In re Shoreham Telephone Co., Inc.
| Decision Date | 17 November 2006 |
| Docket Number | No. 05-077.,05-077. |
| Citation | 915 A.2d 197,2006 VT 124 |
| Parties | In re Appeal of Investigation into EXISTING RATES OF SHOREHAM TELEPHONE COMPANY, INC. |
| Court | Vermont Supreme Court |
Paul J. Phillips and Elijah D. Emerson of Primmer & Piper, P.C., St. Johnsbury, for Appellant.
June E. Tierney, Department of Public Service, Montpelier, for Appellee.
Present: REIBER, C.J., DOOLEY, JOHNSON, SKOGLUND and BURGESS, JJ.
¶ 1.
Shoreham Telephone Company, Inc. appeals from a Public Service Board order requiring that it reduce its revenues from intrastate telephone service by over $1.2 million. Shoreham contends: (1) the Board violated state and federal law by employing a methodology that impermissibly uses interstate revenues to subsidize intrastate rates; (2) the order will produce intrastate rates that are confiscatory; (3) the Board's disallowance of income-tax expense from Shoreham's intrastate cost of service is unsupported by the evidence, unjust, and unreasonable; and (4) the order to establish a liability account for Shoreham's accumulated deferred income taxes (ADIT) was improper. We affirm.
¶ 2. Shoreham is a small telecommunications company that provides telephone services to approximately 3700 customers in several towns in Addison County. After reviewing Shoreham's 2002 supplemental financial reports, the Board found that there was "a significant possibility that Shoreham's intrastate revenues are higher than a just and reasonable level." Accordingly, the Board opened an investigation into Shoreham's existing rates and related issues, including the "benefits (and costs) of establishing Shoreham's rates using a total company (or residual) methodology." See 30 V.S.A. § 227(b) (). The Department of Public Service participated in the proceedings as public advocate. Id. § 217 ().
¶ 3. Following the submission of substantial prefiled testimony by both parties and three days of technical hearings, the hearing officer filed a proposal for decision in August 2004 containing extensive findings and recommendations. Critical among these were his findings that in 2002 Shoreham's net profit of $1.2 million resulted in an overall rate of return of 38.8%, well in excess of industry standards; that application of a "total company" or "residual ratemaking" methodology would ensure that Shoreham — an "average schedule" company since 1982 — received no more than 100% of its intrastate costs, plus a reasonable rate of return; that Shoreham is a Subchapter S corporation which pays no direct income tax, and therefore should reduce its expenses attributed to income taxes; and, finally, that Shoreham should be required to establish a regulatory liability account equal to the difference between its current ADIT balance of $611,143 and the ADIT balance that would have been produced had Shoreham been taxed at the actual corporate income tax rate since 1999. In total, the hearing officer recommended that Shoreham's intrastate rates be adjusted to reduce its intrastate income by $1,126,725.
¶ 4. In November 2004, the Board issued its ruling adopting the proposed decision largely in its entirety, subject to several specific modifications, including a total elimination of the income tax expense from the calculation of Shoreham's legitimate expenses. This resulted in a required reduction of $1,268,459 from Shoreham's intrastate rates. The Board authorized Shoreham to reduce its intrastate rates in three equal stages over a seventeen-month period, and allowed it either to keep the new regulatory account on its books until the liability for which it was collected occurred or return it to taxpayers in the form of amortizations over a reasonable period of time. In response to Shoreham's subsequent motion to alter or amend, the Board modified its decision in several relatively minor respects, but otherwise denied the motion. This appeal followed.
¶ 5. A brief review of the regulatory backdrop is essential to a proper resolution of Shoreham's several claims on appeal. Shoreham is a local exchange carrier (LEC) under state and federal law, subject to separate regulation by the state and federal governments. See Crockett Tel. Co. v. FCC, 963 F.2d 1564, 1566 (D.C.Cir.1992) (). The Federal Communications Commission (FCC) regulates interstate and foreign telecommunications services, while states retain jurisdiction to regulate intrastate services. 47 U.S.C. §§ 151, 152(b). In Vermont, the Board exercises local jurisdiction to ensure that Shoreham's intrastate rates are "just and reasonable." 30 V.S.A. § 218.
