In re Appeal of Investigation into Existing Rates of Shoreham Telephone
  Co., Inc. (2005-077)

2006 VT 124

[Filed 17-Nov-2006]


       NOTICE:  This opinion is subject to motions for reargument under
  V.R.A.P. 40 as well as formal revision before publication in the Vermont
  Reports.  Readers are requested to notify the Reporter of Decisions,
  Vermont Supreme Court, 109 State Street, Montpelier, Vermont 05609-0801 of
  any errors in order that corrections may be made before this opinion goes
  to press.


                                 2006 VT 124

                                No. 2005-077


  In re Appeal of Investigation into             Supreme Court
  Existing Rates of Shoreham 
  Telephone Company, Inc.
                                                 On Appeal from
                                                 Public Service Board

                                                 January Term, 2006

  Michael H. Dworkin, Chair

  Paul J. Phillips and Elijah D. Emerson of Primmer & Piper, P.C., St.
    Johnsbury, for Appellant.

  June E. Tierney, Department of Public Service, Montpelier, for Appellee.


  PRESENT:  Reiber, C.J., Dooley, Johnson, Skoglund and Burgess, JJ.


       ¶  1.  REIBER, C.J.   Shoreham Telephone Company, Inc. appeals from
  a Public Service Board order requiring that it reduce its revenues from
  intrastate telephone service by over $1.2 million. Shoreham contends: (1)
  the Board violated state and federal law by employing a methodology that
  impermissibly uses interstate revenues to subsidize intrastate rates; (2)
  the order will produce intrastate rates that are confiscatory; (3) the
  Board's disallowance of income tax expense from Shoreham's intrastate cost
  of service is unsupported by the evidence, unjust, and unreasonable; and
  (4) the order to establish a liability account for Shoreham's accumulated
  deferred income taxes (ADIT) was improper.  We affirm.
   
       ¶  2.    Shoreham is a small telecommunications company that
  provides telephone services to approximately 3700 customers in several
  towns in Addison County.   After reviewing Shoreham's 2002 supplemental
  financial reports, the Board found that there was "a significant
  possibility that Shoreham's intrastate revenues are higher than a just and
  reasonable level."  Accordingly, the Board opened an investigation into
  Shoreham's existing rates and related issues, including the "benefits (and
  costs) of establishing Shoreham's rates using a total company (or residual)
  methodology." See 30 V.S.A. § 227(b) (Board may order investigation into
  justness and reasonableness of rates).  The Department of Public Service
  participated in the proceedings as public advocate.  Id. § 217 (Department
  of Public Service, through the Director of Public Advocacy, shall represent
  the public at hearings on rates).

       ¶  3.  Following the submission of substantial prefiled testimony by
  both parties and three days of technical hearings, the hearing officer
  filed a proposal for decision in August 2004 containing extensive findings
  and recommendations.  Critical among these were his findings that in 2002
  Shoreham's net profit of $1.2 million resulted in an overall rate of return
  of 38.8%, well in excess of industry standards; that application of a
  "total company" or "residual ratemaking" methodology would ensure that
  Shoreham - an "average schedule" company since 1982 - received no more than
  100% of its intrastate costs, plus a reasonable rate of return; that
  Shoreham is a Sub-chapter S corporation which pays no direct income tax,
  and therefore should reduce its expenses attributed to income taxes; and,
  finally, that Shoreham should be required to establish a regulatory
  liability account equal to the difference between its current ADIT balance
  of $611,143 and the ADIT balance that would have been produced had Shoreham
  been taxed at the actual corporate income tax rate since 1999. In total,
  the hearing officer recommended that Shoreham's intrastate rates be
  adjusted to reduce its intrastate income by $1,126,725. 
   
       ¶  4.  In  November 2004, the Board issued its ruling adopting the
  proposed decision largely in its entirety, subject to several specific
  modifications, including a total elimination of the income tax expense from
  the calculation of Shoreham's legitimate expenses.  This resulted in a
  required reduction of $1,268,459 from Shoreham's intrastate rates. The
  Board authorized Shoreham to reduce its intrastate rates in three equal
  stages over a seventeen-month period, and allowed it either to keep the new
  regulatory account on its books until the liability for which it was
  collected occurred or return it to taxpayers in the form of amortizations
  over a reasonable period of time.   In response to Shoreham's subsequent
  motion to alter or amend, the Board modified its decision in several
  relatively minor respects, but otherwise denied the motion.  This appeal
  followed. 

