At & T Communic. v. Southwestern Bell Tel.

• Decision Date: 27 January 2005
• Docket Number: No. 03-0789.,03-0789.
• Citation: 186 S.W.3d 517
• Parties: AT & T COMMUNICATIONS OF TEXAS, L.P., Petitioner, v. SOUTHWESTERN BELL TELEPHONE COMPANY and Southwestern Bell Communications Services, Inc. D/B/A Southwestern Bell Long Distance, Respondents.
• Court: Texas Supreme Court

Page 517

186 S.W.3d 517

AT & T COMMUNICATIONS OF TEXAS, L.P., Petitioner, v. SOUTHWESTERN BELL TELEPHONE COMPANY and Southwestern Bell Communications Services, Inc. D/B/A Southwestern Bell Long Distance, Respondents.

No. 03-0789.

Supreme Court of Texas.

Argued September 29, 2004.

Decided January 27, 2005.

Kristen L. Worman, Hazen & Terrill, P.C., Steven Baron, Greg Abbott, Edward D. Burbach, Karen Watson Kornell, Elizabeth R.B. Sterling, Office of Atty. Gen., Austin, for Others.

Michael Byrd, Kathleen M. LaValle, Jackson Walker LLP, Dallas, R. Laurance Macon, James J. Scheske, Akin Gump Strauss Hauer & Feld, L.L.P., Shannon H. Ratliff, Ratliff Law Firm, P.L.L.C., Mark Witcher, Austin, for Petitioner.

Mary A. Keeney, Robert J. Hearon Jr., Kathryn E. Allen, Graves Dougherty Hearon & Moody, P.C., Ann Effinger Meuleman, Jose Varela Jr., Thomas Joseph Ballo, Austin, John DiBene, Pleasanton, CA, for Respondents.

Justice HECHT delivered the opinion of the Court.

For years, "Ma" Bell wielded her baby Bells' monopoly control of local telephone exchanges to stifle competition in long-distance service. Now she complains that one of the offspring, since grown and moved out,¹ is using that same power, still not dissipated by competition in local telephone service, against her. History cautions that her complaint may have substance. But the issue in this case is whether Texas regulatory law, legislatively molded to ease the transition to competitive telecommunications markets, provides a remedy.

We must first decide whether the Public Utility Regulatory Act ("PURA" or "the Act")² authorizes the Public Utility Commission ("the Commission") to reduce switched access rates charged by an incumbent local exchange telecommunications carrier that has elected incentive regulation under chapter 58 of the Act, in order to prevent the anticompetitive effect of those rates on the long-distance market. We agree with the court of appeals³ and the trial court that PURA does not give the Commission such authority. We must then consider whether, even without such authority, the Commission may conduct hearings on the alleged anticompetitive effect of switched access rates, and whether it may include as a party to those hearings an affiliated interexchange carrier. We conclude that PURA gives the Commission broader authority to conduct such hearings than the lower courts allowed. Accordingly, we reverse the judgment of the court of appeals and remand the case to the trial court for rendition of judgment in accordance with this opinion.

I

Before 1984, American Telephone and Telegraph Co. ("AT & T") dominated the telecommunications industry in the United States.⁴ It controlled local telephone exchange service⁵ through its Bell system of subsidiary utilities that owned and operated, as monopolies, the enormous networks of wires, cables, switches, and transmission facilities necessary to connect users in particular areas.⁶ And according to allegations by the United States in an antitrust action filed in 1974, AT & T used its control of local telephone service to disadvantage competitive providers of long-distance service and monopolize that market.⁷ As the federal court in that action explained:

AT & T has allegedly used its control of this local monopoly to disadvantage these competitors in two principal ways. First, it has attempted to prevent competing long distance carriers and competing equipment manufacturers from gaining access to the local network, or to delay that access, thus placing them in an inferior position vis-a-vis AT & T's own services. Second, it has supposedly used profits earned from the monopoly local telephone operations to subsidize its long distance and equipment businesses in which it was competing with others.⁸

The federal court approved a consent decree to foster competition among long-distance telephone service providers. The decree required AT & T to divest itself of the "baby" Bell operating companies.⁹ It also called for the creation of geographic regions — now called local access and transport areas ("LATAs"), usually centered around metropolitan statistical areas — within which Bell operating companies could operate and allowed them to provide, in a given area, local exchange service and service between local exchanges¹⁰ — intraLATA service. The consent decree prohibited the "baby Bells" or their affiliates from operating outside their respective areas and from providing service between local exchanges in different areas¹¹ — interLATA service. A separate consent decree created similar "service market areas" ("SMAs", which we also refer to as LATAs) for local exchange carriers owned by GTE Corporation ("GTE").¹² In all, the consent decrees created 18 LATAs in Texas: 16 for Southwestern Bell Telephone Co. ("SWBT"), at that time the AT & T local exchange carrier in Texas,¹³ and two for GTE Southwest, Inc. ("GTE-Southwest"), the GTE local exchange carrier in Texas.¹⁴

