Crockett Telephone Co. v. F.C.C.

• Decision Date: 26 May 1992
• Docket Number: No. 90-1604,90-1604
• Citation: 963 F.2d 1564
• Parties: CROCKETT TELEPHONE COMPANY, Ooltewah-Collegedale Telephone Company, Peoples Telephone Company, West Tennessee Telephone Company, and ALLTEL Tennessee, Inc., Petitioners, v. FEDERAL COMMUNICATIONS COMMISSION and United States of America, Respondents, United States Telephone Association Public Service Commission of Wisconsin National Association of Regulatory Utility Commissioners Intervenors.
• Court: U.S. Court of Appeals — District of Columbia Circuit

Page 1564

963 F.2d 1564

295 U.S.App.D.C. 397

CROCKETT TELEPHONE COMPANY, Ooltewah-Collegedale Telephone

Company, Peoples Telephone Company, West Tennessee

Telephone Company, and ALLTEL Tennessee, Inc., Petitioners, v. FEDERAL COMMUNICATIONS COMMISSION and United States of

America, Respondents,

United States Telephone Association Public Service

Commission of Wisconsin National Association of

Regulatory Utility Commissioners Intervenors.

No. 90-1604.

United States Court of Appeals, District of Columbia Circuit.

Argued Oct. 1, 1991.

Decided May 26, 1992.

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

David R. Poe, with whom Loretta J. Garcia, Washington, D.C., Hermann Ivester, H. Edward Skinner and Valerie F. Boyce, Little Rock, Ark., for ALLTEL Tennessee, Inc., and T.G. Pappas, Nashville, Tenn., for Crockett Telephone Co., Ooltewah-Collegedale Telephone Co., Peoples Telephone Co., and West Tennessee Telephone Co. were on the joint brief, for petitioners.

Laurel R. Bergold, Counsel, F.C.C., with whom Robert L. Pettit, Gen. Counsel, Daniel M. Armstrong, Associate Gen. Counsel, and John E. Ingle, Deputy Associate Gen. Counsel, and James F. Rill, Asst. Atty. Gen., Catherine O'Sullivan, and Robert Wiggers, Attys., Dept. of Justice, Washington, D.C., were on the brief, for respondents.

William Malone and Martin T. McCue, Washington, D.C., were on the brief for intervenor U.S. Telephone Ass'n.

Michael S. Varda and Steven M. Schur, Madison, Wis., were on the brief for Public Service Com'n of Wisconsin.

Paul Rodgers, Charles D. Gray, and James Bradford Ramsay, Washington, D.C., were on the brief for intervenor Nat. Ass'n of Regulatory Utility Com'rs.

Henry Walker was on the brief for amicus curiae urging that the petition for review be dismissed.

Before: EDWARDS, SENTELLE, and HENDERSON, Circuit Judges.

Opinion for the Court filed by Circuit Judge SENTELLE.

SENTELLE, Circuit Judge:

Several local exchange companies engaged in the carriage of both intrastate and interstate telephone communications (collectively "carriers" or "petitioners") seek review of an order of the Federal Communications Commission ("FCC" or the "Commission") in which the Commission affirmed the validity of an intrastate ratemaking methodology employed by several states. Petitioners argue that the ratemaking methodology is, in essence, an unlawful method of "jurisdictional separation." Upon review, we have determined for the reasons set forth below that the state ratemaking methodology does not constitute an unlawful jurisdictional separation and, therefore, we affirm the order on review.

I. BACKGROUND

A. Jurisdictional Separations

The FCC has exclusive jurisdiction to regulate interstate common carrier services including the setting of rates. 47 U.S.C. §§ 151, 152(a) (1991). Conversely, the several states retain jurisdiction to regulate intrastate services including rates. 47 U.S.C. § 152(b)(1) (1991). See also North Carolina Utilities Commission v. FCC, 552 F.2d 1036 (4th Cir.), cert. denied, 434 U.S. 874, 98 S.Ct. 222, 223, 54 L.Ed.2d 154 (1977). The difficulty giving rise to the present controversy is that telephone carriers often use the same facilities to provide both intrastate and interstate service. The costs of these facilities, obviously significant components of the ratebase in each system, must be apportioned between the federal and state jurisdictions in order to "ensure[ ] the confinement of conflicting regulatory tribunals to their proper spheres." Illinois Bell Telephone Co. v. FCC, 883 F.2d 104, 114 n. 9 (D.C.Cir.1989). In 1930, the Supreme Court observed that because of "the difficulty in making an exact apportionment of the property ... extreme nicety is not required," but it did hold that "reasonable measures" are "essential." Smith v. Illinois Bell, 282 U.S. 133, 150, 51 S.Ct. 65, 69, 75 L.Ed. 255 (1930).

