WASHINGTON INDEP. TEL. ASS'N v. UTILITIES AND TRANSPORTATION …

• Decision Date: 06 March 2003
• Docket Number: No. 72330-3.,72330-3.
• Citation: 148 Wash.2d 887,64 P.3d 606
• Court: Washington Supreme Court
• Parties: WASHINGTON INDEPENDENT TELEPHONE ASSOCIATION, a Washington nonprofit corporation; Asotin Telephone Company, a Washington corporation; Centurytel of Washington, a Washington corporation; Centurytel of Inter-Island, a Washington corporation; Centurytel of Cowiche, a Washington corporation; Ellensburg Telephone Company, a Washington corporation; GTE Northwest Incorporated, a Washington corporation; Hat Island Telephone Company, a Washington corporation; Hood Canal Telephone Company, Inc., a Washington corporation; Inland Telephone Company, a Washington corporation; Kalama Telephone Company, a Washington corporation; Lewis River Telephone Company, a Washington corporation; Marshell Telecom, Inc., a Washington corporation; McDaniel Telephone Company, a Washington corporation; Pend Oreille Telephone Company, a Washington corporation; Pioneer Telephone Company, a Washington corporation; Rainier Cable, Inc., a Washington corporation; St. John Cooperative Telephone And Telegraph Company, a Washington corporation; Tenino Telephone Company, a Washington corporation; The Toledo Telephone Company, Inc., a Washington corporation; US West Communications, Inc., a Washington corporation; Western Wahkiakum County Telephone Company, a Washington corporation; Whidbey Telephone Company, a Washington corporation; and Yelm Telephone Company, a Washington corporation, Respondents, v. WASHINGTON UTILITIES AND TRANSPORTATION COMMISSION, Petitioner.

64 P.3d 606

148 Wash.2d 887

WASHINGTON INDEPENDENT TELEPHONE ASSOCIATION, a Washington nonprofit corporation; Asotin Telephone Company, a Washington corporation; Centurytel of Washington, a Washington corporation; Centurytel of Inter-Island, a Washington corporation; Centurytel of Cowiche, a Washington corporation; Ellensburg Telephone Company, a Washington corporation; GTE Northwest Incorporated, a Washington corporation; Hat Island Telephone Company, a Washington corporation; Hood Canal Telephone Company, Inc., a Washington corporation; Inland Telephone Company, a Washington corporation; Kalama Telephone Company, a Washington corporation; Lewis River Telephone Company, a Washington corporation; Marshell Telecom, Inc., a Washington corporation; McDaniel Telephone Company, a Washington corporation; Pend Oreille Telephone Company, a Washington corporation; Pioneer Telephone Company, a Washington corporation; Rainier Cable, Inc., a Washington corporation; St. John Cooperative Telephone And Telegraph Company, a Washington corporation; Tenino Telephone Company, a Washington corporation; The Toledo Telephone Company, Inc., a Washington corporation; US West Communications, Inc., a Washington corporation; Western Wahkiakum County Telephone Company, a Washington corporation; Whidbey Telephone Company, a Washington corporation; and Yelm Telephone Company, a Washington corporation, Respondents, v. WASHINGTON UTILITIES AND TRANSPORTATION COMMISSION, Petitioner.

No. 72330-3.

Supreme Court of Washington, En Banc.

Argued November 19, 2002.

Decided March 6, 2003.

Christine Gregoire, Attorney General, Mary Tenneson, Gregory Trautman, Assistant Attorneys General, for Petitioner.

Stoel, Rives, Timothy O'Connell, Kendall Fisher, Seattle, for Respondents.

Richard Finnigan, Olympia, Amicus Curiae on Behalf of Washington Independent Telephone Assn.

MADSEN, J.

The Washington Utilities and Transportation Commission (Commission) challenges a Court of Appeals decision that invalidated WAC 480-120-540. The Court of Appeals concluded that the Commission set certain rates for telecommunications companies in the rule rather than by adjudication, and thus acted in excess of its authority. The Commission contends that rather than setting rates, WAC 480-120-540 establishes a methodology that must be used in rate setting. We agree. We also agree with the Commission that the rule is not arbitrary and capricious. We reverse the Court of Appeals.

Facts

Generally, local telecommunications companies (local exchange carriers or LECs) provide local access to telephone service. Long distance carriers (interexchange carriers or IXCs) provide only part of the network necessary to complete a long distance call and rely on the local networks of local exchange carriers to originate and terminate the calls. When a long distance call is made, the caller, usually, pays the long distance carrier for the call. The long distance carrier pays the local exchange carriers' originating and terminating access charges for use of the local exchange networks.¹

The rule at issue, WAC 480-120-540, concerns terminating access charges and requires that these charges not exceed the rate charged for comparable local connection service, or, if the local carrier does not provide local connection service, the company cannot charge more as terminating access charges than the cost of providing the service. WAC 480-120-540(1).

