City of Brookings Mun. Telephone Co. v. F.C.C.

Decision Date07 July 1987
Docket NumberNo. 86-1306,86-1306
PartiesCITY OF BROOKINGS MUNICIPAL TELEPHONE COMPANY, et al., Petitioners, v. FEDERAL COMMUNICATIONS COMMISSION and United States of America, Respondents, National Exchange Carrier Association, Inc., American Telephone and Telegraph Company, the BellSouth Operating Companies, et al., National Telephone Cooperative Association, et al., Brindlee Mountain Telephone Company, Intervenors.
CourtU.S. Court of Appeals — District of Columbia Circuit

Petition for Review of an Order of the Federal Communications commission.

Jeffrey Blumenfeld, Washington, D.C., for petitioners.

John E. Ingle, Counsel, F.C.C., with whom Jack D. Smith, Gen. Counsel, Daniel M. Armstrong, Associate Gen. Counsel, Laurel R. Bergold, Counsel, F.C.C., Catherine G. O'Sullivan and Andrea Limmer, Attys., Dept. of Justice, Washington, D.C., were on brief, for respondents. Linda L. Oliver, Counsel, F.C.C. and Robert J. Wiggers, Atty., Dept. of Justice, Washington, D.C., also entered appearances for respondents.

Timothy W. Bergin, with whom Herbert E. Marks, Kenneth A. Levy, Washington, D.C., and Thomas E. Taylor, were on brief, for intervenor, Nat. Exchange Carrier Assn.

Andrew G. Mulitz, David Cosson and Paul G. Daniel, Washington, D.C., were on brief for intervenors, Nat. Telephone Co-op. Ass'n, et al.

Jonathan S. Hoak, Chicago, Ill., and J. Richard Devlin, Bedminster, N.J., entered appearances for intervenor, American Tel. and Tel. Co.

Vincent L. Sgrosso and R. Frost Branon, Jr., Atlanta, Ga., entered appearances for intervenors, The BellSouth Operating Companies, et al.

F. Thomas Tuttle, McLean, Va., entered an appearance for intervenor, Brindlee Mountain Telephone Co.

Before EDWARDS and STARR, Circuit Judges, and SWYGERT, * Senior Circuit Judge.

Opinion for the Court filed by Circuit Judge STARR.

STARR, Circuit Judge:

This case concerns the manner in which certain local telephone companies are reimbursed for providing their subscribers with access to long-distance common carriers. In the order under review, the Federal Communications Commission approved a modified system of reimbursement proposed by the National Exchange Carrier Association, the entity obligated under FCC regulations periodically to examine the formulas for compensation and to suggest revisions to those formulas.

Petitioners are twelve small "average schedule" companies, an appellation that we shall presently explain. They mount a two-pronged attack on the decision. First, they fault the Commission for failing to follow the notice-and-comment rulemaking procedures of the Administrative Procedure Act, 5 U.S.C. Sec. 553 (1982). Second, they contend that approval of the reimbursement modifications proposed by NECA in the face of significant methodological flaws in NECA's approach constituted arbitrary and capricious decisionmaking in violation of the APA, Id. Sec. 706(2)(A). We decline to reach petitioners' procedural objections for the simple reason that they were not raised before the Commission and thus cannot be advanced here. As to their second line of attack, however, we are constrained to conclude that the agency's approval of NECA's proposal was arbitrary and capricious. We therefore grant the petition for review.

I

The path that an interstate telephone call takes as it wends its way from one subscriber to a user at the other end of the line raises two regulatory issues of significance to this case. To state the obvious, a caller uses some of the same facilities to telephone the neighbor next door as are necessary to place a call across the continent. And thus the first issue: because interstate calls originate and terminate over local telephone company (or "exchange company" 1) facilities that also carry intrastate calls, the question arises as to how to apportion the costs of these exchange facilities (known as "local plant") between intrastate and interstate jurisdictions. This apportionment is not of mere academic or internal bookkeeping interest but must be performed because the FCC enjoys jurisdiction over interstate rates, whereas the several States reign supreme over intrastate rates. See 47 U.S.C. Secs. 151, 152(b) (1982 & Supp. III 1985); Louisiana Public Service Commission v. FCC, 476 U.S. 355, 106 S.Ct. 1890, 1894, 90 L.Ed.2d 369 (1986); National Association of Regulatory Utility Commissioners v. FCC (NARUC), 737 F.2d 1095, 1104-05 (D.C.Cir.), cert. denied, 469 U.S. 1227, 105 S.Ct. 1224, 84 L.Ed.2d 364 (1984). 2 Second, because transmission of an interstate call involves more than one carrier, revenues from subscribers must be divided among the carriers in a manner that allows them to recover the interstate costs of local plant.

