BEFORE THE WASHINGTON UTILITIES AND TRANSPORTATION COMMISSION


In Re the Petition for Investigation into the Cost of Universal Service and to 
Reform Intrastate Carrier Access Charges
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	)	Docket No. UT-970325
		
		
		U S WEST's Comments of June 12, 1998

 U S WEST Communications, Inc. (U S WEST) hereby files its comments pursuant to 
the Commission’s Notice of May 20, 1998.  These comments are in connection with 
and in response to the Commission’s filing of a Notice of Proposed Rulemaking 
(CR-102).
Introduction
 U S WEST presented oral argument to the Commission on May 13, 1998, 
encouraging the  Commission to delay this Notice of Proposed Rulemaking until 
the language contained in the proposed rule could be revised so that it does 
not purport to establish rates for telecommunications companies and effect a 
rate reduction for those companies through a rulemaking proceeding.  U S WEST 
believes that an individual adjudication is necessary in order to determine 
whether a company ought to have its rates reduced without an offsetting rate 
increase.  The fact that the rule does not authorize a coincident “revenue 
neutral” filing for companies such as U S WEST and others, is a clear violation 
of the company’s procedural due process rights and is in excess of the 
Commission’s statutory authority to adopt rules. U S WEST will discuss this 
issue in more detail below.  U S WEST also comments on the interrelationship of 
access charge reform with universal service support, and on the relationship of 
this proceeding to the access charge structure established in U-85-23.  
Finally, U S WEST will comment on the language of the rule itself, and offer 
suggestions for changes.
Rates May Not be Set in a Rulemaking 
 It is a fundamental precept of Washington law that a utility’s rates and 
charges are established in its tariffs.  RCW 80.36.100.  Furthermore, changes 
to rates are accomplished by filing revisions to tariffs, which revisions are 
effective on 30 days notice unless they are suspended by the Commission.  RCW 
80.36.110.  The Commission has the authority to suspend a rate increase for up 
to ten months from the proposed effective date of the increase. RCW 80.04.130.  
The Commission cannot, except under limited circumstances, suspend a tariff 
filing which effects a rate decrease.  Id.
 Changes to a company’s rates may be proposed voluntarily by the utility, in 
which case the above ratemaking statutes apply.  If the Commission wishes to 
order a change to the company’s rates or practices, the provisions of RCW 
80.36.140 set forth the process which must be followed in order to effect such 
a rate change.  That statute states, in pertinent part, as follows:
Whenever the Commission shall find, after hearing .  .  . that the rates .  .  
. or practices of any telecommunications company effecting such rates .  .  . 
are unjust, unreasonable, unjustly discriminatory or unduly preferential, or in 
any wise in violation of law .  .  . the Commission shall determine the just 
and reasonable rates, charges, tolls or rentals to be thereafter observed and 
in force and fix the same by order as provided in this title. (Emphasis added.)

Thus, the statute which authorizes the Commission to change a company’s rates 
or practices requires that a hearing be held.  Pursuant to the provisions of 
the Washington Administrative Procedure Act (APA) in 34.05.010(1) “hearing” as 
used in RCW 80.36.140 means an adjudicative proceeding not a rulemaking.  
Furthermore, the Commission is only permitted to change the company’s rates or 
practices through entry of an order.  Pursuant to RCW 34.05.010(10)(a) and (b), 
“order” means a written statement of particular applicability that determines 
the legal rights and duties of a specific person and does not mean an order of 
adoption of a rule.  Thus, it is clear that in order to conclude that a rate 
reduction is appropriate for any telecommunications company in this state, the 
Commission must enter into an adjudicative proceeding and enter an order after 
such proceeding has been concluded.  The Commission is not permitted to take 
such action in a rulemaking.  
