20091208Comments.pdf

DONALD L. HOWELL, II
DEPUTY ATTORNEY GENERAL
IDAHO PUBLIC UTILITIES COMMISSION
PO BOX 83720
BOISE, IDAHO 83720-0074
[phone]
IDAHO BAR NO. 3366
QE- Ci:'\I' ,--
20090Ee -8 AM II: i 6
UTI
Street Address for Express Mail:
472 W. WASHINGTON
BOISE, IDAHO 83702-5983
Attorney for the Commission Staff
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
IN THE MATTER OF THE APPLICATION OF )
MIDVALE TELEPHONE EXCHANGE, INC'S )
PETITION FOR A DECLARATORY RULING. )
)
)
)
CASE NO. MID-T-09-03
COMMENTS OF THE
COMMISSION STAFF
The Staff of the Idaho Public Utilties Commission, by and through its Attorney of
Record, Donald L. Howell II, Deputy Attorney General, submits the following comments in
response to Order No. 30943 issued on November 10,2009.
BACKGROUND
On September 22,2009, Midvale Telephone Exchange (Midvale) filed a Petition for
Declaratory Ruling requesting Commission approval of: (1) the transfer of all assets and
liabilties of Midvale to Midvale Telephone Company (MTC); (2) the proposed contributions by
MTC to an employee stock ownership plan (ESOP); and (3) the acquisition by the ESOP of
authorized and unissued shares of Midvale stock. Midvale also requests that its Certificate of
Public Convenience and Necessity (CPCN) No. 254 be transferred to MTC.
Midvale (a Title 61 regulated company) is curently owned by two shareholders, Lane
Willams (50%) and the Estate of Shirley Archer (50%). Midvale maintains that, since Shirley
Archer's death, it has been exploring options to ensure its continued existence and ongoing
STAFF COMMENTS 1 DECEMBER 8, 2009
operations with the least impact on its customers, service and employees. The Company asserts
that the tax advantages of the proposed transactions are substantiaL.
Mr. Willams and Midvale's Board of Directors believe that the best method to achieve
their stated goals is to transfer the ownership of the corporation to its employees through an
ESOP. Midvale adopted the ESOP on December 22,2008.
On August 27,2009, Midvale incorporated Midvale Telephone Company (MTC).
Midvale proposes to transfer to MTC all of Midvale's assets and liabilities (including all
operating assets, all debt, all public licenses and the CPCN in exchange for all of the issued and
outstanding shares of MTC stock. After the proposed transfer is complete, the ESOP would
acquire a portion of the Midvale stock held by Mr. Wiliams and the estate of Ms. Archer.
Midvale would then redeem the remainder of the shares from the curent ownership by
delivering to Mr. Wiliams and the Archer estate a promissory note for the full value of their
remaining Midvale shares. Upon favorable Commission ruling and completion of the transfer,
MTC would adopt the ESOP and contribute fuds to the ESOP annually as retirement fud
contributions for its employees.
On November 10,2009, the Commission issued Order No. 30943 requesting public
comments on Midvale's Application. Comments are due no later than December 8, 2009.
STAFF ANALYSIS
The goal of Midvale's ownership and Board of Directors is to ensure the Company's
existence and ongoing operations with the least impact on its customers, services and employees.
In this regard, several options were considered, including the sale of stock to Midvale's
employees or to a third party, the redemption of stock by Midvale, the transfer of stock to
Midvale's employees though the use of an ESOP, or a sale of the assets and liabilities of Midvale
to a qualified third party and the discontinuance of service by Midvale. Mr. Willams and the
Board of Directors have determined that the transfer of Midvale ownership to its employees
through an ESOP is the best method to achieve its goals with little or no disruption to its
customers, services and employees.
Staff has reviewed the Company's Petition and Application reflecting the proposed
transactions along with other information provided by the Company and its representatives and is
generally supportive of the Petition for Declaratory Ruling fied by Midvale. Staff has concerns
STAFF COMMENTS 2 DECEMBER 8, 2009
however regarding the ratemaking treatment of the ESOP contributions and other expenses
associated with the transfer of ownership.
The proposed transaction contemplates the transfer of all of Midvale's assets and
liabilties to MTC in a tax-free "Section 351" capitalization in exchange for all of the issued and
outstading shares ofMTC stock. As a result of this transaction, Midvale's existing employees
and customers wil become the respective employees and customers of MTC. Upon completion
of the transactions, Midvale wil have no assets other than a 100% ownership interest in MTC
and will have no liabilties other than obligations for payments due under the Redemption Notes.
Because MTC would own and operate all of the operating assets to provide telecommunication
services to Midvale's customers, MTC would need to become the holder of the Certificate of
Public Convenience and Necessity and be subject to Commission regulation. MTC would also
hold all of the debt curently held by Midvale with the Rural Utilties Service and the Rural
Telephone Finance Cooperative, but it would have no additional debt obligations as a result of
this transaction.
The Company asserts and Staff believes that the current customers of Midvale wil not be
adversely affected by the proposed transactions. Therefore, Staff recommends that the
Commission approve the transfer of all assets and liabilties, along with the CPCN No. 254, from
Midvale to MTC.
