V. Protest by the Office of Ratepayer Advocates

On November 7, 2001, ORA submitted a late-filed protest to the application.⁸ ORA does not oppose the lease or sale of the Property, but objects to Verizon's proposed ratemaking treatment of any gain from the sale.

First, ORA protests that the benefits of the gains associated with the buildings on the Property cannot flow to ratepayers because there is no mechanism for sharing earnings under the Commission's current NRF policies.

Second, ORA states that although Verizon's proposed allocation of land gains from the sale appears consistent with the settlement adopted by the

Commission in D.93-09-038, the arrangement should not continue to apply. ORA notes that the Commission's current rulemaking to examine NRF policies, Rulemaking (R.) 01-09-001 ("NRF Review"), has scheduled a review of gain policies in Phase 3. ORA recommends that the Commission allow the sale to proceed, but separately address the gain on sale ratemaking issues in Phase 3 of the NRF review. Alternatively, ORA suggests the Commission handle any ratemaking issues from sale of the Property in Application (A.) 99-10-010, which involves the allocation of shared assets between Verizon and its affiliates.

Verizon responds that ORA has not justified delaying Verizon's proposed treatment for any gain on sale to another proceeding because the rules which currently govern the accounting of gains are clear. Verizon states that its proposed ratemaking for sale proceeds fully complies with, and is mandated by, existing rules set forth in D.93-09-038. According to Verizon, ORA concedes that the proposed ratemaking complies with the all party settlement approved by that decision. ORA also admits that current NRF policies involve no sharing of earnings, so any gain from the sale of the buildings cannot flow to ratepayers. Verizon maintains that the Commission cannot reverse D.93-09-038 and other NRF decisions, as ORA suggests, to retroactively apply a different ratemaking policy.

Specifically, Verizon states that Phase 3 of the NRF Review proceeding will not commence until late 2002 and will not be completed until the beginning of 2003. Verizon argues that the Commission cannot apply any new gain on sale rules it may develop in its future NRF review to this transaction because this would violate Verizon's due process rights and would constitute retroactive

ratemaking. Baxter and Verizon executed the purchase and sale in mid-September 2001, and submitted the application for its approval on September 20, 2001. Both Verizon and Baxter reasonably expected the Commission to evaluate the transaction according to the regulatory principles in effect at that time, not new rules that ORA hopes the Commission might establish in 2003. Verizon alleges that changing the applicable rules for treatment of gains after the parties negotiated the transaction undermines the business rationale for the sale and threatens the viability of the deal. Furthermore, Verizon contends that prohibitions on retroactive ratemaking require any changes to be applied prospectively.

Verizon objects to ORA's additional proposal to defer ratemaking issues to A.99-10-010 because that case involves leases and the appropriate allocation of costs between Verizon and its affiliates. According to Verizon, the issues in that case are entirely irrelevant to any discussion of the appropriate allocation of gains from the sale of property between ratepayers and shareholders.