                                     I.


       ¶  5.  A brief review of the regulatory backdrop is essential to a
  proper resolution of Shoreham's several claims on appeal.  Shoreham is a
  local exchange carrier (LEC) under state and federal law, subject to
  separate regulation by the state and federal governments.  See Crockett
  Tel. Co. v. FCC, 963 F.2d 1564, 1566 (D.C. Cir. 1992) (reviewing historical
  basis of federal regulation of interstate common carrier services and state
  regulation of intrastate services).  The Federal Communications Commission
  (FCC) regulates interstate and foreign telecommunications services, while
  states retain jurisdiction to regulate intrastate services.  47 U.S.C. §§
  151, 152(b).  In Vermont, the Board exercises local jurisdiction to ensure
  that Shoreham's intrastate rates are "just and reasonable."  30 V.S.A. §
  218.  
   
       ¶  6.  To implement this dual scheme of regulation, "a utility's
  'revenues, investment, and expenses must be apportioned between the
  interstate and intrastate jurisdictions.' "  Pine Tree Tel. & Tel. Co. v.
  Pub. Utils. Comm'n, 631 A.2d 57, 62 (Me. 1993) (quoting Mid-Plains Tel.
  Co., 5 F.C.C.R. 7050, 7050 (1990)), aff'd sub nom. Crockett Tel. & Tel.
  Co.v. FCC, 963 F.2d 1564 (D.C. Cir. 1992).  This process of apportionment
  is known as jurisdictional separation.  Crockett, 963 F.2d at 1566; see
  Smith v. Illinois Bell Tel. Co., 282 U.S. 133, 148, 150 (1930) (holding
  that "reasonable measures" of separations are "essential to the appropriate
  recognition of the competent governmental authority in each field of
  regulation").  Four years after the decision in Smith, Congress authorized
  the FCC to classify carriers' costs as interstate or intrastate for
  purposes of federal regulation, 47 U.S.C. § 221(c), and the FCC eventually
  codified a formal, nonexclusive, cost-based separation procedure at 47
  C.F.R. pt. 36 (1991).  See Crockett, 963 F.2d at 1566-67 (holding that
  federal recognition of the cost-based ratemaking and separations procedure
  was not intended to exclude other methodologies). 

       ¶  7.  From its inception, the separations requirement was recognized
  by the United States Supreme Court to be a costly, complex, and necessarily
  inexact process, in part because in many cases the equipment and plant used
  to provide intrastate service is also used to provide interstate service. 
  See Smith, 282 U.S. at 150 (observing that while separation is essential,
  because of "the difficulty in making an exact apportionment of the property
  . . . extreme nicety is not required"); accord La. Pub. Serv. Comm'n v.
  FCC, 476 U.S. 355, 360 (1986) ("[W]hile the [Communications] Act would seem
  to divide the world of domestic telephone service neatly into two
  hemispheres . . . in practice, the realities of technology and economics
  belie such a clean parceling of responsibility."). 
   
       ¶  8.  To save companies the often substantial expense and effort of
  preparing expert cost studies, the FCC has for many years permitted some
  smaller carriers to derive their interstate costs from an "average
  schedule," essentially an estimate based on general industry data
  approximating the costs of a similarly situated hypothetical exchange
  company. (FN1)  See Crockett, 963 F.2d at 1567 (discussing the history and
  methodology underlying use of average schedules); Nat'l Ass'n of Regulatory
  Util. Comm'rs v. FCC, 737 F.2d 1095, 1127 (D.C. Cir. 1984), cert. denied,
  469 U.S. 1227 (1985) (same); Pine Tree, 631 A.2d at 62-63 (same).  The FCC
  categorizes LECs as either "cost-based" or "average-schedule" companies for
  purposes of compensating them for their federal jurisdictional costs from
  an overall interstate "settlement pool."  A cost-based company tracks and
  reports its interstate costs based on its actual costs.   An
  average-schedule company does not track or report its actual interstate
  costs, but instead recovers its estimated interstate costs based on the
  average schedule. (FN2)
   
