State Corp. Com'n of State of Kan. v. F.C.C., 84-2259

• Decision Date: 01 April 1986
• Docket Number: No. 84-2259,84-2259
• Citation: 787 F.2d 1421
• Parties: STATE CORPORATION COMMISSION OF the STATE OF KANSAS, Petitioner, v. FEDERAL COMMUNICATIONS COMMISSION and United States of America, Respondents, American Telephone and Telegraph Company, General Telephone Company of Florida, Mountain States Telephone & Telegraph Company, Northwestern Bell Telephone and Pacific Northwest Bell Telephone Company, MCI Telecommunications Corporation, Bellsouth Corporation on Behalf of Its Operating Companies--Southern Bell Telephone and Telegraph Company, and South Central Bell Telephone Company; the Bell Atlantic Telephone Companies--the Bell Telephone Company of Pennsylvania, the Chesapeake & Potomac Telephone Companies of Maryland, Virginia, West Virginia, and District of Columbia, the Diamond State Telephone Company, and New Jersey Bell Telephone Company; the Ameritech Operating Companies--Illinois Bell Telephone Company, Indiana Bell Telephone Company, Michigan Bell Telephone Company, the Ohio Bell Telephone Company and Wisconsin Bell; the Nynex Telephone Companies--New York Telephone Company, and New England Telephone and Telegraph Company; Southwestern Bell Telephone Company, National Association of Regulatory Utility Commissioners, and Reservation Telephone Cooperative, et al., Intervenors.
• Court: U.S. Court of Appeals — Tenth Circuit

Page 1421

787 F.2d 1421

STATE CORPORATION COMMISSION OF the STATE OF KANSAS, Petitioner, v. FEDERAL COMMUNICATIONS COMMISSION and United States of

America, Respondents,

American Telephone and Telegraph Company, General Telephone

Company of Florida, Mountain States Telephone & Telegraph

Company, Northwestern Bell Telephone and Pacific Northwest

Bell Telephone Company, MCI Telecommunications Corporation,

Bellsouth Corporation on Behalf of Its Operating

Companies--Southern Bell Telephone and Telegraph Company,

and South Central Bell Telephone Company; the Bell Atlantic

Telephone Companies--the Bell Telephone Company of

Pennsylvania, the Chesapeake & Potomac Telephone Companies

of Maryland, Virginia, West Virginia, and District of

Columbia, the Diamond State Telephone Company, and New

Jersey Bell Telephone Company; the Ameritech Operating

Companies--Illinois Bell Telephone Company, Indiana Bell

Telephone Company, Michigan Bell Telephone Company, the Ohio

Bell Telephone Company and Wisconsin Bell; the Nynex

Telephone Companies--New York Telephone Company, and New

England Telephone and Telegraph Company; Southwestern Bell

Telephone Company, National Association of Regulatory

Utility Commissioners, and Reservation Telephone

Cooperative, et al., Intervenors.

No. 84-2259.

United States Court of Appeals, Tenth Circuit.

April 1, 1986.

Lee H. Woodard, Special Counsel, of Woodard, Blaylock, Hernandez, Pilgreen & Roth, Wichita, Kan. (Brian J. Moline, General Counsel, and James G. Flaherty, Staff Counsel, of Kansas Corporation Commission, Topeka, Kan., with him, on brief), for petitioner.

Linda L. Oliver, Counsel, F.C.C., Washington, D.C. (John E. Ingle, Deputy Associate General Counsel with her, on brief), for respondents.

Michael Boudin of Covington & Burling, Washington, D.C. (Elizabeth V. Foote with him, on brief for AT & T and Listed Intervenor Bell Operating Companies; also on brief were Thomas J. Reiman, Chicago, Ill., and Alfred Winchell Whittaker, Washington, D.C., for Ameritech Telephone Companies; Judith A. Mayenes, W. Preston Granbery, and Robert B. Stechert, Basking Ridge, N.J., for AT & T; Daniel J. Whelan and David K. Hall Washington, D.C., for Bell Atlantic Telephone Companies; William J. Byrnes, Washington, D.C., for MCI; Saul Fisher, White Plains, N.Y., and John B. Messenger, Washington, D.C., for NYNEX Telephone Companies; Vincent L. Sgrosso, Atlanta, Ga., for BellSouth Telephone Companies; Michael C. Cavell, Topeka, Kan., for Southwestern Bell Telephone Co.; David S. Sather and Robert B. McKenna, Washington, D.C., for Mountain States Telephone and Telegraph Co., Northwestern Bell Telephone Co., and Pacific Bell Telephone Company), for intervenors.

David Cosson, Washington, D.C. (Paul G. Daniel with him, on brief, for The Reservation Telephone Cooperative, et al.; also on brief were Paul Rodgers, General Counsel, Charles D. Gray, Asst. Gen. Counsel, and Genevieve Morelli, Deputy Asst. Gen. Counsel, National Ass'n of Regulatory Utility Commissioners, Washington, D.C.), for intervenors.

William Malone, Stamford, Conn., James R. Hobson of Washington, D.C., and James V. Carideo, of counsel, Tampa, Fla., filed a brief, for intervenor General Telephone Co. of Florida.

Before SEYMOUR, SETH and BALDOCK, Circuit Judges.

SEYMOUR, Circuit Judge.

