Farmers Tel. Co. v. Fed. Communications Comm'n

• Decision Date: 19 July 1999
• Docket Number: Nos. 97-9522,97-9547,s. 97-9522
• Parties: (10th Cir. 1999) FARMERS TELEPHONE COMPANY, INC.; TCT WEST, INC.; TRI COUNTY TELEPHONE ASSOCIATION, INC., Petitioners, v. FEDERAL COMMUNICATIONS COMMISSION; UNITED STATES OF AMERICA, Respondents, NATIONAL TELEPHONE COOPERATIVE ASSOCIATION, (NTCA); ALLTEL TELEPHONE SERVICES CORPORATION (ALLTEL); AT&T CORPORATION; PUERTO RICO TELEPHONE COMPANY ("PRTC"); GEORGETOWN TELEPHONE COMPANY, LACKAWAXEN TELEPHONE COMPANY, LINCOLNVILLE TELEPHONE COMPANY, INC.; SUMMIT TELEPHONE COMPANY; WILTON TELEPHONE COMPANY; MCI TELECOMMUNICATIONS CORPORATION, Intervenors. BEAVER CREEK COOPERATIVE TELEPHONE COMPANY, Petitioner, v. FEDERAL COMMUNICATIONS COMMISSION, Respondent, AT&T CORPORATION; NATIONAL TELEPHONE COOPERATIVE ASSOCIATION; PUERTO RICO TELEPHONE COMPANY; ALLTEL TELEPHONE SERVICES CORPORATION ("ALLTEL"); LEAF RIVER TELEPHONE COMPANY; MONTROSE MUTUAL TELEPHONE COMPANY; MCI TELECOMMUNICATIONS CORPORATION, Intervenors
• Court: U.S. Court of Appeals — Tenth Circuit

Page 1241

184 F.3d 1241 (10th Cir. 1999)

FARMERS TELEPHONE COMPANY, INC.; TCT WEST, INC.; TRI COUNTY TELEPHONE ASSOCIATION, INC., Petitioners, v. FEDERAL COMMUNICATIONS COMMISSION; UNITED STATES OF AMERICA, Respondents, NATIONAL TELEPHONE COOPERATIVE ASSOCIATION, (NTCA); ALLTEL TELEPHONE SERVICES CORPORATION (ALLTEL); AT&T CORPORATION; PUERTO RICO TELEPHONE COMPANY ("PRTC"); GEORGETOWN TELEPHONE COMPANY, LACKAWAXEN TELEPHONE COMPANY, LINCOLNVILLE TELEPHONE COMPANY, INC.; SUMMIT TELEPHONE COMPANY; WILTON TELEPHONE COMPANY; MCI TELECOMMUNICATIONS CORPORATION, Intervenors.

BEAVER CREEK COOPERATIVE TELEPHONE COMPANY, Petitioner, v. FEDERAL COMMUNICATIONS COMMISSION, Respondent,

AT&T CORPORATION; NATIONAL TELEPHONE COOPERATIVE ASSOCIATION; PUERTO RICO TELEPHONE COMPANY; ALLTEL TELEPHONE SERVICES CORPORATION ("ALLTEL"); LEAF RIVER TELEPHONE COMPANY; MONTROSE MUTUAL TELEPHONE COMPANY; MCI TELECOMMUNICATIONS CORPORATION,

Intervenors.

Nos. 97-9522, 97-9547

UNITED STATES COURT OF APPEALS TENTH CIRCUIT

July 19, 1999

Petitions for Review from the Federal Communications Commission (AAD 95-77) [Copyrighted Material Omitted] James R. Hobson, Donelan, Cleary, Wood & Maser, Washington, D.C. (Bruce S. Asay, Associated Legal Group, Cheyenne, Wyoming, on brief), for Petitioner.

Laurel R. Bergold, Federal Communications Commission, Washington, D.C. (Joel I. Klein, Assistant Attorney General, Robert B. Nicholson, and Andrea Limmer, U.S. Department of Justice, Washington, D.C., and Christopher J. Wright, General Counsel, and John E. Ingle, Federal Communications Commission, on brief), for Respondent.

Before PORFILIO, MAGILL,^* and LUCERO, Circuit Judges.

MAGILL, Circuit Judge.

Members of the National Exchange Carrier Association (NECA) have petitioned for review of a decision by the Federal Communications Commission (FCC), which interpreted 47 C.F.R. 36.154(f) contrary to an interpretation of that same regulation by NECA. We affirm.

I.

This case concerns the allocation of certain telephone company operating costs between federal and state jurisdictions. The rates charged by each telephone company are generally based on that company's operating costs. Because the FCC regulates rates for interstate telephone service and state utility commissions regulate rates for intrastate telephone service, it is necessary to separate and allocate each company's costs among interstate and intrastate jurisdictions. The process known as "jurisdictional separation" determines how these costs are allocated.

For the most part, telephone service within the United States is divided between local exchange carriers (LECs) and interexchange carriers (IXCs). LECs provide local telephone service to customers within a given geographic calling area (a local exchange), while IXCs enable customers in different local exchanges to call each other. Many items of each LEC's equipment are used for both interstate and intrastate telephone calls. For example, when connecting customers in the same state and same local exchange, the call originates at a home or office within a LEC, and proceeds through the LEC's network or cables, wires, circuits, and switches until it reaches the receiving party. Similarly, when connecting callers in different local exchanges and different states, the call originates at a home or office within one LEC, proceeds through the LEC's network until it is connected to an IXC, crosses state boundaries through the IXC's network until it reaches a second LEC, and is finally connected through the second LEC's network to the receiving party.

