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US West Inc. v. Nelson

June 16, 1998

US WEST, INC., A DELAWARE CORPORATION; US WEST COMMUNICATIONS GROUP, INC., A COLORADO CORPORATION; AND US WEST DEX, INC., A COLORADO CORPORATION, PLAINTIFFS/APPELLANTS,
v.
SHARON L. NELSON, IN HER OFFICIAL CAPACITY AS CHAIRMAN OF THE WASHINGTON UTILITIES AND TRANSPORTATION COMMISSION; RICHARD HEMSTAD, IN HIS OFFICIAL CAPACITY AS COMMISSIONER OF THE WASHINGTON UTILITIES AND TRANSPORTATION COMMISSION; AND WILLIAM R. GILLIS, IN HIS OFFICIAL CAPACITY AS COMMISSIONER OF THE WASHINGTON UTILITIES AND TRANSPORTATION COMMISSION, DEFENDANTS/APPELLEES.



Appeal from the United States District Court for the Western District of Washington

Before: Donald P. Lay, Senior Circuit Judge,* and Harry Pregerson and Susan P. Graber, Circuit Judges.

The opinion of the court was delivered by: Pregerson, Circuit Judge:

FOR PUBLICATION

D.C. No. CV-96-06025-FDB

Franklin D. Burgess, District Judge, Presiding

Argued and Submitted

June 5, 1998

Seattle, Washington

Opinion by Judge Pregerson

SUMMARY

FACTUAL AND PROCEDURAL BACKGROUND

In 1982, the mammoth telecommunications corporation known as American Telephone and Telegraph Company was splintered in an antitrust consent decree. See United States v. American Tel. and Tel. Co., 552 F. Supp. 131 (D.D.C. 1982), aff'd mem., 460 U.S. 1001 (1983). Appellant US West, Inc. was one of several Regional Bell Operating Companies formed pursuant to that decree. US West, Inc. is a holding company for many subsidiaries, including appellants US West Dex, Inc. ("West Dex") and US West Communications Group, Inc. ("West Communications"). West Dex publishes and distributes telephone directories free to Washington resi- dents, although it solicits advertisements from and sells those directories to a small number of people outside the state. West Communications provides local exchange telecommunica- tions services in fourteen western and midwestern states, including Washington.

The Washington Utilities and Transportation Commission (the "Commission") regulates the rates of public utilities, including appellants' telecommunications services. Because public utilities are monopolies, the Commission must cali- brate rates to simulate competition and to ensure that the utili- ties receive a fair return--no more, no less--on their investment. Generally, the higher a utility company's profits are in one year, the lower its rates can be in the following year.

Confronted with these objectives, the utility companies may be tempted by accounting practices that make their net profits appear as small as possible. For example, a company like US West owns many small affiliates. Some of those affil- iates, like West Communications, are regulated by the Com- mission; others, such as West Dex, operate free of Commission regulation. This regulatory loophole might encourage US West to attribute its costs to the regulated West Communications, while shifting its profits to the unregulated West Dex. To correct for this and other similar incentives, the Commission has developed several accounting practices of its own. One of these practices, imputation, involves adjusting the revenue requirement of the regulated affiliate to realize portions of the cost savings, gains on sale, lower capital costs, profits, and revenues that the affiliated family--regulated or not--has experienced as a whole.

In 1996, the Commission set the rates that West Communi- cations could charge for intrastate telephone rates by imputing income earned by West Dex. See Washington Util. and Transp. Comm'n v. West Communications, Inc., 1996 WL 350826 (Wash. U.T.C.). West Communications appealed that rate order to the King County Superior Court, which affirmed the order. West Communications appealed that decision to the Washington Supreme Court, which also affirmed. US West Comm., Inc. v. Washington Util. and Transp. Comm'n, 949 P.2d 1321 (Wash. 1997).

On December 17, 1996, before the Washington Supreme Court handed down its decision, the US West companies*fn1 brought this action against the Commission defendants in fed- eral district court, seeking declaratory and injunctive relief. In their complaint, the US West companies attacked the practice of imputation, something that they had not done before the Commission or in the Washington proceeding. Specifically, the US West companies alleged that the Commission's impu- tation of West Dex's profits from its yellow pages directories to West Communications violated their rights under the First and Fourteenth Amendments to the United States Constitution and under 42 U.S.C. S 1983. On March 17, 1997, the Com- mission defendants moved to dismiss the complaint for lack of subject matter jurisdiction, pursuant to Fed. R. Civ. P. 12(b)(1) and the Johnson Act, 28 U.S.C. S 1342. On May 2, 1997, the district court granted the Commission defendants' motion, holding that the Johnson Act deprived it of jurisdic- tion.

The US West companies timely appeal.

JURISDICTION AND STANDARD ...


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