Connecticut Office of Consumer Counsel v. F.C.C.

• Decision Date: 20 September 1990
• Docket Number: D,No. 1191,1191
• Citation: 915 F.2d 75
• Parties: CONNECTICUT OFFICE OF CONSUMER COUNSEL, James F. Meehan, Consumer Counsel, Connecticut Department of Public Utility Control, Peter G. Boucher, Chairman of the Department of Public Utility Control, and Clarine Nardi Riddle, Attorney General, State of Connecticut, Petitioners, v. FEDERAL COMMUNICATIONS COMMISSION and United States of America, Respondents, American Telephone and Telegraph Company, Intervenor. ocket 89-4157.
• Court: U.S. Court of Appeals — Second Circuit

Page 75

915 F.2d 75

CONNECTICUT OFFICE OF CONSUMER COUNSEL, James F. Meehan Consumer Counsel, Connecticut Department of Public Utility Control, Peter G. Boucher, Chairman of the Department of Public Utility Control, and Clarine Nardi Riddle, Attorney General, State of Connecticut, Petitioners, v. FEDERAL COMMUNICATIONS COMMISSION and United States of America, Respondents American Telephone and Telegraph Company, Intervenor.

No. 1191, Docket 89-4157.

United States Court of Appeals Second Circuit.

Argued June 6, 1990.

Decided Sept. 20, 1990.

Bill Kowalski, Sr. Staff Atty., Connecticut Office of Consumer Counsel, New Britain, Conn. (Clarine Nardi Riddle, Atty. Gen. for the State of Conn.; Robert S. Golden, Jr., and Rachael Davis, Asst. Attys. Gen., Connecticut Dept. of Public Utility Control, New Britain, Conn., of counsel), for Petitioners.

John E. Ingle, Deputy Associate Gen. Counsel, F.C.C., Washington, D.C. (James F. Rill, Asst. Atty. Gen., Robert B. Nicholson, Robert J. Wiggers, U.S. Dept. of Justice, Washington, D.C.; Robert L. Pettit, Gen. Counsel, and Laurel R. Bergold, F.C.C., Washington, D.C., of counsel), for respondents.

David W. Carpenter, Chicago, Ill. (Peter D. Keisler, Sidley & Austin, Chicago, Ill.; Francine J. Berry, and Judy Sello, Basking Ridge, N.J., of counsel), for intervenor.

Before KEARSE, WINTER and WALKER, Circuit Judges.

WINTER, Circuit Judge:

This petition involves rates for interstate telephone service charged by intervenor American Telephone and Telegraph Company ("AT & T") to its customers in Connecticut. Specifically, we are asked to examine a surcharge collected by AT & T from its Connecticut customers in order to recover the expense of a gross receipts tax imposed on AT & T by the State of Connecticut. Petitioners, various Connecticut state officials, seek review of a decision of the Federal Communications Commission denying petitioners' complaint that the surcharge was unjustly and unreasonably discriminatory in violation of 47 U.S.C. Secs. 201(b) and 202(a) and denying their request for an administrative hearing on the complaint. Because the surcharge was a reasonable method of preventing states from singling out telecommunications for taxation in order to transfer a portion of their tax burden to non-residents via rates for interstate telephone service and because there are no material factual issues in dispute, we deny the petition.

BACKGROUND

1. The Calculation of Interstate Rates

The Federal Communications Commission ("FCC" or "Commission") has broad regulatory authority over the formulation of rates for interstate telephone calls. See 47 U.S.C. Secs. 152, 201(b) (1982). The rates permissibly charged by a telecommunications company (or "carrier") are based on the costs incurred by that carrier in providing interstate telephone service. For carriers that offer both intrastate and interstate service, the FCC, working with a Federal-State Joint Board, allocates costs between intrastate and interstate service, and itself supervises the recovery of interstate costs, leaving recovery of intrastate costs to the oversight of state regulatory authorities. National Ass'n of Reg. Util. Comm'rs v. FCC, 737 F.2d 1095, 1105 (D.C.Cir.1984), cert. denied, 469 U.S. 1227, 105 S.Ct. 1225, 84 L.Ed.2d 364 (1985) ("NARUC ").

The interstate costs isolated by this "separations process" are further segregated into two components. One component, "traffic sensitive" or variable costs, represents costs to the carrier that vary with the intensity of telephone use. The greater the number of calls made, or the longer the duration of any one call, the higher is the traffic sensitive cost. The other component, "nontraffic sensitive" or fixed costs, represents costs that are incurred by a carrier independent of the intensity of telephone use. This would include, for example, the cost of telephone wires, which are equally necessary for one call or a hundred. See NARUC, 737 F.2d at 1104.

A carrier recovers traffic sensitive costs directly from charges to the individual end users of its telephone services. A carrier's fixed costs, however, except for an isolated component that is recovered from end users, see NARUC, 737 F.2d at 1109-10, are recovered through an averaging process. Through the National Exchange Carrier Association ("NECA"), interstate fixed costs are "pooled" nationwide and divided equally amongst all of a carrier's consumers. The purpose of the averaging process is to ensure the existence of a nationwide telecommunications network and to avoid gaps in that network in areas of high fixed costs relative to use.

