Mountain States Tel. and Tel. Co. v. Arizona Corp. Commission

• Decision Date: 02 February 1982
• Docket Number: CA-CIV,No. 1,1
• Citation: 132 Ariz. 109,644 P.2d 263
• Parties: The MOUNTAIN STATES TELEPHONE AND TELEGRAPH COMPANY, a Colorado corporation, Plaintiff-Appellee, v. The ARIZONA CORPORATION COMMISSION, Defendant-Appellant, and Sears Roebuck and Company, Intervenor-Defendant-Appellant. 5847.
• Court: Arizona Court of Appeals

Page 263

644 P.2d 263

132 Ariz. 109

The MOUNTAIN STATES TELEPHONE AND TELEGRAPH COMPANY, a Colorado corporation, Plaintiff-Appellee, v. The ARIZONA CORPORATION COMMISSION, Defendant-Appellant and Sears Roebuck and Company, Intervenor-Defendant-Appellant.

No. 1 CA-CIV 5847.

Court of Appeals of Arizona, Division 1, Department B.

Feb. 2, 1982.

Rehearing Denied March 26, 1982.

Review Denied April 27, 1982.

Coleman M. Connolly, Denver, Joseph C. O'Neil and Fennemore, Craig, von Ammon & Udall by Calvin H. Udall, C. Webb Crockett, George T. Cole, Phoenix, for plaintiff-appellee

Robert K. Corbin, Atty. Gen. by Thomas P. Prose, Asst. Atty. Gen., Phoenix, for defendant-appellant Arizona Corp. Commission.

Montgomery & Andrews, P. A. by Frank Andrews, III, Allen H. Brill, Santa Fe, N. M., and Gust, Rosenfeld, Divelbess & Henderson by James M. Koontz, Phoenix, for intervenor-defendant-appellant Sears Roebuck and Co.

OPINION

JACOBSON, Presiding Judge.

The sole issue on this appeal is whether telephone terminal equipment ¹ attached to service lines of Mountain States Telephone and Telegraph Company (the Company) is presently an integral part of the utility service furnished by the Company so as to subject rates charged for the use of such equipment to the jurisdiction of the Arizona Corporation Commission (Commission).

This action arose out of proceedings initiated by the Commission to reconsider its 1976 Decision No. 47561 (hereinafter referred to as the "1976 decision"). As a result of that inquiry, the Commission in 1980 issued Decision No. 51049 (hereinafter referred to as the "1980 decision") which, in part, rescinded the 1976 decision and ordered that the prices charged by the Company for certain terminal equipment and fixed by 1976 tariffs (Section 99 tariffs) shall remain in force and effect without change pending further order of the Commission. The Company sought judicial review of these two orders, basically contending that the Commission no longer had jurisdiction to fix the actual rates charged by the Company for terminal equipment. The trial court on January 21, 1981, entered judgment in favor of the Company, setting aside the two challenged orders. The Commission and Sears, Roebuck and Company (Sears) which was an intervenor before the Commission and a party to the trial court litigation have appealed.

In order to understand the ramifications of this controversy, it is necessary to set forth some historical background. From the time of statehood until 1968, a certificated telephone company was required as part of its public utility service obligation to provide its customers all of the terminal equipment necessary to use the telephone network. Conversely, during this period, it was improper for anyone, including the customer, to attach or use any terminal equipment not provided by the certificated telephone company. Thus, the Company in Arizona enjoyed a monopoly on supplying terminal equipment and the rates charged therefor were regulated by the Commission.

In 1968, this concept was drastically changed by the Federal Communication Commission (FCC) decision in In the Matter of Carterfone, 13 FCC 2d 420 (1968). At issue in Carterfone, was the validity of a tariff filed by American Telephone and Telegraph Company which provided in part:

No equipment, apparatus, circuit or device not furnished by the telephone company shall be attached to or connected with the facilities furnished by the telephone company, whether physically, by induction or otherwise.

Carterfone declared this tariff invalid as being "unreasonable, unlawful and unreasonably discriminatory under Sections 201(b) and 202(a) of the Communications Act of 1934, as amended." ² 13 FCC 2d at 426.

Carterfone was followed by a series of federal judicial and administrative decisions which had the effect of introducing into the terminal equipment market competitors to the certificated telephone companies which competitors were unregulated by either the FCC or the Arizona Corporation Commission.