 Ratemaking is not included in the definition of a rule.  “Rule” is defined in 
RCW 34.05.010(16).  A utility rate is not something under paragraph (a) the 
violation of which subjects a person to a penalty or administrative sanction, 
it is the price at which a service can be purchased.  A utility rate is clearly 
not something which under paragraph (b) establishes procedures relating to 
agency hearings.  A utility rate is also not something under paragraph (c) 
which establishes or affects qualifications for any benefits or privileges 
conferred by law.  A utility rate is not something under paragraph (d) which 
establishes or affects standards for issuance of any license.  A utility rate 
is not something  under paragraph (e) which establishes or affects mandatory 
standards for any product which must be met before distribution or sale.  On 
the other hand, ratemaking is included in the definition of an adjudicative 
proceeding in RCW 34.05.010(1).  In order for a matter to be subject to the 
rule making process of the APA, it must meet the APA definition of a “rule.”  
Hillis v. Dept. of Ecology, 131 Wn.2d 373, 932 P.2d 139 (1997).
 The Commission’s authority to conduct ratemaking under the APA other than by 
adjudication is addressed in RCW 34.05.422.  That section provides that “Unless 
otherwise provided by law,:(a) applications for rate changes . . . may, in the 
agency’s discretion, be conducted as adjudicative proceedings; (b) . . . review 
of denials of applications for . . . rate changes shall be conducted as 
adjudicative proceedings; . . . .”  Clearly, it is “otherwise provided by law,” 
in RCW 80.36.140.  That statute requires a hearing before rates are determined 
to be unjust and unreasonable, and new rates ordered in their places.
The Rule is Not Authorized by State or U. S. Supreme Court Decisions
 At the May 13, 1998 open meeting, it was noted that the Commission now 
believes that it has authority to enter into ratemaking pursuant to rules and 
that such authority is supported by various Supreme Court cases.  U S WEST 
believes that the Commission is referring here to the Permian Basin rate cases, 
In re Permian Basin Area Rate Cases, 390 U.S. 747, 88 S. Ct. 1344, 20 L.Ed. 2d 
312 (1968).  However, the holding in the Permian Basin rate cases is not 
applicable to the Washington Commission’s authority under Washington state 
law.  
 The ratemaking which was engaged in the Permian Basin area rate cases pursuant 
to a rulemaking process was entirely different from what the Commission is 
attempting to accomplish here.  The rulemaking in those cases was conducted 
under the authority of the Natural Gas Act, which granted the FPC authority to 
establish rates within a zone of reasonableness.  Further, the rulemaking 
proceeding was such that the FPC conducted extensive evidentiary hearings over 
almost two years, with hundreds of parties.  The parties presented, and the FPC 
considered, extensive evidence regarding costs and other pertinent data.  The 
alternative to this type of proceeding would have been for the Commission to 
rule individually on 3,278 rate increase requests.
 In Permian Basin, the Supreme Court held that it was permissible for the 
Federal Power Commission to impose maximum area rates on the producers of 
natural gas.  This decision was based on the specific provisions of the Natural 
Gas Act, which granted the FPC broad regulatory authority.  The court noted 
that “legislatures and administrative agencies may calculate rates for a 
regulated class without first evaluating the separate financial position of 
each member of the class; it has been thought to be sufficient if the agency 
has before it representative evidence, ample in quantity to measure with 
appropriate precision the financial and other requirements of the pertinent 
parties.”  (Emphasis added).  In re Permian Basin at 769.  However, neither the 
statutory framework of the Natural Gas Act, nor the representative evidence 
required, is present in this case.  The Commission has conducted no evidentiary 
hearings, nor is there any other basis upon which to conclude that rate 
reductions are appropriate.
 U S WEST is a public utility whose rates are required to be fair, just, 
reasonable and sufficient.  RCW 80.36.080.  Although the statutes do not define 
“traditional rate of return, rate base regulation,” RCW 80.36.135 uses that 
phrase to contrast that form of regulation to the alternative form of 
regulation specified in that section.  Those two forms of regulation of rates 
are the only ones in Washington law.  U S WEST is not operating under an AFOR 
as authorized in RCW 80.36.135.  It is therefore under “traditional, rate of 
return, rate base regulation.”  
 In POWER v. WUTC, 104 Wn.2d 798, 711 P.2d 319 (1985), the court analyzed basic 
ratemaking principles of traditional rate of return, rate base regulation in 
the context of a challenge to a Commission decision affecting utility rates.  