       ¶  9.  Because the average-schedule system used by federal regulators
  conveniently designates a certain portion of a carrier's overall costs as
  interstate, "[u]nsuprisingly, several states have come to rely on average
  schedules for their own intrastate ratemaking purposes."  Crockett, 963
  F.2d at 1567.  Just as many states have subtracted from a cost-based
  carrier's total costs its actual interstate costs in order to derive from
  the remainder its intrastate costs, so a number of states deduct from the
  total cost base of an average-schedule carrier that portion attributed by
  the average schedule to interstate usage, "and treat the residuum as
  intrastate."  Id.; see also Pine Tree,  631 A.2d at 63 (explaining that
  "some state regulators simply subtract these [average-schedule] interstate
  costs from the company's total costs and treat the residuum as intrastate
  costs").  This intrastate ratemaking method is known as "total company" or
  "residual ratemaking."  Crockett, 963 F.2d at 1567.   

       ¶  10.  The residual-ratemaking process, in the context of an
  average-schedule company, has been described as follows: 

    [First], the commission determines a reasonable level of expense
    and a reasonable return on the net investment rate base for the
    total company.  The commission then deducts the amount of average
    schedule payments from the total company revenue requirement to
    determine the intrastate portion of the total company revenue
    requirement.  Intrastate rates are then established to recover
    this residual amount.

  Pine Tree, 631 A.2d at 63 (quotation omitted).  Thus, state regulators
  using residual ratemaking-like the Board here-assume that the intrastate
  revenue requirement is equal to the company's total revenue requirement
  less revenue deemed by the average schedule to be interstate.  Id. 

       ¶  11.  As the Crockett court noted, the residual-ratemaking method
  "has a significant impact on jurisdictional separations."  963 F.2d at
  1567.   While an average-schedule company that uses the cost-based method
  might enjoy a recovery in excess of its total revenue requirements (when
  the average federal "settlement" exceeds the company's actual interstate
  costs), the use of residual-ratemaking generally "will guarantee 100%
  recovery, no more, no less."  Pine Tree, 631 A.2d at 64 (quotation
  omitted); see also Crockett, 963 F.2d at 1568-69 (illustrating how "a
  carrier using the average schedule to calculate costs of interstate service
  but determining actual costs for intrastate ratemaking could be provided
  with a total base for rate calculation exceeding 100 percent of its
  costs").  
   
       ¶  12.  In the seminal Crockett decision, a federal appeals court
  upheld the use of residual ratemaking as a lawful separations methodology
  against a challenge brought by several LECs.  The court readily
  acknowledged that,  "[b]y relying on an average schedule, residual
  ratemaking only approximates actual interstate costs, while Part 36 [the
  FCC approved cost-based method] requires detailed cost studies which allow
  greater precision in figuring the proper intrastate ratemaking base."
  Crockett, 963 F.2d at 1568.   Nevertheless, the court rejected the LECs'
  claims that Congress had preempted the field by approving the use of actual
  cost-based ratemaking, holding-to the contrary-that states remain free to
  employ other methodologies, including residual ratemaking, as a means to
  comply with the Supreme Court's constitutional admonition in Smith for
  jurisdictional separation.  Crockett, 963 F.2d at 1573-74.

       ¶  13.  The use of  residual ratemaking received further approval from
  the Maine Supreme Judicial Court in Pine Tree.  There, as here, a small
  telephone company challenged the state utility commission's use of the
  total-company method to determine the carrier's intrastate rates.  Pine
  Tree, 631 A.2d at 62.  The company asserted, among other claims, that the
  method "use[s] revenues  generated from interstate customers to benefit
  intrastate customers violat[ing] the . . . prohibition against
  cross-subsidization." Id. at 66 (quotation omitted).  The argument rested
  on the fundamental principle, dating from as early as Smyth v. Ames, 169
  U.S. 466 (1898), that one class of customers should be neither burdened by
  the losses nor benefitted by the profits generated in connection with
  services accorded a different class of customers.  See El Paso Elec. Co. v.
  Fed. Energy Reg. Comm'n, 667 F.2d 462, 468 (5th Cir. 1982) (reviewing
  history and rationale of principle that "with respect to ratemaking, each
  jurisdiction or class of customers should pay its own way").  The rule
  against "cross-subsidization"-essentially a corollary to the preemption
  principle that states may not intrude upon areas, such as interstate
  commerce, regulated by the federal government-promotes the jurisdictional
  separation essential to regulatory ratemaking.  Id.
   
