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07/17/96 ILLINOIS BELL TELEPHONE COMPANY v.

July 17, 1996

ILLINOIS BELL TELEPHONE COMPANY, PETITIONER-APPELLANT,
v.
ILLINOIS COMMERCE COMMISSION, RESPONDENT-APPELLEE (THE PEOPLE EX REL. JAMES E. RYAN, ATTORNEY GENERAL OF THE STATE OF ILLINOIS, INTERVENING RESPONDENT-APPELLEE). CITIZENS UTILITY BOARD, PETITIONER-APPELLANT, V. ILLINOIS COMMERCE COMMISSION AND ILLINOIS BELL TELEPHONE COMPANY, RESPONDENTS-APPELLEES (THE PEOPLE EX REL. JAMES E. RYAN, ATTORNEY GENERAL OF THE STATE OF ILLINOIS, INTERVENING RESPONDENT-APPELLEE). CITIZENS UTILITY BOARD, PETITIONER-APPELLANT, V. ILLINOIS COMMERCE COMMISSION AND ILLINOIS BELL TELEPHONE COMPANY, RESPONDENTS-APPELLEES (LDDS METROMEDIA COMMUNICATIONS COMPANY AND ILLINOIS PUBLIC TELECOMMUNICATIONS ASSOCIATION, PETITIONERS; THE PEOPLE EX REL. JAMES E. RYAN, ATTORNEY GENERAL OF THE STATE OF ILLINOIS, INTERVENING RESPONDENT-APPELLEE). MCI TELECOMMUNICATIONS CORPORATION, PETITIONER-APPELLANT, V. ILLINOIS COMMERCE COMMISSION, RESPONDENT-APPELLEE (THE PEOPLE EX REL. JAMES E. RYAN, ATTORNEY GENERAL OF THE STATE OF ILLINOIS, INTERVENING RESPONDENT-APPELLEE). AT&T COMMUNICATIONS OF ILLINOIS, INC., PETITIONER-APPELLANT, V. ILLINOIS COMMERCE COMMISSION, RESPONDENT-APPELLEE (THE PEOPLE EX REL. JAMES E. RYAN, ATTORNEY GENERAL OF THE STATE OF ILLINOIS, INTERVENING RESPONDENT-APPELLEE).



Petition for review of the order of the Illinois Commerce Commission. Appeal No. 2--94--1272. Petition for review of the order of the Illinois Commerce Commission. Appeal No. 2--94--1440. Petition for review of the order of the Illinois Commerce Commission. Appeal No. 2--94--1443. Petition for review of the order of the Illinois Commerce Commission. Appeal No. 2--94--1464. Petition for review of the order of the Illinois Commerce Commission. Appeal No. 2--94--1468.

Released for Publication September 25, 1996.

The Honorable Justice Hutchinson delivered the opinion of the court. Doyle and Rathje, JJ., concur

The opinion of the court was delivered by: Hutchinson

JUSTICE HUTCHINSON delivered the opinion of the court:

The present case is a direct appeal from an order of the Illinois Commerce Commission (Commission). See 220 ILCS 5/10--201 (West 1994). Illinois Bell Telephone Company (Bell) initiated this proceeding by filing a petition in Commission docket No. 92--0448 to regulate rates and charges for noncompetitive services under an alternative form of regulation (petition). See 220 ILCS 5/13--506.1 (West 1994). The Citizens Utility Board (CUB) then filed a complaint in Commission docket No. 93--0239 for an investigation and reduction of Bell's rates (complaint). See 220 ILCS 5/9--250, 10--108 (West 1994). American Telephone & Telegraph Communications of Illinois, Inc. (AT&T), MCI Telecommunications Corporation (MCI), and the Attorney General (AG) intervened in Bell's petition. On August 11, 1993, the Commission's hearing examiners consolidated the proceedings. The AG, as an appellee, has filed a brief in support of the Commission's final order of October 11, 1994. We have consolidated the appeals of Bell, CUB, AT&T, and MCI.

