U.S. West Communications, Inc. v. Washington Utilities and Transp. Com'n

Decision Date24 December 1997
Docket NumberNo. 64821-2,64821-2
CourtWashington Supreme Court
Richard Finnigan, Olympia, Edward Shaw, Seattle, Richard Potter, Timothy O'Connell, Everett, Miller, Nash & Wiener, Clyde MacIver, Seattle, Perkins, Coie, Stone, Olsen & Williams, Sherilyn Peterson, Bellevue, for Appellant

Ater, Wynne, Hewitt, Dodson & Skerritt, Arthur Butler, Stephen Kennedy, Seattle, Christine Gregoire, Atty. Gen., Shannon Smith, Sally Johnston, Gregory Trautman, Asst. Attys. Gen., Olympia, Christine Gregoire, Atty. Gen., Robert Manifold, Asst. Atty. Gen., Seattle, for Respondent.

GUY, Justice.

This is an appeal from a decision of the Washington Utilities and Transportation Commission granting in part and denying in part a petition for an accounting order filed by a telecommunications company. We affirm the Commission's decision.


On May 12, 1994, US West Communications, Inc. (US West or Company) petitioned to the Washington Utilities and Transportation Commission (Commission) for an accounting order authorizing it to change, for intrastate ratemaking purposes, certain depreciation methodology, accounting and depreciation lives. The Company requested authorization: (1) to adopt the Equal Life Group (ELG) depreciation methodology in place of Vintage Group (VG) depreciation, effective with 1982/83 vintages; (2) to amortize At the request of US West and by agreement of the parties, the case was submitted for the Commission's decision on written prefiled testimony, rebuttal, and briefs. On May 26, 1995, the Commission served its order on the merits of the case, which was denominated its Fourth Supplemental Order. The Commission: (1) authorized US West to adopt ELG on a going-forward basis starting with plant of 1995 vintage; (2) authorized US West to amortize its depreciation reserve deficiency as found in the order over five years; and (3) rejected the Company's proposal to shorten depreciation lives. While the Commission granted US West's request to adopt ELG methodology on a going-forward basis beginning with vintage year 1995, it did not grant US West's request to adopt ELG for vintages in service since 1982/83.

over a period of five years, a deficiency in its depreciation reserve account; and (3) to adopt shorter lives for ten categories of plant.

US West appealed to the Superior Court, which found that the Commission's factual findings were not sufficient to enable the court to determine the basis for the Commission's decision. The Superior Court returned the case to the Commission for entry of more specific findings. On remand, the Commission made additional findings in support of its conclusions and again denied US West's requests to adopt ELG for earlier vintages and to shorten lives. US West again appealed.

On the second appeal, the Superior Court affirmed the Commission's order. Judge Lasnik found that the Commission's findings of fact regarding retroactive application of ELG were amply supported by the record and that the Commission gave sufficient reasons, also amply supported by the record, to support its decision that the depreciation lives should not be shortened. We accepted direct review and assigned this case as a companion case to the US West

                rate case, cause number 64822-1. 1  Further facts are included below as relevant to the issues

Did the Commission exceed its statutory authority or act in an arbitrary or capricious manner in refusing to allow US West to apply the ELG depreciation method to property put in use prior to 1995? Were the Commission's reasons given to support only going-forward application of the ELG method of depreciation supported by substantial evidence in the record before the Commission?

Did the Commission exceed its statutory authority or act in an arbitrary or capricious manner in refusing to grant US West's petition to shorten the depreciation lives of certain types of property? Were the Commission's reasons given to support its decision not to allow US West to shorten depreciation lives supported by substantial evidence in the record before the Commission?

