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DIMINUTIVE `DAVID’ HAD A KILLER AIM

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David picked up a pebble, slipped it into his slingshot, whirled it about, and let fly - and that single blow injured four Goliaths.

David is actually a coalition of citizens representing older Utahns, the disabled and small business owners. Led by Tim Funk of the Crossroads Urban Center and others, they organized to oppose a sweetheart deal passed by the 1990 Utah Legislature to help US WEST.The group went up against the Utah Public Service Commission, the Division of Public Utilities, the State Legislature and the interests of US WEST.

Those filing the suit were Justin C. Stewart, George L. Gigi, A. Earl Cox, Barbara Toomer, Ronald Turpin and Pat Coryell.

Their lawyers - volunteers who knew they would not be paid unless the court ordered payment - were James L. Barker and John J. Flynn, both of Salt Lake City.

"It's been a real kind of grass-roots effort," said Funk.

The likely short-term outcome is that telephone rates throughout Utah will be lower or at least won't rise as quickly.

Funk speculates that US WEST may owe rate payers something like a $100 million settlement because of past overearnings. US WEST says it earned on the average less than its authorized rate in the 1980s and recently the PSC gave it a rate hike, suggesting it was making less than it should.

Barker - a former Salt Lake City commissioner and former assistant Utah attorney general who represented the Committee of Consumer Affairs - says he volunteered his expertise because of principle.

"I thought it was absolutely wrong to let a monopoly earn profits above a reasonable return on their investments," he said.

Duane Cooke, spokesman for US WEST, responded that the company didn't have an absolute control over the rate of return.

"We are a regulated utility, and we are subject to the orders of the Public Service Commission. So to suggest that we somehow have absolute control over our authorized rate of return is ridiculous," he said.

The case dates back to the 1990 Legislature, which passed a law giving the PSC the right to approve incentive rate plans and giving utilities involved the right to veto the plans. An incentive plan would let a utility make more money than its usual guaranteed rate of return.

If no incentive plan were in effect, a utility's rates would be controlled by the earlier system, in which the PSC sets an authorized rate of return.

Under the 1990 law, US WEST devised an incentive plan, the PSC rejected it and formulated its own and then US WEST exercised its veto. At that point, the regulatory climate reverted to the traditional system, in which the PSC sets a fixed rate of return.

The plan US WEST rejected would have allowed the utility to keep all profits up to a rate of return of 12.2 percent. Anything from 12.2 percent to 13.2 percent would be split, with the company getting 20 percent and the rate payers getting back 80 percent. From 13.2 to 14.2 percent, the company was to keep 40 percent, and from 14.2 percent to 17 percent return, the company was to keep half.

All profits above 17 percent return were to revert to ratepayers.

But the incentive plans never went into effect. Instead, US WEST was governed by the traditional system, which allows it to earn a fair and reasonable rate of return, as set by the PSC, Cooke said.

For years US WEST earned more than the authorized rate of return. The company argues that this only balances out the lean years that preceded that period, when it earned less than the set rate:

"It's important to understand that ratemaking is not an exact science, it's more of an art than a science. Rarely do our actual earnings match the rate of return that is authorized."

The rate of return is a target at which regulators and the utility aim. In commerce's fluctuating climate, the target may be hard to see. They may hit high or low, but continually correct their aim.

"As the actual earnings are determined, then our revenues and also our rates can be adjusted up or down, to bring them into line with our authorized rate of return," he said.

The Supreme Court castigated the PSC for an "extraordinary default in the regulation of USWC's (US WEST's) earnings over the past years."

The court quoted a decision by the PSC that "The company has earned nearly 17 percent annually on its Utah investments over that period of time (the past five or six years) and we doubt very much that actual returns in the near future will be significantly lower."

That high rate occurred between 1987 and 1990, according to US WEST.

Cooke argues that the higher earnings then must be seen in context.

"It is true that during that period our actual earnings were above the authorized level set by the commission. That in and of itself isn't wrong," he said.

"If you look at the first half of the 1980s, we earned significantly under the authorized rate of return. And in fact if you take that approximately 10 years in aggregate, we earned millions below what we were authorized."

Cooke estimates that the utility actually took in $22 million below the authorized rate of return, when the whole decade is counted.

Has the "overearning" continued into the '90s? Cooke doesn't know exactly what the levels are in recent years. "But let me just point out that last year, in the most recent rate case, our revenue requirement was examined and we actually received a rate increase, which suggests that we were earning below our authorized level."

He pointed out that while the utility veto aspect of the 1990 law was declared unconstitutional, the incentive section was upheld.

Although the PSC took a great deal of heat in the ruling, it was following the law that the Legislature passed.

When the dust settled and the Utah Supreme Court issued its ruling on July 29, here's what the "Davids" accomplished: The deal in the 1990 state law is struck down. The Utah Supreme Court castigates the Public Service Commission for letting US WEST increase its profits without the PSC making a rational finding about it. An incentive plan formulated by the PSC for US WEST is ruled illegal.

The Supreme Court did not strike down the entire law as unconstitutional, but it did rule that one section was illegal: the provision that allowed US WEST to reject the proposed incentive plan.

The option in effect unconstitutionally gave US WEST a veto over rules that govern it, the court held.

The Supreme Court also ruled that the PSC's incentive plan was illegal because "it was entered without notice to any party or a hearing on the merits." Also, it would allow US WEST to earn up to 17 percent return before rates were adjusted.

That, the court wrote, was "a prescription for regulatory neglect and exploitative rates."

As a matter of fact, the ruling states that "we emphatically note that the commission has allowed USWC accelerated depreciation rates to induce USWC to invest in Utah and USWC has not made the investments contemplated."

Why did the Legislature pass such a law in the first place?

"US WEST is a strong lobbying presence at the State Legislature," said Funk. The bill was rejected once before, rejected again, but later passed.

The unconstitutional provision is "abominable . . . it's ludicrous. It gave legislative powers back to the utility company," he said.

After the law was passed, he charged, the PSC held a hearing "and gave the farm away to the telephone company - in the form of the incentive plan that has now been called illegal.

"We thought that the only choice that we had was to see them in court. And that's what we did."

The court ruled, "There is no doubt that the plaintiffs in this case have conferred substantial benefits on all USWC ratepayers."

And for Barker and Flynn who fought in court and researched the law, and for the volunteers who typed and came up with legal fees for the petitioners, a reward is coming. The Supreme Court ordered the PSC to pay legal fees to the winners.

But Barker says the issue goes farther than US WEST.

"All the other utilities were waiting to see how US WEST made out in their attempt to get their incentive program . . . We were fearful that the other utilities would immediately come in and present the incentive programs of their own," he said.

While incentive plans weren't outlawed by the court, the justices had such severe criticisms of the idea that it seems unlikely to Barker that incentives like this will ever be pursued again.