ISSUES PRESENTED FOR REVIEW

The parties raise a variety of issues concerning the Commission's order. CUB contends (1) the Commission failed to incorporate an adequate price index or earnings sharing proviso into the order; (2) the order permits Bell to earn monopoly profits in violation of section 13--506.1 which requires rates to be "just and reasonable"; (3) if section 13--506.1 allows the Commission to promulgate a regulatory scheme permitting monopoly profits, such legislation is beyond the State's police powers and is therefore void and unconstitutional; (4) section 13--506.1 represents an impermissibly vague and illegal delegation of authority by the legislature; (5) the Commission violated section 13--506.1 by allowing Bell: (A) pricing flexibility of 2% per year for noncompetitive services in addition to any changes provided for by the price-cap index, and (B) to meet the cross-subsidy test (see 220 ILCS 5/13--507 (West 1994)) by using a revenue test rather than a revenue-requirement test; (6) the Commission adopted Bell's reduction in test-year revenue levels improperly based on selective evidence which ignored uncontroverted evidence demonstrating an increase in Bell's revenue levels; (7) the Commission erred as a matter of law and fact by: (A) deregulating Bell's depreciation rates, (B) amortizing an alleged depreciation reserve deficiency, and (C) adopting a five-year amortization of an alleged reserve deficiency in Bell's analog-switching account; (8) the Commission failed to apply section 9--230 thereby increasing the cost of capital charged to ratepayers because of Bell's affiliation with Ameritech; (9) the Commission ignored substantial evidence by refusing to modify Bell's capital structure to avoid excessive cost of capital; (10) the Commission failed to hold Bell to its burden of proof; (11) Bell did not meet its burden of proof; and (12) the Commission unlawfully shifted the burden of proof to CUB.

On appeal Bell argues the Commission (1) acted arbitrarily and without evidence by including in the inflation offset to the price-cap index the entire 1.1% input price adjustment related to lower interest rates and by increasing the consumer productivity dividend from 0.5% to 1%; (2) acted arbitrarily and without evidence by imputing $51 million to Bell's regulated revenues on the theory that Ameritech, unilaterally and without compensation for Bell, guaranteed Bell would exercise its contract renewal option with the publishers of the Yellow Pages; (3) in determining Bell's fair rate of return on equity: (A) applied an improper legal standard, and (B) improperly refused to consider relevant evidence; (4) erred in disallowing depreciation expense and reducing Bell's rate base to reflect the average vacancy level in Bell's facilities; (5) acted arbitrarily and without evidence by excluding all discretionary services from the residence service basket; and (6) acted arbitrarily and without evidence by capping service rates for five years instead of three years.

AT&T asserts the Commission (1) erred by ordering rate reductions in bands B, C, and D because such rate reductions would give Bell an anticompetitive advantage for the provision of these services; (2) in the alternative should have ordered Bell to implement across-the-board rate reductions to Bell's switched access services instead of rate reductions to bands B, C, and D.

Finally, MCI contends (1) the Commission violated section 13--506.1 by: (A) granting Bell price flexibility for noncompetitive services without evidence to support such flexibility, (B) not ordering intraMSA 1 equal access and presubscription as a quid pro quo offsetting the decreased regulation of Bell, and (C) implementing pure price regulation of Bell's noncompetitive services given Bell's refusal to open its local monopoly to competition; and (2) the Commission erred in reducing Bell's local usage rates below imputed costs without ordering a corresponding decrease in carrier access rates.

Before discussing the facts, it is necessary to address the appellants' complete failure to provide the required table of contents of the record on appeal. Rule 342(a) dictates that the

"complete table of contents, with page references, of the record on appeal *** shall state:

(1) the nature of each document, order, or exhibit, e.g., complaint, judgment, notice of appeal, will, trust deed, contract and the like;

***

(3) the names of all witnesses and the pages on which their direct examination, cross-examination, and redirect examination begin." 155 Ill. 2d R. 342(a).

In lieu of a complete table of contents of the record on appeal, appellants have reproduced an index apparently created by the Commission. This index does not state the nature of the exhibits, the names of the witnesses, or the pages on which direct examination, cross-examination, and redirect examination begin. This lack of a proper table of contents is especially troublesome because this record is voluminous; it is comprised of seven crates, 130 volumes, and thousands of pages of testimony and exhibits.

The appellants are warned that any future failure to provide a proper table of contents will have serious repercussions. The provision of a table of contents conforming to Rule 342(a) is not a request; it is a mandate. See Lagen v. Balcor Co., 274 Ill. App. 3d 11, 14-15, 210 Ill. Dec. 773, 653 N.E.2d 968 (1995). Because this is the first time section 13--506.1 has been construed and the form of alternative regulation crafted by the Commission will substantially affect the vitally important telecommunications industry (see 220 ILCS 5/13--102, 13--103 (West 1994)), we will address the merits of the appellants' arguments. In the future, the failure to comply strictly with Rule 342(a) will result in the dismissal of appellants' appeals.