Petitioner challenges a declaratory order of the Federal Communications Commission (FCC or Commission). The order would preempt state utility commissions from altering the sampling periods employed by local telephone companies to separate the costs of equipment used in both interstate and intrastate service and to divide interstate revenues among themselves. We affirm.

I.

The FCC and state utility commissions regulate charges for interstate and intrastate service respectively. Appropriate rates depend largely upon the investment and operating costs of individual companies. Because many items of telephone equipment are used for both interstate and intrastate calls, allocating the cost of such equipment bears directly upon the rates customers will pay for each form of service. The process of "jurisdictional separations" determines how these costs are allocated for ratemaking purposes. Since 1947, separations have been accomplished using a manual developed over the years by the FCC and state utility commissions.

Jointly used equipment may be traffic sensitive or not. The cost of traffic sensitive equipment varies according to its use in either interstate or intrastate service, and it has generally been allocated on that basis. In contrast, the cost of non-traffic sensitive equipment remains constant irrespective of use. Such equipment includes telephones, wiring within customers' homes or offices, and lines connecting individual telephones to local switching offices. The FCC has labored for years to develop an appropriate formula to allocate the costs associated with non-traffic sensitive equipment. Under the 1970 Ozark Plan, ¹ each local company sampled calls during a representative period to ascertain the relative amount of time that such equipment was used for interstate calls. The resulting figure is known as a subscriber line use ratio, or SLU. As a matter of policy, the separations manual then applied a formula which shifted approximately 3.3 percent of non-traffic sensitive costs to the interstate jurisdiction for every 1 percent of use. The percentage figure generated by the formula and applied to separate a carrier's total non-traffic sensitive costs is known as its subscriber plant factor, or SPF.

Between 1970 and 1982, the market for long distance services became markedly competitive. Interstate calling increased substantially in relation to intrastate use, and the multiplier aspect of the SPF formula shifted more non-traffic sensitive costs into the interstate jurisdiction. In response to these developments, the FCC convened a federal-state joint board to reexamine separations policy, including the treatment of non-traffic sensitive costs. The Commission ultimately adopted the joint board's proposals with minor modifications. See Amendment of Part 67 of the Commission's Rules and Establishment of a Joint Board, 89 F.C.C.2d 1 (1982). The resulting regulations were affirmed on review. See MCI Telecommunications Corp. v. FCC, 750 F.2d 135 (D.C.Cir.1984).

Concluding that increases in long distance calling may have unduly inflated the non-traffic sensitive costs allocated to interstate use, the FCC determined that carriers' SPF should be frozen at 1981 levels pending the development of comprehensive revisions in separations policy. See id. at 139, 141. An accompanying amendment to the separations manual specified that a telephone company's average 1981 SLU ratio should be factored into the SPF formula in order to accomplish this objective. ² Although the amendment itself did not fix the representative period to be used in calculating SLU, the freeze order states that all allocative variables should remain constant, see Amendment of Part 67, 89 F.C.C.2d at 6, and that carriers would continue to conduct cost studies and calculate SPF as they had done in the past, see id. at 14-15. The Commission left open for joint board consideration whether seven-day usage studies should replace five-day studies. ³ See id. at 22. Based upon these assumptions, the freeze order included specific figures for the Bell system's frozen SPF and SLU. See id. at 5 & n. 12.

The order issued in this case emerged from a subsequent dispute between Southern Bell and General Telephone of Florida (GTF). Each company provides local telephone service and handles interstate calls as well. Since 1970, Southern Bell had administered a single pool of interstate revenues under what is known as a settlement agreement between the two companies. Under this agreement, Southern Bell reimbursed GTF for its interstate costs in accordance with the separations manual and the SPF formula in particular. In 1980, seeking to increase its share of interstate revenues, GTF requested that seven-day rather than five-day studies be used for the purpose of calculating SPF. Southern Bell refused. GTF then persuaded the Florida Public Service Commission to require that Southern Bell accept seven-day studies. Following Bell's appeal to state court, the Florida Commission obtained a remand and reversed its initial decision with respect to interstate settlements.

Southern Bell had also petitioned the FCC to preempt Florida from ordering carriers to adopt new sampling periods for interstate settlement purposes. Although Florida had reversed itself, three other states had recently required the use of seven-day studies for separations purposes and others appeared ready to follow. Adjustments of this kind would increase carriers' SPF and, as a result, the proportion of their non-traffic sensitive costs allocated to interstate use. Accordingly, after soliciting public comment, the FCC concluded that declaratory action was called for and ruled that state regulatory commissions were preempted from prescribing the time period to be used by carriers in calculating SPF for either interstate settlement or jurisdictional separations purposes. See Establishment of Interstate Toll Settlements and Jurisdictional Separations Requiring the Use of Seven Calendar Day Studies by the Florida Public Service Commission, 93 F.C.C.2d 1287 (1983). The Commission based its ruling upon statutory authority conferred by the Communications Act of 1934, 47 U.S.C. Secs. 151 et seq. (1982), and upon the conclusion that state regulation would both violate the FCC's freeze order and frustrate uniform federal regulation of rate base allocation. The preemption order itself expressed no opinion on the merits of any particular time period which carriers might use to calculate SPF, see 93 F.C.C.2d at 1287 n. 1, but left the matter for joint board resolution.

Following requests for reconsideration, including one filed by petitioner, the FCC...