DOCKET NO. UT-940641

BEFORE THE WASHINGTON UTILITIES AND TRANSPORTATION COMMISSION

In the Matter of the Petition of 
U S WEST Communications, Inc., for Depreciation Accounting Changes

DOCKET NO. UT-940641

FIFTH SUPPLEMENTAL ORDER, ON REMAND, GRANTING PETITION IN PART


SUMMARY

  PROCEEDINGS:  On May 11, 1994, U S WEST Communications, Inc. (U S WEST, USWC, 
or Company), petitioned for an accounting order authorizing it to change, for 
intrastate ratemaking purposes, certain depreciation practices and parameters: 
adoption of the Equal Life Group (ELG) depreciation methodology in place of 
vintage group depreciation (VG) effective with 1982/83 vintages; amortization 
of a deficiency in its depreciation reserve account; and adoption of shorter 
lives for ten categories of plant.

  PROCEDURAL STATUS:  Prehearing conferences were held before administrative 
law judges on August 19 and December 5, 1994.  By agreement of parties, the 
case was submitted for Commission decision on the basis of written testimony 
and briefs.  The Fourth Supplemental Order, entered May 26, 1995, granted the 
petition in part.  The order authorized U S WEST to adopt ELG on a 
going-forward basis, starting with plant of 1995 vintage; authorized U S WEST 
to amortize its depreciation reserve deficiency as found in the order over five 
years; and rejected the Company's proposal to shorten lives.

  The Company obtained judicial review of the Commission's order.  The matter 
now is on remand from the Superior Court of the State of Washington for King 
County.  The Superior Court, Robert S. Lasnik, Judge,  found that the 
Commission's factual findings were not sufficient to enable the court to 
determine the basis for the Commission's decision to allow U S WEST to adopt 
ELG only on a prospective basis or to determine the basis for the Commission's 
rejection of U S WEST's evidence in support of shorter lives.  The Superior 
Court directed the Commission to take further action consistent with the 
court's order.

  COMMISSION:  The Commission reconsiders its order and reaches the same 
conclusions and result.  It makes additional findings in support of its 
conclusions and order.  It grants the petition in part.  The Company is 
authorized to adopt ELG on a going-forward basis, starting with plant of 1995 
vintage.  The Commission authorizes the Company to amortize its depreciation 
reserve deficiency as found in this order over five years.  The Commission 
rejects the Company's proposal to shorten depreciation lives.

  APPEARANCES:  U S WEST was represented by Edward T. Shaw, attorney, Seattle.  
The Commission was represented by Steven W. Smith, assistant attorney general, 
Olympia.  Robert F. Manifold, assistant attorney general, Seattle, appeared as 
Public Counsel.  Intervenor GTE Northwest Incorporated (GT-NW) was represented 
by Tim Williamson and Richard Potter, attorneys, Everett.  Intervenor 
Washington Independent Telephone Association (WITA) was represented by Richard 
A. Finnigan, attorney, Tacoma.  Intervenor Telecommunications Ratepayers 
Association for Cost-effective and Equitable Rates (TRACER) was represented by 
Arthur A. Butler, attorney, Seattle.  Intervenor MCI Communications Corporation 
(MCI) was represented by Brooks E. Harlow, attorney, Seattle.  
MEMORANDUM

I.  SCOPE OF PROCEEDING

 A. The Company's Petition

  On May 11, 1994, U S WEST filed a petition for an order granting it the 
authority to adopt, for intrastate ratemaking purposes, certain changes in 
depreciation methodology, accounting, and depreciation lives.

  U S WEST's proposal has three parts.  First, the Company requests 
authorization to adopt equal life group depreciation (ELG) in place of the 
depreciation methodology it currently uses, vintage group depreciation (VG), 
effective with 1982/83 vintages.  Second, the Company requests authorization to 
amortize, over a period of five years, a deficiency that it presently has in 
its depreciation reserve account.  Third, the Company requests authorization to 
adopt shorter lives for ten categories of plant.

  The petition asserts that the Company is not recovering its capital in 
Washington State in an adequate or timely manner, as shown by a comparison of 
capital recovery measures (composite depreciation rate and depreciation reserve 
ratios) in Washington State with other states in which U S WEST operates.  It 
asserts as causes of the alleged failure: Commission orders in 1986-87 that 
required the Company to stop employing the ELG methodology and to refund 
ELG-associated revenues from 1982 forward;       WUTC v. Pacific Northwest Bell 
Telephone Company, Docket Nos. U-82-19, Sixth Supplemental Order [Denying 
rehearing; ordering refunds] (September 1986); WUTC v. Pacific Northwest Bell 
Telephone company, Docket No. U-85-52, Ninth Supplemental Order [Order on 
reopened hearing, accepting settlement agreement] (May 1987). the lack of 
ongoing ELG; the failure to address reserve deficiencies on the intrastate 
portion of U S WEST's plant; and the use of depreciation lives in Washington 
that are too long to keep pace with rapid technological and competitive changes.

  The composite effect of U S WEST's proposals is to increase the Company's 
depreciation expense by $159 million per year, based on plant investment as of 
January 1, 1994.  This is an increase in depreciation expense of 88%, 
increasing the composite rate from 6.4% to 12.0%.
 B. Issues

1. Should the Commission authorize U S WEST to adopt the equal life group (ELG) 
depreciation grouping methodology in place of the methodology it currently uses 
for grouping plant and equipment, the vintage group (VG) depreciation grouping 
methodology?  If so, should the Commission authorize ELG only on a going 
forward basis, or authorize it effective with 1982/83 vintages?

2. Should the Commission authorize U S WEST to amortize any current 
depreciation reserve deficiency, as an alternative to recovering the deficiency 
over the remaining lives of the plant and equipment?  If so, over how many 
years?

