BEFORE THE WASHINGTON UTILITIES AND TRANSPORTATION COMMISSION


WASHINGTON UTILITIES AND TRANSPORTATION COMMISSION, 

              Complainant,
           
             vs.

U S WEST COMMUNICATIONS,INC.

               Respondent.	DOCKET NO. UT-970010
	
	PUBLIC COUNSEL’S REPLY BRIEF RE INTERCONNECTION COST ADJUSTMENT MECHANISM 
TARIFF, ADVICE 2821T
	


 This reply brief is filed on behalf of the Public Counsel Section of the 
Washington Attorney General (Public Counsel or PC) to address arguments made in 
the response briefs of U S WEST Communications, Inc. (USWC), and Washington 
Independent Telephone Association (WITA).

I. ARGUMENT
A. Commission Authority
WITA questions whether the Commission has authority to “reject” a tariff in the 
manner proposed here.  The argument is not well taken.  Here the Commission has 
received the tariff for filing, has suspended the filing and has initiated 
formal review proceedings.  The Commission clearly possesses the necessary 
authority to now determine, prior to going forward with an analysis of the rate 
proposal itself,  whether there is a legal infirmity which must be addressed as 
a threshold question.  It cannot be seriously argued that, notwithstanding the 
existence of a legitimate issue as to the fundamental legality of the filing, 
the Commission is required to conduct full blown evidentiary hearings on all 
issues and only then address a dispositive legal issue.  The Commission’s 
enabling statutes contain no such limitation on its authority to address issues 
in an efficient and timely manner.

B. Retroactive Ratemaking
 USWC  does not dispute that retroactive ratemaking is prohibited in 
Washington.  USWC Answer at 5.  Nor does USWC challenge Public Counsel’s 
description of the three basic categories of costs which the ICAM proposal 
seeks to recover.  These costs are:

Costs allegedly incurred to reconfigure the network prior to the filing of the 
application.
Costs incurred after the filing.  Refunds would be made to the CLECs if the 
costs are less than the surcharges, as determined at the end of the three-year 
period.
Costs incurred in categories unanticipated at the time the ICAM is approved.  
This group of costs would apparently be recovered by a second surcharge at the 
end of the three-year period.

USWC states that it “does not seek to recover past costs in future rates.” USWC 
Answer at 5.  This statement is at odds with the elements of the filing as set 
out above, all three of which contemplate that rates would be set to recover 
costs after the fact.  See, PC Opening Brief at 4-5.  The essence of the bar 
against retroactive ratemaking is that a utility company may not seek approval 
to increase its future rates in order to recover past costs. Ratemaking is by 
its nature a legislative process which operates on a prospective basis.  
Customers have a right to advance notice of rate changes and the burden of 
paying for past expenses may not be properly placed on present or future 
customers who may not have incurred the original costs.  PC Opening Brief at 
3.  The ICAM proposal violates these limitations.

 USWC and WITA cite the Commission’s approval of an Energy Cost Adjustment 
Clause (ECAC) for Puget Sound Power & Light WUTC v. Puget Sound Power & Light, 
Docket No. U-81-41, Sixth Supplemental Order. in support of their position 
that  the ICAM is permissible.   Energy cost adjustment mechanisms have 
generally been upheld by the courts against retroactive ratemaking challenges, 
on the basis, inter alia, that an ECAC does not allow recovery of past costs, 
but merely uses the past costs as an estimate of future fuels costs. As a 
practical matter, this amounts to no more than the orthodox use of a test 
period. See generally, The Ghost of Regulation Past: Current Applications of 
the Rule Against Retroactive Ratemaking in Public Utility Proceedings, 1991 U. 
Ill. L. Rev 983, 1019.
  By contrast, the ICAM mechanism proposed here is expressly designed to 
determine actual past costs and then to provide recovery of those costs in 
future rates. The rationale of the Puget Power ECAC decision, therefore, does 
not require the Commission to approve the ICAM mechanism.  The Oregon Public 
Utility Commission decision cited in our opening brief likewise concluded that  
prior approval of fuel cost adjustment mechanisms did not insulate the ICAM 
proposal against a retroactive ratemaking challenge. In the Matter of  the 
Application of US WEST Communications, Inc. for an Interconnection Cost 
Adjustment Mechanism (ICAM), UT 135, Order  No. 97-180, pp. 5-6.

 USWC in its brief cites to the Commission’s approval in the last rate case of 
a “side record” to allow for recovery of research and development (R&D) costs, 
adopting the proposal of Public Counsel.  USWC Answer at 6-7. Again, there are 
clear differences between the cited rate case adjustment and the ICAM 
proposal.  In the case of R&D, the company performs research not knowing if it 
will have any benefit or if it does, who will experience the benefits. The 
Commission, therefore, presumes no benefit to ratepayers initially.  The 
company is allowed, however, to keep records of its R&D work.  It can only 
recover its costs if it comes back before the Commission and carries its burden 
of showing of benefit to ratepayers.  In effect, the company must establish 
that current and future ratepayers will obtain benefit and the costs are 
assigned to those benefits on a going-forward basis.   By contrast, the ICAM 
mechanism simply creates a guaranteed regulatory asset with future 
dollar-for-dollar “make whole” recovery for past costs.

