June 27, 2002 – The Public Services Commission hearing examiner presiding over the Innovative Telephone rate investigation has given phone company executives until Friday to comply with a request from investigators to turn over financial records from its parent company, Innovative Communication Corp., and other ICC firms.
Hearing examiner Frederick Watts said on Wednesday that if the company ignores the directive, he will seek permission from the PSC to subpoena the records. Verbal requests for information were twice rejected during the day's continuation of a hearing that began on Tuesday.
The hearing is one in a series Watts is holding as part of the PSC's legally mandated investigation into Innovative's rates to determine whether the company is complying with regulations regarding its earnings. The hearings are open but PSC members are not present for the proceedings; they are to act after receiving the hearing examiner's report of the investigation findings.
Technical consultants in charge of collecting and analyzing data from Innovative Telephone say they need records from ICC and other affiliate companies which they say are conducting inter-company transactions with the phone company. They say they especially want to examine Innovative's financial role in a land transaction. They did not give any details concerning what the transaction was.
Questions concerning the land deal were among those on a list submitted to Innovative by Watts. Innovative attorney Gregory J. Vogt protested what he termed the late submissions. Watts responded that in some cases, he might be flexible — but that in the case of the questions about the phone company's apparent financial role in the land transaction, he was not.
The technical consultants also questioned a witness about construction projects listed by Innovative as a factor in setting a net investment rate base. The technical consultants indicated they would reject the submissions because Innovative had not provided enough supporting information. Anthony J. Zarillo, lead consultant for AUS Pathways, said, "We eliminated it because the company did not provide sufficient background data to support it."
David J. Milkowsky, a partner in the accounting firm Ernst & Young, said, "There are a number of transactions between the regulated company and the affiliates, and in order to satisfy both sides of the transaction, the records of the parent and the affiliates have to be reviewed." AUS, the consulting firm contracted by the PSC to conduct the rate investigation, has engaged Ernst & Young as a member of its technical consulting team.
Vogt asserted — as he had done on Tuesday — that the information being sought was not relevant to the rate investigation. But Watts said neither he as examiner nor Vogt as the company's lawyer was in a position to decide which records the PSC should ask to review in going about determining how the phone company sets its rates.
Vogt said he planned to respond to a number of issues brought up at the hearing by filing legal briefs with the hearing examiner. Vogt declined to specify the issues involved, saying he would first consult with Innovative executives. "There are a couple of legal issues that came up through the hearing," he said, which made him feel that an introduction of past regulatory cases would help the examiner and PSC members set their decisions within a properly established legal framework.
But after drawing their respective lines in the sand, Watts and Vogt agreed they would rather work things out. The hearing ended Wednesday afternoon, but Watts called on the investigators and the company representatives to meet informally and privately on Thursday morning in a final attempt to resolve their differences.
Other than the debate on access to records, discussion of rate setting dominated the Wednesday session.
Innovative witness Julia Johnson, former chair of the Florida Public Service Commission, argued against regulators forcing settlements between the phone company and its affiliates, saying that to do so would interfere in the affairs of non-regulated companies. Johnson, an accountant who now has her own company, Net Communications, also spoke against the call by AUS for Innovative Telephone to undertake a cost-of-services study.
"Cost-of-service studies and cost allocation studies are usually done in preparation of requesting a rate increase," she said. "The question is, what is to be gained?"
To force the company to conduct such a study is not appropriate, given Innovative's small size, Johnson said, and the only sure result would be an added cost that would be passed along to consumers.
Zarillo defended his view that such a study is necessary. The PSC must "find a level of rates they call fair and reasonable," he said. "How could that level be determined without conducting such a study?"
Johnson said regulators should trust Innovative to be fair in its rate setting. She said her own take on the investigation findings so far is that there are signs that the phone company is undercharging residential subscribers for basic service.
"A cost-of-service study may be direct and rigid and a nice accounting layout, but when it comes to setting rates, it can be a different thing," she said.
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