782 F.2d 263 (D.C. Cir. 1986), 84-1451, GTE Service Corp. v. F.C.C.

Docket Nº:84-1451.
Citation:782 F.2d 263
Party Name:GTE SERVICE CORPORATION, et al., Appellants, v. FEDERAL COMMUNICATIONS COMMISSION, Appellee, MCI Telecommunications Corp., Illinois Bell Telephone Co., et al., New York Telephone Co., et al., Pacific Bell, et al., Southwestern Bell Telephone Co., Bell Telephone Company of Pa., et al., American Telephone and Telegraph Company, North American Telecom
Case Date:January 28, 1986
Court:United States Courts of Appeals, Court of Appeals for the District of Columbia Circuit

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782 F.2d 263 (D.C. Cir. 1986)

GTE SERVICE CORPORATION, et al., Appellants,



MCI Telecommunications Corp., Illinois Bell Telephone Co.,

et al., New York Telephone Co., et al., Pacific Bell, et

al., Southwestern Bell Telephone Co., Bell Telephone Company

of Pa., et al., American Telephone and Telegraph Company,

North American Telecommunications Association, US West,

Inc., Intervenors.

No. 84-1451.

United States Court of Appeals, District of Columbia Circuit

January 28, 1986

Argued Oct. 24, 1985.

Page 264

Appeal from an Order of the Federal Communications Commission.

William Malone, with whom James R. Hobson was on brief for appellants, GTE Service Corp., et al.

John E. Ingle, Deputy Associate Gen. Counsel, F.C.C., with whom Jack D. Smith, Gen. Counsel, Daniel M. Armstrong, Associate Gen. Counsel, C. Grey Pash, Jr. and Jane E. Mago, Counsel, F.C.C., were on brief for appellee, F.C.C. Bruce E. Fein, F.C.C., also entered an appearance for appellee.

Robert B. McKenna, with whom Jeffrey S. Bork, Robert W. Barker, and L. Andrew Tollin were on brief for intervenor, US West, Inc. Luisa L. Lancetti also entered an appearance for US West, Inc.

Alfred Winchell Whittaker, with whom Thomas J. Reiman was on brief for intervenor, American Information Technologies Corp.

Jules M. Perlberg, with whom Jonathan S. Hoak, Howard J. Trienens and Alfred A.

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Green were on brief for intervenor, American Tel. and Tel. Co.

Michael H. Bader, Kenneth A. Cox, William J. Byrnes, Thomas R. Gibbon and Theodore D. Kramer were on brief for intervenor, MCI Telecommunications Corp. Robert Michelson also entered an appearance for intervenor MCI Telecommunications Corp.

Robert L. Barada and Dennis S. Kahane were on brief for intervenors, Pacific Bell, et al. Nancy L. Knowlton and Stanley J. Moore also entered appearances for intervenors Pacific Bell, et al.

Edgar Mayfield, William C. Sullivan, Linda S. Legg and Liam S. Coonan were on brief for intervenor, Southwestern Bell Telephone Co.

Saul Fisher, John B. Messenger, Raymond F. Scully and Alan B. Sternstein were on brief for intervenors, New York Telephone Co., et al.

Lawrence W. Katz entered an appearance for intervenors, Bell Telephone Co. of Pennsylvania, et al.

Albert H. Kramer and Denise Boon entered appearances for intervenor, North American Telecommunications Assn.

Before MIKVA and STARR, Circuit Judges, and GREENE, District Judge. [*]

Opinion for the Court filed by Circuit Judge STARR.

STARR, Circuit Judge:

GTE Service Corp. owns several "independent" local telephone companies, that is, local companies that were not part of the AT & T family prior to the recent divestiture. The principal issue raised by GTE's appeal is whether the Federal Communications Commission abused its discretion when it authorized the transfer of facilities necessary to implement the break-up of the Bell System, while reserving for later rate proceedings questions about the accounting treatment of certain divestiture expenses. GTE contends that, inasmuch as its rights under various contracts with AT & T are tied to the accounting treatment of these items, GTE has been improperly required to pay a portion of AT & T's divestiture-related costs.

For the reasons that follow, we conclude that the Commission did not abuse its discretion. Accordingly, we affirm.


An understanding of this dispute requires a passing familiarity with the consent decree under which AT & T has divested its local telephone operations and a more detailed recounting of the history of the FCC proceedings now under review.