FACTUAL OVERVIEW

Section 13--506.1 was enacted to empower the Commission to adopt alternative forms of regulation for noncompetitive telecommunications services. Traditionally, the regulation of noncompetitive telecommunications services has been accomplished through the rate of return (ROR) method. The regulatory framework for ROR regulation is found in the Public Utilities Act (Act) (220 ILCS 5/1--101 et seq. (West 1994)). At its most rudimentary level, ROR regulation comprises a Commission determination of what is a reasonable ROR on the utility's equity; the Commission then sets rates at levels designed to produce the target ROR. Illinois Bell Telephone Co. v. Illinois Commerce Comm'n, 203 Ill. App. 3d 424, 428, 149 Ill. Dec. 148, 561 N.E.2d 426 (1990) (Illinois Bell Telephone Co. I); see generally 220 ILCS 5/9--101 through 9--252 (West 1994). On December 13, 1988, Bell filed a request for, and the Commission eventually promulgated, an alternative regulatory plan. Illinois Bell Telephone Co. I, 203 Ill. App. 3d at 427. On appeal we reversed the plan as beyond the Commission's authority. Illinois Bell Telephone Co. I, 203 Ill. App. 3d at 437-39, 442. Section 13--506.1 was enacted to expand the statutory authority of the Commission and thereby remedy the problem identified in Illinois Bell Telephone Co. I.

Section 13--506.1 specifically grants the Commission the authority to "implement alternative forms of regulation in order to establish just and reasonable rates for noncompetitive telecommunications services including, but not limited to, price regulation, earnings sharing, rate moratoria, or a network modernization plan." 220 ILCS 5/13--506.1(a) (West 1994). Either a telecommunications carrier or the Commission on its own motion may initiate consideration of an alternative regulatory plan. 220 ILCS 5/13--506.1(b) (West 1994). In determining the appropriateness of any alternative plan, the Commission must consider both the "public policy goals declared in Section 13--103," and whether the regulatory plan will: "(1) reduce regulatory delay and costs over time; (2) encourage innovation in services; (3) promote efficiency; (4) facilitate the broad dissemination of technical improvements to all classes of ratepayers; (5) enhance economic development of the State; and (6) provide for fair, just, and reasonable rates." 220 ILCS 5/13--506.1(a) (West 1994). The Commission may implement a plan

"only if it finds, after notice and hearing, that the plan or modified plan at a minimum:

(1) is in the public interest;

(2) will produce fair, just, and reasonable rates for telecommunications services;

(3) responds to changes in technology and the structure of the telecommunications industry that are, in fact, occurring;

(4) constitutes a more appropriate form of regulation based on the Commission's overall consideration of the policy goals set forth in Section 13--103 and this Section;

(5) specifically identifies how ratepayers will benefit from any efficiency gains, cost savings arising out of the regulatory change, and improvements in productivity due to technological change;

(6) will maintain the quality and availability of telecommunications services; and

(7) will not unduly or unreasonably prejudice or disadvantage any particular customer class, including telecommunications carriers." 220 ILCS 5/13--506.1(b) (West 1994).

The legislature incorporated several safeguards in section 13-506.1 including: (1) requiring that, in the first three years of a plan, the basic residence service rates be no higher than the rates in effect 180 days before the filing of the plan (220 ILCS 5/13--506.1(c) (West 1994)); (2) requiring at least annual reports documenting the telecommunications service is complying with the plan (220 ILCS 5/13--506.1(d) (West 1994)); (3) providing for the rescission of a plan on the motion of any person alleging that rates under the plan are "unfair, unjust, unreasonable, unduly discriminatory, or are otherwise not consistent with the requirements of this Article" (220 ILCS 5/13--506.1(e) (West 1994)); and (4) ensuring that preexisting safeguards against discriminatory or unjust rates are not subject to implied repeal (220 ILCS 5/13--506.1(f) (West 1994)).

Section 13--506.1 expresses the legislature's determination that the telecommunications industry must be transformed from a regulated monopoly into a system of fully competitive markets. The legislature has found that "universally available and widely affordable telecommunications services are essential" to Illinois and its citizens. 220 ILCS 5/13--102(a) (West 1994). Understandably then, article 13 of the Act provides for the regulation of the telecommunications industry. See 220 ILCS 5/13--101 et seq. (West 1994). Article 13, however, will automatically be repealed on July 1, 1999. 220 ILCS 5/13--803 (West 1994). Therefore, some force must take the place of Commission regulation to ensure continued availability and affordability. That force is the implementation of free-market mechanisms designed to lead to the creation of competitive markets for all forms of telecommunication services. See 220 ILCS 5/13--103(b) (West 1994) ("it is the policy of the State of Illinois that *** when consistent ...


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