The court noted that “The states have the right under their police power, and 
within constitutional limitations, to regulate public utilities operating 
within their borders and to prescribe reasonable rates at which charges may be 
made by public utilities for their services to the public.”  711 P.2d at 325.  
The court discussed the statutory “just and reasonable” standard that applies 
to rates, and stated: “Following this broad standard, then, the WUTC must in 
each rate case endeavor to not only assure fair prices and service to 
customers, but also to assure that regulated utilities earn enough to remain in 
business--and each of which functions is as important in the eyes of the law as 
the other.”  Id. at 326.
 The Commission controls aggregate revenue by calibrating individual charges to 
collectively produce an amount of revenue that will, after accounting for 
reasonable operating expenses, allow the utility to achieve a fair dollar 
return on the rate base which represents the invested capital.  All of these 
factual items must be determined based on evidence introduced and made part of 
a record, in a hearing.  State ex rel. Pacific Tel. & Tel. v. Dept. of Pub. 
Service, 19 Wn.2d 200, 142 P.2d 498 (1943).  “In all jurisdictions, the rate 
making authority is required to gather facts upon which to base an order 
affecting rates, and from those facts make findings which support the order 
entered.  142 P.2d at 507.  This means that an adjudicative type hearing must 
be held, when the Commission seeks to reduce overall revenues against the will 
of the utility, even though some individual rates might increase.
 While it is true that the case law holds that a utility is not entitled to 
earn the same return on every type of rate, that only applies when the 
aggregate of rates allows the utility a reasonable opportunity under prudent 
management, to realize a fair dollar return on the value of the property it has 
devoted to public service.  North Coast Power Co. v. Kuykendall, 117 Wash. 563, 
567, 201 P. 780 (1921).  When only a reduction in one class of rate is proposed 
by the government, then the lawfulness of that reduction cannot depend on 
factors such as comparison to other rates, under this authority.  The 
lawfulness of the reduction depends on whether in aggregate, the company will 
be able to have the reasonable opportunity to earn the fair return to which it 
is entitled.  That is a question which can only be addressed in a hearing.
The Commission has Always Recognized that Mandated 
Rate Changes Must be Preceded by a Hearing

 From the earliest days of regulation in Washington, it has been clear that the 
only way in which a regulated company’s effective rates can be reduced by the 
Commission, over the objection of the utility, is through the filing and 
litigation of a complaint under RCW 80.04.110 and 80.04.120 in which evidence 
is introduced sufficient to overcome the presumption of reasonableness that 
effective rates enjoy.  In State ex rel. Great Northern Ry. Co. v. Railroad 
Comm.,47 Wash. 627, 92 Pac. 457 (1907), the court struck down a Commission 
order that had reduced certain rates without there having been a complaint 
filed against those rates.  In State ex rel. Northern Pacific Ry. Co. v. 
Railroad Comm., 52 Wash. 440, 100 Pac. 987 (1909), the court again affirmed a 
lower court decision that reversed an order of the Commission that reduced 
rates without there having been a complaint and hearing on the specific rates.  
The court held that without such a complaint and hearing, the Commission was 
not authorized to make an order changing the rates.
 From that time until today, the Commission has acted as if it believed a 
complaint is necessary to reduce a utility’s rates over the utility’s 
objection.  In State ex. rel Puget Sound Power & Light Co. v. Dept. of Pub. 
Works, 179 Wash. 461, 38 P.2d 350 (1934), during the height of the Depression, 
the Commission filed a complaint seeking to reduce electric rates used by 
farmers for irrigation, in a vain attempt to address their economic plight.  In 
Pacific Tel. & Tel, supra, the Commission filed a complaint and conducted an 
exhaustive evidentiary hearing, before issuing its order that reduced the 
company’s rates.  In 1989, the Commission filed a complaint, not a rulemaking, 
against U S WEST’s predecessor, Pacific Northwest Bell Telephone Company, 
alleging that the company’s rates were excessive of those necessary to produce 
a fair rate of return in Washington Utilities & Transportation Comm. v. Pacific 
Northwest Bell Tel. Co., Cause No. U-89-2698F, 126 PUR 4th 1 (1991). 
