South Cent. Bell Telephone Co. v. Louisiana Public Service Com'n, 83-3494

Citation744 F.2d 1107
Decision Date11 October 1984
Docket NumberNo. 83-3494,83-3494
PartiesSOUTH CENTRAL BELL TELEPHONE COMPANY, Plaintiff-Appellee, v. LOUISIANA PUBLIC SERVICE COMMISSION, Thomas E. Powell, George J. Ackel, Ed Kennon, Louis Lambert and John G. Schwegmann, Jr., Defendants-Appellants.
CourtUnited States Courts of Appeals. United States Court of Appeals (5th Circuit)

Stone, Pigman, Walther, Wittmann & Hutchinson, Paul L. Zimmering, Michael R. Fontham, New Orleans, La., Marshall B. Brinkley, La. Public Serv. Comm., Baton Rouge, La., for defendants-appellants.

Jones, Walker, Waechter, Poitevent, Carrere & Denegre, James P. Browning, Jr., Herschel Abbott, Jr., M. Robert Sutherland, Charles G. Rivet, New Orleans, La., for plaintiff-appellee.

John E. Ingle, Nancy Stanley, F.C.C., Washington, D.C., for amicus F.C.C.

Appeal from the United States District Court for the Middle District of Louisiana.

Before GEE, RANDALL and JOHNSON, Circuit Judges.

RANDALL, Circuit Judge:

The Louisiana Public Service Commission appeals a modified preliminary injunction of the District Court for the Middle District of Louisiana requiring the Louisiana Public Service Commission to grant an increase in intrastate telephone rates sufficient to allow the South Central Bell Telephone Company to cover increased operating expenses of $40,506,000 resulting from the implementation of depreciation rates and methodologies prescribed by the Federal Communications Commission. The district court issued its order upon finding that the Louisiana Public Service Commission had failed to comply with an earlier, non-dollar specific preliminary injunction requiring the Louisiana Public Service Commission to utilize the federally mandated depreciation practices. Because we conclude that the district court acted within its authority and discretion in issuing the modified injunction, we affirm.

A. Basic Principles of Public Utility Ratemaking.

Because this case involves the role of depreciation rates and methodologies in determining the revenue requirements of a regulated utility, we begin by briefly reviewing certain basic principles of regulatory ratemaking. 1 Public regulatory commissions have the responsibility of ensuring that regulated utilities on the one hand do not receive monopolistic returns but on the other hand do recover sufficient revenues to pay legitimate expenses and to provide a rate of return on investment that will compensate present investors and attract new capital when needed. In determining a rate structure that will adequately meet a utility's prospective revenue requirements, a regulatory commission makes predictions based on the utility's revenues, expenses, and investments in some selected previous year, called the "test year." Although the normal costs of service incurred by a utility will usually increase from year to year, the test year serves as a reasonably accurate basis for estimating future operating expenses and return requirements because the increasing costs generally will be offset, at least theoretically, by additional revenue supplied by new customers. Once the cost of service for the test year is adjusted for any extraordinary change expected to occur in the upcoming year, the regulatory commission is able to calculate tariffs relying on test year figures as representative of future revenue requirements.

A utility's "rate base" is the total amount of its investments in providing its service, including its investment in working capital for the test year. The utility's earnings, or the amount returned on investment, is its revenues minus its expenses. The utility's rate of return is therefore determined by dividing the utility's total investment by its earnings. Thus, an increase in a utility's expenses requires a corresponding increase in a utility's revenues in order for the rate of return to remain constant. Similarly, an adjustment in the utility's rate of return necessitates a corresponding adjustment in the utility's revenues, assuming expenses and investment remain the same.

In determining the expenses incurred by a utility in the test year, regulatory agencies use principles of depreciation accounting. Under these principles the cost of an asset having a useful life of more than one year is not counted as an expense in the year incurred. Rather, the costs are capitalized and spread over that period of time during which the item is in service. The costs of the asset are then recouped from future ratepayers through depreciation charges. A change in the depreciation rate, therefore, results in a change in the expenses incurred during the first years of the asset's useful life, although of course, as long as the prediction of useful life is accurate, the total amount of expenses incurred over the asset's useful life would remain the same. The purpose of depreciation accounting is to match costs with the revenues they generate. Expenditures for long-lived assets are thought to be more properly charged over the various periods in which the assets are useful in the production of revenues. See generally Docket No. 20,188, 83 F.C.C.2d 267, 270-71 (1980).

