BEFORE THE WASHINGTON UTILITIES AND TRANSPORTATION COMMISSION


MCI Telecommunications Corporation and AT&T Communications of the Pacific 
Northwest, Inc.,

                                            Complainants,

            vs.

U S WEST Communications, Inc., GTE Northwest, Inc. and United Telephone Company 
of the Northwest,

                                            Respondents.	)
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		DOCKET NO.  UT-970658
		
		
		U S WEST Communications, Inc.’s Petition for Administrative Review of the 
Administrative Law Judge’s Initial Order

 U S WEST Communications, Inc. (“U S WEST”), pursuant to WAC 480-09-780, hereby 
requests administrative review of the Administrative Law Judge’s (“ALJ”) 
Initial Order. Specifically, U S WEST challenges the fourth and seventh 
Findings of Fact and the second and third Conclusions of Law in the Initial 
Order.  According to the ALJ, these findings and conclusions mandate that U S 
WEST remove an alleged subsidy from its payphone service in the amount of 
$874,315.  U S WEST challenges the ALJ’s finding of a subsidy as being contrary 
to law, fact and the Commission’s own earlier decisions.  
I.  BACKGROUND
 Section 276 of the Telecommunications Act of 1996 (the “Act”) requires 
carriers to remove all charges from their tariffs that recover the costs of 
payphones.  In its Payphone Orders, Implementation of the Pay Telephone 
Reclassification and Compensation Provisions of the Telecommunications Act of 
1996, CC Docket No. 96-128, Report and Order, FCC Rcd. 20,540 (1996) (“Report 
and Order”); Order on Reconsideration, 11 FCC Rcd. 21,233 (1996) (“Order on 
Reconsideration”) (together, the “Payphone Orders”).   the FCC set forth a six 
point checklist for compliance with § 276.  Among the requirements of the 
checklist, a LEC was required “to certify it has effective tariffs reflecting 
the removal of the charges that recover the costs of the payphones and any 
intrastate subsidies.” (Initial Order at 7). There is no dispute that U S WEST 
has complied with all five of the other checklist requirements.
 In order to satisfy the IXCs that there were no subsidies in its payphone 
services, U S WEST relied upon three types of information to demonstrate that 
there was no subsidy:
(a) a TSLRIC analysis demonstrating that there was no subsidy (Exhibit 42C);

(b) a booked cost analysis which demonstrated there was no subsidy (Exhibit 
41); and

(c) several previous decisions from the Commission which demonstrate that U S 
WEST’s payphone service passes a stringent imputation analysis which 
demonstrate the lack of a subsidy.

As U S WEST noted in its testimony, the Commission had long ago eliminated the 
source of any potential subsidy by drastically lowering U S WEST’s CCL and 
switched access rates in a variety of orders.  (Exh. T38 at 14:1-15:8).
 Despite this plethora of evidence, MCI and AT&T filed this action, accusing U 
S WEST of failing to remove a payphone subsidy in the amount of $2,150,000.  
Subsequently, MCI and AT&T raised the amount of the alleged subsidy to 
$6,117,000.  Further, MCI and AT&T, in violation of the Act, refused to pay U S 
WEST any “dial around” compensation until the payphone subsidies were removed.  
The complainants requested the Commission to declare that U S WEST’s payphone 
service was improperly subsidized and to order U S WEST to remove the alleged 
subsidy.
 Commission Staff thereafter intervened.  Staff rejected MCI’s and AT&T’s 
subsidy analysis as hopelessly flawed.  Instead, Staff offered its own analysis 
which was based upon U S WEST’s booked cost analysis (Exhibit 41).  In essence, 
Staff took U S WEST’s Exhibit 41 and de-imputed certain revenues which came 
from public access line (PAL) and other charges, resulting in Staff’s Exhibit 
30C.  According to Staff, de-imputing these revenues shows that U S WEST’s 
payphone service is subsidized in the amount of $874,315.
 Staff’s Exhibit 30C is flawed for a variety of reasons.  First, the Commission 
had already examined U S WEST’s payphone services in earlier dockets and found 
that, as adjusted, U S WEST did not subject its competitors to a price 
squeeze.  (Exh. 38T at 18-21).  A finding of a subsidy would directly 
contradict earlier decisions of the Commission on the same issue.  (Id.)  
Second, Staff’s analysis erred in that it failed to remove expenses affiliated 
with toll service, since toll service remains regulated.  Staff removed all 
other expenses for associated regulated service but failed to remove toll 
expenses.  Staff provided no explanation for its violation of earlier WUTC 
decisions which required removal of toll expenses in its analysis of payphone 
service.  (See, infra, at § II.1.a).  When these expenses are removed, the 
subsidy in Staff’s analysis turns into a surplus.  Alternatively, if Staff 
included toll expenses (which it should not), it should also include toll 
revenue; otherwise, Staff’s position is inconsistent.  Again, this adjustment 
would demonstrate a surplus.
 In her Initial Order, the ALJ properly rejected MCI’s and AT&T’s flawed 
analysis.  The ALJ also correctly ordered MCI and AT&T to pay U S WEST dial 
around payphone compensation retroactive to April 15, 1997.  The ALJ erred, 
however, in finding that a subsidy exists in U S WEST’s payphone services and 
ordering U S WEST to reduce its access charges to remove the alleged subsidy.  
In finding the existence of a subsidy, the ALJ simply accepted Staff’s analysis 
with no modifications and apparently did not consider earlier Commission 
decisions.  As will be demonstrated, the ALJ’s conclusion must be rejected 
because she improperly failed to match toll expenses with toll revenues and she 
failed to adequately harmonize her findings with previous Commission decisions.
II.  ARGUMENT
 As the ALJ correctly noted:
The primary issue in this proceeding is simple: were U S WEST’s and GTE’s 
payphone operations being subsidized by the company’s regulated operations at 
the time the provision of the payphone service was deregulated by the FCC.

