In re Verizon New Eng., Inc.

• Decision Date: 28 December 2005
• Docket Number: No. 2004–785.,2004–785.
• Citation: 153 N.H. 50,889 A.2d 1027
• Court: New Hampshire Supreme Court
• Parties: APPEAL OF VERIZON NEW ENGLAND, INC. d/b/a Verizon New Hampshire (New Hampshire Public Utilities Commission).

153 N.H. 50

889 A.2d 1027

APPEAL OF VERIZON NEW ENGLAND, INC. d/b/a Verizon New Hampshire (New Hampshire Public Utilities Commission).

No. 2004–785.

Supreme Court of New Hampshire.

Argued: Sept. 14, 2005.

Opinion Issued: Dec. 28, 2005.

McLane, Graf, Raulerson & Middleton, P.A., of Concord (Steven V. Camerino and Sarah B. Knowlton on the brief, and Mr. Camerino orally), and Bruce P. Beausejour and Victor D. Del Vecchio, of Boston, Massachusetts, on the brief, for the petitioner.

Kelly A. Ayotte, attorney general (Wynn E. Arnold, senior assistant attorney general, on the brief and orally), for the State.

F. Anne Ross, consumer advocate (Ms. Ross and Rorie E.P. Hollenberg, staff attorney, on the brief, and Ms. Ross orally), for the Office of Consumer Advocate, as amicus curiae.

DALIANIS, J.

Verizon New England, Inc. d/b/a Verizon New Hampshire (Telephone Company) appeals an order of the New Hampshire Public Utilities Commission (PUC) requiring the imputation of at least $23.3 million earned by the Telephone Company's unregulated affiliate, Verizon Yellow Pages Company (Directory Company), for ratemaking purposes. We affirm.

The publication of telephone directories has been an integral part of the telecommunications business for over a century. Traditionally, telephone directories have been comprised of "White Pages," an alphabetical listing of subscribers and their telephone numbers, and "Yellow Pages," a section devoted to advertisements sold by the publisher. Prior to 1984, AT&T, through a regulated regional operating company, compiled, published and distributed telephone directories for New Hampshire "in house," and Yellow Pages operations and revenues belonged entirely to the regional operating company. The Yellow Pages business earned the company "supra-competitive" profits. United States v. American Tel. and Tel. Co., 552 F.Supp. 131, 193 (D.D.C.1982), aff'd , 460 U.S. 1001, 103 S.Ct. 1240, 75 L.Ed.2d 472 (1983). All revenues, expenses and assets associated with directory operations were included in the regulated books of the regional operating company.

In 1984, pursuant to a consent decree arising from major anti-trust litigation, AT&T divested itself of twenty-two regional operating companies, including the Telephone Company. See id. at 141, 222–25. The divested operating companies were permitted to retain their Yellow Pages print businesses. Id. at 194. At divestiture, the Telephone Company elected to transfer assets associated with directory operations to the Directory Company, a non-regulated affiliate.

Although the Telephone Company no longer published a telephone directory, it was still required to provide a compilation of subscriber listings—the "White Pages"—to all of its customers. N.H. Admin. Rules , PUC 405.04. The Telephone Company, therefore, entered into a directory publishing agreement with the Directory Company (1984 DPA). Under the 1984 DPA, the Telephone Company granted the Directory Company the exclusive right during the term of the agreement to contact the Telephone Company's subscribers for the purposes of soliciting and obtaining directory advertising for publication in telephone directories. The Directory Company agreed to compile, print and publish telephone directories for distribution to the Telephone Company's subscribers, and further agreed to pay annual publishing fees to the Telephone Company. The agreement was to remain in force for five years, after which it would be automatically renewed on a yearly basis, subject to termination by either party on one year's notice.

On July 12, 1985, the PUC issued an order allowing the 1984 DPA to go into effect without modification. The PUC noted, however, that it would continue to monitor the relationship between the Telephone Company and the Directory Company, and it reserved the right to take further regulatory action as warranted. The order also directed the Telephone Company to provide the PUC with updated information about changes in the terms and conditions of the 1984 DPA, including information about income derived from Yellow Pages.

The 1984 DPA remained in effect from January 1, 1984, through December 30, 1990. In November 1990, the Telephone Company and the Directory Company entered into a Directory License Agreement, effective January 1, 1991 (1991 DLA), with the intent of replacing the 1984 DPA. The Telephone Company granted the Directory Company an exclusive license to use its name in soliciting directory advertising, as well as to use its name, slogans, and marks in publishing and distributing directories. The 1991 DLA also granted the Directory Company the exclusive right to designate its directories as the "official" directories of the Telephone Company. As consideration for this license, the Directory Company agreed to pay the Telephone Company an annual fee based upon the revenues generated by its telephone directory publishing endeavors.