A LEC's cost of operating and maintaining equipment used for both interstate and intrastate telephone calls is classified as either traffic sensitive or non-traffic sensitive (NTS). Traffic sensitive costs are those that vary according to use in either interstate or intrastate service, and such costs typically are allocated between those jurisdictions on that basis. NTS costs, however, remain constant irrespective of use. NTS costs include costs associated with equipment such as telephones, wiring within customers' homes or offices, and lines connecting individual telephones to local switching offices.

The FCC has struggled for years to develop a formula to allocate NTS costs between federal and state jurisdictions. In 1970, the FCC adopted the "Ozark Plan" to allocate costs associated with NTS equipment. Under the Ozark Plan, NTS costs were assigned to the interstate jurisdiction based on a formula that, in effect, shifted approximately 3.3 percent of NTS costs to the interstate jurisdiction for every 1 percent of interstate use. This percentage figure was known as the subscriber plant factor (SPF). See generally MCI Telecomms. Corp. v. FCC, 750 F.2d 135, 137-38 (D.C. Cir. 1984) (describing operation of Ozark Plan). Between 1970 and 1982, the level of interstate calling increased substantially in relation to intrastate calling. Because of the SPF multiplier, NTS costs were allocated to the interstate jurisdiction about three times as fast as actual interstate use. By the early 1980s, some LECs' SPFs enabled them to allocate 85 percent of their NTS costs to the interstate jurisdiction. Concerned about the ever-increasing amount of NTS costs being allocated to the interstate jurisdiction, the FCC decided in 1982 to freeze temporarily LECs' SPFs at 1981 levels. This temporary freeze was upheld on review. See id. at 140-42.

While the SPF freeze was in effect, the FCC developed a new way to allocate NTS costs that was not dependent on a LEC's SPF. Specifically, the FCC determined that LECs would be allowed to allocate a flat twenty-five percent of their NTS costs to the interstate jurisdiction. In an effort to prevent LECs' interstate allocations from dropping precipitously, the FCC elected to phase in the flat allocation rate over a period of eight years, ending in 1993. In addition, the FCC created a Universal Service Fund (USF) to assist high cost LECs in maintaining universal telephone service. The FCC describes the USF as "a formula that allocates an additional percentage of the costs of high cost companies to the interstate jurisdiction, over and above the basic 25 percent allocation. The additional percentage of interstate allocation [is] calculated each year depending upon whether the amount of any particular LECs' costs substantially exceed[] the national average. This high cost allocation is recovered through the USF, supported through usage charges contained in the access charge rates paid by the IXCs." Brief for FCC at 8; see also In re United States Tel. Ass'n, 6 FCC Rcd 1873, 1873 (1991) (USTA) (explaining that "[t]he USF was established to further mitigate the impact of the change to the 25 percent allocator for carriers with high SPF allocators and higher than average NTS costs" and that the USF essentially "assigns additional costs to the interstate jurisdiction for carriers with NTS costs that are significantly above the national average"). Like the flat allocation rate, the USF was phased in over an eight-year period. See id.; see generally 47 C.F.R. 36.641 (setting forth the manner for phasing in the USF after 1988). This scheme was affirmed on direct review. See Rural Tel. Coalition v. FCC, 838 F.2d 1307, 1313-17.

During the phase-in period, LECs continued to use their respective SPFs to determine the interstate allocation for NTS costs, but each company's SPF was scheduled to diminish each year until 1993 when the interstate allocation was to be fixed at twenty-five percent. See 47 C.F.R. 36.154(d)-(e) (describing manner in which SPF was to be calculated between 1988 and 1992). To prevent a LEC's interstate allocation from decreasing too rapidly, however, the FCC provided that no LEC's interstate allocation for NTS costs "shall decrease by a total of more than five percentage points from one calendar year to the next," when taking into account the combined effect of the reduction in SPF and the possible additional costs allocated to the interstate jurisdiction under the USF. Id. 36.154(f)(1). Although the regulations promulgated by the FCC provide for the phase-in to be complete by 1993, this five percent limitation had the effect of preventing LECs with especially high SPFs from reaching the twenty-five percent flat rate within eight years. For example, a hypothetical LEC with a SPF of eighty-five percent in 1981 would still have an allowed interstate allocation of forty-five percent after eight years. In order to prevent these LECs from undergoing a severe hardship in 1993 when the flat rate was scheduled to take effect, i.e., to prevent the hypothetical LEC from reducing its interstate allocation from forty-five percent to twenty-five percent in one year, the FCC has allowed the transition period for such companies to extend beyond 1993. See USTA, 6 FCC Rcd at 1874 (explaining that for carriers that "will not reach the 25 percent allocator in the prescribed eight year transition period[,] . . . the transition would continue beyond the eight year period until the 25 percent allocator is reached without exceeding the limitation of five percentage points"); In re Waitsfield-Fayston Tel. Co., 5 FCC Rcd 5933, 5934 n.4 (Com. Car. Bur. 1990) ("Although the Commission determined that the SPF transition should be completed by 1993 for most carriers, it allowed the transition period to extend beyond 1993 for companies subject to the 5 percentage point limit on the reduction in their interstate allocation."); MTS & WATS Mkt. Structure, 50 Fed. Reg. 939 (1985) (adopting recommended decision in MTS & WATS Mkt. Structure, 49 Fed. Reg. 48325, 48338-39 & n.70 (1984), which explained that the five percent reduction limitation "would result in a 12 step transition in the case of a local company with a current frozen SPF of 85 percent").

The present dispute concerns whether the five percent annual reduction limitation set forth in 36.154(f)(1) applies in perpetuity, even for LECs that...