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