American Network, Inc. v. Washington Utilities and Transp. Com'n

Citation776 P.2d 950,113 Wn.2d 59
Decision Date13 July 1989
Docket NumberNo. 54608-8,54608-8
CourtWashington Supreme Court
PartiesAMERICAN NETWORK, INC., et al., Respondents, v. WASHINGTON UTILITIES AND TRANSPORTATION COMMISSION et al., Appellants.

Kenneth O. Eikenberry, Atty. Gen., Donald T. Trotter, Asst., James R. Cunningham, Sr. Asst., Olympia, for appellant Utilities and Transp. Com'n.

Edward T. Shaw, Douglas N. Owens, Seattle, for appellant Pacific Northwest Bell.

McInerney, Baker & Kinnear, W.K. McInerney, Jr., James D. Oesterle, Seattle, for respondent American Network, Inc.

John P. McDonald, Vancouver, for respondent Comnet, Inc.

SMITH, Justice.

This is an appeal by the Washington Utilities and Transportation Commission (Commission) from an order of the Superior Court of Washington for Thurston County dated November 6, 1987, which declared invalid a security deposit rule adopted by the Commission through an order dated May 12, 1986 (effective July 31, 1986) as (1) an undue, though indirect, burden on interstate commerce without proof of "legitimate intrastate objectives" and "no less onerous alternatives;" and, (2) violation of the equal protection clause of the Fourteenth Amendment through discrimination against interexchange telecommunications companies as a class, absent "explicit showing" and "definitive determination" of need for the security deposit rule.

Pacific Northwest Bell Telephone Company (Pacific Northwest Bell) joined as additional appellants.

Respondents are American Network, Inc. (AmNet) and COMNET, Inc. (Comnet).

This court granted direct review on May 8, 1988. We find that the Washington Utilities and Transportation Commission enacted the security deposit rule pursuant to its proper and lawful authority. We therefore reverse the order of the Superior Court.

Issues Presented

The issues involved in this case may be summarized as follows:

(1) Whether the Washington Utilities and Transportation Commission had statutory or other enabling authority to promulgate WAC 480-120-057 and WAC 480-120-021, the security deposit rule;

(2) If the Commission had authority to promulgate the security deposit rule, then whether the Commission, in exercising its authority, violated the commerce clause, article 1, section 8, of the United States Constitution; and

(3) If the Commission had authority to promulgate the security rule, then whether the Commission, in exercising its authority, violated the equal protection clause of the fourteenth amendment to the United States Constitution or the special privileges and immunities clause, article 1, section 12, of the Washington State Constitution.

Articulated Positions of the Parties

Appellant Washington Utilities and Transportation Commission argued that the Superior Court erred in declaring the deposit rule invalid because the rule constitutes a legitimate, reasonable regulation of the operations of intrastate companies which are expressly subject to Commission regulation. Appellant Commission also argued that the rule imposes no "indirect burden" on interstate commerce that would involve the commerce clause; and even if such a burden is shown, the "balancing of interests" favors the regulation.

Appellant Commission additionally argued that the classification of interexchange telecommunications companies is a valid classification for the purpose of a deposit rule. The Commission asserted that all interexchange telecommunications companies are treated equally and that a rational relationship exists between the classification and valid regulatory purposes, thus meeting this court's test for equal protection of the laws under both federal and state constitutions.

Respondent AmNet argued that the deposit rule is completely antithetical to the proclaimed policy of the Legislature to encourage competitive telecommunications services in this state in that the rule imposes a new cost associated with providing services, thus making it more expensive for all long distance service ratepayers.

Respondent AmNet further argued that the deposit rule effectively imposes a regulation which grants preferences to some and unduly prejudices others. AmNet concluded that the Commission's "interference with the objectives of the statute" is beyond the scope of its authority.

Intervenor-Respondent Comnet argued that the absence of specific factual determinations by the Commission precludes any assertion that the deposit rule, or any classification within the rule or deriving in any way from the terms of the rule or its criteria, is reasonable, rational or can be presumed to be so.