 In 1990, the Commission adopted rules setting maximum charges for Alternative 
Operator Service companies to charge their customers.  Like the proposed WAC 
480-120-540, this rule, WAC 480-120-141, purported to establish an upper limit 
on specific types of charges that AOS providers could make, without there 
having been any complaint or hearing that addressed the ratemaking issues of 
revenue, expense and rate base for any individual AOS provider.  There were 
several AOS providers who had tariffs that had taken effect prior to the 
adoption of WAC 480-120-141, which contained rates that were higher than the 
maximum set in the rule.  The Commission did not take the position that the 
adoption of the rule superseded the effective tariffs of these companies.  
Instead, the Commission filed complaints against several companies, including 
International Pacific, Inc., and Fone America, and proceeded to hearing to 
litigate the ratemaking issues.  Ultimately the litigation was settled by the 
approximately simultaneous amendment of the rule to raise the cap and voluntary 
tariff filings by the respondent companies and other so called “grandfathered” 
companies to bring their maximum rates within the new cap.  The point is that 
the Commission’s consistent interpretation of its ratemaking authority, for 
almost a century, has been that a complaint and hearing are required to reduce 
rates over the objection of the utility.
Rulemaking is Permissible to Establish Prospective Rate Design
 U S WEST believes that the Commission does have the authority to establish 
appropriate rate design through a rulemaking.  This is entirely different from 
establishing rate levels through a rulemaking.  As such, were the Commission to 
permit all telecommunications companies to file revenue neutral adjustments to 
their tariffs, U S WEST believes that such action would be permissible through 
a rulemaking.
 Thus, should there be a rulemaking that explicitly provided that the rate 
changes required, by way of reductions in access charges and increases in other 
charges, would be revenue neutral, then this issue of a required hearing in 
order to demonstrate that the aggregate of charges permit a reasonable 
opportunity to earn the fair return would not be presented.  The prior rate 
order for the company determines what level of earnings meets the 
constitutional requirement, until changed by proper Commission action in a rate 
case.  So long as the utility’s earnings are not reduced by one-sided rate 
reductions against the utility’s will, there is no issue that the rule violates 
the case law setting the Commission’s authority under traditional rate of 
return, rate base regulation.  Also, should the Commission determine to conduct 
a rulemaking whose effect would be prospective in future general rate cases, in 
which the utility’s overall revenue requirement is addressed but constraints on 
rate design are imposed by rule, that would not present the above issues.  
Finally, should the Commission determine to use rulemaking to indicate the 
types of tariff filings that would be accepted in the future without suspension 
in a revenue neutral context, that also would not present the above legal 
issues.
Access Charge Reform and Universal Service
 The Commission Notice states that the purpose of this proposed rulemaking is 
to conform Washington’s access charge system with state and federal laws 
encouraging competition.  The reason stated by the Commission in support of 
this proposal is to begin “the process of identifying and removing implicit 
subsidies.”  Removal of implicit subsidies is required by the Federal 
Telecommunications Act of 1996 (“Act”); Section 254(e) UNIVERSAL SERVICE 
SUPPORT states: “support should be explicit and sufficient.”  However, ESSB 
6622 specifically directs the Commission to “plan and prepare to implement a 
program for the preservation and advancement of universal telecommunications 
service which shall not take effect until the legislature approves the program. 
 The purpose of the universal service program is to benefit telecommunications 
ratepayers in the state by minimizing implicit sources of support and 
maximizing explicit sources of support that are specific, sufficient, 
competitively neutral and technology neutral to support basic 
telecommunications services for customers of telecommunications companies in 
high-cost locations.” ESSB 6622 Section 1(1).  
 Implementation of this proposed rule on January 1, 1999 may be viewed by as an 
end-run around ESSB 6622 if the rule does not authorize a “revenue neutral” 
switched access service filing for companies.  If terminating switched access 
rates are replaced by an explicit terminating access charge rate element, the 
rule would not be in conflict with ESSB 6622.  However, if elimination of the 
terminating switched access implicit subsidy requires an increase to local 
service rates or to originating switched access service rates to offset the 
revenue loss, the legislature could consider such a new rule a violation of 
section 2(1).  U S WEST will need to increase local service rates by at least 
$16 million unless an explicit terminating switched access service rate element 
is included as part of this proposed rule.  U S WEST does not believe ESSB 6622 
authorized new rules that provide for the removal of implicit subsidies 
utilized to fund universal service prior to legislative approval of a new 
universal service plan.
