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

• Decision Date: 03 March 1998
• Docket Number: No. 64822-1,64822-1
• Citation: 134 Wn.2d 74,949 P.2d 1337
• Court: Washington Supreme Court
• Parties: , 184 P.U.R.4th 594 US WEST COMMUNICATIONS, INC., a Colorado corporation, Appellant, v. WASHINGTON UTILITIES AND TRANSPORTATION COMMISSION, Respondent.

Page 74

134 Wn.2d 74

949 P.2d 1337, 184 P.U.R.4th 594

US WEST COMMUNICATIONS, INC., a Colorado corporation, Appellant, v. WASHINGTON UTILITIES AND TRANSPORTATION COMMISSION, Respondent.

No. 64822-1.

Supreme Court of Washington En Banc.

Argued June 24, 1997.

Decided Dec. 24, 1997.

As Amended March 3, 1998.

Davis, Wright & Tremaine, Daniel Waggoner, Gregory Kopta, Ronald Roseman, Seattle, Richard Finnigan, Olympia, Dmitri Iglitzin, Seattle, Richard Potter, Timothy O'Connell, Everett, Edward Shaw, Miller, Nash & Wiener, Clyde Mac Iver, Brooks Harlow, Seattle, A. Timothy Williamson, Bellevue, Sara Miller, Portland, OR, Michael Shortly, Rochester, NY, Sherilyn Peterson, Bellevue, for Appellant

Christine Gregoire, Atty. Gen., Gregory Trautman, Asst. Atty. Gen., Olympia, Christine Gregoire, Atty. Gen., Robert Manifold, Asst. Atty. Gen., Seattle, Roselyn Marcus, Carlisle, PA, Ater, Wynne, Hewitt, Dodson & Skerritt, Arthur Butler, Stephen Kennedy, for Respondent.

GUY, Justice.

This case involves an appeal by a telecommunications company of a Washington Utilities and Transportation Commission decision denying the company's petition for an increase in telephone rates. We affirm the order of the Commission.

FACTS

On February 17, 1995, US West Communications, Inc. (US West or the Company) petitioned the Washington Utilities and Transportation Commission (Commission) for a During the rate proceedings, the Commission decided two motions which are challenged by US West in this appeal. The Commission denied US West's request to exclude consideration of revenue derived from the publication of yellow pages advertising. The Commission also held that the issues recently considered in a prior depreciation case need not be relitigated in the rate case.

                statewide general rate increase for telephone services. 1  US West sought approximately[949 P.2d 1341]  $204 million a year in additional revenues, phased in over four years.  The order indicates the Commission heard from 52 expert witnesses and received nearly 800 exhibits, comprising over 10,000 pages of written testimony and documentation.  The record also includes more than 4,000 pages of transcript testimony occurring over several weeks.  In addition to US West, Commission Staff, and Public Counsel, 2 many other parties 3 participated in the proceeding.  The Commission held seven days of public hearings to receive testimony from customers in different cities throughout Washington
                

In its 137-page final dispositive order, the Commission denied the request for increased rates and found, instead, that the Company was over-collecting approximately $91.5 million a year from Washington telephone customers. The Commission directed the Company to reduce rates by that amount.

The most relevant findings for the purposes of the issues presented to this Court (stated in abbreviated form) are as follows:

* US West's customer service has deteriorated significantly since 1991. There are significant problems with both repair and installation services. US West representatives have repeatedly promised service would improve but performance has worsened, measured by objective criteria.

* "Team Bonus Awards" and merit payments for US West employees are tied to standards putting a primary emphasis on the Company's financial performance to the point where complete failure to achieve customer service goals may be totally offset by superior Company financial performance. Such standards fail to tie bonus payments to customer service goals and permit emphasis on financial performance to the exclusion of customer service.

* Setting the Company's authorized rate of return on equity at the low end of the reasonable range, and allowing the Company to petition for adjustment upon a showing of improved stable customer service, will provide incentive to the Company to improve its customer service performance.