(Initial Order at 8).  The ALJ, however, incorrectly concluded that U S WEST’s 
deregulated payphone service was subsidized by its regulated operations.
A. TOLL EXPENSES ARE NOT PROPERLY INCLUDED IN A SUBSIDY ANALYSIS OF DEREGULATED 
PAYPHONE SERVICE.

 1. U S WEST’s Position
 As noted, Commission Staff utilized one of the studies submitted by U S WEST 
to begin its analysis (Exhibit 41 adjusted by Commission Staff in Exhibit 
30C).  Staff took U S WEST’s booked cost analysis and “de-imputed” certain 
revenues which Staff determined came from PAL and other line charges.  (Exh. 
30C).  Staff asserted that the costs of PAL lines should be imputed because the 
PAL remains regulated.  By imputing these costs, Staff tried to make U S WEST’s 
payphone service mirror that of third party payphone providers, who must 
purchase the PAL from U S WEST.  Based upon these adjustments, Commission Staff 
turned U S WEST’s booked cost analysis into what Staff called a fully 
distributed cost (FDC) analysis.  Staff’s FDC analysis concluded that U S WEST’
s payphone services were subsidized in the amount of $.874 million.
 For the purposes of this docket only, and in the spirit of negotiation and 
cooperation, U S WEST was willing to work with Staff’s analysis. U S WEST, 
however, does not agree with Staff’s contention that an FDC analysis was 
mandated by the FCC or that Staff properly included certain elements in its 
analysis.  (See U S WEST’s Post-Hearing Brief at 12-13).  U S WEST, however, 
acquiesces in the use of Staff’s analysis to demonstrate that even Staff’s 
analysis demonstrates the absence of a subsidy, once properly adjusted to 
account for toll expenses.  One must adjust Staff’s analysis, however, to 
exclude expenses directly attributable to U S WEST’s regulated toll service.  U 
S WEST presented testimony and evidence that over $1.9 million in expenses are 
directly attributable to toll expenses:
   $1,662,000 in toll commission expenses.  Payphone commissions are amounts 
paid to payphone space providers for all revenues U S WEST receives from end 
users for telephone calls.  (Exh. T-48, 10:5-8).  The commissions are paid for 
total receipts, both toll and local.  (Id. At 10:11-12).  Of U S WEST’s total 
payphone commission expense of $5,360,000, 31% is due to toll calls.  (Id. at 
11:19-23).  This equals $1.662 million.
   
   $264,000 in coin collection expenses.  As U S WEST noted in its testimony, 
coin boxes would be emptied less frequently if not for toll receipts.  (Id. At 
12:2-6).  Based upon payphone usage revenue data for 1996, coin collection 
expenses of $2.034 million should be reduced by 13%, to account for toll.  This 
equals $.264 million.