       ¶  14.  The Maine court rejected the cross-subsidization claim,
  distinguishing its earlier decision in Maine Water Co. v. Public Utility
  Commission, 482 A.2d 443 (Me. 1984), where it found that the utilities
  commission had improperly attempted a "dollar-for-dollar flow[-]through" of
  gains from one division to another.  Pine Tree, 631 A.2d at 66.  The case
  before it was more akin to Millinocket Water Co. v. Public Utility
  Commission, 515 A.2d 749 (Me. 1986), where the commission had used a
  "[c]ompany's parent as proxy for determining the cost of equity and did not
  attempt to effectuate a flow-through."  Pine Tree, 631 A.2d at 66 (internal
  quotation omitted).  The court in Pine Tree thus concluded that, in
  employing residual ratemaking, "the commission relied on average schedules
  as a proxy to determine Pine Tree's interstate costs and did not attempt to
  effect a flow-through of gains from Pine Tree's interstate activities to
  subsidize its intrastate activities."  Id.  Accordingly, it found no
  violation of the separations principle.

       ¶  15.  With this regulatory background in mind we turn to Shoreham's
  principal claim that the Board erroneously relied on residual ratemaking in
  violation of state and federal law.  As noted, Shoreham has been an
  average-schedule company since 1982, recovering its interstate costs based
  on the FCC-approved generalized industry average, and thereby avoiding the
  significant administrative burden and expense of tracking its actual 
  costs.   Nevertheless, Shoreham argued below, and renews its claim here,
  that the Board was prohibited from employing the average schedule under the
  residual ratemaking method.  Shoreham urged reliance, instead, on a "proxy"
  cost study that it had commissioned which purported to show that its
  intrastate revenues were deficient by $168,028.  The Board declined,
  finding that the proxy study relied upon calculations that "appear to be
  inconsistent with the FCC's [jurisdictional separations regulations] and
  [the National Exchange Carrier Association's] guidelines" causing its
  "accuracy and appropriateness" to be "questionable."
   
       ¶  16.  The Board opted, instead, to apply the residual ratemaking
  method, noting that  Shoreham's choice to remain an average-schedule
  company had allowed it to enjoy an excessive recovery, with intrastate
  customers paying for the same plant and operations that Shoreham was
  already being compensated for through interstate rates.  Applying residual
  ratemaking, the Board concluded, would ensure that intrastate rates are
  just and reasonable, and would limit Shoreham's recovery to 100% of its
  total revenue requirements.  The result, as noted, was an order requiring
  Shoreham to reduce its intrastate revenues by $1,237,143, to $822,404.

       ¶  17.  Orders of the Board enjoy a strong presumption of validity. 
  In re Green Mountain Power Corp., 162 Vt. 378, 380, 648 A.2d 374, 376
  (1994).  Where the Board exercises ratemaking authority, we afford
  substantial deference to its decisions so long as the Board's actions "are
  directed at proper regulatory objectives."  In re Green Mountain Power
  Corp., 142 Vt. 373, 380, 455 A.2d 823, 825 (1983).  In recognition of the
  complexities of utility regulation, we defer to the Board's particular
  expertise in ratemaking and assume a limited role in the process.  In re
  Cent. Vt. Pub. Serv. Corp., 141 Vt. 284, 288, 449 A.2d 904, 907 (1982). 
  Thus, we accept the Board's findings and conclusions that are not clearly
  erroneous, In re Vermont Telephone Co., 169 Vt. 476, 481, 739 A.2d 671,
  674-75 (1999), and in reviewing those findings "we give great deference to
  the particular expertise and informed judgment of the Board."  In re E.
  Georgia Cogeneration Ltd. P'ship, 158 Vt. 525, 531, 614 A.2d 799, 803
  (1992). 