* US West voluntarily stipulated, as a condition of its predecessor's merger with two other companies into US West, that the merger would have no effect upon the imputation of yellow pages earnings. US West Direct, the publisher of the yellow pages, benefits substantially from its existing relationship with US West and from the former integrated operation as a part of Pacific Northwest Bell (PNB). Yellow pages classified advertising directory publication constitutes a former regulatory asset of the Company. Neither US West nor its predecessor, PNB, received compensation * Test year net operating income after all adjustment is $204,749,579.

for transfer of the yellow pages publication to US West Direct, and US West receives no licensing fee for directory publication although it receives a small fee for basic [949 P.2d 1342] subscriber information. US West Direct's relevant yellow pages advertising excess revenues during the test year were imputed by the Commission at $50,934,378 to US West's net operating income.

* US West's adjusted Washington intrastate rate base is $1,561,793,482.

* A rate of return in the range of 9.367% to 9.88% on US West's rate base will maintain its credit and financial integrity and will enable it to acquire sufficient new capital at reasonable terms to meet its service requirements. Setting the authorized return at 9.367% with the opportunity to increase the rate of return to 9.627% upon satisfactory resolution of customer service quality problems will provide incentive to US West to improve its service quality. The appropriate overall rate of return for US West is therefore 9.367%.

* Costs of providing service are properly shown in a study of total service long run incremental costs. The Company's cost studies do not appropriately measure the Company's incremental costs of providing service. Costs of the local loop are not properly included in the incremental cost for local exchange service. The Hatfield Model cost study identifies the Company's true costs of providing local service more closely than the Company's study.

* The Company did not demonstrate that it faces effective competition sufficient to constrain prices in any market for its regulated services.

* Centrex service ⁴ tariffs that effect unbundling of the Centrex elements, price the highest-priced Centrex line at the level of the private line NAC, and remove the station location requirement, will achieve the unbundling goals identified in prior Commission orders and will be fair, just and reasonable.

Administrative Record (AR) at 1779-1915 (Fifteenth Supplemental Order: Commission Decision and Order Rejecting Tariff Revisions; Requiring Refiling--hereafter Order).

The Order denied US West's proposal to increase urban residential phone rates from the statewide average of $10.50 to $21.85 and rural residential rates to $26.35. The Commission found that the incremental cost of local service is less than $5.00 per month and that, even if the entire incremental cost of the "loop" (the facilities needed for the connection between the central office and the consumer's telephone which also carry long distance and specialized services, such as voice mail, as well as local service) is allocated to the local ratepayer, the price covers that cost. The Commission concluded there was no local service subsidy. The Commission directed the Company to establish a statewide residential rate of $10.50 per month, the average rate presently in effect. The Commission found that rate covers the cost of local residential service and provides a substantial contribution to shared and common costs.

With regard to competition, the Commission stated:

[US West] argues that it needs to meet existing and impending competition with sharply higher rates for residential customers, and lower rates for other, more competitive services. While higher local rates simply are not supported by the record in this proceeding, the Commission agrees that the Company needs pricing flexibility to respond to competition AR at 1788-89.

when it appears. As a result, the Commission is authorizing the Company to file banded rates for any service it chooses. The rate set in this order will be the top end of the band. The Company may choose any level above incremental cost for the bottom of the band.... This flexibility gives the Company the ability to drop prices where competition requires, while restraining its ability to raise the rates of captive customers. Of course, the Company[949 P.2d 1343] is always free to propose increases in the rate caps if it can prove increased costs.

US West appealed the Commission's Order, and the Superior Court affirmed the decision of the Commission. We accepted direct review.

The Company argues to this Court that: the Commission erred in imputing revenue from the publication of the yellow pages advertising to the Company's net operating income; the Commission was required to allow US West to introduce the depreciation evidence introduced in the depreciation docket again in this rate case; US West had insufficient notice that the Commission was going to consider the issue of the Centrex service; the Commission's rejection of US West's "cost studies" was error; the Commission lacked authority to lower the Company's rate of return based on evidence of poor service quality; the Commission erred in disallowing the "team and merit" salary bonuses from the Company's expenses; and the Commission did not have the authority to order US West to provide a customer service program.

BURDEN OF PROOF AND STANDARD OF REVIEW

In the rate setting proceeding before the Commission, the burden to demonstrate the need for increased rates was on US West. RCW 80.04.130(2) provides:

At any hearing involving any change in any schedule, classification, rule or regulation the effect of which is to increase any rate, charge, rental or toll theretofore charged, the burden of proof to show that such increase is just and reasonable shall be upon the public service company.

Judicial review of the Commission's actions are reviewed under the...