Statutes and Security Deposit Rule

The full text of the deposit rule appears in WAC 480-120-057. In the order amending and adopting rules permanently (General Order R-250, p. 3-4), the Commission ruled:

... While interexchange carriers are customers of the local exchange carrier, they also provide unique services to the public in that they themselves are offering telecommunications services. As second level carriers, they may incur large bills very swiftly, but may have little in the way of assets in the event that financial difficulties might be encountered, putting collection of those bills by the local exchange carrier in jeopardy. Because they are in turn carriers, using interconnection with the local exchange network as the foundation of their business activities, the Commission finds them to be a unique customer class for which normal deposit rules do not accord the local exchange provider with adequate protection against financial loss, to the possible detriment of monopoly ratepayers the Commission believes that either the prepayment or the deposit alternatives in the rule adopted herein are consistent with the public interest.

The rule change affects no economic values.

Under RCW 80.01.040 and RCW 80.36, the Commission is given regulatory authority over intrastate telecommunications. RCW 80.01.040 grants to the Commission the power to regulate telecommunications "in the public interest" and to "[m]ake such rules and regulations as may be necessary to carry out its other powers and duties." In exercise of that statutory authority, the Commission has defined interexchange telecommunications companies (ITC's) as companies which provide telecommunications services for hire within the state, but which do not provide basic telephone service. RCW 80.04.010; WAC 480-120-021(2).

For the "public interest" purpose of protecting against increased costs to ultimate ratepayers resulting from interexchange telecommunications company failures and defaults, the Commission promulgated the disputed security deposit rule under new section WAC 480-120-057, establishing alternative objective financial criteria which an interexchange telecommunications company may use to establish credit.

WAC 480-120-057(1) provides as follows:

(1) Establishment of credit--interexchange telecommunications company. An interexchange telecommunications company may establish credit by demonstrating to the utility any one of the following subdivisions (a) or (b) of this subsection, subject to the provisions of subsection (4) of this section [relating to amount of deposit or security]:

(a) Corporate debt rating. The interexchange telecommunications company or, if the interexchange telecommunications company is unable to comply with this provision, its parent or affiliated company, has undertaken to guarantee the payment of all charges incurred by the subscribing interexchange telecommunications company, has a corporate debt rating, according to Standard and Poor's of BBB or higher, or according to Moody's of Baa or higher, with respect to any outstanding general debt obligation; or

(b) When the interexchange telecommunications company has demonstrated to the utility, through the bimonthly provision of certified financial statements, the following financial criteria:

(i) A positive cash flow from total company operations over the past twelve months.

(ii) A minimum level of net worth at least equivalent to the deposit which would otherwise be required.

(iii) A current ratio (current assets-to-current liabilities) of 1.1 to 1 or a debt-to-equity ratio of 1.8 to 1.

(iv) A minimum accounts receivable turnover ratio (annual sales divided by average accounts receivable) of four over the last twelve months.

WAC 480-120-057(1).

Summary of Facts

In 1984, American Telephone and Telegraph Company (AT & T) divested itself of local Bell telephone companies, including Pacific Northwest Bell Telephone Company. See United States v. AT & T, 552 F.Supp. 131, 195-97 (D.D.C.1982), aff'd, 460 U.S. 1001, 103 S.Ct. 1240, 75 L.Ed.2d 472 (1983). Pursuant to the court ordered divestiture, Pacific Northwest Bell was required to make the technical changes necessary to provide interexchange telecommunications companies with "access ... equal in type, quality, and price to that provided to AT & T and its affiliates." United States v. AT & T, 552 F.Supp. at 227. The conversion was ordered to be substantially completed by September 1, 1986. 552 F.Supp. at 233.

Following the increase in access prices with the conversion to equal access, 20 percent of the reseller ITC's obtaining access from Pacific Northwest Bell failed during the 18 months preceding adoption of the deposit rule by the Commission. One of those failures, which left Pacific Northwest Bell with a large uncollected debt, occurred 1 month after an ITC's deposit had been refunded pursuant to the deposit rule then in existence which allowed a refund where the ITC had paid its bills consistently for 12 months. See WAC 480-120-056(11)(a).

Following the AT & T divestiture, new ITCs entered the market and began to compete with Pacific Northwest Bell, which previously held the intrastate monopoly on services, and with AT & T, which previously held the interstate monopoly on services.

As defined by RCW 80.04.010 and WAC 480-120-021(2), interexchange telecommunications companies are those which provide...

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