MCI Telecommunications Corp. v. Public Service Com'n of Utah

• Court: Utah Supreme Court
• Writing for the Court: STEWART; HALL, C.J., HOWE, Associate C.J., and DURHAM; ZIMMERMAN
• Citation: MCI Telecommunications Corp. v. Public Service Com'n of Utah, 840 P.2d 765 (Utah 1992)
• Decision Date: 12 May 1992
• Docket Number: 890252,Nos. 890251,TEL-AMERICA,s. 890251
• Parties: MCI TELECOMMUNICATIONS CORP., Petitioner, v. PUBLIC SERVICE COMMISSION OF UTAH, Brian T. Stewart, Chairman, James M. Byrne, Commissioner, Respondents.OF SALT LAKE CITY, INC., Petitioner, v. PUBLIC SERVICE COMMISSION OF UTAH, Brent H. Cameron, Commissioner, James M. Byrne, Commissioner, Brian T. Stewart, Chairman, Respondents.

Page 765

840 P.2d 765

MCI TELECOMMUNICATIONS CORP., Petitioner, v. PUBLIC SERVICE COMMISSION OF UTAH, Brian T. Stewart, Chairman, James M. Byrne, Commissioner, Respondents.

TEL-AMERICA OF SALT LAKE CITY, INC., Petitioner, v. PUBLIC SERVICE COMMISSION OF UTAH, Brent H. Cameron,

Commissioner, James M. Byrne, Commissioner, Brian

T. Stewart, Chairman, Respondents.

Nos. 890251, 890252.

Supreme Court of Utah.

May 12, 1992.

Rehearing Denied June 8, 1992.

Gregory B. Monson, C. Scott Brown, Salt Lake City, for Mountain States Telephone.

Ted D. Smith, Salt Lake City, for U.S. West Communications.

David L. Stott, Laurie L. Noda, Salt Lake City, for Public Service Com'n.

Randy L. Dryer, Jim Butler, Salt Lake City, for MCI Telecommunications.

Thomas M. Zarr, Stanley K. Stoll, Daniel D. Hill, Salt Lake City, for Tel-America.

Michael L. Ginsberg, Salt Lake City, for Division of Public Utilities.

STEWART, Justice:

In 1985, the Public Service Commission (Commission) granted Mountain States Telephone and Telegraph Co., now U.S. West Corp. (U.S. West), ¹ a $22 million general rate increase and established 14.2% as its authorized rate of return on equity. In granting the increase, the Commission assumed that U.S. West would pay a federal corporate income tax of 46%, the then-existing rate.

On October 22, 1986, Congress enacted the Tax Reform Act of 1986 (Act), which provided a two-step reduction in the federal corporate income tax rate, from 46% to 40% effective June 1987, and then to 34% effective January 1988. This amounted to a total reduction of approximately 26%.

In December 1986, the Commission requested that the major utilities in the state provide it with information showing the anticipated effect of the reduced income tax rates on their earnings. The president of U.S. West responded that although the initial impact on cash flow would be negative, "the tax law is a critical factor in averting rate requests." He further stated, "Considering all of the data, I feel very good about the possibility of rate stability for our customers over the next few years. The benefits of the 1986 Tax Reform Act will go to ratepayers since they work to offset intrastate increases in our continuously changing industry." In January 1987, the Commission requested that the Utah Division of Public Utilities (Division) review the responses of the companies. The Division recommended that the Commission not order U.S. West to reduce its rates. The Commission then directed the Division to undertake a formal investigation of U.S. West's rate of return.

The Committee of Consumer Services (Committee) was created by the Legislature to serve as "advocate ... of positions most advantageous to a majority of residential consumers." Utah Code Ann. § 54-10-4(3) (1990). On June 1, 1987, the Committee filed a motion with the Commission asking it to declare the rates of all public utilities subject to the Commission's jurisdiction to be interim rates or, alternatively, to require them to establish refund reserve accounts from which excess earnings could be refunded to ratepayers. The Commission denied the motion on June 30, 1987, referring in part to the Division's report that U.S. West's rate of return for 1986 and 1987 would be less than 13% and 12% respectively, less than its authorized rate of 14.2%. The Division represented that the net effect of the Act on U.S. West's earnings would be an increase of $1.2 million in 1987 and $0.5 million in 1988. The Division also reported that it was monitoring U.S. West's earnings on a monthly basis and would alert the Commission to any significant changes.

By August 1987, utility regulators in forty-three states and the District of Columbia had taken some action to reduce utility rates in response to the Act.

On August 11, 1987, the Committee requested that U.S. West disclose its earnings. U.S. West objected on the ground that the Division was already monitoring its earnings. The Committee then moved to compel U.S. West to respond to the request for data. The Commission ruled in November 1987 that the motion to compel would be held in abeyance pending completion of the Division's investigation, but that in the meantime the Division should give the Committee the financial information it had obtained from U.S. West.

