Virginia State Corp. Commission v. F.C.C.

• Decision Date: 18 June 1984
• Docket Number: No. 83-1136,83-1136
• Citation: 737 F.2d 388
• Parties: VIRGINIA STATE CORPORATION COMMISSION, Petitioner, v. FEDERAL COMMUNICATIONS COMMISSION and United States of America, Respondents, North American Telephone Association, et al., Intervenors.
• Court: U.S. Court of Appeals — Fourth Circuit

Page 388

737 F.2d 388

60 P.U.R.4th 171

VIRGINIA STATE CORPORATION COMMISSION, Petitioner, v. FEDERAL COMMUNICATIONS COMMISSION and United States of America, Respondents North American Telephone Association, et al., Intervenors.

No. 83-1136.

United States Court of Appeals, Fourth Circuit.

Argued Oct. 7, 1983.

Decided June 18, 1984.

Russell W. Cunningham (Donald G. Owens, Sherry H. Bridewell, Richmond, Va., David E. Blabey, Washington, D.C., Lawrence G. Malone, Albany, N.Y., Lynwood J. Evans, Phoenix, Ariz., Richard P. Rosenberry, Lawrence F. Barth, Columbus, Ohio, Lloyd N. Moore, Jr., Montgomery, Ala., Donald A. Low, Topeka, Kan., Rosemary O'Leary, Lawrence, Kan., Harris S. Leven, Jonathan L. Heller, Columbus, Ohio, Jean E. Heilman, St. Paul, Minn., Lee McCulloch, Little Rock, Ark., Jack Shreve, Benjamin H. Dickens, Jr., Tallahassee, Fla., Steven W. Hamm, Raymond E. Lark, Jr., Russell H. Putman, Jr., Columbia, S.C., Joseph I. Lieberman, New Haven, Conn., Peter J. Jenkelunas, New Britain, Conn., Janice E. Kerr, San Francisco, Cal., Gretchen Dumas, Sacramento, Cal., J. Calvin Simpson, San Francisco, Cal., Douglas N. Owens, Olympia, Wash., Steven R. Shanahan, Cheyenne, Wyo., Bruce W. Renard, Tallahassee, Fla., Diane L. McIntire, Washington, D.C., Steven M. Schur, Madison, Wis., Jon E. Kingstad, Milwaukee, Wis., Paul Rodgers, Charles D. Gray, Washington, D.C., Frank J. Kelley, Atty. Gen., Detroit, Mich., Louis J. Caruso, Sol. Gen., Don L. Keskey, John M. Dempsey, Asst. Attys. Gen., Chicago, Ill., Ronald D. Eastman, Sp. Asst. Atty. Gen., Linda Mounts, Joel B. Shifman, Charleston, W.Va., on brief), for petitioner.

John E. Ingle, Deputy Associate Gen. Counsel, Washington, D.C. (Bruce E. Fein, Gen. Counsel, Great Falls, Va., Daniel M. Armstrong, Associate Gen. Counsel, Washington, D.C., on brief), for respondents.

Michael Boudin, Washington, D.C. (Leonard R. Stein, San Francisco, Cal., Raymond F. Scully, Philadelphia, Pa., Lester G. Stiel, Cleveland, Ohio, W. Preston Granbery, New York City, Earl R. Huffman, David Horn, Cincinnati, Ohio, Thomas L. Jones, John Wohlstetter, Richard McKenna, James Hobson, Albert H. Kramer, John W. Hunter, Carolyn C. Hill, Washington, D.C., Maria A. Kendro, Kansas City, Mo., on brief), for intervenors supporting respondents.

Before WIDENER, MURNAGHAN and SPROUSE, Circuit Judges.

MURNAGHAN, Circuit Judge:

The controversy here presented involves an order of the Federal Communications Commission (FCC) entitled "Uniform System of Accounts and Petition for Declaratory Ruling on Question of Federal Preemption." CC Docket No. 79-105, FCC 82-581 (released Jan. 6, 1983). The order provides that, when the FCC has prescribed depreciation rates and methods for classes of property used by telephone companies, state regulation of the same matter is thereby preempted.

Petitioner, Virginia State Corporation Commission, along with multiple Petitioner-Intervenors representing regulatory agencies of other states, argues that the states' fixing of depreciation rates and accounting methods for intrastate ratemaking purposes is preempted neither by the express language of the Federal Communications Act of 1934, 47 U.S.C. Sec. 151 et seq. (1976) (the Act), nor by FCC rules explicitly governing depreciation of telephone equipment and facilities that are used interchangeably to provide both interstate and intrastate service. We agree with the FCC that its order released January 6, 1983 preempts state regulation of the depreciation rates and methods here involved, and thereby reemphasize our recognition in North Carolina Utilities Commission v. F.C.C., 552 F.2d 1036 (4th Cir.1977) ("NCUC II"), cert. denied, 434 U.S. 874, 98 S.Ct. 222, 54 L.Ed.2d 154 (1977), that "FCC regulations must preempt any contrary state regulations where the efficiency ... of the national communications network is at stake...." Id. at 1046.

