ORDER NO. 99-384

ENTERED JUN 16 1999

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

OF OREGON

UI 116 (4)

DISPOSITION: SUPPLEMENTAL APPLICATION APPROVED WITH CONDITIONS

On February 25, 1999, the Commission received an application from GTE Northwest Incorporated (Company or GTENW), filed pursuant to ORS 759.375 and ORS 759.390, requesting authority to enter into an amended agreement for Yellow Pages Services with GTE Directories Corporation (GTEDC), an affiliated interest.

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 June 8, 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 between GTE Northwest Incorporated and GTE Directories Corporation 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 between GTE Northwest Incorporated and GTE Directories Corporation.

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 GTE Directories Corporation is granted, subject to conditions stated in Appendix A.

 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 of 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. A party may appeal this order pursuant to ORS 756.580.

TO: Bill Warren through Marc Hellman and Mike Myers

FROM: Thomas P Riordan

SUBJECT: UI 116 (4) - GTE Northwest, Incorporated (GTENW) Supplemental Application for Approval to Enter an Amended Agreement for Yellow Pages Services with GTE Directories Corporation (GTEDC), an Affiliated Interest

SUMMARY RECOMMENDATION:

I recommend approval with conditions.

 DISCUSSION:

The company filed this supplemental application on February 25, 1999. GTENW and GTEDC, as wholly owned subsidiaries of GTE Corporation, are affiliated interests under ORS 757.015.

Previously, all GTE telephone operating companies (Telops), including GTENW, advertised for their products and services in the GTEDC yellow pages; however, the advertising was billed to GTE North who in turn billed the Telops for the identical amounts. In effect, this was an accounting pass-through. Under this previous arrangement, GTENW and other Telops were only billed for their yellow page advertising, based on a processing fee of 15 percent. In 1998, the actual billing to GTENW was about $52,700. However, on November 15, 1998, the current arrangement began wherein GTEDC contracts and bills directly with GTENW and all other GTE Telops for these advertising services. The 1999 projected annual cost for GTENW, on an Oregon operations basis, is $548,000. These costs will continue to be charged to FCC Account 6613, Product Advertising. The substantial increase in this cost, as stated by the company, is due to the change from a nominal fee basis to a prevailing price basis, in accordance with FCC Docket 96-150 and FCC Part 32.27 Transactions with Affiliates.

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

There are no differences in the basic terms and conditions for the advertising services under the 11/15/98 agreement from those in the previous agreement with GTE North, except that the method for pricing has changed to a prevailing market price.

2. Transfer Pricing Methods and Cost Allocations

The Commission’s transfer pricing policy for services purchased by a regulated telecommunications utility from an affiliate is that the sale shall be recorded in the regulated accounts at the non-regulated affiliate’s cost or fair market rate, whichever is lower. This policy likely has not been met in this instance, because GTEDC is not charging GTENW the lower price, but the prevailing market price for the advertising services. Additionally, the Commission should retain the right to review costs, as well as the return component used in affiliated interest transactions, for reasonableness and for appropriate application in subsequent rate proceedings. To facilitate such review, it is essential that GTEDC and GTENW maintain sufficient accounting records to reflect what the actual cost, including the return component, is for GTEDC to provide yellow page services to GTENW. See proposed ordering condition no. 4.

3. Determination of Public Interest Compliance

GTENW’s customers likely will not be harmed by this transaction, because the company is paying, with the inclusion of the rate of return provision as proposed in ordering condition no. 5, a fair and reasonable price for the advertising services from GTEDC. Therefore, staff believes that this transaction meets the Commission’s public interest requirements.

4. Records Availability, Audit Procedures and Reporting Requirements

I believe that proposed ordering condition no. 1 affords the Commission adequate access to records and provides for the auditing of transactions between GTENW and GTEDC.

CONCLUSIONS:

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

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

An affiliated interest relationship exists between GTE Northwest, Inc., and GTE Directories Corporation.

The supplemental 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 reflecting the amendments to the agreement between GTE Northwest, Inc., and GTE Directories Corporation be approved with the following conditions:

GTE Northwest, Inc., shall provide Staff access to all books of account, as well as all documents, data and records of GTE Northwest, Inc. and GTE Directories 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, Inc., 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’s terms that alter the intent and extent of those 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.

GTENW shall maintain sufficient accounting records to reflect what is the actual cost, including the return component, for GTEDC to provide yellow page services to GTENW.

For accounting purposes, the return component used in calculating GTE Northwest, Inc.’s Oregon cost of the yellow page advertising services received from GTE Directories Corporation shall be limited to GTE Northwest, Inc.’s current authorized rate of return of 9.69 percent as stated in Commission Order No. 98-388.

cc: Phil Nyegaard

Kathy Miller