On September 1, 1987, the Division filed a second report with the Commission indicating that U.S. West's rate of return remained below its 14.2% authorized rate of return. Again, the Division recommended that the Commission take no action.

The Division's conclusions appear to have been seriously in error. U.S. West's actual rate return had exceeded its authorized rate of return in six of the first eight months of 1987, even though the first phase of the federal tax reduction was not effective until June 1987. Data furnished by U.S. West to MCI Telecommunications Corporation in September 1988 in response to interrogatories provided the following monthly breakdown for U.S. West's return on equity for its Utah intrastate operations:

  Month     1987    1988
                January    12.02%  17.23%
                February   15.14%  15.62%
                March       3.52%  22.04%
                April      15.00%  16.23%
                May        16.62%  12.29%
                June       17.86%  16.02%
                July       16.24%
                August     25.31%
                September  20.76%
                October    17.24%
                November   19.89%
                December   24.48%
                

As is evident from these figures, U.S. West's rate of return increased dramatically after the first phase of the tax reduction became effective. For the last six months of 1987, U.S. West's average monthly rate of return on equity was over 20%.

In December 1987, the Division and U.S. West privately negotiated a $9 million reduction in future rates to be effective January 1, 1988. The Commission approved the stipulation without a hearing or findings of fact to justify the amount of reduction and without disclosing what U.S. West's earnings had been in 1987, what they would likely be in 1988, or by how much they exceeded the authorized rate of return.

Subsequent events disclosed that the $9 million reduction was inadequate to reduce U.S. West's earnings to its authorized rate of return. U.S. West's high rate of earnings continued for the first six months of 1988. During that period, its average monthly earnings were in excess of a 16% rate of return, even with the January 1987 rate reduction. Thus, U.S. West's earnings significantly exceeded its authorized rate of return for each of the twelve months following the effective date of the first phase of the tax reductions under the Act.

On January 28, 1988, the Committee requested that U.S. West produce the financial data on which the $9 million rate reduction was negotiated. This request was made after the second phase of the tax reduction became effective. U.S. West responded that it considered the investigation closed and refused to disclose the data. The Committee then hired an independent consulting firm to review both the settlement and U.S. West's earnings. In May 1988, the firm issued a report asserting that the $9 million stipulated rate reduction was "clearly inadequate."

In July 1988, the Commission initiated a general rate case, docket No. 88-049-07, to investigate the reasonableness of U.S. West's rates and earnings. Again the Commission denied the Committee's request to declare U.S. West's rates interim rates. Instead, the Commission ruled that if U.S. West's earnings were in excess of its authorized rate of return, they would be subject to a rebuttable presumption that they were unjust and unreasonable and subject to refund. In August 1988, the Division, the Committee, and U.S. West stipulated to a further rate reduction of $31 million, a $20 million reduction to be effective September 1, 1988, and an $11 million reduction to be effective January 1, 1989.

On September 22, 1988, the Commission, with no findings of fact, rejected the stipulated reduction and ordered an interim rate reduction of only $27 million, $16 million of which would be effective August 1, 1988, and $11 million of which would be effective January 1, 1989.

Then, in October 1988, the Commission, at U.S. West's request, vacated its September 22 order reducing rates by $27 million--again with no findings of fact--and instead approved a stipulation for a permanent reduction of $26 million, $16 million to be effective September 22, 1988, and $10 million to be effective January 1, 1989. The Commission, also at U.S. West's request, vacated its August 2 order declaring that earnings in excess of U.S. West's authorized rate of return were presumptively unjust and unreasonable and subject to refund. In addition, the parties agreed that there would be no further demands for interim rate decreases pending the conclusion of the general rate case, and the Commission approved the agreement, again without findings.

Finally, one year later, in October 1989, after formal hearings and extensive findings of fact and conclusions of law, the Commission entered still another rate reduction order of almost $22 million to be effective November 15, 1989.

Thus, over a period of approximately two years, the Commission entered three orders reducing U.S. West's rates in a four-step process by a total of $57 million. The reductions were apparently due, at least in part, to the fact that the Tax Reform Act had decreased U.S. West's federal tax liability, thereby increasing its earnings to a level significantly in excess of its authorized rate of return.

While the Commission was considering the stipulation on which the October 1988 rate reduction was based, David Irvine, a U.S. West ratepayer and former PSC Commissioner, filed a request for agency action, asking the Commission to (1) investigate U.S. West's rate of return for the years 1987 and 1988, and (2) order U.S. West to refund to the ratepayers all earnings exceeding the 14.2% authorized rate of return. The Commission subsequently granted MCI Telecommunications Corp. (MCI), Tel-America of Salt Lake City, Inc. (Te...