3. Should the Commission authorize U S WEST to adopt shorter depreciation lives 
for any or all of ten plant groups?

 C. Procedural Status

 By agreement of parties, the case was submitted for Commission decision on the 
basis of written testimony and briefs.  The Commission's Fourth Supplemental 
Order granted the petition in part.  The order authorized U S WEST to adopt ELG 
on a going-forward basis, starting with plant of 1995 vintage.  It authorized U 
S WEST to amortize its depreciation reserve deficiency as found in the order 
over five years.  It rejected the Company's proposal to shorten lives.

  The Company obtained judicial review of the Commission's order.  The Superior 
Court of the State of Washington for King County, Robert S. Lasnik, Judge, 
found that the Commission's findings were insufficient to enable the court to 
determine the basis for the Commission's decision to allow U S WEST to adopt 
ELG only on a prospective basis.  The court indicated that if the basis for the 
Commission's decision not to authorize ELG for vintages earlier than 1995 was a 
1987 Settlement Agreement in Docket No. U-85-52, the Commission's order would 
violate RCW 34.05.570(3)(c) in that the Commission did not give U S WEST fair 
notice that the Commission was considering using the Settlement Agreement to 
estop U S WEST from receiving a decision on the merits on its request to apply 
ELG to pre-1995 vintages.  The Superior Court also found that the Commission's 
findings were insufficient to enable the court to determine the basis for the 
Commission's rejection of U S WEST's evidence in support of shorter lives.  The 
court indicated that to the extent the Commission deferred consideration of 
this issue to the upcoming triennial represcription process (discussed within), 
it violated the RCW 34.05.570(3)(f) requirement that the agency decide all 
issues requiring decision.  The Superior Court remanded the matter to the 
Commission for further proceedings consistent with the court's order.

  The Commission has thoroughly reconsidered its decision in light of the 
Superior Court's order.  The Commission believes that its original order 
reached the correct conclusions and result.  We will endeavor to make findings 
supporting our decision.
 D. Background

  1. Depreciation

  When plant and equipment are expected to be used in more than one accounting 
period, the investment is capitalized and depreciated over time.  Depreciation 
is an accounting system that allocates the cost of tangible capital assets, 
less net salvage, over the estimated useful life of the asset unit (which may 
be a group of assets).  It enables a Company to recover its capital investment 
in a timely manner over the economically useful life of the assets.  A 
depreciation rate determines how much of the capitalized investment is 
allocated as an expense over each accounting period.  The methods used to 
calculate depreciation vary.

  The following passages, from Louisiana Public Service Com. v. FCC, 476 U.S. 
355, 106 S.Ct. 1890, 90 L.Ed.2d 369 (1986), further explain some of the 
depreciation concepts involved in this proceeding, and provide a context for U 
S WEST's request for authorization to use the ELG methodology.  The first 
passage, at pp. 364-65, defines "depreciation" and explains its significance in 
the regulated utility context:

 Depreciation is defined as the loss in service value of a capital asset over 
time.  In the context of public utility accounting and regulation, it is a 
process of charging the cost of depreciable property, adjusted for net salvage, 
to operating expense accounts over the useful life of the asset.  Thus, 
accounting practices significantly affect, among other things, the rates that 
customers pay for service.  This is so because a regulated carrier is entitled 
to recover its reasonable expenses and a fair return on its investment through 
the rates it charges its customers, and because depreciation practices 
contribute importantly to the calculation of both the carrier's investment and 
its expenses.  [case citation omitted]  See generally, 1 A. Priest, Principles 
of Public Utility Regulation (1969); P. Garfield & W. Lovejoy, Public Utility 
Economics (1964); 1 A. Kahn, Economics of Regulation (1970).

 The total amount that a carrier is entitled to charge for services, its 
"revenue requirement," is the sum of its current operating expenses, including 
taxes and depreciation expenses, and a return on its investment "rate base."  
The original cost of any given item of equipment enters the rate base when that 
item enters service.  As it depreciates over time--as a function of wear and 
tear or technological obsolescence--the rate base is reduced according to a 
depreciation schedule that is based on an estimate of the item's expected 
useful life.  Each year the amount that is removed from the rate base is 
included as an operating expense.  In the telephone industry, which is 
extremely capital intensive, depreciation charges constitute a significant 
portion of the annual revenue requirement recovered in rates;. . . .

The second passage, at pp. 360-61, discusses a 1980 Federal Communications 
Commission (FCC) order in Docket FCC 79-105 that changed two depreciation 
practices affecting telephone plant:      Property Depreciation, 83 FCC2d 267 
(1980), reconsideration denied, 87 FCC2d 916 (1981).

First, the order altered how carriers could group property subject to 
depreciation.  Because carriers employ so many individual items of equipment in 
providing service, it would be impossible to depreciate each item individually, 
and property is therefore classified and depreciated in groups.  The order 
permitted companies the option of grouping plant for depreciation purposes 
based on its estimated service life (the "equal life" [ELG] approach).  This 
replaced the FCC's prior practice of requiring companies to classify and 
depreciate property according to its year of installation (the "vintage year" 
[VG] method).  This change was made to allow depreciation to be based on 
smaller and more homogenous groupings, which, the FCC concluded, would result 
in more accurate matching of capital recovery with capital consumption.

 The 1980 order further sought to promote improved accounting accuracy by 
replacing "whole life" depreciation with the "remaining life" method.  Under 
remaining life, and unlike the treatment under a whole life regime, if 
estimates upon which depreciation schedules are premised prove erroneous, they 
may be corrected in midcourse in a way that assures that the full cost of the 
asset will ultimately be recovered.

  Generally speaking, the Commission has required all large utilities and 
telephone companies to utilize VG, toget