Generally included in the NECA pool are the taxes--such as property or income taxes--paid by a carrier to the states in which it operates. As a result of the pool system, therefore, taxes paid by a carrier to any one state are usually borne in equal proportion by all of its customers in all of the states in which it operates.

2. The Gross Receipts Tax Surcharge

One type of tax that states have imposed on selected businesses is a "gross receipts tax." This tax is levied against all the revenues collected by particular kinds of companies within the state. Ten states, including Connecticut, have assessed a gross receipts tax on the revenue of telecommunications companies.

Some carriers do not include the costs of gross receipts taxes in the NECA pool but rather seek to recover such taxes from their customers in the states that impose the particular tax. By means of a "gross receipts tax surcharge" ("GRTS") these carriers "flow through" the gross receipts tax directly to telephone users in the taxing state. The GRTS collected by AT & T from its Connecticut customers is the subject of the instant litigation.

3. Procedural History

In March 1986, AT & T filed a tariff amendment with the FCC to "establish a tariff provision to flow through any utility or telecommunications taxes imposed on AT & T Communications' interstate gross receipts to customers in the jurisdiction imposing the tax." AT & T first collected a GRTS in Florida, and then extended the practice to eight more states, including Connecticut. The FCC denied various petitions for suspension or rejection, and the GRTS took effect. Petitions for review filed in the First and Second Circuits were consolidated in the First Circuit and dismissed in September 1987 on the ground that denial of a motion to suspend a tariff is not a final judgment of an administrative agency and thus is not subject to appellate review. See Maine Public Advocate v. FCC, 828 F.2d 68 (1st Cir.1987).

On March 18, 1988, petitioners filed with the FCC the complaint in the instant matter. It alleged that AT & T, in collecting a GRTS in Connecticut, violated 47 U.S.C. Secs. 201, 202 and 208, because the GRTS "subject[ed] Connecticut customers to undue and unreasonable discrimination, disadvantage, and prejudice." Specifically, petitioners argued that the GRTS imposed discriminatory prices upon Connecticut consumers for "like" services. They contended that AT & T, by flowing through the Connecticut gross receipts tax directly to Connecticut customers only, while pooling other fixed costs nationwide, forced Connecticut consumers to pay higher rates for interstate telephone services than paid by consumers in the other states in which AT & T operates. This was especially unfair, charged petitioners, in that AT & T's fixed cost of service in Connecticut is lower than the national average and Connecticut consumers thus already bear a larger share of fixed costs than those in "high-cost" states. Separately, petitioners alleged that the GRTS, even if permissible as a matter of principle, was calculated incorrectly because it permitted AT & T to overcollect the cost of Connecticut's gross receipts tax by "double counting" deductible expenses and ignoring the time value of money. As relief, petitioners demanded that AT & T be restrained from imposing the GRTS on Connecticut customers, that AT & T be forced to refund all GRTS monies collected in Connecticut, and that a hearing be held on the complaint. Discovery commenced, and written testimony and briefs were submitted to the FCC.

The Commission dismissed petitioners' complaint. Connecticut Office of Consumer Counsel v. AT & T Communications, FCC 89-315 (Nov. 16, 1989) ("Order") found that the GRTS was a "just and reasonable" method of recovering a gross receipts tax expense. Without such a provision, the Commission reasoned, "states would have an incentive to target telecommunications carriers for special tax burdens and thereby export the cost of the tax to customers in other states." Id. at 3. Thus, the rate differental caused by the GRTS was "not unjust or unreasonable discrimination." Id. The Commission also ruled that petitioners had proffered no evidence to support their assertion that AT & T computed the GRTS incorrectly. Finally, the Commission ordered that petitioners' motion for a hearing be denied on the ground that there were no relevant questions of fact in controversy that required full evidentiary proceedings. Id. at 4.

We agree with the Commission and deny the petition for review.

DISCUSSION

In reviewing the actions of the Commission, ¹ we apply the usual deferential scope of review and will not overturn the Commission's order unless its decision was "arbitrary, capricious, ... or otherwise not in accordance with law." 5 U.S.C. Sec. 706(2)(A) (1988). Furthermore, as a specialized agency, the Commission enjoys broad discretion in carrying out its ratemaking duties, see, e.g., Permian Basin Area Rate Cases, 390 U.S. 747, 800, 88 S.Ct. 1344, 1377, 20 L.Ed.2d 312 (1968); FPC v. Hope Natural Gas Co., 320 U.S. 591, 602, 64 S.Ct. 281, 287, 88 L.Ed. 333 (1944); AT & T v. FCC, 572 F.2d 17, 23-24 (2d Cir.), cert. denied, 439 U.S. 875, 99 S.Ct. 213, 58 L.Ed.2d 190 (1978), and we will not disturb the decision below if the agency has "provide[d] a coherent and reasonable explanation of its...