The 1991 DLA, like the 1984 DPA it superseded, was to remain in force for five years, after which it would be automatically renewed on a yearly basis, subject to termination by either party on one year's notice. The PUC, finding the agreement "just and reasonable," issued an order on March 6, 1991, approving it without modification.

In 1996, Congress adopted the Telecommunications Act of 1996, 47 U.S.C.A. §§ 151 et seq . (2001 & Supp.2005), which, among other things, required telephone service providers to furnish subscriber list information "under nondiscriminatory and reasonable rates, terms and conditions" to any person requesting such information for directory publishing purposes. 47 U.S.C. § 222(e) (2000). The Telephone Company had followed such a non-discriminatory policy from the time of the 1984 divestiture in its listings licensing agreements. On December 9, 1997, the Directory Company notified the Telephone Company that it was terminating the 1991 DLA as of January 1, 1999. It cited the "important changes in the relationships between telecommunications service providers and directory providers" required by the Telecommunications Act of 1996 as its primary motivation for doing so.

On December 23, 1998, the Directory Company and the Telephone Company executed an amendment to the 1991 DLA (1999 amendment), effective as of January 1, 1999, allowing the 1991 DLA to remain in effect. Under the 1999 amendment, the exclusive licenses granted to the Directory Company were restricted to Maine, as were its obligations to make revenue sharing payments to the Telephone Company. The Telephone Company failed to file the 1999 amendment with the PUC. On December 24, 1998, the Directory Company notified the Telephone Company that it was postponing termination of the 1991 DLA to January 1, 2000. On January 1, 2000, the companies again postponed termination to March 31, 2000, to allow for more time to execute a new directory publishing agreement.

In early 2000, the Telephone Company and the Directory Company entered into a new directory publishing agreement (2000 DPA) and a listings license agreement (2000 LLA), which were filed with the PUC on March 8, 2000. Under the 2000 DPA, the Directory Company agreed to fulfill the Telephone Company's continuing regulatory obligations with respect to the publication and distribution of telephone directories. The Directory Company was given the right to sell advertising "in any section" of the directories, and the Telephone Company would have no rights or interest in any revenues received by the Directory Company in connection with the sale of directory advertising.

The 2000 LLA granted the Directory Company a non-exclusive license to use the Telephone Company's listing information for directory use, and the Telephone Company reserved the right to issue similar licenses to other parties. Unlike the 1984 DPA and the 1991 DLA, the 2000 LLA did not require the Directory Company to pay any fees or to share revenues from directory advertising sales as part of the licensing fee arrangement. The 2000 DPA was to remain in force for two years, after which it would be automatically renewed on a yearly basis, subject to termination by either party on one year's notice. The 2000 LLA was valid for one year, was automatically renewable on a yearly basis, and could be terminated by either party upon ninety days' notice.

In October 2001, the PUC commissioned an audit of the Telephone Company. The auditor concluded that the Telephone Company's parent company, Verizon, Inc., removed Yellow Pages revenues from the Telephone Company without the express permission of the PUC, that the PUC had not approved the Telephone Company's existing contract in which it had no rights or interest in Yellow Pages revenues, and that the Yellow Pages business would likely have substantial value were it to be sold in an arm's length transaction.

On the basis of the audit, the PUC initiated a proceeding to determine the proper regulatory treatment of Yellow Pages revenues in New Hampshire, and whether or not the Telephone Company retained, or should have retained, any rights or interest in those revenues.

On July 9, 2004, the PUC issued an order finding that the 2000 DPA did not compensate the Telephone Company and its ratepayers for the value derived by the Directory Company from its association with the Telephone Company. The PUC concluded that the 1999 amendment was a modification of an affiliate contract, and that because it was not filed with the PUC pursuant to RSA 366:3 (1995), it was unenforceable in New Hampshire. It further determined that the 1991 DLA was not validly terminated before 1999, and that revenue sharing payments under the 1991 DLA with respect to New Hampshire Yellow Pages operations were improperly terminated in 1999. The PUC also concluded that, as a matter of law, the Telephone Company could not unilaterally relinquish the value derived from Yellow Pages or the right to contribution arising therefrom on behalf of itself or its ratepayers.

The PUC determined that the appropriate...