C. Discrimination
 Both USWC and WITA challenge the accuracy of Public Counsel’s assertion that 
USWC and its customers will benefit from “network rearrangement” and therefore 
should bear some of the costs, if any costs are found appropriate.  USWC and 
WITA argue that only the new CLECs, or others who interconnect will incur 
benefits.  The point to be made here is that the network upgrades and 
rearrangements which are proposed here would be made to the public switched 
network.  It is unlikely that all the rearrangements contemplated will be used 
solely or exclusively for CLEC traffic.  By implementing these changes, USWC 
will be obtaining network improvements of benefit to itself and all other users 
of the public switched network.  To limit cost recovery for those improvements 
to CLECs alone is therefore unreasonable discrimination.  See discussion in 
Section E regarding piecemeal ratemaking issue.
 WITA takes issue with the reference to the FCC’s Number Portability Order, 
arguing that the order turns on a specific statute not applicable here. The 
criticism misses the mark.  The analogy is a useful one because it reflects the 
application of the principles of competitive neutrality and nondiscrimination. 
While Section 271(e)(2) of the Telecommunications Act of 1996 may relate only 
to number portability, the principles of competitive neutrality and 
nondiscrimination are fundamental to the interconnection provisions of the Act 
as a whole, 47 USC Section 251(c), as they are to telecommunications policy in 
Washington state.  RCW 80.36.300.

D. Consistency with the Telecommunications Act of 1996 
 As Public Counsel pointed out in its opening brief, the ICAM filing is 
inconsistent with the cost recovery mechanism provided for the 
Telecommunications Act.  PC Opening Brief at 6-7.  Interestingly, USWC argues 
that “[n]o party describes where in the Act or the FCC’s rules, or any 
negotiated or arbitrated agreement, there is a mechanism for this type of 
recovery.”  USWC Answer at 13.  That is precisely the problem with the ICAM 
proposal.  While USWC construes this absence of statutory language to mean that 
USWC may seek recovery in a separate filing, a contrary and at least as 
plausible conclusion is that no such recovery is permitted.  
 The Act is not, in fact, silent as to the recovery of the costs of 
interconnection.  A formula for determining cost is announced,  47  USC Section 
252(d), and a procedure created to allow parties and/or state regulatory 
commissions to set those costs.  47 USC Section 252(a)-(e).  USWC is correct 
that the Act makes no mention of the interconnection or competition surcharge 
which USWC here seeks to create.  In the course of addressing interconnection, 
unbundling, and resale pricing in Section 252, Congress had the opportunity to 
create a special mechanism for the alleged “start-up” costs approached here.  
Congress did not do so.  Accordingly, a better reading of the Act’s framework 
is that all of the costs of interconnection are to be recovered through 
appropriate pricing of unbundled network elements, interconnection, and 
resale.  If  these are priced correctly, any legitimate costs will be recovered 
through those prices.
 
E. Procedural Disposition of This Motion
 Both USWC and WITA oppose the motion to reject on the grounds that no 
determination can properly be made on the issues raised without completion of 
the hearing process.  Public Counsel does not agree.  However, if the 
Commission determines not to reject the filing at this time, Public Counsel 
requests that the Commission take the motions under advisement rather than 
denying them.  This will preserve the issues raised in the motion to dismiss 
for consideration once the hearing record has been made.
 USWC has suggested that it would be willing to extend the suspension period 
for this filing to allow for completion of the generic pricing case.  The 
company indicates that the results of that case might obviate the need for some 
or all of the cost recovery sought in the ICAM proposal.  Public Counsel urges 
the Commission not to take this approach.  USWC’s position on the purpose of 
suspension seems inconsistent with the company’s statement that “these costs 
are not included elsewhere . . . and that no other mechanism exists for their 
recovery.”  USWC Answer at 13.  In addition, this has the effect of giving USWC 
a second opportunity to raise issues which should properly be resolved in the 
generic case.   Neither the public interest nor the interests of administrative 
efficiency are well served by duplicative litigation of what are essentially 
the same issues, namely, what is the correct pricing for interconnection, 
unbundled elements, and resale.  The proper approach is for the Commission to 
reject the ICAM tariff on the grounds set forth in the motions.   The generic 
proceeding is the correct forum to determine the issue of whether recovery of 
additional interconnection costs beyond those addressed under Section 252(d) is 
permitted under the 1996 Act, and if so, how they should be determined and 
recovered.
 An additional point needs to made here.  USWC completed a general rate case in 
1995, with a Commission order in 1996 which is now on appeal.  The company last 
week filed a revised rate request for approximately $70 million in new revenue, 
structured as an update to allow it to earn its authorized rate of return.  
Docket No. UT 970766.  It appears the ICAM proposal, if approved, would result 
in a near doubling of this revenue amount, thus creating a significant 
potential for overearning.  Addressing a revenue request of this magnitude in a 
separate proceeding, where the revenue sought is essentially based on costs 
incurred to upgrade the rate base, amounts to piecemeal ratemaking.  For this 
reason as well, the appropriate forum for resolution of interconnection cost 
issues is the generic case or a general rate case.

II. CONCLUSION
 Public Counsel respectfully urges that the Commission disapprove and reject 
the USWC Interconnection Cost Adjustment Mechanism tariff, Advice No. 2821T.  
The tariff constitutes retroactive ratemaking, is inconsistent with the cost 
recovery mechanisms of the Telecommunications Act of 1996 and violates the 

antidiscrimination and competitive neutrality requirements of state and federal 
law.

 DATED this 12th day of September, 1997

Respectfully submitted,

Simon J. ffitch
Assistant Attorney General
Public Counsel Section