US LEC of Tennessee, Inc. v. Tennessee Regulatory Authority, No. M2004-01417-COA-R12-CV (TN 4/17/2006), M2004-01417-COA-R12-CV.

CourtSupreme Court of Tennessee
Docket NumberNo. M2004-01417-COA-R12-CV.,M2004-01417-COA-R12-CV.
Decision Date17 April 2006

Page 1

Unpublished Opinion

No. M2004-01417-COA-R12-CV.
Court of Appeals of Tennessee, at Nashville.
May 4, 2005 Session.
Filed April 17, 2006.

Appeal from the Tennessee Regulatory Authority; No. 02-00562; Sara Kyle, Chairman.

Judgment of the Tennessee Regulatory Authority Affirmed.

Henry M. Walker and Kristy R. Godsey, Nashville, Tennessee, for the appellant, US LEC of Tennessee, Inc.

Carlos C. Smith and Mark W. Smith, Chattanooga, Tennessee, for the appellee, Electric Power Board of Chattanooga.

J. Richard Collier, Carolyn E. Reed, and Randall Gilliam, Nashville, Tennessee, for the appellee, Tennessee Regulatory Authority.

William C. Koch, Jr., P.J., M.S., delivered the opinion of the court, in which Patricia J. Cottrell and Frank G. Clement, Jr., JJ., joined.



This appeal involves a dispute between two telecommunications services providers in the Chattanooga market. A privately owned provider filed a complaint with the Tennessee Regulatory Authority asserting that a competing provider owned by a municipal electric utility was receiving an illegal cross-subsidy because the electric utility was permitting the provider to use its name without compensation. One of the Authority's hearing officers conducted a hearing and then filed an initial order concluding that the provider owned by the electric utility was not receiving a cross-subsidy in violation of Tenn. Code Ann. § 7-52-402 (2005). After the initial order became final, the private provider filed a Tenn. R. App. P. 12 petition for review with this court. We have concluded that the provider's uncompensated use of the electric utility's name is not a cross-subsidy prohibited by Tenn. Code Ann. § 7-52-402.


The Electric Power Board of Chattanooga (EPB) was created by private act in 1935.1 It provides electric power to both business and residential customers in the City of Chattanooga, most of Hamilton County, and parts of eight other Tennessee counties and North Georgia. In October 1997, after the Tennessee General Assembly, following Congress's lead, authorized municipal electric utilities to begin offering telecommunications services,2 EPB applied to the Tennessee Regulatory Authority (Authority) for a certificate of convenience and necessity to enable it to begin providing telecommunications services through a telecommunications division that would be separate from EPB's electric utility system.

Because EPB's application was the first of its kind in Tennessee, the Authority convened a contested case proceeding to consider its application for a certificate of convenience and necessity. Eight entities intervened in the proceeding, including the Consumer Advocate Division of the Office of the Attorney General and Reporter, BellSouth Telecommunications, Inc., AT&T Communications of the Southern States, Inc., and the Tennessee Cable Telecommunications Association (TCTA). US LEC of Tennessee, Inc. (US LEC), a North Carolina telecommunications services provider doing business in the Chattanooga market, did not intervene. From the outset, EPB made it clear that it intended to operate its telecommunications division under its own name, and the intervenors likewise made it clear that they were equally insistent that EPB's electric utility system should not cross-subsidize its telecommunications division.

The TCTA led the opposition to EPB's application for a certificate of convenience and necessity. One of TCTA's experts recognized that, unlike other new entrants into the local telecommunications services market, EPB had a "substantial amount of goodwill and name recognition developed with those electric ratepayers." To address TCTA's concerns about the cross-subsidization prohibited by Tenn. Code Ann. § 7-52-402, the TCTA and EPB negotiated and filed with the Authority a detailed set of conditions on EPB's certificate that were intended to ensure compliance with Tenn. Code Ann. § 7-52-402.3

By their own terms, these conditions formed "the essential methods that EPB should adopt to properly separate telecommunications from electric power accounting data, [to] provide assurance that cross-subsidization does not occur, and to properly allocate cost." The conditions recognized that EPB would provide telecommunications services through a discrete telecommunications services division, that the revenues and expenses of the telecommunications services division would be segregated from those of the electric utility system, and that the two entities would acquire services from each other at the rates charged other customers. They also provided a "general allocator" for expenses that could not be directly allocated. With specific regard to joint marketing, the conditions included a Code of Conduct providing that:

The electric system and the telecommunications division of the Electric Power Board of Chattanooga may jointly offer their respective products and services to customers provided that the customer is informed (a) of the separate identities of each and (b) that the products and services of the electric utility system are distinct and separately priced from the offerings of the telephone division and the customer may select one without the other.

