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June 19, 2002 – The second in a series of hearings in connection with the Public Services Commission's mandatory investigation into Innovative Telephone's rates saw lively differences of opinion Wednesday between the company's witnesses and the vice president of the consulting firm hired by the PSC to investigate the utility's rates.
AUS Consultants, the New Jersey firm contracted by the PSC, has recommended that Innovative's Economic Development Commission tax breaks be passed on to its customers. Anthony J. Zarillo, AUS executive vice president, also said the regulatory commission should investigate whether the tax breaks in effect give the phone company profits above the legal cap of 11.5 percent.
But, testifying for Innovative, local economist Richard Moore said that such moves would "generate a grotesque contamination of our industrial development program. I am shocked and dumbfounded by the apparent schizophrenia in our single fiscal policy supporting economic development."
Moore and Gregory J. Vogt, Innovative's attorney, maintain that directing Innovative to pass its tax breaks on to customers would discourage outside investment because investors would be wary of receiving tax breaks from one government agency that could be summarily taken away by another.
Holland Redfield, vice president of Innovative Communication Corp., Innovative Telephone's parent company, also said that directing how Innovative is to use its EDC breaks would set a "dangerous" precedent that could have far-reaching ramifications. "What's to stop it from governing other businesses' EDC benefits?" he asked.
Moore gave an elaborate example to illustrate his view: "To understand the incentives created by tax benefits, suppose a local company that manufactures and exports rum has financial difficulties after losing its plant in a storm."
He described the scenario of the company wanting to stay in business in the Virgin Islands but lacking the resources to do so. Rather than shutting down, the company applies for EDC benefits so investors will have an incentive to invest in the firm. The government grants the benefits, and the company invests $25 million and rebuilds its plant, hires local residents and resumes producing its product, when suddenly the government changes its mind. Instead of allowing the company's investors to realize the tax benefits, it says the company must reduce the price of rum by the amount of the benefits.
Zarillo slowly and carefully pointed out to Moore that rum is not a regulated public utility, and the PSC doesn't govern private companies; it would have no say in how private industry should put its tax breaks to use.
"What if Innovative just decided to pack up and leave if they lost their tax benefits?" Zarillo asked. "What would happen then?" He pointed out that Innovative as a public utility has an obligation to the community it serves and cannot simply go out of business.
In 1998, the PSC hired Georgetown Consulting Group to determine whether an investigation was warranted into the rates of what was then the V.I. Telephone Corp. — Vitelco, now Innovative Telephone. After Vitelco was granted near-total exemption from taxes for five years in a deal worked out in 1997 with Gov. Roy L. Schneider, members of the 22nd Legislature called on the PSC to look into reducing phone rates by 20 percent. The PSC then directed Georgetown to prepare a report on Vitelco's rate practices.
Georgetown consultant Jamshad Madan reported to the Legislature in June of 1999 that his research indicated that a rate reduction likely was called for, and he recommended an investigation.
However, the PSC dismissed Georgetown's recommendation. Walter Challenger, who then chaired the commission, cited an error in Madan's report as part of the justification for the dismissal. The error was in a spreadsheet program; it failed to calculate gross receipts taxes in Vitelco's expenses. Madan responded that with its IDC benefits, Vitelco no longer paid gross receipts taxes and wouldn't for the five years the benefits would be in effect; so, the error had no bearing on financial projections.
Another Innovative attorney, Derek Hodge, testified on Tuesday at the first of the current series of rate hearings. He said the reason that Vitelco applied for and received IDC benefits in 1997 was that the company suffered more than $100 million in losses as a result of Hurricanes Hugo and Marilyn, and only $17 million of the Hugo losses were recoverable from insurance.
Hodge maintained Tuesday that in rejecting the rate study three years ago, the PSC also rejected Georgetown's recommendation that the IDC benefits be considered part of the company's income in calculating its rate of return.
Hodge also said Innovative has lived up to its IDC obligations, which include investing $100 million in the territory; maintaining at least 421 full-time employees, 80 percent of them V.I. residents; funding scholarships; and contributing to various charitable causes.
Over the course of several years, Sen. Adlah "Foncie" Donastorg tried to get the IDC, the Legislature and the PSC to investigate whether ICC was using the phone company as a tax shelter for other holdings. He charged that ICC placed employees of other subsidiaries on the phone company's payroll to take advantage of its tax-exempt status.
Zarillo and Gregory Loyd Mann, a consultant working with AUS, made it clear at this week's hearings that Innovative's use of its tax benefits is not being questioned. What is, they said, is whether the breaks in effect give Innovative profits beyond its cap of 11.5 percent.
The Tuesday and Wednesday presentations took place before attorney Frederick Watts, the PSC hearing examiner for the case, who will submit recommendations to the commission based on his findings. Watts said the next hearing with AUS and Innovative will be at 9 a.m. next Tuesday.
On Friday at 9 a.m., the PSC will meet in regular session. Its agenda includes the Innovative rate investigation.

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