ORDER NO. 99-259

ENTERED APR 14 1999

This is an electronic copy. Appendices and footnotes may not be included.

OF OREGON

UI 160 (2)

DISPOSITION: APPLICATION APPROVED WITH CONDITIONS

On January 27, 1999, the Commission received an application from GTE Northwest Incorporated (Company), filed pursuant to ORS 759.375 and ORS 759.390, requesting authority to engage in certain affiliated interest transactions. The amendments extend the termination dates of the Master Service Agreement by one year and the Master Service Agreement for Software Development by three years and make other clarifying revisions.

Based on a review of the application and the Commission’s records, the Commission finds that the application satisfies applicable statutes and administrative rules. At its Public Meeting on April 6, 1999, the Commission adopted Staff’s recommendation to approve the application with conditions. Staff’s recommendation is attached as Appendix A and is incorporated by reference.

Jurisdiction

ORS 759.005 defines a "telecommunications utility" as anyone providing telecommunications service to the public in Oregon. The Company is a telecommunications utility subject to the Commission's jurisdiction.

Affiliation

An affiliated interest relationship exists under ORS 759.010.

Applicable Law

ORS 759.390 requires telecommunications utilities to seek approval of contracts with affiliated interests within 90 days of execution of the contract. The intent of the statute is to protect ratepayers from the abuses which may arise from less than arm's length transactions. Portland General Electric Company, UF 3739, Order No. 81-737 at 6. Failure to file within the 90-day time limit may preclude the utility from recovering costs incurred under the contract. See ORS 759.390.

ORS 759.390(3) requires the Commission to approve the contract if the Commission finds that the contract is fair and reasonable and not contrary to the public interest. However, the Commission need not determine the reasonableness of all the financial aspects of the contract for ratemaking purposes. The Commission may reserve that issue for a subsequent proceeding.

Ratepayers should not be harmed by approval of this application.

CONCLUSIONS

The Company is a telecommunications utility subject to the jurisdiction of the Commission.

An affiliated interest relationship exists.

The agreement is fair, reasonable, and not contrary to the public interest.

The application should be granted.

ORDER

IT IS ORDERED that the supplemental application of GTE Northwest Incorporated for authority to engage in certain affiliated interest transactions with GTE Governmental Systems Corporation is granted, subject to conditions, if any, stated in Appendix A.

Made, entered, and effective ________________________.

APPENDIX A

DATE: February 25, 1999

TO: Bill Warren through Marc Hellman and Mike Myers

FROM: Marion Anderson

SUBJECT: UI 160 (2) - GTE Northwest, Incorporated (GTE-NW) Supplemental Application for Approval of Amendments to the Master Service and Master Service for Software Development Agreements with GTE Government Systems Corporation (GS), an Affiliated Interest

SUMMARY RECOMMENDATION:

I recommend approval with conditions.

DISCUSSION:

GTE-NW and GS are affiliated interests under ORS 759.010 through the following chain of ownership: GTE Corporation wholly owns GTE-NW and Contel Federal Systems, Inc.; Contel Federal Systems, Inc., wholly owns GS.

PERTINENT ISSUES:

I have investigated the following issues to determine if the agreement is fair and reasonable, and not contrary to the public interest.

1. Scope of Services

The amendments at issue are Number 3 to the Master Service Agreement and Number 4 to the Master Service Agreement for Software Development. The termination dates are extended to September 30, 1999 (one year) and September 30, 2001 (three years), respectively. The remaining revisions are of a clarification nature: i.e. name change recognition; assignment, notice and corporate affiliate updating.

February 25, 1999

Page 2

PERTINENT ISSUES: (continued)

2. Transfer Pricing Methods and Cost Allocations

There are changes in labor delineation and hourly rates for the Master Service Agreement. However, as noted in the staff review of the previous supplemental application, there are no material Oregon intrastate dollar transactions resulting from this contract (as shown below) and no change is projected.

3. Determination of Public Interest Compliance

There are no changes in this application that would negate previous staff approval.

4. Records Availability, Audit Procedures and Reporting Requirements

I believe that detailed recommendation condition 1 affords the Commission adequate access to records and provides for the auditing of transactions between GTE-NW and GS.

CONCLUSIONS:

Based on an investigation and review of this application, my conclusions are as follows:

GTE Northwest, Incorporated is a regulated telecommunications company subject to the jurisdiction of the Public Utility Commission of Oregon.

An affiliated interest relationship exists between GTE Northwest, Incorporated and GTE Government Systems Corporation.

The application appears to be fair and reasonable and not contrary to the public interest.

February 25, 1999

Page 3

DETAILED RECOMMENDATION:

Based on the preceding discussion and conclusions, I recommend that the supplemental application modifying the agreements between GTE Northwest, Incorporated and GTE Government Systems Corporation be approved with the following conditions:

GTE Northwest, Incorporated shall provide the Commission access to all books of account, as well as all documents, data and records of GTE Northwest, Incorporated and GTE Government Systems Corporation that pertain to transactions between the two.

The Commission reserves the right to review for reasonableness all financial aspects of this arrangement in any rate proceeding or earnings review under an alternative form of regulation.

GTE Northwest, Incorporated shall notify the Commission in advance of any substantive changes to the agreement, including any material changes in any cost. Any changes to the agreement terms that alter the intent and extent of activities under the agreement from those approved herein shall be submitted for approval in an application for a supplemental order (or other appropriate format) in this docket.

Detailed recommendation condition 4 of Order No. 97-416 remains in effect.

cc: Phil Nyegaard

Kathy Miller