When these toll expenses are removed from Staff’s analysis, the analysis 
demonstrates a surplus of $1.051 million.
 There are several reasons why toll expenses must be removed from a subsidy 
analysis of U S WEST’s payphone service:
  a. Previous Commission Decisions
 On March 17, 1995, the Commission entered its decision in Northwest Payphone 
Association v. U S WEST, Docket No. UT-920174.  In that docket, the Commission 
examined U S WEST’s payphone service to determine if U S WEST was subjecting 
its competitors to a price squeeze in the competitive payphone market.  In 
analyzing U S WEST’s payphone service, the Commission determined that toll 
expenses and revenues are not to be included:
The specific items and the revenues and expenses excluded from the proper 
imputation analysis include . . . (4) toll and operator revenues and expenses.

Order Granting in Part, Docket No. UT-920174 at 13.  Thus, as the Commission 
has previously held, toll expenses are not to be included in a subsidy analysis 
of payphone service.
  b. Toll Service is Still Regulated.
 As Staff acknowledges, toll service remains regulated (Exh. T-29, 11:4-6).  
The whole point of the FCC’s deregulation checklist for payphones is to ensure 
that U S WEST’s regulated services do not subsidize its deregulated payphone 
service.  By failing to remove toll expenses in its subsidy analysis, Staff has 
turned the FCC’s mandate on its head: U S WEST is forced to subsidize certain 
expenses of its regulated toll service with revenues from its deregulated 
payphone service.  This is contrary to the purpose of the Act, which is to 
remove all implicit and explicit subsidies and to promote competition.  
Accordingly, toll expenses must be excluded from a subsidy analysis of U S WEST’
s payphone service.
c. Proper Subsidy Analysis Requires Proper Matching of Expenses and Revenues.

 Staff acknowledged that a proper subsidy analysis required matching of 
payphone expenses with payphone revenues.  (Tr. at 272:12 - 273:15).  The 
revenues used for U S WEST’s embedded cost study did not include toll 
revenues.  (Exh. 51T at 8:1-3).  Based upon Staff’s “matching” principle, the 
subsidy analysis should not include toll expenses since it does not include 
toll revenue.  Plainly, Staff did not apply its own principles to its subsidy 
analysis, to the detriment of U S WEST.
d. The Act Requires a Subsidy Analysis of U S WEST’s Payphone Service; not an 
Analysis of a Stand-Alone Payphone Operation.

 Throughout the hearing on this matter, it became abundantly clear that Staff 
wished to include toll expenses in its subsidy analysis because it believed 
that the FCC’s Payphone Orders and the Act demanded a “broad” analysis of a 
“payphone operation.”  For example, during cross examination, Mr. Zawislak, on 
behalf of Commission Staff, repeatedly stated that a subsidy analysis must be 
performed for the “payphone operation” of U S WEST, rather than U S WEST’s 
payphone service.  (Tr. At 301:21 - 302:10).  Thus, Staff’s analysis became 
unnecessarily inclusive, and encompassed expenses – such as toll expenses – 
which do not belong in an analysis of U S WEST’s payphone service.  When Mr. 
Zawislak was asked to identify the portions of the Act which required an 
analysis of U S WEST’s payphone operations – rather than payphone service – he 
could not.  (Tr. At 303:15-24; 368:11-15).  When asked to distinguish between 
“payphone operations” and “payphone service,” Mr. Zawislak replied that the 
terms were interchangeable.
 As U S WEST noted in its brief, Staff’s overly broad analysis incorrectly 
included toll expenses.  Section 276(a)(1) of the Act mandates that U S WEST 
“shall not subsidize its payphone service directly or indirectly from its 
telephone exchange operations or its exchange access operations.”  47 U.S.C. § 
276(a)(a).  Thus, the Act itself distinguishes between “payphone service” and 
operations; subsidy analyses are to focus only upon payphone service.  The Act, 
itself, belies Staff’s impression that an analysis of payphone operations – 
which includes toll expenses – is required.