Are the Commission's decisions authorizing US West to adopt ELG on a going-forward basis and rejecting US West's proposal to shorten depreciation lives unconstitutional? 2


The function of ratemaking is legislative in character, and the Commission is the regulatory agency charged by statute with setting public utility rates in this state; the judicial branch is not empowered to itself undertake to fix US West, as a regulated utility, receives a return on its investment in providing utility service. The revenue allowed to the utility is determined by adding the operating expenses to the rate base multiplied by the allowed rate of return. Included in the operating expenses is depreciation of the utility's property. POWER, 104 Wash.2d at 808-09, 711 P.2d 319. Louisiana Pub. Serv. Comm'n v. Federal Communications Comm'n, 476 U.S. 355, 364-65, 106 S.Ct. 1890, 1896, 90 L.Ed.2d 369 (1986) contains a concise description of depreciation as it applies to the telephone industry:

rates. People's Org. for Wash. Energy Resources (POWER) v. Utilities & Transp. Comm'n, 104 Wash.2d 798, 807-08, 711 P.2d 319 (1985). The Commission is directed to "[r]egulate in the public interest ... the rates, services, facilities, and practices of all persons ... supplying any utility service ... including ... telecommunications companies." RCW 80.01.040(3). The Commission is to set rates which are fair, just, reasonable and sufficient. RCW 80.36.080. The Commission has the power to "ascertain and by order fix the proper and adequate rates of depreciation or retirement of the several classes of property of each public service company." RCW 80.04.350.

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.

There are many different depreciation accounting methods. In the telecommunications industry, property is grouped for purposes of depreciation since it would not be practical to assign a depreciation life to each unit of property.

VG and ELG are two accounting methods which use different ways of grouping assets for depreciation purposes. Under VG, all assets acquired in a given year (a vintage) are grouped into a category and then the lives are averaged. The ELG method subdivides the vintage group into subgroups of assets with the same anticipated service life.

Historically, the Commission has required large utilities and telephone companies to use VG, together with "remaining life," for purposes of depreciation. Under "remaining life depreciation," the remaining undepreciated plant in each account is depreciated over the current estimate of the remaining life of that account. For many years, US West and its predecessor, Pacific Northwest Bell, have been disagreeing with the Commission over which accounting method is appropriate.


In its petition, US West sought an accounting order pertaining to depreciation. The rate of depreciation directly affects rates. Louisiana Pub. Serv. Comm'n, 476 U.S. at 364-65, 106 S.Ct. at 1896; see POWER, 104 Wash.2d at 809, 817, 711 P.2d 319. Therefore, the burden to demonstrate the need for shortening depreciation lives and for applying the ELG method to older vintages of property was on US West. RCW 80.04.130(2).

Judicial review of the Commission's order is conducted under the Administrative Procedure Act, RCW 34.05. Tanner Elec. Coop. v. Puget Sound Power & Light, 128 Wash.2d 656, 667, 911 P.2d 1301 (1996); POWER, 104 Wash.2d at 812, 711 P.2d 319. The burden of demonstrating the invalidity of agency action is on the party asserting invalidity. RCW 34.05.570(1)(a). RCW 34.05.570(3) provides in relevant part that the court shall grant relief from an agency order in an adjudicative proceeding only if it determines that:

(a) The order ... is in violation of constitutional provisions on its face or as applied;

(b) The order is outside the statutory authority or jurisdiction of the agency c) The agency has engaged in unlawful procedure or decision-making process ...

(d) The agency has erroneously interpreted or applied the law;

(e) The order is not supported by evidence that is substantial when viewed in light of the whole record before the court ...

(f) The agency has not decided all issues requiring resolution by the agency;


(h) ... or

(i) The order is arbitrary or capricious.

The Commission decides questions of fact, and review by this Court is of the Commission's findings and not a review of the superior court's decision. Waste Management of Seattle, Inc. v. Utilities & Transp. Comm'n, 123 Wash.2d 621, 633, 869 [949 P.2d 1328] P.2d 1034 (1994); Inland Empire Distrib. Sys., Inc. v. Utilities & Transp. Comm'n, 112 Wash.2d 278, 282, 770 P.2d 624, 87 A.L.R.4th 627 (1989). The Commission's findings of fact are reviewed under a substantial evidence standard. In re Electric Lightwave, Inc., 123 Wash.2d 530, 542, 869 P.2d 1045 (1994).

The Commission has broad generalized powers in rate setting matters. Jewell v. Utilities & Transp. Comm'n, 90 Wash.2d 775, 776, 585 P.2d 1167 (1978). We generally accord...

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