I. Background

Under the current state of the telecommunications art, local telephone companies provide "telephone plant" (facilities and equipment) that serve both interstate and intrastate communications needs. Section 152 of the Act provides in subsection (a) that the statute "shall apply to all interstate and foreign communication by wire," but in subsection (b) that "nothing in this chapter shall be construed to apply or to give the Commission jurisdiction with respect to (1) charges, classifications, practices, services, facilities, or regulations for or in connection with intrastate communication service by wire ...." Within this framework of divided authority, the Commission's statutory mandate is a broad one, "to make available ... to all the people of the United States a rapid, efficient, Nationwide, and world-wide wire ... communication service with adequate facilities at reasonable charges...." 47 U.S.C. Sec. 151.

In order to achieve the mandated goal, the FCC is specifically empowered under 47 U.S.C. Sec. 220 to prescribe depreciation practices to be followed by interstate carriers. ¹ At the same time, the Act recognizes the continued vitality of state regulation of intrastate service. Section 221(b) provides that "nothing in this chapter shall be construed to apply, or to give the Commission jurisdiction, with respect to charges, classifications, practices, services, facilities, or regulations for or in connection with wire ... exchange service ... even though a portion of such exchange service constitutes interstate ... communication, in any case where such matters are subject to regulation by a State commission or by local governmental authority." Because most of the nation's telephone plant is used interchangeably to serve both interstate and intrastate telecommunications needs, the potential for conflict between federal and state regulatory action is obvious. ²

The conflict at issue on this appeal had its genesis in two separate orders issued by the FCC in 1980 and 1981; both orders were designed to compel carriers to employ depreciation practices that more truly reflected actual depreciation rates in light of technological reality. After seven years of study, the FCC first determined in 1980 that the prior practice of "vintage year" grouping for depreciation purposes was inaccurate, and ordered that the "equal life group" method be used. See Docket No. 20188, 83 F.C.C.2d 267 (1980). The equal life method permitted greater precision in allocating costs of service to current consumers and allowed more rapid capital recovery for plant having a short useful life. ³

Thus, while the prior "vintage year" method was thought to "stifle innovation and inhibit the introduction of new technology," 83 F.C.C.2d at 281, the "equal life" method was intended to bolster the competitive market structure that the FCC sought to foster. The same 1980 order also replaced the "whole life" method of depreciation with the "remaining life" method, which allowed a carrier to recoup the full cost of plant by making corrections in useful life estimates over time. 83 F.C.C.2d at 288-90. ⁴

The FCC's 1981 order provided that inside wiring in homes and businesses no longer should be treated as a capital investment to be depreciated over time, but rather as a cost to be "expensed" to current users. Again, the thrust of the rule change was to ensure that consumers actually requesting and benefitting from installed wiring pay for that benefit. By expensing the wiring, the burden of costs associated with such station connections would be placed on the causative ratepayer, and other consumers would not be forced to bear rates unduly inflated by a depreciation component for wiring services previously provided. 85 F.C.C.2d 818, 824 (1981).

The two orders were first challenged on April 30, 1981, when the National Association of Regulatory Utility Commissioners ("NARUC") filed a Petition for Clarification of the 1981 wiring order. Specifically, NARUC requested that the FCC issue a statement that the provisions of the wiring order were not binding upon state regulatory commissions insofar as intrastate communications service was concerned. The FCC responded to the petition in a Memorandum Opinion and Order of April 27, 1982, in which it concluded that in light of the relevant legislative history of the Act, "where state [accounting and depreciation] 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." ⁵ 89 F.C.C.2d 1094, 1108 (1982).

In response to the FCC's opinion and order, the American Telephone and Telegraph Company filed a Petition for Reconsideration on June 7, 1982. General Telephone Company of Ohio likewise petitioned for a Declaratory Ruling that inconsistent state action was foreclosed under the Act. ⁶ After further pleadings and comments, the FCC reversed its earlier position in a second Memorandum Opinion and Order of January 6, 1983. C.C. Docket No. 79-105, F.C.C. No. 82-581, slip op. (Jan. 6, 1983). After it carefully resurveyed the legislative history and decisional law, and reexamined the express language of the Act, the FCC adopted the view that the most logical and reasonable interpretation of the Act "is that where the Commission prescribes depreciation rates for classes of property [and the depreciation methods to be used], state commissions are precluded from departing" from those rates and methods. Id. at 17, p 44. In reversing itself, the FCC espoused the notion that the plain terms of section 220 of the Act appear "clearly to preempt the states in connection with depreciation expense determinations and the related accounting." Id. at 6, p 17. Moreover, the FCC found that, even if section 220 did not possess a preemptive effect as a matter of law, the FCC's own policies and rulings would preempt inconsistent state regulatory action as a matter of federal supremacy. Id. at 17, p 45.

Supported by numerous state and local regulatory commissions, the Virginia...