U.S. West Communications, Inc. v. Arizona Corp. Com'n, 1

• Court: Court of Appeals of Arizona
• Citation: 185 Ariz. 277,915 P.2d 1232
• Docket Number: No. 1,CA-CC,1
• Parties: U S WEST COMMUNICATIONS, INC., a Colorado corporation, Appellant, v. The ARIZONA CORPORATION COMMISSION, Appellee. 95-0001.
• Decision Date: 08 February 1996

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915 P.2d 1232 185 Ariz. 277 U S WEST COMMUNICATIONS, INC., a Colorado corporation, Appellant,
v.
The ARIZONA CORPORATION COMMISSION, Appellee. No. 1 CA-CC 95-0001. Court of Appeals of Arizona,
Division 1, Department C. Feb. 8, 1996.
Reconsideration Denied April 12, 1996.

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U S West Law Department by Gary L. Lane, Fennemore Craig, P.C. by Timothy Berg, Phoenix, for Appellant.

Arizona Corporation Commission, Legal Division by Christopher C. Kempley and Bradford A. Borman, Phoenix, for Appellee.

OPINION

FIDEL, Judge.

U S West Communications, Inc. ("US West") appeals from Decision No. 58927 of the Arizona Corporation Commission ("the Commission") establishing the telephone rates that US West may charge its Arizona customers. US West argues that the Commission unreasonably and unlawfully (1) imputed to US West an excessive amount of operating income for directory revenues that a related company earned, (2) disallowed a portion of US West's lease expenses, and (3) disallowed a transition cost adjustment to cover US West's change from cash to accrual accounting for non-pension retirement benefits. We find error on the first ground and none on the latter grounds.

BACKGROUND

US West, a public service corporation that provides telecommunication services, applied to the Commission on July 15, 1993, for permission to increase its Arizona rates. Following extensive proceedings, the Commission determined US West's revenue requirement based on its reasonable test-year ¹ operating costs and its fair value rate base. ² The Commission then set rates intended to cover US West's reasonable operating costs and provide its shareholders a 7.61 percent rate of return. See Scates v. Arizona Corp. Comm'n, 118 Ariz. 531, 534, 578 P.2d 612, 615 (App.1978). The new rates became effective January 16, 1995.

US West filed this appeal pursuant to Arizona Revised Statutes Annotated ("A.R.S.") § 40-254.01, which provides for an expedited direct appeal to this court from Commission orders relating to rate making or design. The statute does not provide for de novo review. Consolidated Water Utils., Ltd. v. Arizona Corp. Comm'n, 178 Ariz. 478, 481, 875 P.2d 137, 140 (App.1993). US West

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"must make a clear and satisfactory showing that the [Commission's] order is unlawful or unreasonable." A.R.S. § 40-254.01(E). DIRECTORY REVENUE IMPUTATION

US West first argues that the Commission erred when it imputed operating income revenue of $60,684,000 to US West based on the allegedly excess revenue earned by an affiliate, U S West Direct (USWD). US West proposed in its rate application, and agrees on appeal, that $43 million of USWD's profits should be imputed as income; it argues that the Commission's larger imputation violated the terms of the Commission's 1988 settlement agreement with US West's predecessor, Mountain Bell, in which the Commission accepted USWD's spin-off as a separate, unregulated entity.

In recommending an imputation of $60,684,000, the Commission staff attributed to US West all USWD profits that exceeded the 11.4 percent rate of return that would have been permitted had USWD remained a regulated entity. Staff explained, "The intent [of the adjustment] is to provide ratepayers the same benefit from the directory publishing business as they had before the assets were transferred." The Commission adopted this rationale. We consider whether, in so doing, the Commission violated the terms of the 1988 settlement agreement.

At the outset of the inquiry, we must address the Commission's argument that we should defer to its interpretation of the settlement agreement. The purpose of contract interpretation is to determine and enforce the parties' intent. Taylor v. State Farm Mut. Auto. Ins. Co., 175 Ariz. 148, 152, 854 P.2d 1134, 1138 (1993). Determining the intent of contracting parties may require fact finding, but "[w]hether contract language is reasonably susceptible to more than one interpretation so that extrinsic evidence is admissible is a question of law for the court." Id. at 158-59, 854 P.2d at 1144-45. Although the Commission staff offered evidence to support its view that the methodology used to determine the $60,684,000 imputation was consistent with the settlement agreement, the agreement contained no language to support the Commission's interpretation, and the meaning of the contract must be determined as a matter of law. See Maxwell v. Fidelity Fin. Servs., 184 Ariz. 82, 907 P.2d 51, 62 (1995). Because interpreting the agreement is a question of law for the court and not a discretionary matter constitutionally entrusted to the Commission, we owe no deference to the Commission's interpretation.

The seeds of this dispute were sown when, in the course of the reorganization of AT & T, Mountain Bell, US West's predecessor, was separated from AT & T and was assigned the assets used to publish regional yellow and white page directories. See United States v. AT & T, 552 F.Supp. 131, 193-95, and 200-01 (D.D.C.1982), aff'd sub nom Maryland v. United States, 460 U.S. 1001, 103 S.Ct. 1240, 75 L.Ed.2d 472 (1983). Mountain Bell transferred these assets to USWD, a subsidiary of Mountain Bell's parent company, U S West, Inc. ("USWI"). The Commission objected and, in October 1987, declared the transfer of directory publishing assets void because of Mountain Bell's failure to comply with A.R.S. § 40-285. ³ Mountain Bell filed an action in superior court challenging this decision; the Commission and Mountain Bell settled the matter in May of 1988.

Under the terms of the settlement, the Commission agreed to "take no further action to challenge" Mountain Bell's transfer of yellow pages assets to USWD. The parties also agreed:

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That included in Mountain Bell's 1984 rate case (which is the basis for rates currently charged the ratepayers) were the fees received from USWD under publishing agreements with USWD; that in future rate cases filed by Mountain Bell, the Commission, in arriving at the test year operating income of Mountain Bell, will consider the fees and the value of services received by Mountain Bell from USWD under publishing agreements with USWD; that Mountain Bell and the Commission Staff may present evidence in support of or in contradiction to those fees and the value of those services. Mountain Bell and the Commission agree that in subsequent rate cases downward adjustments from the $43 million in fees received by Mountain Bell from USWD and included in Mountain Bell's 1984 rate case will require more than a showing by Mountain Bell that it negotiated a lesser amount with USWD.

US West argues that the Commission has violated the settlement agreement by treating USWD's assets as if they...