DR 98-058
DR 98-059
WILTON TELEPHONE COMPANY, INC.
HOLLIS TELEPHONE COMPANY, INC.
Overearnings Investigations
Order Approving Stipulation and Comprehensive Settlement
Agreement
O R D E R N O. 23,190
April 6, 1999
APPEARANCES: Frederick J. Coolbroth, Esq. for Wilton Telephone
Company; William Homeyer, for the Office of Consumer Advocate;
and Larry S. Eckhaus, Esq. for the Staff of the New Hampshire
Public Utilities Commission.
I. PROCEDURAL HISTORY
Pursuant to Commission Order No. 22,823 in DR 97-187
(January 6, 1998), the Staff ("Staff") of the New Hampshire
Public Utilities Commission ("Commission") conducted and prepared
for the Commission a review of the earnings of Wilton Telephone
Company, Inc. ("Wilton") and Hollis Telephone Company, Inc.
("Hollis") (together the "Companies"), both wholly owned
subsidiaries of Telecommunications Systems of New Hampshire
("TSNH"), and the relationship of those excess earnings to toll
rates. The Staff concluded that, based upon a 1996 test year,
both Wilton and Hollis were substantially overearning and
recommended initiation of rate cases for both Companies.
On April 20, 1998, the Commission issued Orders of
Notice pursuant to RSA 365:5 and 378:7 opening investigations
into the level of earnings of Wilton and Hollis. The Orders of
Notice scheduled prehearing conferences for May 27, 1998 to
address the issue of temporary rates, to consider motions to
intervene, and to establish a procedural schedule. By letter
dated May 18, 1998, the Commission postponed the hearing on
temporary rates to June 19, 1998.
On June 23, 1998, the Commission issued Order No.
22,960 (Wilton) and Order No. 22,961 (Hollis) approving a common
procedural schedule for both Companies. That schedule has been
modified from time to time at the request of the Participants or
the Commission.
On June 30, 1998, the Commission issued Order No.
22,968 approving a stipulation of the Parties and Staff
establishing Wilton's current rates as temporary rates effective
as of the date of the Order. On the same date, the Commission
issued Order No. 22,969 approving a stipulation of the Parties
and Staff establishing Hollis's current rates as temporary rates
effective with the date of the Order, subject to certain specific
reductions.
The Staff conducted audits of the Companies and issued
Final Reports on October 2, 1998, after review by the Companies
and their responses thereto. After periods of discovery, Staff
filed the testimonies of Mark A. Naylor, Finance Director, Mary
K. Hart, PUC Examiner and Thomas S. Lyle, Utility Analyst III on
October 6, 1998.
On November 16, 1998, the Companies filed the
Testimonies of Stuart Draper, President, General Manager and sole
Director of Wilton and Hollis, John M. Chandler, CPA, and Robert
J. Rohr in support of their position. The OCA filed the joint
testimony of Kenneth E. Traum, Finance Director and William P.
Homeyer, Economist in support of its position.
In an effort to narrow the issues and reach a
settlement in these proceedings, the Parties and Staff met on
numerous occasions; on October 27, 1998, November 5, 1998 and
December 1, 10, and 16, 1998. On February 4, 1999, the Parties
and Staff entered into a Stipulation and Comprehensive Settlement
Agreement ("Agreement"). A hearing was held on February 10,
1999, at which time the Agreement was presented to the Commission
for its consideration.
II. THE AGREEMENT
The Agreement represents all of the full participants
in this docket, with regard to the fixing of permanent rates
pursuant to RSA 378:28; temporary rate refunds pursuant to RSA
378:29; rate case expenses; penalties pursuant to RSA 365:41 and
RSA: 374:17; affiliate contracts pursuant to RSA Ch. 366;
Customer Refunds pursuant to RSA 365:5, and RSA 366:4 and other
related statutes.
With regard to revenue requirement issues, the Parties
and Staff resolved all outstanding issues relating to normalizing
and adjusting entries between Staff and the Companies. In
attempting to reach accord on the portion of the overall expenses
involved in the operations of TSNH, Wilton and Hollis, a compromise
rate of 10.875% was settled on for the purpose of this proceeding.