On May 10, 1999, the Authority granted EPB a certificate of convenience and necessity, and "EPB Telecom" began providing telecommunications services to local businesses in April 2000.

On May 15, 2002, US LEC filed a complaint with the Authority alleging that EPB was engaging in discriminatory and anti-competitive business practices. It complained that EPB was allowing EPB Telecom to use EPB's name, that EPB was granting EPB Telecom access to buildings that it was not granting to other telecommunications providers, and that EPB had failed to file its annual audits with the Authority. BellSouth Telecommunications, Inc. intervened in the proceeding, and in June 2002, the Authority referred the matter to a hearing officer for disposition. Three months later, US LEC filed an amendment to its complaint containing a fourth allegation — that EPB Telecom had refused to allow US LEC to interconnect with EPB Telecom's network or to provide certain unbundled services.

The hearing officer later concluded that US LEC did not have standing to take issue with EPB Telecom's failure to file its annual audits, and the parties informally resolved US LEC's building access and network interconnection and unbundled services claims. Thus, the only remaining issue involved US LEC's claim that EPB's marketing and advertising activities violated the anti-subsidization provisions in Tenn. Code Ann. § 7-52-402 or the Code of Conduct agreed upon by EPB and the TCTA.

The hearing officer conducted hearings on February 25 and March 16, 2004. During these hearings, US LEC presented evidence that EPB's name was instantly recognizable and that it had value because of the company's reputation for quality and goodwill with its customers. It also presented evidence purporting to demonstrate that EPB was intentionally blurring the lines between its electric utility system and EPB Telecom. US LEC cited various sales tactics, joint marketing activities, press releases, and the EPB website as evidence of the manner in which EPB had allowed EPB Telecom to leverage EPB's name and insisted that these activities violated the Code of Conduct and Tenn. Code Ann. § 7-52-402. For its part, EPB insisted that its conduct was consistent with both the Code of Conduct and Tenn. Code Ann. § 7-52-402.

In its post-hearing brief, US LEC insisted that joint marketing provisions in the Code of Conduct should be clarified and strengthened. It argued that EPB Telecom should be required either to pay EPB for the use of its name or to operate using a name that did not indicate a relationship with EPB. Because of the difficulties in quantifying the benefit that EPB Telecom derives from its use of the EPB name, US LEC argued that requiring EPB Telecom to change its name would be more appropriate and that changing EPB Telecom's name would not pose an undue hardship on EPB Telecom because name changes are common in the telecommunications industry.

The hearing officer filed an initial order on May 6, 2004. Despite her conclusion that US LEC lacked standing to challenge EPB's advertising and marketing activities,4 the hearing officer invoked the Authority's general supervisory and regulatory power under Tenn. Code Ann. § 65-4-104 (2004) as authority to address US LEC's complaints about EPB's and EPB Telecom's conduct. The hearing officer then concluded that EPB Telecom's uncompensated use of the EPB name was not a subsidy prohibited by Tenn. Code Ann. § 7-52-402 and that neither EPB nor EPB Telecom had violated the Code of Conduct. US LEC did not request the Authority to review the initial order, and so the initial order became the Authority's final order by operation of law on May 21, 2004. US LEC thereafter filed a Tenn. R. App. P. 12 petition for review on June 8, 2004.


The outcome of this appeal hinges on the scope of Tenn. Code Ann. § 7-52-402's prohibition against a municipal electric system providing subsidies to its telecommunications services division.

US LEC insists that EPB Telecom's uncompensated use of EPB's name is a subsidy prohibited by Tenn. Code Ann. § 7-52-402. The Authority and EPB respond that the subsidies prohibited by Tenn. Code Ann. § 7-52-402 are confined to the use of revenues from the sale of electricity to pay for costs of providing telecommunications services. These arguments require the court to focus first on the meaning of the word "subsidies" as it is used in Tenn. Code Ann. § 7-52-402.


The search of the meaning of statutory language is a judicial function. Roseman v. Roseman, 890 S.W.2d 27, 29 (Tenn. 1994); BellSouth Telecomms., Inc. v. Greer, 972 S.W.2d 663,...

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