To address the first issue, the FCC has devised the rather bureaucratic nomenclature of "jurisdictional separation" procedures. See MCI Telecommunications Corp. v. FCC, 750 F.2d 135, 137 (D.C.Cir.1984); see also MCI Telecommunications Corp. v. FCC, 712 F.2d 517, 523 n. 4 (D.C Cir.1983). To address the second, it has developed a "settlement process." Because of their bearing on this case, each warrants what we shall try to limit to a modest description.

A

For purposes of "jurisdictional separation" procedures, the Commission distinguishes traffic sensitive costs from non-traffic sensitive costs. As their names suggest, these terms refer respectively to exchange company costs that vary with the extent of phone usage and those that do not. See NARUC, 737 F.2d at 1104. 3 In general, the FCC has separated traffic sensitive costs of local plant attributable to the interstate jurisdiction on the basis of relative minutes of use. FCC Brief at 4-5.

Allocation of non-traffic sensitive ("NTS") costs of local plant, in contrast, has presented a thornier problem. See MCI, 750 F.2d at 137. Beginning in 1970, the Commission adopted for NTS separations a method based on the "subscriber plant factor" ("SPF"). See id. at 137-38 & n. 2. See generally Prescription of Procedures for Separating & Allocating Plant Investment, 26 F.C.C.2d 247 (1970). Whatever its benefits, this approach had the "effect of assigning approximately 3.3 percent of the non-traffic sensitive costs of subscriber plant equipment to the interstate jurisdiction for every 1 percent of interstate calling." MCI, 750 F.2d at 137 (citation omitted). This skewing of cost allocation permitted exchange companies to recover through interstate revenues NTS costs properly recoverable through intrastate rates. See id. at 138. As an interim remedial measure, the Commission in 1982 froze the percentage of NTS costs allocable to the interstate jurisdiction at 1981 average levels. See id. at 139, aff'g Amendment of Part 67 of the Commission's Rules & Establishment of a Joint Board, 89 F.C.C.2d 1 (1982). In 1984, the Commission finally abandoned the SPF factor method entirely in favor of assigning to the interstate jurisdiction a flat 25% of the NTS costs of each exchange company. Amendment of Part 67 of the Commission's Rules & Establishment of a Joint Board, 96 F.C.C.2d 781 (1984), reconsid. denied, FCC No. 85-56 (Jan. 30, 1986), pet'n for review pending sub nom. Rural Telephone Coalition v. FCC, No. 84-1110 (D.C.Cir. filed Mar. 22, 1984).

Recognizing that the shift from SPF to a fixed allocatur would work a "major change[ ]," id. at 802, the Commission decided to delay implementation until January 1, 1986, two years from the date of its decision. In addition, the FCC determined that no exchange company subject to the new separation procedures would lose more than 5% of its interstate allocation per year. See MTS & WATS Market Structure & Establishment of a Joint Board; Amendment, 50 Fed. Reg. 939, app. A (1985) (amending part 67 of the Commission's rules, 47 C.F.R. pt. 67); see also 47 C.F.R. Sec. 67.124(d)(7) (1986). By virtue of the fact that since 1971 exchange companies employing the SPF separations procedure had been able to assign no more than 85% of their NTS costs to the interstate jurisdiction, this decision meant that some companies would take as long as twelve years to reach the much-reduced 25% limit. See NECA Modification of Average Schedules, app. B (Sept. 16, 1985), J.A. at 63-65; see also Petitioners' Brief at 8-9 & n. 18.

Now all this assumes the availability of accurate cost data, the basic ingredient needed for the FCC's recipe. But this assumption is not borne out by reality, at least in respect of smaller telephone companies. Here is why. To determine interstate costs accurately, it is necessary to begin with reliable estimates of total intrastate and interstate costs, known collectively as "unseparated" costs. Most local telephone (or "exchange") companies obtain data on their unseparated costs by periodically performing lengthy, expensive cost studies, thereby earning the name "cost companies." However, the Commission traditionally has recognized that "[p]recise determination of a local company's costs in all relevant areas may require extensive data collection, analysis, reporting and auditing, which can be a difficult and costly burden for small telephone companies." NARUC, 737 F.2d at 1127. Accordingly, the FCC permits certain small exchange companies to estimate costs through use of an average schedule that "adopts generalized industry data to reflect the costs of a hypothetical exchange company." Id.; see also MTS & WATS Market Structure: Average Schedule Companies, 103 F.C.C.2d 1017, 1019 (1986) [hereinafter Average Schedule Order ], Joint Appendix ("J.A.") at 1, 2.

This, then, is the genesis of the term "average schedule companies," a group which consists, in essence, of local telephone companies that are typically smaller than the sometimes behemoth members of the "cost company" species. It is NECA's efforts to adapt the changes in separations procedures that we have just discussed for application to these smaller, "average schedule" companies...

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