ORDER NO. 99-302

ENTERED APR 27 1999

This is an electronic copy. Appendices and footnotes may not appear.

OF OREGON

UI 93 (20)

DISPOSITION: SUPPLEMENTAL APPLICATION APPROVED WITH CONDITIONS

On March 12, 1999, the Commission received an application from GTE Northwest Incorporated (Company), filed pursuant to ORS 759.375 and ORS 759.390, requesting authority to extend and modify the contract with AG Communications Systems Corporation (AGCS).

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 20, 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 application of GTE Northwest Incorporated for authority to engage in certain affiliated interest transactions with AG Communications Systems Corporation is granted, subject to the conditions stated in Appendix A.

Made, entered, and effective ________________________.

APPENDIX A

REGULAR AGENDA CONSENT AGENDA X EFFECTIVE DATE

DATE: March 29, 1999

TO: Bill Warren through Marc Hellman and Mike Myers

FROM: Marion Anderson

SUBJECT: UI 93 (20) - GTE Northwest, Incorporated (GTE-NW) Supplemental Application for Approval of Amendment No. 4 to the General Processor Unit Agreement with AG Communications Systems Corporation (AGCS)

SUMMARY RECOMMENDATION:

Staff recommends approval with conditions.

DISCUSSION:

The Commission approved a revised agreement governing the deployment of general processor units (GPU) for GTD-5 switches in Order No. 95-1264, dated November 30, 1995. This supplemental application was filed March 12, 1999, and extends and modifies that contract. The estimated total Oregon cost over the three-year life is $79,800.

The affiliated interest relationships are established under ORS 759.010 in that GTE Corporation has 100% and 19.99% equity positions in GTE-NW and AGCS, respectively. Under a joint venture agreement with AT&T, the latter position has declined by sale from an initial 51% and will be liquidated on the first business day following December 31, 2003.

PERTINENT ISSUES:

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

1. Scope of Services

This amendment does the following:

repairs or replaces, at AGCS’s option, defective GPU hardware

corrects defective GPU software

upgrades each operating system and the processor memory to 64 megabytes

provides 7X24 TAC availability

upgrades each GPU to any new generic without additional software cost

provides hardware installation and software features at additional cost to GTE-NW

2. Transfer Pricing Methods

Due to the lack of system interchangeability, once the initial switching investment was made, no alternative suppliers existed. Detailed Recommendation Condition 1 allows staff to develop necessary information as needed.

3. Public Interest Compliance

Sterling Sawyer, Senior Economic Analyst, reviewed the technical descriptions in this agreement and approved the contract with one caution. He considered the repairing or replacement of defective GPU hardware section to be a redundant feature that should be a part of the normal AGCS warranty. No ex-ante estimation of associated cost is developable and the total Oregon cost is immaterial.

4. Records Availability, Audit Procedures and Reporting Requirements

I believe that Detailed Recommendation Conditions 1, 4 and 5 afford the Commission adequate access to records and provide for the auditing of transactions between GTE-NW and AGCS.

CONCLUSIONS:

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

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

2. An affiliated interest relationship exists between GTE Northwest, Incorporated, and AG Communications Systems Corporation.

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

DETAILED RECOMMENDATION:

Based on the preceding discussion and conclusions, I recommend that the supplemental application presenting the agreement between GTE Northwest, Incorporated, and AG Communications Systems Corporation be approved with the following conditions:

1. GTE Northwest, Incorporated, shall provide Staff access to all books of account, as well as all documents, data and records of GTE Northwest, Incorporated, and AG Communications Systems Corporation that pertain to transactions between them.

2. 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.

3. 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 supplemental order (or other appropriate format) in this docket.

4. GTE Northwest, Incorporated shall provide, upon Commission request, a record of expenditures made for general processor unit hardware defect repair or replacement.

5. Condition 4 of Order No. 98-042 (carried over to all orders from Order No. 93-238 in this docket) remains in effect.

cc: Phil Nyegaard

Kathy Miller