       ¶  18.  With this highly deferential standard in mind, we can find no
  basis to disturb the Board's considered judgment that use of the residual
  ratemaking methodology in this case yielded a just and reasonable
  intrastate rate consistent with federal law.  As the Board succinctly yet
  comprehensively explained, residual ratemaking merely

    accepts the interstate/intrastate cost separation factors that are
    inherent in the "average schedule" interstate rates.  The
    methodology then applies the FCC's allowed 11.25% return on equity
    to these interstate cost allocations, thus assuring that Shoreham
    has a fair opportunity to recover its interstate costs.  It also
    uses an intrastate return rate that we establish for determining a
    return on intrastate investment, and then employs a weighted
    average of the interstate and intrastate returns in conjunction
    with the total regulated ratebase and expenses of Shoreham to
    produce a revenue requirement for the Company as a whole. 
    Thereafter, the methodology simply derives the state share of
    revenues by subtracting interstate revenues (which are based upon
    the average schedule allocations plus the FCC-determined return)
    from the total.  Under this approach, Shoreham has a reasonable
    opportunity to earn its authorized return on equity (or exceed it)
    in the interstate jurisdiction because the Board simply accepts
    the FCC's allocations and return on equity.  Similarly, Shoreham
    can earn a fair return on its intrastate investment (as determined
    using the implied "average schedule" separations factors).

  Shoreham's vigorous claims to the contrary notwithstanding, we are not
  persuaded that the Board erred in rejecting its assertion that residual
  ratemaking effects an impermissible shift or reclassification of interstate
  revenues for intrastate purposes.  As the Board found, the methodology is
  premised precisely on the separations requirement.  It merely takes
  advantage of the simplicity of the average-schedule cost allocation-which
  Shoreham has retained for over twenty years for interstate cost
  purposes-for use in intrastate ratemaking.
   
       ¶  19.  Furthermore, as noted earlier, courts that have addressed
  residual ratemaking have determined that it is a sound methodology which
  does not impermissibly intrude into federal jurisdiction. "Insofar as the
  cost basis underlies average schedule ratemaking, there is no inconsistency
  in allowing the states to base their rates on the same relatively
  inexpensive method of computing the facility component of ratebase that the
  federal regulator uses," and it is reasonable for states to "view the
  average schedule computation as an informal jurisdictional separation" that
  complies with the jurisdictional restraints on states.  Crockett, 963 F.2d
  at 1572-73 (holding that residual ratemaking is not preempted by the
  Communications Act).  Nor, as Pine Tree explained, did the Board's reliance
  on the average-schedule settlement impermissibly attempt to cross-subsidize
  ratepayers.  See 631 A.2d at 66 (concluding that the utility commission had
  properly "relied on average schedules as a proxy to determine Pine Tree's
  interstate cost and did not attempt to effect a flow-through of gains from
  Pine Tree's interstate activities to subsidize its intrastate rates").  

       ¶  20.  As noted, the Board's investigation showed that Shoreham's use
  of mixed methodologies of cost recovery (actual costs for intrastate,
  average schedule for interstate) resulted in an excessive recovery. As a
  result of Shoreham's use of different cost-allocation methods in different
  jurisdictions, the Board found, Shoreham's ratepayers were paying for some
  of the same plant and expenses twice-once through interstate rates and once
  through intrastate rates.  This was made evident by the discovery that
  Shoreham's overall rate of return was 38.8%, far beyond typical rates of
  return for regulated industries, and resulting in a windfall for Shoreham. 
  The use of residual ratemaking, the Board concluded, properly bars Shoreham
  from recovering more than 100% of its revenue requirements, and therefore
  is consistent with state and federal regulatory policy.
   
       ¶  21.  The Board also properly rejected Shoreham's argument that
  interstate revenues were subsidizing intrastate rates as a factual matter,
  noting that to properly analyze the claim it would need to compare
  Shoreham's interstate revenues and costs based on the sort of "proxy"
  methodology which Shoreham provided for its intrastate costs.  No proxy
  study for interstate costs was offered, however, because Shoreham does not
  use a cost-based approach for interstate ratemaking.  Similarly, Shoreham's
  claim that its actual intrastate costs exceeded its residual-ratemaking
  intrastate costs was based on a proxy study which the Board found to be
  unreliable, a finding which we do not second-guess.  In re Cent. Vt. Pub.
  Serv. Corp., 167 Vt. 626, 627, 711 A.2d 1158, 1160 (1998) (mem.). 
  Shoreham's additional reliance on two out-of-state cases to support its
  cross-subsidization claim is equally unpersuasive, as both decisions were
  premised upon a fundamental failure to separate, rather than the use of
  residual ratemaking as a separations methodology.  See United States v. RCA
  Alaska Commc'ns, Inc., 597 P.2d 489, 499 (Alaska 1979); Elkhart Tel. Co. v.
  State Corp. Comm'n, 640 P.2d 335, 338 (Kan. Ct. App. 1982).