2. The ALJ’s Decision to Include Toll Expense in the Subsidy Analysis is Wrong 
and Should be Rejected.

 Despite the amount of evidence presented and the arguments given, the ALJ did 
not address why toll expenses are now properly included in a subsidy analysis 
of payphone service any why earlier Commission decisions are no longer 
applicable.  Rather, the ALJ made the conclusory and unsupported statement: 
“The Commission Staff has analyzed the proper elements, and uses the 
appropriate data to determine whether a subsidy exists.”  (Initial Order at 
19).  The Initial Order did not discuss how the decision to include toll 
expenses squared with the Commission’s earlier decision in Docket No. 
UT-920174.  The Initial Order did not discuss why revenues from U S WEST’s 
unregulated payphone service should be used to subsidize expenses incurred by U 
S WEST’s regulated toll service.  The Initial Order did not explain how it was 
proper to include toll expenses in a subsidy analysis when the revenue figures 
used did not include toll revenues.  Rather, the Initial Order focused on U S 
WEST’s contention that the Act required only an analysis of the payphone 
service, not a payphone operation.  The ALJ dismissed the argument as a 
“semantic smokescreen,” and noted that Staff used “service” and “operations” 
interchangeably.
 U S WEST submits that, under the WUTC’s order in Docket No. UT-920174, toll 
expenses do not belong in a subsidy analysis of payphone service.  The ALJ’s 
refusal to discuss the merits of the majority of U S WEST’s reasons does not 
change this fact.  Moreover, the ALJ’s dismissal of the distinction between 
payphone service and payphone operations with pejorative phrasing is 
misplaced.  The Act itself draws the distinction: subsidies are to be removed 
from the payphone service.  Staff, by undertaking an analysis of a non-existent 
“payphone operation,” erred by expanding the subsidy analysis improperly.  By 
using “operation” and “service” interchangeably, Staff only demonstrates that 
it erred as to the proper scope of the inquiry. 
 U S WEST submits that the ALJ erred in allowing toll expenses to be included 
in the subsidy analysis of U S WEST’s payphone service.  Once these expenses 
are excluded, Staff’s analysis demonstrates that there is no subsidy.  
Accordingly, the ALJ’s finding that a subsidy exists in U S WEST’s payphone 
service and her order requiring its removal must be reversed.
B. IN THE ALTERNATIVE, THE ALJ SHOULD HAVE ALLOWED U S WEST TO INCLUDE TOLL 
COMMISSION REVENUES TO OFFSET TOLL EXPENSES.

 Staff concedes that if toll expenses are included, the analysis should also 
include toll commission revenues.  (See Initial Order at 17).  U S WEST 
believed (and still believes) that Staff’s inclusion of these figures is wrong, 
but sought at hearing to substantiate toll commission revenues which would 
mirror similar transactions that U S WEST’s toll service has with third party 
payphone providers.
 The starting point of this analysis is to recognize that U S WEST pays toll 
commission to payphone providers for toll calls generated from their 
payphones.  (Tr. at 392:22 - 393:10).  The regulated U S WEST toll service 
would have a similar arrangement with the deregulated payphone service upon 
deregulation.  (Id.) In fact, a Memorandum of Understanding between U S WEST’s 
payphone and toll services is being prepared to reflect this transfer.  For 
purposes of the subsidy analysis, a typical commission percentage was used, 
multiplied by U S WEST’s payphone toll revenues, and imputed to the payphone 
service as revenue.  (Id.)  This number was calculated and the total toll 
commission revenue is set forth on Exhibit 47C.  When this toll commission 
revenue is added to the results of U S WEST’s payphone service, Staff’s 
analysis demonstrates a payphone surplus.  
 The Initial Order rejected U S WEST’s toll commission revenue, putting U S 
WEST in the untenable position of having toll expenses added to the subsidy 
analysis without a corresponding revenue source.  The ALJ rejected U S WEST’s 
revenue figure as “phantom.”  (Initial Order at 19).
 It is difficult to discern the ALJ’s objection to U S WEST’s toll commission 
revenue evidence insofar as the Initial Order lacks any analysis.  If the ALJ 
rejected the figure because no actual transfer of funds between toll service 
and payphone service took place, the ALJ is being inconsistent.  We note that 
the ALJ imputed the PAL rate to U S WEST’s results based, in part, upon Staff’s 
testimony that, “U S WEST’s deregulated payphone operations should be subject 
to the same PAL price (cost of doing business for payphone service providers) 
as are its competitors.”  (Exh. T-29 at 10:7-10).  Thus, the ALJ imputed the 
cost of the PAL line to U S WEST’s payphone service in order to recreate a 
situation where U S WEST’s deregulated payphone service was buying PALs from 
regulated U S WEST.  Similarly, U S WEST seeks to impute revenues from toll 
commissions to recreate a situation where U S WEST’s payphone service is 
receiving toll commissions from U S WEST.  The transactions are functionally 
equivalent and boil down to a question of fairness: if the ALJ is going to 
treat U S WEST’s payphone service as a separate entity for the purpose of 
imputing a PAL cost, then the ALJ must treat U S WEST’s payphone service as a 
separate entity for the purpose of receiving toll commission revenues.  The 
fact that no money changes hands is irrelevant – the point of imputation is to 
account for transactions that should have been made.
 Accordingly, the ALJ erred by dismissing U S WEST’s toll commission revenue as 
“phantom.”  Imputation of toll commission revenue is just as “phantom” as 
imputation of the PAL rate.  Both imputations attempt to account for 
transactions which never really occurred; but which (according to Staff), are 
necessary to meet the cross-subsidy test.  Assuming that the toll expenses are 
offset by toll commission revenues, Staff’s analysis demonstrates that there is 
no subsidy in U S WEST’s payphone service.
C. THE INITIAL ORDER IS INCONSISTENT WITH PREVIOUS COMMISSION DECISIONS 
REGARDING U S WEST’S PAYPHONE SERVICE.