B. FCC Regulations on Depreciation.

Regulatory power over the telecommunications industry is exercised by both federal and state governments. In 1934, Congress enacted the Communications Act of 1934, 47 U.S.C. Sec. 151, et seq., "to make available, so far as possible ... a rapid, efficient, Nation-wide, and world-wide wire and radio communication service with adequate facilities at reasonable charges." 47 U.S.C. Sec. 151. To achieve this goal, Congress gave the Federal Communications Commission (FCC) regulatory authority to establish depreciation practices and to require the keeping of prescribed accounts. 2 The FCC's power, however, was carefully curtailed not to extend to intrastate communications. 3 Under the Communications Act, state regulatory commissions, such as the Louisiana Public Service Commission, retain the authority to regulate intrastate rates, facilities, and practices of the telecommunications industry. See La. Const. art. IV, Sec. 21; La.Rev.Stat.Ann. Sec. 45:1161, et seq.

In 1980, after seven years of study, the FCC adopted the "remaining-life" and "straight-line equal life group" (SLELG) depreciation methods. Docket No. 20,188, 83 F.C.C.2d 267 (1980), on reconsideration, 87 F.C.C.2d 916 (1981). According to the FCC, use of these depreciation methods would "calibrate more closely the flow of revenues with the recovery of capital," 83 F.C.C.2d at 281, and thus provide communications utilities with additional cash flow needed to meet the construction requirements of a rapidly changing technology. 4 The FCC acknowledged that use of the accelerated depreciation methods would result in increased revenue requirements over the short term, but stated that "the relative size of the increment will be repaid many times over in future years as the ability of regulated telephone companies to provide '... rapid, efficient ... communication service with adequate facilities at reasonable charges is enhanced.' " 5 Id. For similar reasons, the FCC in 1981 ruled that station connections were to be expensed immediately instead of capitalized and recovered over their useful life through depreciation. Docket No. 79-105, 85 F.C.C.2d 818 (1981).

In April 1982, the FCC, in response to a petition for clarification submitted by the National Association of Regulatory Utility Commissioners (NARUC), declared that its prior rulings on depreciation methodologies and station connections were not applicable to the states. 89 F.C.C.2d 1094 (1982). Refusing to repudiate forty years of administrative practice and court precedent, the FCC ruled that, "when state regulation is reconcilable with federal policies or rules, there is no occasion for us to override state agency actions in furtherance of legitimate state regulatory objectives." 6 Id. at 1108.

Following the FCC's preemption ruling, on June 7, 1982, the American Telephone and Telegraph Company (AT & T), on behalf of itself and associated Bell System Operating Companies, filed a petition for reconsideration. On the same day, General Telephone Company of Ohio sought a "declaratory ruling" ordering the Public Utilities Commission of Ohio to use the same depreciation rates for intrastate purposes as had been prescribed by the FCC. After a joint reply period for the two petitions, the FCC, in a "Memorandum Opinion and Order" released on January 6, 1983 (Preemption Order), reversed itself and declared that its "depreciation policies and rates, including the expensing of inside wiring, preempt inconsistent state depreciation policies and rates." 92 F.C.C.2d 864, 880 (1983). The FCC based its Preemption Order on both the preemptive effect of Sec. 220 of the Act and the agency's own regulatory power. 7 Although conceding that its depreciation methods would have an immediate upward impact on rates, the FCC reasoned that more timely capital recovery would encourage greater technological progress, which would, in turn, result in more efficient service and lower costs. According to the FCC, "[i]f competition is to be viable, it is necessary for prices to reflect depreciation expenses that are realistic for a competitive market." 92 F.C.C.2d at 877. The FCC concluded: "[W]e find it imperative to declare today that inconsistent state prescribed depreciation rates are preempted by the Communications Act and are accordingly void." 92 F.C.C.2d at 879.

C. The Proceedings Below.

On May 3, 1982, the South Central Bell Telephone Company (South Central Bell) filed tariff revisions with the Louisiana Public Service Commission (Louisiana Commission) seeking an increase in intrastate rates in the amount of $238,600,000. As partial justification for the increased revenues, South Central Bell relied on the FCC's adoption of remaining life and SLELG depreciation methods in 1980 and the FCC's ruling in 1981 requiring the expensing of station connections. At the time of the...

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