It was also agreed to split the costs allocable to the Companies on
an equal basis (50/50) for this proceeding only. In summary, the
Agreement produces the following permanent revenue requirement (on
an intrastate basis):
Wilton Hollis
Revenue Requirement 1,224,464 $ 1,239,123
Revenue Increase (Decrease) $( 126,971) ($258,811)
%Increase (Decrease) (9.40)% (17.28)%
Rate Base $ 1,025,190 $ 1,845,477
Return on Rate Base 10.000%
8.588%
Return on Equity 10.000%
10.000%
The Companies agreed that their financial reporting to
the Commission has been inaccurate and earnings have been
understated. The Companies agreed to take the steps detailed in the
Agreement to rectify this situation. Furthermore, each of the
Companies agreed to pay a cash penalty of $25,000, for a total of
$50,000 as provided by RSA 365:41 and RSA: 374:17. No portion of
such fines shall be considered by the Commission in establishing any
of the Company's rates or charges, now or in the future. The
Companies further agreed to credit customers with an amount
approximately equal, after agreed upon adjustments, to the excess
revenues collected by the Companies during the period 1994 -
1997. It was agreed that $130,691 would be refunded to Wilton
Customers for a period not to exceed three (3) years, and that
$231,666 would be refunded to Hollis customers over a period not
to exceed five (5) years. It was also agreed that the Companies
may return the amounts more quickly via larger credits, subject
to approval by the Commission, and that at such time as the above
total amounts to be returned are achieved, the credits would
cease. No interest shall accrue with regard to the unrefunded
amounts, however, the unrefunded amount shall be deducted from
rate base in any future rate case proceeding.
The Companies agreed to the following terms to fulfill
their promise of full compliance with Commission rules and
reporting procedures:
1. A new senior accountant shall be hired to oversee and assist
in keeping accurate records for the Companies. The cost of
this position is not to be included in the current rate
cases.
2. The accounting software used by the Companies shall be either
upgraded or replaced, with the decision regarding such upgrade
or replacement, and which software if replacement is decided
upon, being made before December 31, 1998. The cost of
upgrading/replacing the software is not to be included in the
current rate cases.
3. The Companies' auditors shall perform additional audit
procedures to ensure the presence and filing of affiliate
agreements and to test the accuracy of the allocation of
expenses among the Companies and their affiliates, including
but not limited to:
4. The Companies' Auditors shall perform additional procedures to
tie the Companies' financial statements to the PUC Annual
Reports and provide the reconciliation to the Commission
Finance Staff and the OCA. This reconciliation may be included
in the management letter referenced below.
5. Beginning with the 1998 financial audit, the Companies'
auditors shall conduct its audits in accordance with the more
stringent standards applied to publicly-held companies
(issuance of SAS 61 letters to the Companies' Boards of
Directors and rotation of audit partners) rather than the more
lenient privately-held company standards used in auditing the
Companies in prior years.
6. As additional agreed-upon procedures, the Companies' auditors
will review the accounting relating to affiliate transactions
for consistency with contracts on file with the Commission.
The results will be incorporated into the management letter
referenced in item 8 below.
7. The Companies agree to meet Compliance Deadlines, specified in
the Agreement pertaining to Findings as contained in the
Staff's audit.
8. The Companies' auditors shall issue a management letter with
copies of the SAS 61 letter and annual financial reports to be
provided directly to the Commission Finance Director and OCA
for FY 1998 through FY 2000.
9. Should instances which precipitated the OCA and Staff's
recommendation for replacement of the Companies' auditors occur
again in the future, the Parties and Staff agree that
retention of the Company's auditors will be reviewed by the
Commission.
All startup and organization costs associated with the
acquisition of Hollis shall be considered Transaction Costs and
shall be booked below the line as provided for in the stipulation
approved by Commission Order 21,253. No portion of such costs shall
be considered by the Commission in establishing any of the
Companies' rates or charges, now or in the future.
The switch currently leased by TSNH to Hollis shall be
sold by TSNH to Hollis at its original cost, or then fair market
value whichever is lower, net of depreciation that would have been
allowed and net of any lease payments in excess of depreciation
which exceeds what Hollis' return would have been on the switch.
The proposed value shall be reviewed and approved by Staff.
It was also agreed that TSNH shall be permitted to earn
the allowed return on equity for the Companies as a return on the
assets it holds (trucks, etc.) which are used by TSNH in providing
telephone service for the Companies. It was further agreed that, to
facilitate the tracking of this return during subsequent audits, the
charges related to the TSNH should be recorded as separate,
stand-alone monthly recurring journal entries in the Companies'
general ledgers.
The Parties and Staff agree that 10.875% of allocable
costs shall be borne by TSNH and the remainder shall be allocated to
the Companies based upon the number of access lines using the number
of lines present in each company at the end of the previous year.
All recently filed affiliated contracts, contracts
between affiliates for the benefit of Wilton and/or Hollis, and
previously filed contracts shall be separately reviewed in this
docket on a going forward basis only. Once approved they shall be
effective as of January 1, 1999. All contracts between and among
affiliates shall be considered affiliate contracts if any of the
service or materials provided are for the benefit of either Wilton
or Hollis. Wilton and Hollis shall file with the Commission
annually, in conjunction with its Annual Report to the Commission, a
reconciliation of all charges by TSNH, Draper Energy and any other
companies owned by Stuart Draper, showing amounts billed to Hollis
and Wilton. The reconciliation should provide a functional cost
analysis and be broken down between labor and other expenses, and
direct and indirect charges. Where goods and services are provided
based on prevailing prices approved by the Commission, the charges
shall be reconciled to the contract.