Access Charge Reform and U-85-23
 In the Eighteenth Supplemental Order in Cause No. 85-23, the Commission 
adopted an allocation of non-traffic sensitive (NTS) costs based on a division 
of 50% to local exchange services, 25% to interstate toll and 25% to intrastate 
toll. Asotin Telephone Company (19%), General Telephone Company (24.9%) and 
Pacific Northwest Bell Telephone Company (16.95%) were allowed different 
allocations.  In Docket No. UT-950200, the Commission Staff argued that the 
cost of the loop should be allocated to services that use the loop based on the 
formula adopted by the Commission in Docket No. U-85-23.  Staff stated: “In 
that case the Commission said that loop costs should be recovered 25% from 
interstate toll, 16.96% from intraLATA toll and the remainder, 58.05% from 
local service.  Thus staff’s calculation of the incremental cost of local 
service includes 58.05% of the cost of the local loop.”  Staff argued that 
“loop costs are not part of the incremental cost of local exchange service but 
are allocated to local exchange service and toll service because of the 
Commission’s past orders.”  In UT-950200, the Commission reaffirmed the loop 
allocation policy when it stated “one should not expect local service to be 
expected to cover 100% of loop costs, because some loop costs had been assigned 
to other services.” Page 85, UT-950200.  Reduction of terminating switched 
access rates by over 50% would result in less than 25% of the NTS costs being 
recovered from interstate toll service.  In fact, the switched access rate 
reductions required in UT-950200, resulted in switched access service rates 
lower than U S WEST’s interstate rates and intrastate rates in U S WEST’s other 
thirteen states.  Currently, U S WEST switched access service revenues 
contribute less than 25% to NTS costs.
The Language of the Proposed Rule
 With regard to the language of the rule itself, U S WEST notes that in subpart 
one of the rule, the cost of terminating access service is not properly defined 
or identified.  A local exchange company should, at a minimum, be permitted to 
charge for terminating access at the same rate level that it charges for a 
local interconnection service, such as end office switching or tandem 
switching.  Although the costs for such switching have been established in the 
generic proceeding, no prices have yet been established.  Both U S WEST and GTE 
have proposed prices which include common and overhead costs plus an additional 
mark-up.  The proposed 480-120-540(1) should, at a minimum, be amended to 
reflect the appropriate rate levels for local interconnection service, i.e., 
the price for such service, not the cost.
 The rule also makes an inappropriate distinction between the price for 
originating and terminating access.  There is no basis to believe that costs 
which are not recovered in terminating access can be recovered in originating 
access.  Large customers with the ability to bypass originating access will do 
so, leaving other customers with a larger share of joint and common costs.  
However, joint and common costs are a part of the costs appropriately recovered 
from all customers, and originating and terminating access should be set at 
comparable levels.  
 As noted above, if subsection 1 and subsection 2 were linked to allow any 
terminating access charge reductions to be reflected in an additional explicit 
universal service rate element applied to terminating access, with an effective 
date for both the rate increase and the rate reduction concurrent, U S WEST 
believes that such an amendment would go a long way to correcting the 
infirmities contained in this rule.  This is particularly true for a company 
such as U S WEST, which is still regulated under rate of return regulation and 
which only five months ago completed a rate case wherein the Commission 
established a revenue requirement based, at least in part, on revenues from 
access charges at the access charge rate currently in effect.  Any rate 
reduction without an offsetting rate increase would in effect be an amendment 
to the Commission’s order establishing U S WEST’s revenue requirement in Docket 
No. UT-970766.  As noted above, such an activity pursuant to a rulemaking is 
simply impermissible.
 Respectfully submitted this 12th day of June, 1998.

     U S WEST Communications, Inc.


     By_________________________________
      Lisa A. Anderl, WSBA No. 13236