Four years after the Smith decision, Congress enacted § 221(c) of the Communications Act, which authorized the FCC to adjudge what portion of the carriers' property "shall be considered as used in interstate or foreign telephone toll service." 47 U.S.C. § 221(c). The Commission may adopt rules governing the apportionment of the costs between state and federal jurisdictions under a formal regulatory process known as "jurisdictional separation." See National Association of Regulatory Utility Commissioners v. FCC, 737 F.2d 1095, 1104-05 (D.C.Cir.1984) (NARUC ), cert. denied, 469 U.S. 1227, 105 S.Ct. 1224, 1225, 84 L.Ed.2d 364 (1985). Section 221(c) requires, inter alia, that "classification [of costs as either interstate or intrastate] shall be made after hearing, upon notice to the carrier, the State commission (or ... Governor ...) of any" affected state.

Significantly, for over thirty years following the enactment of § 221(c), the FCC did not adopt any formal jurisdictional separation methodology. Instead, it informally surveyed what was an essentially monopolistic industry to determine that interstate rates were just and reasonable in its view. In practice, the Commission, the state regulatory agencies, the then-unified American Telephone & Telegraph Company, and the few small independent companies informally negotiated jurisdictional separations despite the fact that the FCC was empowered to dictate a particular methodology. See Mid-Plains Telephone Company, Inc., Petition for Declaratory Ruling Regarding the Commission's Part 36 Separations Procedures, 5 F.C.C.R. 7050 (1990) (the "Mid-Plains Order ").

In 1969 the Commission for the first time endorsed a formal separation procedure under § 221(c). Prescription of Procedures for Separating and Allocating Plant Investment, Operating Expenses, Taxes, and Reserves Between the Intrastate and Interstate Operations of Telephone Companies, Report and Order, 16 F.C.C.2d 317 (1969). These procedures, with some subsequent amendments, prescribe accounting guidelines designed to attribute with some precision the costs utilities incur to their appropriate interstate or intrastate source. The Commission has codified this direct cost-based methodology at 47 C.F.R. Part 36 (1991).

In 1971 Congress revisited the Commission's jurisdictional separation authority and enacted legislation requiring it to follow certain procedures before adopting any separation methodology under § 221 in the future. Specifically, Congress provided that

[t]he Commission shall refer any proceeding regarding the jurisdictional separation of common carrier property and expenses between interstate and intrastate operations which it institutes pursuant to a notice of proposed rulemaking ... to a Federal-State Joint Board.

47 U.S.C. § 410(c). Since 1971, the Commission has not utilized its authority under §§ 221(c) and 410(c) to adopt other separation methods, leaving Part 36 as the first and only formally approved set of rules.

We should note that the Part 36 cost-based separations rules do affect state ratemaking authority to the extent such rules apply to the telephone companies within their jurisdiction. See Hawaiian Telephone Company v. Public Utilities Commission of Hawaii, 827 F.2d 1264, 1275 (9th Cir.1987), cert. denied, 487 U.S. 1218, 108 S.Ct. 2870, 101 L.Ed.2d 906 (1988). Although each state has great freedom to regulate intrastate rates, once the FCC has applied its jurisdictional separation, that part of the cost base deemed to be interstate is outside the jurisdictional reach of the state regulatory agency. See, e.g., Smith, 282 U.S. at 159, 51 S.Ct. at 72.

B. Average Schedules and Residual Ratemaking

Although the Commission has formally adopted only the Part 36 cost-based jurisdictional separation method under § 221(c), it has nonetheless permitted some companies, including petitioners, to "estimate some or all of their costs through the use of an 'average schedule' which adopts generalized industry data to reflect the cost of a hypothetical exchange company" for purposes of figuring their interstate rates. NARUC, 737 F.2d at 1127. The "average schedule" allows companies to avoid the expense and effort of cost studies, and instead rely on industry-wide averages developed from information gathered by the National Exchange Carrier Association (NECA). Id.

This interstate ratemaking method has a significant impact on jurisdictional separations. Though average schedule ratemaking has never been formally adopted as a separation methodology, it does label a certain portion of total costs as interstate costs. Unsurprisingly, several states have come to rely on average schedules for their own intrastate ratemaking purposes. Just as the states subtract from the total cost base of a Part 36 carrier that part determined by FCC regulation to be interstate, many states deduct from the total cost base of an "average schedule" company that part attributed by the average schedule to interstate usage and treat the residuum as intrastate. This intrastate ratemaking method is known as "total company" or "residual" ratemaking. Put simply, a residual ratemaking state assumes that the intrastate revenue requirement is equal to the company's total revenue requirement less revenues deemed by the average schedule to be interstate.

C. The Present Controversy

In 1989, Mid-Plains Telephone Company filed a petition with the FCC seeking an order declaring that Wisconsin's use of the residual ratemaking method constituted an unlawful jurisdictional separation. The FCC denied the petition in the order we now review, Mid-Plains Order, 5 F.C.C.R. 7050 (1990).

Petitioners now seek to overturn the Commission's order and ask us to hold that residual ratemaking is, at heart, not only an intrastate ratemaking scheme but a de facto jurisdictional separation methodology, not approved by the FCC pursuant to §§ 221(c) or 410(c), but simply thrust upon companies by the states. Worse still, petitioners contend, residual ratemaking plainly conflicts with the one formal separation method the FCC...