As a result of these developments the Commission entered its 1976 decision. The 1976 decision recognized that as a result of the Carterfone decision "many vendors and suppliers of communications terminal equipment, in addition to telephone companies, are now furnishing communications terminal equipment in Arizona." The decision further recognized that the Commission had no power to regulate or otherwise control the prices or conditions of service with respect to these independent vendors and suppliers. Based upon these recognitions, the Commission found that:

The existence of competition within the terminal equipment market insures that the users of terminal equipment will have a choice and that the price for this equipment will be governed by the presence of competition.

The 1976 decision thus ordered that the Company be required to set a "minimum level" for terminal equipment but it was further "authorized to set the actual charge for such equipment at or above such level on the basis of economic and market conditions." The net effect of the 1976 decision was that over and above the "minimum" rate, the Company was allowed to charge what the market would bear. The Company proceeded to operate under the "Section 99 tariffs" filed in connection with the 1976 decision.

The next important development in this field occurred when the Federal Communications Commission entered its order In The Matter of Amendment of Section 64.702 of the Commission's Rules and Regulations (Second Computer Inquiry), Docket No. 20828. The Second Computer Inquiry decision in essence found that competition in the terminal field existed; that this competition was publicly desirable; that the regulation of terminal equipment had a negative effect on competition and was harmful to the consuming public; and that terminal equipment "was a severable commodity from the provisions of transmission service." Based upon these findings, the Second Computer Inquiry decision ordered, effective March 1, 1982, that customer premise terminal equipment be completely deregulated and that this equipment be removed from the rate base structure.

The Commission's 1980 decision recognized that:

... as a practical matter, the implementation of the FCC decision in the Second Computer Inquiry will mean that the Commission may no longer be able to regulate, as they have in the past, the terminal equipment offerings of Mountain Bell. In view of the FCC decision ... and faced with the reality of competition in the terminal equipment field, the Commission concludes that terminal equipment offerings must be fully deregulated and subjected to the competitive forces of the free market.

However, the 1980 decision concluded that a period of time would be necessary to accomplish complete deregulation and that the March 1, 1982, date set by the FCC was a reasonable period to accomplish that result. In the meantime, the Commission was of the opinion that the "partial regulation" afforded by the 1976 decision was unlawful and that until March 1, 1982, the Commission had full authority to regulate the rates charged for terminal equipment.

Subsequent to the order to show cause issued by the Commission in this matter, but prior to its 1980 decision being rendered, the Company in fact filed new tariffs with the Commission affecting Section 99 tariff terminal equipment which was expected to produce approximately 22.5 million dollars additional annual revenue or an increase of approximately 1.875 million per month.

It is basically the Company's position, both before the trial court and on appeal, that where a public service company no longer enjoys a monopoly as to a service that it offers, the Commission lacks jurisdiction to regulate that service. Corollary to this position is a "federal preemption" argument that the state lacks authority to regulate terminal equipment at all. The Commission counters by contending that its 1980 decision is completely compatible with the federal preemption in this field, but more importantly, until complete federal preemption is effective (March 1, 1982) the Commission has a constitutionally granted power to regulate public service corporations, a status which the Company enjoys. In addition, intervenor Sears argues that the existence of competition in a given field does not prohibit the state from exercising authority to fix prices and that in any event the competition in the terminal equipment field is "flawed" and in reality non-existent, thus justifying continued exercise of Commission jurisdiction in the area.

We turn first to the Company's contention that by reason of Second Computer Inquiry, the Arizona Corporation Commission has lost jurisdiction to regulate terminal equipment based upon a federal supremacy preemption argument. This contention is based primarily upon two cases, North Carolina Utilities Commission v. FCC, 537 F.2d 787 (4th Cir. 1976), cert. denied, 429 U.S. 1027, 97 S.Ct. 651, 50 L.Ed.2d 631 (1976) (North Carolina I) and North Carolina Utilities Commission v. F.C.C., 552 F.2d 1036 (4th Cir. 1977) (North Carolina II).

North Carolina I dealt with the issue of whether, in face of Carterfone, state regulatory commissions could prohibit the connection of customer supplied terminal equipment, except for a use exclusively concerned with interstate communications. In other words, could state commissions require carrier-supplied terminal equipment for intrastate communications? The court held that the intrastate use of terminal equipment was so inter-related with the interstate use of the same equipment that state control over intrastate use would frustrate the exercise of the plenary jurisdiction granted to the FCC over interstate and foreign communications by the Federal Communication Act of 1934. The holding in North Carolina I was that the Federal Communication Act of 1934 preempted state regulation of telephone terminal equipment used for both...