As is by now well known, the transformation of the Nation's telephone system began on November 20, 1974, when the Department of Justice filed suit in the United States District Court for the District of Columbia against AT & T, Western Electric, and Bell Laboratories, alleging various violations of the antitrust laws. The Government charged, among other things, that AT & T, in violation of the Sherman Act, had monopolized the inter-city telecommunications market and the telecommunications product market by utilizing its control over the local Bell Operating Companies (BOCs) to preclude competition in both these markets. The remedy sought was the divestiture from AT & T of both the BOCs and Western Electric, AT & T's equipment manufacturing arm. Almost eight years later, in January 1982, the parties to that landmark litigation announced agreement on a proposed consent decree. The proposed decree was styled as a "Modification of Final Judgment" (MFJ) of a 1956 decree that had terminated an earlier antitrust action against AT & T. Pursuant to the Tunney Act, 15 U.S.C. Sec. 16(b)-(h) (1982), the District Court requested and received numerous public comments, including those of the FCC in which

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the Commission advanced the position that the MFJ should be approved because "it is reasonable and is likely to enhance competition in several different markets." Brief for Amicus Federal Communications Commission at 6-7, United States v. American Tel. & Tel. Co., 552 F.Supp. 131 (D.D.C.1982).

The settlement was approved and the MFJ entered by the District Court on August 11, 1982. United States v. American Tel. & Tel. Co., 552 F.Supp. 131 (D.D.C.). The District Court concluded that "the divestiture from AT & T of companies providing local services is in the public interest." Id. at 170. The court's judgment was thereafter affirmed by the Supreme Court. Maryland v. United States, 460 U.S. 1001, 103 S.Ct. 1240, 75 L.Ed.2d 472 (1983).

With AT & T's fate thus determined, the MFJ required AT & T to divest itself of the BOCs within eighteen months, that is, by February 1984. See 552 F.Supp. at 226. Under the reorganization plan submitted by AT & T in December 1982 and approved, with modifications, by the District Court in April 1983, the BOCs were to be transferred to seven regional holding companies. See United States v. Western Elec. Co., 569 F.Supp. 1057, 1131 (D.D.C.), aff'd sub nom. California v. United States, 464 U.S. 1013, 104 S.Ct. 542, 78 L.Ed.2d 719 (1983).

Before effectuating this complex set of transactions, however, AT & T was required by sections 214 and 310(d) of the Communications Act, 47 U.S.C. Secs. 214, 310(d) (1982), to obtain formal Commission approval of the transfer of licenses and facilities. On January 14, 1983, the FCC ordered AT & T to file the required applications no later than March 1, 1983. AT & T complied. The FCC then placed the applications on public notice pursuant to section 309(b) of the Act, 47 U.S.C. Sec. 309(b). Thereafter, GTE filed a petition to deny. GTE asserted that, inasmuch as divestiture primarily benefitted AT & T's shareholders, the Commission's consent should be conditioned so that the shareholders--and not the public or other carriers--would bear the expenses of divestiture.

GTE's interest in AT & T's divestiture expenses arises from inter-carrier contractual relations governing domestic toll telephone services. Prior to divestiture, these services were provided jointly by AT & T, the BOCs, and some 1400 independent telephone companies, a number of which are owned by GTE. 1 Under the "settlements" contracts between the BOCs and the larger independent companies, all revenues from jointly provided services were first placed in a common pool. 2 The total expenses of the participating carriers attributable to the joint services were then paid out of the pool, with the balance distributed among the participating carriers in proportion to their investments used in providing the joint services. The net effect of all this was, in GTE's words, that "each carrier recovered its expenses and earned a uniform rate of return on its investment in the joint enterprise." GTE Brief at 12. Because of these settlement arrangements, expenses of one carrier improperly charged against the joint service diminished the common rate of return, thereby reducing the total amount paid to the other carriers. 3

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GTE contended before the FCC, and contends here, that AT & T has been improperly charging divestiture-related expenses--particularly $393 million in litigation costs--against the settlements pool since 1974. GTE sought to have the FCC disallow these expenses for both ratemaking and settlements purposes, and to require AT & T, as a condition of Commission approval at AT & T's divestiture-related transfers, to make the appropriate accounting adjustments. In GTE's view, this remedial action would reverse what GTE deems to be improper expense charges against the settlements pool and would thereby result in reimbursement to the independent carriers under the so-called "true-up" (retroactive adjustment) provisions of the settlements contracts.

On December 23, 1983, the Commission released its Transfer Order granting AT & T's application and authorizing the necessary transfers. 96 F.C.C.2d 18 (1983). This order contained twelve conditions, including four (conditions 4 through 7) specifying the accounting treatment to be given AT & T's divestiture-related expenses. 4 In a separate statement, FCC Chairman Fowler objected to the latter conditions on the grounds that they were not needed to ensure that divestiture was in the public interest and that they amounted, in practical effect, to a disallowance of the covered expenses. Id. at 111. Chairman Fowler also opined that such a disallowance "ordinarily involves full hearing rights." Id.

AT & T and several Bell companies filed petitions for reconsideration, objecting to the four transfer conditions for largely the reasons articulated by the Chairman. GTE filed a petition seeking "clarifications" from the Commission on two points. GTE sought an explicit determination that administrative costs of divestiture were to be

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disallowed for settlements as well as ratemaking purposes. It also...

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