custom calling features.

TRACER also filed comments on the stipulation. It applauds the efforts of Staff and GTE-NW to implement the revenue reductions into rates as soon as practicable. It also supports the fact that many of the stipulated rates serve to align rates more closely with the cost of the service and to simplify the overall rate structure. While it would prefer that basic rates be reduced, it does not oppose the stipulation.

Commission Resolution

We have reviewed the stipulation and comments filed by the parties. For the reasons set forth above and those contained in the supporting testimony, we find the stipulation reasonable and adopt it in its entirety. The stipulation results in significant benefits to GTE-NW’s customers. The informal settlement produces a $25 million annual intrastate revenue reduction for GTE-NW and allows those reductions to be implemented into rates in an expedited manner. It also requires GTE to make a one-time refund of approximately $2.4 million to its customers for its deferred 1995 and 1997 Oregon tax kickers.

We acknowledge CUB’s concern regarding customer confusion when selecting a local service option. We do not, however, believe that this issue warrants the rejection of the stipulation. As noted above, the stipulation is an integrated document that reflects considerable negotiation between Staff and GTE-NW. It results in a $25 million annual revenue reduction for GTE-NW—worth more than $2 million per month to Oregon ratepayers. Even if another settlement could ultimately be reached with the company incorporating CUB’s recommendation, such a revised stipulation necessarily would involve further discussions, additional proceedings, and a delay of the scheduled October 1, 1998, implementation of the reduced rates. Such a delay over this issue does not justify a cost to ratepayers of $2 million per month. CUB’s concerns can be addressed in discussions between CUB, Staff, and GTE-NW prior to the company’s next publication of its directories.

We also note that, due to the upcoming implementation of new EAS routes, the majority of GTE-NW’s customers will soon have a six-month grace period to choose the proper EAS calling plan. Beginning October 3, 1998, customers in the Portland area and many outlying exchanges will be permitted to change EAS options for a six-month period without incurring a fee for the change in service. See Order No. 98-333 at 7. A similar six-month grace period is likely to occur beginning October 1999. See Order No. 98-316. Consequently, GTE-NW will provide free EAS service option changes for significant periods of time in the foreseeable future.

ORDER

 IT IS ORDERED that the stipulation, attached as Appendix A, and amendment, attached as Appendix B, are adopted. GTE Northwest Incorporated shall file revised tariffs consistent with the stipulation to be effective October 1, 1998.

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 service of this order. The request must comply with the requirements in OAR 860-014-0095. A copy of any such request must also be served on each party to the proceeding as provided by OAR 860-013-0070(2). A party may appeal this order to a court pursuant to ORS 756.580.