       ¶  22.  "The statutory basis of the Board's regulatory authority is
  extremely broad and unconfining with respect to means and methods available
  to that body to achieve the stated goal of adequate service at just and
  reasonable rates."  In re Green Mountain Power Corp., 142 Vt. at 380, 455
  A.2d at 825.  The Board's decision here to apply residual ratemaking to
  Shoreham was well within its authority and was directed at proper
  regulatory objectives.  Accordingly, it may not be disturbed. 

                                     II.

       ¶  23.  Shoreham next claims that the Board violated state law in
  applying residual ratemaking because it lacks authority to use revenues
  from interstate operations to establish just and reasonable intrastate
  rates.  Shoreham's argument is premised on the following passage from In re
  New England Telephone & Telegraph Co., 115 Vt. 494, 503, 66 A.2d 135, 141
  (1949):

    [I]t needs no citation of authorities to show that the
    jurisdiction of the commission extends only to intrastate
    operation and matters pertaining thereto.  It is so limited by
    statute. . . .  The amount of property in this state devoted to
    interstate operations cannot properly be included in a rate base
    used to determine just and reasonable rates to be charged for
    intrastate service.  No "end result" could be said to be just and
    reasonable when reached by such a method.  
   
       ¶  24.  Shoreham argues that this passage prohibits the Board "from
  including interstate operations in a rate base . . . to determine just and
  reasonable intrastate rates" and that the residual ratemaking method simply
  reclassifies interstate revenues as intrastate revenues.  As previously
  discussed in connection with Shoreham's federal claim, however, the
  residual-ratemaking method properly separates interstate and intrastate
  property, and Shoreham has not  established that it results in
  impermissible cross-subsidization.  Furthermore, the quoted passage from
  New England Telephone related to a finding incorporating the company's
  average combined interstate and intrastate investment which we forbade the
  Board to use on remand, explaining that the interstate and intrastate
  property must be properly separated between state and federal
  jurisdictions. Id.  The case did not concern residual ratemaking, and
  provides no basis to conclude that the Board here exceeded its
  jurisdiction.  

                                  III.


       ¶  25.  Shoreham next contests the Board's decision to eliminate the
  income-tax expense from its  cost of service.  The Board noted that
  Shoreham is a Sub-chapter S corporation for income-tax purposes and as such
  does not pay federal or state income taxes as a corporate entity, instead
  "passing through" that tax obligation to its individual shareholders. 
  Shoreham had nevertheless  calculated its revenue requirement for
  ratemaking purposes at the 40.44% C-Corporation tax rate for federal and
  state tax payments, and had been collecting those monies from ratepayers. 
  Both the Department and the hearing officer recommended that because
  Shoreham distributes net income to its shareholders who pay taxes at
  individual tax rates of 25.12%, Shoreham's income-tax expense should be
  adjusted to compensate its shareholders at the amount of their 25.12%
  personal income tax rates.  Testimony from the Department's Director of
  Finance recognized, however, that the Board had several options, and that
  one of these was to find that personal taxes paid by the shareholders were
  irrelevant to the company's legitimate expenses.  In such a case, the Board
  would be justified in disallowing the income tax expense in its entirety.
   
       ¶  26.  In departing from the recommendation of the hearing officer
  and the Department, the Board concluded that it was improper to include an
  income-tax expense because rates are based on adjusted test-year expenses
  and "payment of taxes simply was not one of Shoreham's actual expenses in
  the 2002 test year." (FN4)  The Board noted that Shoreham enjoyed other
  benefits from its Sub-chapter S corporate form, and that  it was a
  voluntary choice by Shoreham to choose this form.  The Board thus concluded
  that it was neither just nor reasonable to require ratepayers to compensate
  Shoreham for a nonexistent tax liability.  See Hastings v. Village of
  Stowe, Elec. Dept., 125 Vt. 227, 231, 214 A.2d 56, 59 (1965) (upholding
  Board's elimination of income tax expense not actually incurred).   