 The Initial Order finds that U S WEST’s deregulated payphone service is being 
subsidized by U S WEST’s regulated operations.  As we noted in our briefs 
before the ALJ, the Commission found in 1995 that U S WEST’s payphone service 
passed a stringent imputation test and reaffirmed that decision in 1996.  The 
ALJ contends that the issue of a subsidy in U S WEST’s payphone service was not 
performed in these earlier dockets.  (Initial Order at 12).  An analysis of the 
issues in those dockets, and the conclusions drawn therefrom, demonstrate that 
to be incorrect.  Moreover, these earlier decisions directly contradict the 
findings in the Initial Order.
 On March 17, 1995, the WUTC entered its opinion in Northwest Payphone 
Association v. U S WEST, Docket No. UT-920174.  In that docket, the Commission 
utilized an imputation test to determine whether U S WEST was subjecting its 
competitors to a price squeeze in the competitive payphone market.  The 
Commission described the test as follows:
The purpose of imputation is to establish a price floor for retail services in 
a market where the monopoly provider of the bottleneck network facilities 
competes against a competition at the retail level ….  In this case, the 
bottleneck facility is the public access line and the retail service is the 
public payphone market.

Order Granting Complaint in Part, Docket No. UT-920174, issued March 17, 1995 
at 8.  The Commission found that U S WEST's payphone service did not pass an 
imputation test.  The Commission had two remedies: either (1) order U S WEST to 
raise its payphone price; or (2) order U S WEST to lower its charges for 
bottleneck facilities.  The Commission's discretion, however, was limited by 
its duty to, "review every rate to ensure that it is compensatory."  Fifth 
Supplemental Order Denying Reconsideration, Docket No. UT-920174, issued June 
30, 1995, at  10.  If the Commission had concluded that U S WEST's payphone 
services were not covering their own costs, it would have ordered U S WEST to 
increase its retail payphone rates.  It did not.  Rather, it ordered U S WEST 
to reduce its bottleneck prices.  The only conclusion to be drawn is that the 
Commission concluded and found that U S WEST's payphone services were not 
subsidized.
 The subsidy issue was revisited in U S WEST's latest general rate case, Docket 
No. UT-950200.  In that docket, the Commission rejected the allegations that a 
price squeeze existed for competitors of U S WEST in the payphone market:
The Commission rejects [the complainants'] challenge.  The average PAL rate is 
lower as result of this order than it was as a result of the earlier imputation 
docket, which found no price squeeze at the current business rate.  Thus, for a 
price squeeze to exist now, it would have to be the case that USWC's costs have 
increased.  There is no good evidence to support such a finding.

Fifteenth Supplemental Order, Docket No. UT-950200, issued April 11, 1996 at 
122.  The import of these two Commission Decisions is manifest:  U S WEST's 
payphone services were not subsidized.  If one were to argue otherwise, one 
would have to argue that the Commission ordered U S WEST to subsidize its 
competitors.  The WUTC did not, and could not, enter such an order.
 Elemental rules of jurisprudence, collateral estoppel and fairness dictate 
that the ALJ’s contrary findings and conclusions be rejected.
III.  CONCLUSION
 Wherefore, U S WEST respectfully requests the Commission to reject the fifth 
and seventh Findings of Fact and the second and third Conclusions of Law set 
forth in the Initial Order.  U S WEST further requests the Commission to enter 
a final order finding that no inappropriate subsidies are contained in U S WEST’
s Washington payphone services.
 Respectfully submitted this 23rd day of September, 1998.
      U S WEST Communications, Inc.


      ________________________________
      Peter J. Butler, Attorney at Law