¶ 6. To implement this dual scheme of regulation, "a utility's `revenues, investment, and expenses must be apportioned between the interstate and intrastate jurisdictions.'" Pine Tree Tel. & Tel. Co. v. Pub. Utils. Comm'n, 631 A.2d 57, 62 (Me. 1993) (quoting Mid-Plains Tel. Co., 5 F.C.C.R. 7050, 7050 (1990)), aff'd sub nom. Crockett Tel. Co. v. FCC, 963 F.2d 1564 (D.C.Cir.1992). This process of apportionment is known as jurisdictional separation Crockett, 963 F.2d at 1566; see Smith v. Illinois Bell Tel. Co., 282 U.S. 133, 148, 150, 51 S.Ct. 65, 75 L.Ed. 255 (1930) (). Four years after the decision in Smith, Congress authorized the FCC to classify carriers' costs as interstate or intrastate for purposes of federal regulation, 47 U.S.C. § 221(c), and the FCC eventually codified a formal, nonexclusive, cost-based separation procedure at 47 C.F.R. pt. 36 (1991). See Crockett, 963 F.2d at 1566-67 ().
¶ 7. From its inception, the separations requirement was recognized by the United States Supreme Court to be a costly, complex, and necessarily inexact process, in part because in many cases the equipment and plant used to provide intrastate service is also used to provide interstate service. See Smith, 282 U.S. at 150, 51 S.Ct. 65 (); accord La. Pub. Serv. Comm'n v. FCC, 476 U.S. 355, 360, 106 S.Ct. 1890, 90 L.Ed.2d 369 (1986) ().
¶ 8. To save companies the often substantial expense and effort of preparing expert cost studies, the FCC has for many years permitted some smaller carriers to derive their interstate costs from an "average schedule," essentially an estimate based on general industry data approximating the costs of a similarly situated hypothetical exchange company.1 See Crockett, 963 F.2d at 1567 (); Nat'l Ass'n of Regulatory Util. Comm'rs v. FCC, 737 F.2d 1095, 1127 (D.C.Cir.1984), cert. denied, 469 U.S. 1227, 105 S.Ct. 1224, 84 L.Ed.2d 364 (1985) (same); Pine Tree, 631 A.2d at 62-63 (same). The FCC categorizes LECs as either "cost-based" or "average-schedule" companies for purposes of compensating them for their federal jurisdictional costs from an overall interstate "settlement pool." A cost-based company tracks and reports its interstate costs based on its actual costs. An average-schedule company does not track or report its actual interstate costs, but instead recovers its estimated interstate costs based on the average schedule.2
¶ 9. Because the average-schedule system used by federal regulators conveniently designates a certain portion of a carrier's overall costs as interstate, "[u]nsuprisingly, several states have come to rely on average schedules for their own intrastate ratemaking purposes." Crockett, 963 F.2d at 1567. Just as many states have subtracted from a cost-based carrier's total costs its actual interstate costs in order to derive from the remainder its intrastate costs, so a number of states deduct from the total cost base of an average-schedule carrier that portion attributed by the average schedule to interstate usage, "and treat the residuum as intrastate." Id.; see also Pine Tree, 631 A.2d at 63 (). This intrastate ratemaking method is known as "total company" or "residual ratemaking." Crockett, 963 F.2d at 1567.
¶ 10. The residual-ratemaking process, in the context of an average-schedule company, has been described as follows:
[First], the commission determines a reasonable level of expense and a reasonable return on the net investment rate base for the total company. The commission then deducts the amount of average schedule payments from the total company revenue requirement to determine the intrastate portion of the total company revenue requirement. Intrastate rates are then established to recover this residual amount.
Pine Tree, 631 A.2d at 63 (quotation omitted). Thus, state regulators using residual ratemaking—like the Board here—assume that the intrastate revenue requirement is equal to the company's total revenue requirement less revenue deemed by the average schedule to be interstate. Id.3
¶ 11. As the Crockett court noted, the residual-ratemaking method "has a significant impact on jurisdictional separations." 963 F.2d at 1567. While an average-schedule...
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