       ¶  27.  Although Shoreham suggests that its due process rights were
  somehow compromised by the Board's decision to adopt a position contrary to
  the recommendation of the hearing officer and the Department, we discern no
  violation.  As noted, Shoreham was on notice that disallowance was an
  option through the testimony of the Department's Director of Finance.  That
  testimony, in turn, supported the view that no income-tax expense should be
  recognized as a legitimate expense if the Board concluded that such taxes
  were irrelevant in the case of a company, such as Shoreham, which simply
  paid no corporate tax.  The Board's conclusion in this regard was neither
  contrary to the evidence nor unjust and unreasonable.  Accordingly, it may
  not be disturbed.

                                     IV.

       ¶  28.  Related to its previous claim, Shoreham also disputes the
  Board's order that it establish a liability account for its ADIT and repay
  that amount to ratepayers because Shoreham has no tax liability.  In this
  regard, the Board made the following pertinent findings.

    [ADIT] represents the amount of cost-free capital provided by
    customers through rates to pay for anticipated income taxes that
    have been deferred.  Differences in the amount of actual income
    taxes paid and the amount of income taxes deferred to a future
    period arise due to the difference in the recognition of revenues
    and expenses for ratemaking purposes and income tax purposes. 
    Shoreham's cost of service filing in this case reflects a rate
    base deduction for ADIT of $611,143 which was based on Shoreham's
    historical application of the C-Corporation income tax rate for
    ratemaking purposes.   The balance in Shoreham's ADIT account
    represents customer funds that were paid prior to December 31,
    2002, for future anticipated income tax obligations.  Shoreham
    does not pay income taxes but reimburses the shareholders for
    their personal income tax obligation.

       ¶  29.  The parties agreed below that if the Board reduced the
  income-tax expense, it must also reduce the ADIT balance to reflect the
  change in income-tax rates, but disagreed on what to do with the excess
  funds that Shoreham had generated by applying the C-Corporation rates. 
  Shoreham proposed to keep the difference.  The Board disagreed.  Based on
  its finding that Shoreham pays no state or federal income taxes and thus
  has no future deferred income tax liability, the Board concluded that it
  was a "basic fact" that the existing ADIT account represented ratepayers'
  funds, and ordered Shoreham to return those funds to ratepayers.  The Board
  reasoned that it had authorized Shoreham to collect from ratepayers in
  anticipation of future tax liabilities, and that  Shoreham knew the funds
  were advance contributions from ratepayers to be held for future
  liabilities.  The Board concluded, "[t]his basic fact that the ADIT
  represents customer funds is unchanged now that it is apparent that the
  future liability has now been reduced or eliminated."

       ¶  30.  Shoreham now claims that the Board cannot order return of the
  ADIT funds to ratepayers because it never authorized Shoreham to collect
  ADIT funds in the first place.  Because the Board's prior order regarding
  Shoreham's rates was a stipulated bottom-line settlement in which the Board
  did not specifically rule on particular costs, Shoreham asserts that it was
  never actually authorized by the Board to collect income taxes in advance
  from its ratepayers in anticipation of future tax liabilities. 
  Accordingly, Shoreham argues, the ADIT balance must be set at zero.
   
       ¶  31.  We are not persuaded.  Whether or not specifically authorized
  by the Board, the evidence shows that Shoreham collected ADIT from
  ratepayers.  Shoreham acknowledged as much below, and its own
  cost-of-service filing reflected a rate base deduction for ADIT in the
  amount of $611,143, which had been collected from ratepayers based on
  Shoreham's historical application of the C-Corporation income-tax rate for
  ratemaking purposes.  Nor, as Shoreham claims,  is the Board's ruling
  inconsistent with its decision to disallow Shoreham's income-tax expense
  going forward.  The record and findings support the Board's conclusion that
  Shoreham has been collecting funds from ratepayers for an income-tax
  expense it did not and will not incur; that the ADIT balance represents
  ratepayer funds collected in the past; and that these funds should be
  returned to ratepayers.  Nor, finally, does the Board's action amount to
  retroactive ratemaking.  "Retroactive ratemaking occurs when rates are set
  at a level that permits a utility to recover past losses, or that requires
  it to refund past excess profits, that resulted from a disparity between
  projected expenses of a prior rate base and actual incurred expenses."  In
  re Green Mountain Power Corp., 162 Vt. at 387, 648 A.2d at 380.  ADIT funds
  are not profits; they are funds collected from ratepayers to be held for a
  future tax liability that in this case will not arise.  The Board did not
  engage in illegal retroactive ratemaking in ordering Shoreham to refund its
  ADIT balance.