The Commission explains that WAC 480-120-540 was adopted as part of its efforts to implement procompetitive policies of the state telecommunications act of 1985, Laws of 1985, ch. 450, and the federal Telecommunications Act of 1996, 47 U.S.C. § 151 (1996) (hereafter 1996 Act). Each of these acts represents changing policy regarding regulation of telecommunications companies, i.e., movement in the direction of competition.² The United States Supreme Court has explained that the Federal Communications Commission (FCC) has rule-making authority to carry out provisions of the Communications Act of 1934, which include the local competition provisions added by the Telecommunications Act of 1996. AT & T Corp. v. Iowa Utils. Bd., 525 U.S. 366, 119 S.Ct. 721, 142 L.Ed.2d 835 (1999). The Court said that "[t]he [1996 Act] fundamentally restructures local telephone markets. States may no longer enforce laws that impede competition, and incumbent LECs are subject to a host of duties intended to facilitate market entry." AT & T, 525 U.S. at 371, 119 S.Ct. 721.

Against the background of the state and federal acts, the Commission promulgated WAC 480-120-540.³ WAC 480-120-540 applies to both incumbent local exchange carriers and competitive local exchange carriers not used.⁴ The rule is designed to carry out state and federal policy to promote competition in the local telecommunications market by addressing one of several reforms sought under the federal 1996 Act, i.e., access charge reform.⁵ As the United States Supreme Court explained in Verizon Communications, Inc. v. F.C.C., 535 U.S. 467, 122 S.Ct. 1646, 1662, 152 L.Ed.2d 701 (2002):

It is easy to see why a company that owns a local exchange ... would have an almost insurmountable competitive advantage not only in routing calls within the exchange, but, through its control of this local market, in the markets for terminal equipment and long-distance calling as well.... The incumbent company ... could place conditions or fees (called "access charges") on long-distance carriers seeking to connect with its network. In an unregulated world, another telecommunications carrier would be forced to comply with these conditions, or it could never reach the customers of a local exchange.

(Citation omitted.)

Incumbent companies thus had a competitive advantage over potential competitors because they could, through terminating access charges, increase revenue from other companies and lower rates charged to their own customers. The local exchange carrier was, in effect, able to export costs of service for its local customers—with these costs ultimately being paid by the customers of other companies, i.e., the customers of interexchange carriers who pay the long distance charges.

This practice was not unlawful, and indeed the Commission approved it. A telecommunications company's rates must be "fair, just, reasonable and sufficient." RCW 80.36.080. When a telecommunications company files with the Commission a tariff (a schedule of rates and services), as required by RCW 80.36.100, and if the Commission does not act, the tariff becomes effective 30 days after filing, RCW 80.36.110(1), and has the force and effect of state law. Gen. Tel. Co. of N.W. v. City of Bothell, 105 Wash.2d 579, 585, 716 P.2d 879 (1986). The Commission has authority, however, to suspend any new tariff within 30 days of filing, hold a hearing to consider the proposed change, and prescribe a different rate if it concludes that the change is unjust, unfair, or unreasonable. RCW 80.36.110, .140. Thus, existing terminating access charges, although anticompetitive, were valid and had the force and effect of law (provided they were not suspended and undergoing investigation).⁶

Moreover, it is both state and federal policy that telecommunications service be provided in all areas at affordable and comparable rates, i.e., that universal service be provided. This policy had been effected by "implicit subsidies" to high cost areas through rate averaging and through revenues from access charges that offset losses in local rates. Thus, while serving as barriers to competition, access charges also served to subsidize universal service.

In adopting WAC 480-120-540, the Commission said that its purpose is to "convert a pricing structure that retards competition to one designed to support emerging competition without favoring any class of participants. Ultimately this will enable greater customer choice throughout the state of Washington." Wash. Utils. & Transp. Comm'n, General Order No. R-450, Order Adopting Rules Permanently, In the Matter of Adopting WAC 480-120-540 Relating to Intrastate Carrier Access Charge Reform, Docket No. UT-970325 (Oct. 5, 1998) (hereafter Order R-450) at 1; Clerk's Papers (CP) at 46.

There is no dispute that the rule can and probably will result in a reduction of revenue derived from terminating access charges. The Commission noted: Companies such as U S WEST Communications, GTE Northwest, PTI Communications (now CenturyTel) today provide local services to nearly all business and residential customers. Their rates are regulated by the Commission and must be fair, just, reasonable, and sufficient. A decrease in access charges will result in either a decrease in their overall profits (which must remain "sufficient") or an offsetting increase in other rates, or some combination of the two.

Order R-450 at 4; CP at 49. The rule contains alternatives intended to permit a company to offset losses in terminating access revenue—so that it is possible that the net effect of the rule may be revenue neutral. If a local exchange carrier employs the alternatives set out in the rule, the Commission has determined that it will permit the change without critical review. The first is that a local exchange company, if "authorized by the commission to recover any costs for support of universal access to basic telecommunications service through access charges[,]... shall recover such costs as an additional, explicit universal service rate element applied to terminating access service." WAC 480-120-540(3). This option is designed to allow a company to replace any implicit subsidy for universal service that was previously obtained through terminating access charges with an explicit rate for universal service.⁷ The second option is that a local exchange company that is required under the rule to lower terminating access rates may file tariffs or price lists to increase or restructure originating access charges. WAC 480-120-540(6).⁸ In addition to these...