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FILED: November 10, 2004 IN THE COURT OF APPEALS OF THE STATE OF OREGON
NORTHWEST PUBLIC COMMUNICATIONS COUNCIL,
fka The Northwest Payphone Association,
Appellant,

v.
PUBLIC UTILITY COMMISSION OF OREGON,
Respondent,
and
QWEST CORPORATION,
Intervenor-Respondent.

02C-12247; A119640
Appeal from Circuit Court, Marion County.
Richard D. Barber, Judge.
Argued and submitted March 16, 2004.
Brooks E. Harlow argued the cause for appellant. With him on the briefs were William H. Walters and
Miller Nash LLP.

Jas. Jeffrey Adams, Assistant Attorney General, filed the brief for respondent. With him on the brief were
Hardy Myers, Attorney General, and Mary H. Williams, Solicitor General.
John P. Nusbaum argued the cause for intervenor-respondent. With him on the brief were Lawrence

Reichman and Perkins Coie LLP, and Alex Duarte and Qwest Corporation.
Before Edmonds, Presiding Judge, and Wollheim and Schuman, Judges.
EDMONDS, P. J.
Reversed and remanded with instructions to remand to the PUC for reconsideration.
Wollheim, J., concurring.
EDMONDS, P. J.
Appellant Northwest Public Communications Council is an organization of businesses that provide pay

telephone service to the public. The businesses use the telephone lines and other services of regulated local exchange carriers (LECs) to carry out their activities. (1) Appellant appeals a decision of the trial court that affirmed the order of respondent Oregon Public Utilities Commission (PUC) setting the rates that respondent Qwest Corporation (Qwest), a regulated LEC, charges appellant's members for payphone
(2)
services in Oregon. We reverse and remand.
Appellant challenges the PUC's final order in Docket UT-125 and its order on reconsideration of the payphone aspects of that final order. In Docket UT-125 the PUC evaluated the rate schedule that Qwest filed for all of its regulated intrastate services, not just those relating to payphones. Under state law, the PUC's responsibility was to determine, after a hearing, whether Qwest had proved that its proposed rates were just and reasonable, and, if they were not, to adjust the rates so that they were. See ORS 759.180(1). In making that determination, the PUC followed the traditional procedure for reviewing a regulated utility's rate schedule. In the first phase of the proceeding, it established the rate of return that Qwest was entitled to receive on its property that is used or useful for providing regulated services in Oregon (Qwest's rate base). In the second phase, the PUC evaluated the rates that Qwest proposed for its various services and made appropriate adjustments so that, as a package, they would provide it the opportunity to earn that return. One consequence of following the traditional method is that reducing the rates for one service is likely to require raising the rates for another. That is necessary in order to provide Qwest an opportunity to earn the intended rate of return on its rate base as a whole. Thus, the rates for one service may be greater than Qwest's costs while the rates for another may be less. When that happens, the first service is said to subsidize the second.
In its final order, the PUC adopted Qwest's proposal for the rates that a payphone service provider (PSP), such as appellant's members, will pay for the use of a payphone access line (PAL). It agreed with Qwest that those rates should be essentially the same as the rates that Qwest charges for a business phone line. As well as paying for a PAL, a PSP will also need to use Qwest's CustomNet call screening service, which
permits a PSP to avoid fraudulent use of the payphone. (3) The PUC approved Qwest's proposed rate for CustomNet without examining Qwest's cost of providing the service. Although a majority of Qwest's lines that have CustomNet service are PALs, the service is available for other lines as well, and 37 percent of
lines with CustomNet serve customers other than PSPs. (4)
Appellant does not challenge the rates for PALs and CustomNet under Oregon law. Rather, it argues that federal law requires the PUC to use a different rate-setting method for payphone services instead of the traditional method that the PUC used. Appellant relies on 47 USC section 276 (section 276), as amended by the Telecommunications Act of 1996 (the Act), and on orders that the Federal Communications Commission (FCC) has issued pursuant to section 276. Section 276 and those orders, according to appellant, have fundamentally changed the method for setting rates for payphone services that Bell
operating companies (BOCs), including Qwest, provide to PSPs. (5) The fundamental shift is that section 276 requires the PUC to focus on a BOC's cost of providing the specific payphone service at issue rather than on its total rate of return, thereby allowing PSPs to compete with the BOC's own payphones on a more equal footing. According to appellant, the PUC erred because it failed to apply the FCC's approach.
We begin our analysis by examining the overall purpose of the Act, which is to promote competition in the telecommunications industry. Section 276 describes its specific purpose as "to promote competition among payphone service providers and promote the widespread deployment of payphone services to the benefit of the general public[.]" Section 276(b)(1). For many years, LECs were the sole providers of payphone services. The traditional regulatory approach permitted them to subsidize their payphone services from their earnings on other services, a practice known as cross-subsidization. Section 276 prohibits such cross-subsidization for LECs that are also BOCs. Section 276(a) provides:
"After the effective date of the rules prescribed pursuant to subsection (b) of this section, any
Bell operating company that provides payphone service-

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