All markups from affiliates for any services provided,
directly or indirectly, to either Hollis or Wilton shall be
eliminated. All such services or materials from affiliates shall
henceforth be provided in accordance with the Commission's Uniform
System of Accounts or as otherwise approved by the Commission.
For Wilton, the revenue reduction will be implemented
through rate reductions in toll and access services which maintain
the toll-access rate differential prescribed in Order No. 20,196 in
Docket DE 90-002, Generic Investigation Into Intralata Toll
Competition Access Rates, 78 NH PUC 365 (1993). For Hollis, the
revenue reduction shall be implemented first through ten percent
(10%) reductions in residential and business basic exchange rates.
The balance of the revenue reduction shall be implemented through
rate reductions in toll and access services which maintain the
toll-access rate differential prescribed in Order No. 20,196 in
Docket DE 90-002, Generic Investigation Into Intralata Toll
Competition Access Rates, 78 NH PUC 365 (1993).
Neither Wilton nor Hollis shall file for an increase in
rates to take effect prior to the resolution of all compliance
issues referred to previously.
The parties also agreed that only that portion of
expenses related to the rate case may be collected from ratepayers;
that portion related to compliance and other issues may not. It was
agreed that the proper allocation between the rate and compliance
issues was approximately 50/50, and that the Companies will,
therefore, collect only 50% of expenses from ratepayers, after the
expenses have been reviewed and approved by the Commission as
appropriate. No portion of the expenses to be borne by shareholders
shall be considered by the Commission in establishing any of the
Companies rates or charges, now or in the future.
The Companies agreed to provide a calculation, subject to
review by the OCA and Staff, of the difference between Permanent
Rates and Temporary Rates from June 30, 1998 to the date Permanent
Rates are implemented. The Parties and Staff agreed that the Rate
Case Expenses may be offset against the sum of Refunds to Customers
and the Temporary Rate Refunds with the net amount to be refunded
over the length of time referred to above. The Companies agree
that the Refunds to Customers, Rate Case Expenses and Temporary Rate
Refunds will be tracked separately in the accounting records to
facilitate reconciliation.
III. COMMISSION ANALYSIS
These dockets were initially opened for the purpose of
addressing the issue of overearnings. In addition to the
overearnings issue, the Stipulation addresses issues concerning
accounting procedures not followed by Wilton and Hollis. We note
that the Companies had previously agreed to follow those procedures
in a previous stipulation. As a consequence of their failure to do
so, the Companies have agreed to pay certain penalties under the
terms of the Agreement. The Companies have also agreed to proposals
for rate design, temporary rate refunds and rate case expenses.
The rate design proposal actually results in decreases in
all rates except the intra-state toll message rate for both
companies. The net result of the temporary rate refunds, stipulated
customer credit and rate case expenses is a monthly credit for
Wilton customers of approximately $1.62 for three years and
approximately $1.26 for Hollis customers for five years. The
permanent rate reduction for Wilton customers of $76,989 in toll
charges is an average annual reduction of $23.38 per customer
assuming 3,292 customers. The permanent rate reduction for Hollis
customers of $129,960 in local, toll and installation charges is an
average annual reduction of $37.70 per customer assuming 3,447
customers. An individual customer's reduction will, of course,
depend upon his/her usage. In addition, the intrastate toll
providers will experience reductions in access charges totaling
$49,623 for Wilton and $128,961 for Hollis.
After considering the Stipulation that was presented to
the Commission and the number of issues that it resolves, as well as
the reductions that it proposes for customers, the Commission finds
that the Agreement is an appropriate resolution of the issues
involved.
Based upon the foregoing, it is hereby
ORDERED, that the Agreement entered into by the Parties
and Staff is hereby approved; and it is
FURTHER ORDERED, that Wilton and Hollis shall file
appropriate tariff pages to effectuate the permanent rate decreases
effective with service rendered on and after April 1, 1999; and it
is
FURTHER ORDERED, that Wilton and Hollis shall file
appropriate tariff pages to effectuate the Refunds to Customers and
Temporary Rate Refunds net of Rate Case Expenses, in accordance with
the Agreement effective with service rendered on and after April 1,
1999; and it is
FURTHER ORDERED, that each Company shall pay a cash
penalty of $25,000, for a total of $50,000, as provided by RSA
365:41 and RSA: 374:17, by check made payable to the State of New
Hampshire no later than March 31, 1999; and it is
FURTHER ORDERED, that the Parties and Staff shall review
all recently filed affiliated contracts, contracts between
affiliates for the benefit of Wilton and/or Hollis, and previously
filed contracts for submission to the Commission for their approval
no later than April 30, 1999.
By order of the Public Utilities Commission of New
Hampshire this sixth day of April, 1999.
Douglas L. Patch Susan S. Geiger Nancy Brockway
Chairman Commissioner Commissioner
Attested by:
Thomas B. Getz
Executive Director and Secretary