EMPLOYEE STOCK OWNERSHIP PLAN
If the Commission issues a favorable declaratory ruling on the Application, MTC would
adopt the ESOP plan and trust already adopted by Midvale. MTC would then contribute funds to
the ESOP on an anual basis as a retirement fund contribution for its employees. Midvale
asserts that there is no specific provision under Idaho Code, Commission rules or other
regulations governing telecommunications carriers which require the Commission to approve:
(i) the structure of payment under the ESOP; (ii) the amount of the contribution; or (iii)
characterize the contribution as a utilty expense. Therefore, Midvale states its petition for
declaratory ruling in this matter is more or less a request that the Commission inform Midvale if
the Commission believes it must approve any of the above items or any other items with respect
to the creation of the ESOP pursuant to any of the Commission's regulatory powers.
Idaho Code § 61-901 requires that the Commission approve "instruments of security"
pertaining to utilty assets. Midvale asserts that the operations of the Company will be
STAFF COMMENTS 3 DECEMBER 8, 2009
unchanged and the adoption of the ESOP plan and trust wil not impair the Company's assets.
No additional debt or equity securities will be issued so authority under Idaho Code § 61-901 is
not required.
Commission approval is required to transfer the Certificate of Public Convenience and
Necessity Certificate No. 254. Staff believes that Midvale is not required to obtain Commission
approval to establish and adopt an ESOP plan and trust. However, the Commission is charged
with establishing rates that are just and reasonable. In that regard, the Commission has the
authority to exclude from retail rates any contributions to the ESOP that it believes to be
excessive. Denying recovery of costs in rates would not negate the ESOP plan even though the
costs are not paid by customers.
MTC intends to contribute approximately $400,000 per year to the ESOP plan and trust.
The Company also sponsors a 401(k) plan where employees can receive up to 4% of their
compensation in employer-matching contributions. Given that the Company's eligible payroll
for 2008 was $1,909,443, the 2008 ESOP contribution of $400,000 represents 21 % of eligible
compensation. While Staff is aware of the necessity for utilty companies to provide retirement
benefits to its employees, the annual ESOP contribution coupled with the employer matching
contributions to the ESOP plan and trust create a level of retirement fuding that could be
considered excessive beyond the reasonable amount necessar to maintain qualified employees
to provide service to its customers. Midvale, however, is not asking to include any ESOP
contributions in retail rates at this time.
Midvale has also incurred significant consulting and legal expenses related to the
establishment of the ESOP. The expenses have been booked to the Company's operating
accounts for financial statement puroses. These accounts are above-the-line accounts that could
be included in revenue requirement calculations to determine retail rates. The Company has not
requested any rate relief at this time. If these expenses are included during a test year, Staff
would likely recommend that these expenses not be recovered in rates paid by customers. Staff
believes that most of these expenses are personal estate planing expenses of the ownership of
Midvale and it would be inappropriate to pass these expenses on to customers. Staff agrees with
the Company that the tax advantages of the proposed transactions are substantiaL. The owners
wil benefit from many of these tax advantages.
STAFF COMMENTS 4 DECEMBER 8, 2009
RECOMMENDATIONS
Given that the proposed transactions will help ensure the continued existence of the
Company without adversely affecting customer service, Staff recommends that the Commission
approve the Company's petition for declaratory ruling to:
i. Transfer all assets and liabilties of Midvale to MTC;
2. Establish and adopt the ESOP plan and trust by MTC;
3. Allow the ESOP to acquire the authorized and unissued shares of Midvale stock; and
4. Transfer the Certificate of Public Convenience and Necessity, Certificate No. 254
from Midvale to MTC.
The amount of the anual contributions to the ESOP plan and trust is solely determined by the
plan sponsors and trustees and does not require Commission approvaL. However, the
Commission does have the authority to determine the level of retirement contributions to be
included in retail rates. Staff recommends that the Commission reserve judgment on the amount
of the ESOP contributions to be included in rates until such time that the Company requests
recovery of the ESOP contributions in a future rate case.
Respectfully submitted this oli-D day of December 2009.
M
Donald L. Ho 11, II
Deputy Attorney General
Technical Staff: Donn English
Terri Carlock
i:umisc:commentsmidt09.3dhdetc comments. doc
STAFF COMMENTS 5 DECEMBER 8, 2009
CERTIFICATE OF SERVICE
I HEREBY CERTIFY THAT I HAVE THIS 8TH DAY OF DECEMBER 2009,
SERVED THE FOREGOING COMMENTS OF THE COMMISSION STAFF, IN
CASE NO. MID-T-09-03, BY MAILING A COPY THEREOF, POSTAGE PREPAID,
TO THE FOLLOWING:
CYNTHIA A MELILLO
GIVENS PURSLEY LLP
PO BOX 2720
BOISE ID 83701-2720
E-MAIL: cam~givenspursley.com
STEVE CHILD
MIDVALE TELEPHONE CO
PO BOX 7
MIDV ALE ID 83645-0007
Jo~SECRETARf ~
CERTIFICATE OF SERVICE