The consent decrees required the Bell and GTE local exchange carriers over time to convert their facilities to allow equal access by all interexchange carriers, and Federal Communications Commission guidelines followed, requiring other local exchange carriers to allow equal access, too.¹⁵ In Texas, AT & T, GTE, and a large number of smaller carriers continued to provide long-distance intraLATA and interLATA service.¹⁶ Before the AT & T consent decree, the Bell local exchange monopolies shared in AT & T's long-distance service revenues, based on minutes of use and mileage.¹⁷ After the divestiture, the FCC and the Commission replaced this revenue sharing with switched access rates paid by interexchange (long-distance) carriers to local exchange carriers to compensate the latter for access services, to allow them to recoup their investment in local telephone networks, and to further the long-standing national policy of universal service by subsidizing more expensive rural service and residential rates.¹⁸ In the beginning, switched access rates in Texas were over $0.20 per minute.¹⁹ The cost-of-service component of the rate was small; in 1999, the Commission estimated it at about $0.01 per minute.²⁰ Over the years, federal regulators have reduced switched access rates for interstate calls to near cost, while switched access rates for long-distance calls within Texas, which are subject to state regulation, have been reduced to a little less than $0.06 per minute.²¹ Texas intrastate switched access rates are among the highest in the nation.²²

The structure of telecommunications markets changed dramatically with the 1995 amendments to PURA²³ and the enactment of the federal Telecommunications Act of 1996.²⁴ Both statutes opened local exchange service to competition.²⁵ To facilitate the transition, the 1995 amendments to PURA allowed an incumbent local exchange carrier²⁶ to remove itself from the traditional regulatory framework and elect instead incentive regulation under what is now, as recodified and further amended, chapter 58 of the Texas Utility Code.²⁷ (For convenience, we shall refer to the recodified version of PURA.) An "electing" incumbent local exchange carrier was required to cap its rates for basic network services, including switched access, at September 1, 1995 levels for four years.²⁸ In exchange, section 58.025(a) provided that the carrier could not, "under any circumstances, be subject to a complaint, hearing, or determination regarding the reasonableness of the company's: (1) rates; (2) overall revenues; (3) return on invested capital; or (4) net income."²⁹ Under section 58.025(b), this did not "prohibit a complaint, hearing, or determination on an electing company's implementation and enforcement of a competitive safeguard required by Chapter 60",³⁰ which was also added by the 1995 amendments.³¹ But section 58.062 specifically provided:

Notwithstanding any other provision of this title [that is, PURA], the commission may not reduce an electing company's rates for switched access services before the expiration of the cap on basic network services.³²

As the Commission explained in a 1999 report, "[t]he expectation was that, by the time the rate freeze ended, the market would be sufficiently competitive that prices would be disciplined without regulation."³³ SWBT elected incentive regulation, as did GTE-Southwest.³⁴

Also under the federal Telecommunications Act of 1996, a "baby Bell" that proved it had opened its own local exchange market to competition and met certain other requirements was allowed for the first time to enter the interLATA long-distance market.³⁵ In 1999, SWBT, together with a sister company, Southwestern Bell Communications Services, Inc. ("SBCS"), and their parent, SBC Communications, Inc. (collectively, "SBC"), applied for permission for SBCS to compete in interLATA markets in Texas. That same year, the Legislature extended the incentive regulation period for local exchange carriers under chapter 58 to September 1, 2005,³⁶ and apparently in anticipation of SBC's application being granted, amended chapter 58 by adding section 58.301, requiring an electing carrier with more than five million access lines in Texas — only SWBT fell within the requirement — to reduce switched access rates $0.01 per minute by September 1, 1999, and an additional $0.02 per minute by the earlier of July 1, 2000, or the date it began providing interLATA services in Texas.³⁷ SWBT complied with these reductions. At the same time, the Legislature removed switched access rates from the list of basic services³⁸ and repealed section 58.062,³⁹ which prohibited the Commission from reducing them,⁴⁰ but added a new section 58.302 (which we quote and examine in more detail in part II) restricting increases and decreases in such rates.⁴¹ The FCC approved SBC's application effective June 30, 2000,⁴² and SBCS began offering interLATA long-distance service to SWBT's local exchange customers ten days later.⁴³

Shortly thereafter, on September...