                                     V.
   
       ¶  32.  Shoreham's final two arguments require no extended
  discussion.  Shoreham claims  that the Board impermissibly exceeded its
  jurisdiction in suggesting that it would likely impute "total company"
  average-schedule ratemaking to Shoreham even if Shoreham decided to make a
  federal-law election to convert to cost basis.  The Board's statement in
  this regard was contingent on the effect of such an election on rates, and
  was dictum in any event, concerning a speculative scenario that had not
  occurred and was not before it.  Accordingly, the issue is not ripe for
  decision by this Court.  See In re Robinson/Keir P'ship, 154 Vt. 50, 57,
  573 A.2d 1188, 1192 (1990) ("Courts will ordinarily not render decisions
  involving events that are contingent upon circumstances that may or may not
  occur in the future.").

       ¶  33.  Lastly, Shoreham asserts that the Board's ruling was
  confiscatory because the shift in revenues will result in intrastate rates
  that fail to compensate Shoreham for its actual intrastate property costs,
  and therefore deprive Shoreham of the value of its interstate property
  without just compensation.  We agree with the Department, however, that
  Shoreham failed to properly raise this issue below, and therefore may not
  raise it on appeal.  See Town of Hinesburg v. Dunkling, 167 Vt. 514,
  523-24, 711 A.2d 1163, 1168-69 (1998) (issue must be raised below to be
  preserved for review on appeal).  While Shoreham cites to two sentences in
  its exceptions to the hearing officer's proposed decision referring to the
  recommended reduction as confiscatory, this was not adequate to afford the
  Board a fair opportunity to address the issue.  See In re White, 172 Vt.
  335, 343, 779 A.2d 1264, 1270-71 (2001) (to properly preserve issue for
  review, party must present it with sufficient specificity and clarity to 
  afford trial court fair notice and opportunity to rule on it).  Moreover,
  as noted in connection with its subsidization claim, Shoreham provided no
  reliable evidence of its actual intrastate cost to support the assertion
  that confiscation will occur as a result of the Board's order.

       Affirmed.



                                       FOR THE COURT:



                                       _______________________________________
                                       Chief Justice


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                                  Footnotes


FN1.  Historically, AT&T used a cost-based separations approach to determine
  each Bell Operating Company's costs of providing interstate service, which
  the FCC later codified in its rules after the divestiture of AT&T in 1983. 
  Pine Tree Tel. & Tel. Co. v. Pub. Utils. Comm'n, 631 A.2d 57, 63 (Me.
  1993); Mid-Plains Tel. Co., 5 F.C.C.R. 7050.  For small, independent
  telephone companies, the FCC allowed AT&T to distribute revenues by a
  system of "settlements" based on "average schedules."  Pine Tree, 631 A.2d
  at 63.  Those small, independent companies are still, today, allowed to use
  average schedules to estimate their interstate costs.  Id.

FN2.  Under FCC rules, LECs receive compensation, or "access revenue," from
  interstate carriers for use of the LEC local networks.  See 47 C.F.R. §
  32.5082.  Many smaller LECs, including Shoreham, participate in an
  "interstate access pool," administered by the National Exchange Carrier
  Association.  See id. §§ 69.601-69.612.  LECs recover "settlements" from
  the pool to recover costs of providing interstate services plus a pro rata
  share of the pool's interstate earnings.  See id. § 69.605(a).  Companies
  are categorized as "cost-based" or "average schedule" for purposes of
  recovering their federal jurisdictional costs from the interstate
  settlement pool.

FN3.  A company's "revenue requirement" is the total amount that a carrier is
  entitled to charge for expenses."  La. Pub. Serv. Comm'n, 476 U.S. at 365. 
  It is the "sum of  [the carrier's] current operating expenses, including
  taxes and depreciation expenses, and a return on its investment 'rate
  base.' " Id.   The "rate base" has been described as the "net value of the 
  property upon which a return should be earned."  In re Vt. Tel. Co., 169
  Vt. 476, 482, 739 A.2d 671, 675-76 (1999) (quotation omitted). 

FN4.  In its order regarding Shoreham's motion to alter or amend, the Board
  increased Shoreham's expenses slightly, by $4,773, to treat Shoreham's
  owner-investors the same as other Vermont investors of public companies
  with regard to investment earnings.


