Western Union Corp. v. F.C.C., s. 86-1196

• Decision Date: 13 September 1988
• Docket Number: Nos. 86-1196,86-1268 and 86-1647,s. 86-1196
• Citation: 856 F.2d 315
• Parties: WESTERN UNION CORPORATION, Petitioner, v. FEDERAL COMMUNICATIONS COMMISSION and United States of America, Respondents, American Telephone & Telegraph Co., et al., Intervenors.
• Court: U.S. Court of Appeals — District of Columbia Circuit

Page 315

856 F.2d 315

272 U.S.App.D.C. 361

WESTERN UNION CORPORATION, Petitioner, v. FEDERAL COMMUNICATIONS COMMISSION and United States of America, Respondents American Telephone & Telegraph Co., et al., Intervenors.

Nos. 86-1196, 86-1268 and 86-1647.

United States Court of Appeals District of Columbia Circuit.

Argued Jan. 22, 1988.

Decided Sept. 13, 1988.

Milton J. Grossman, with whom H. Richard Juhnke, Arthur H. Simms, and Peter G. Wolfe, Washington, D.C., were on the brief, for petitioner.

John Ingle, Deputy Associate General Counsel, F.C.C., with whom Diane S. Killory, General Counsel, Daniel M. Armstrong, Associate General Counsel, Linda L. Oliver, and Laurel R. Bergold, Counsel, F.C.C., and Robert Nicholson and Andrea Limmer, Attys., U.S. Dept. of Justice, Washington, D.C., were on the brief, for respondents. Catherine G. O'Sullivan, Atty., U.S. Dept. of Justice, Washington, D.C., also entered an appearance for respondent U.S.

William R. Drexel, Kansas City, Mo. (for Southwestern Bell), with whom Raymond F. Scully, Alan B. Sternstein, Washington, D.C., and John W. Berresford, Philadelphia, Pa. (for Bell intervenors); Jonathan S. Hoak, David W. Carpenter, Washington, D.C., and Francine J. Berry, New York City (for American Tel. & Tel. Co.); Alfred Winchell Whittaker, Richmond, Va. (for Ameritech Operating Companies); R. Frost Branon, Jr., Atlanta, Ga. (for BellSouth Telephone Companies); Saul Fisher, Bedminster, N.J. (for NYNEX Telephone Companies); Dan T. Foley, Oklahoma City, Okl. (for Southwestern Bell Telephone Co.); and Robert B. McKenna, Denver, Colo. (for U.S. West Telephone Companies) were on the joint brief, for intervenors.

Thomas J. Reiman entered an appearance for intervenors Ameritech Operation Companies, et al. Katherine I. Hall, Washington, D.C., entered an appearance for intervenors the Bell Telephone Co. of Pennsylvania, et al. Martin J. Silverman, Washington, D.C., entered an appearance for intervenor NYNEX Telephone Companies. Robert L. Barada and Stanley J. Moore, San Francisco, Cal., entered appearances for intervenor Pacific Telesis Telephone Companies. T. Michael Payne, St. Louis, Mo., entered an appearance for intervenor Southwestern Bell Telephone Co. Jules M. Perlberg and Dale E. Thomas, Chicago, Ill., entered appearances for intervenor AT & T. Lawrence W. Katz, Prescott, Ariz., James R. Young, Washington, D.C., and J. Manning Lee entered appearances for intervenor Bell Atlantic Telephone Companies.

Dana A. Rasmussen, Washington, D.C., and Robert B. McKenna, Denver, Colo., entered appearances for intervenors Mountain States Tel. & Tel. Co., et al.

Randolph J. May, Timothy J. Cooney, Joseph DeFranco, Howard Monderer, and Daniel A. Huber, Washington, D.C., entered appearances for intervenors American Broadcasting Companies, Inc., et al., in No. 86-1268.

Before MIKVA, EDWARDS, and BUCKLEY, Circuit Judges.

Opinion for the court filed by Circuit Judge BUCKLEY.

BUCKLEY, Circuit Judge:

Western Union seeks review of the Federal Communications Commission's decisions approving the local telephone exchanges' rates charged to companies providing telex communications. As a ratepayer, Western Union objects that certain costs were improperly allocated to the particular services it required. Because the agency failed to explain adequately its decision approving the allocations of costs proposed by the local telephone exchanges, we grant the petitions for review and remand to the agency.

I. BACKGROUND

Following the breakup of American Telephone and Telegraph Company ("AT & T"), the Federal Communications Commission ("FCC" or "Commission") required local telephone exchange companies ("LECs"), as successors to the operating companies that had provided local services as part of the AT & T complex, to provide interexchange carriers (e.g., AT & T, MCI, Sprint, Western Union, and others) with access to local exchange facilities. These services fall into two broad categories: "switched access," which permits interexchange carriers to use local exchange facilities for connecting long-distance telephone calls; and "special access," which permits the exclusive use of LEC facilities to link interexchange carriers with one or more LEC "serving wire centers" ("SWCs") that in turn connect the interexchange carriers with specific customers.

Special access circuits provide a variety of services, among which are telex, telegraph, voice, and video communications. See generally MCI Telecommunications Corp. v. FCC, 842 F.2d 1296, 1298 (D.C.Cir.1988) (consolidated for argument with the petitions in this case, but disposed of separately). This case concerns challenges by Western Union to several elements of the tariff schedule approved by the FCC for use of special access facilities.

The tariff schedules submitted by the LECs recognize nine types of special access circuits or channels. Beginning with the simplest systems and moving up the scale to the most complex, these consist of metallic, telegraph-grade, voice-grade, program audio, video, wideband analog, wideband data, digital data, and high capacity systems. Western Union is primarily concerned with the rates charged for its use of metallic and voice-grade channels.

The rates charged for each of the special access channels are comprised of three components that, added together in various configurations, determine the full amount charged for a particular service. Channel termination, also called "loop," is the most basic component and provides the connection between an interexchange carrier and a local SWC, as well as between the SWC and the customer's premises. All carriers pay a flat rate for the use of the basic loop. Some carriers have additional loop costs depending on the quality of access the carrier needs in order to serve its customers. The second component is channel mileage or "trunk," which covers the cost of service between two SWCs. Western Union does not use trunk facilities. The third component, "optional features and functions," is not at issue here.

The LECs offer users a choice of special access services in order to provide the users flexibility in determining the quality of service they require. In principle, the tariffs charged by the LECs for these services should reflect the costs that are fairly allocable to the facilities utilized by their interexchange customers. Many elements of the LECs' costs, however, cannot be assigned directly to any one specific service. In an effort to allocate the costs fairly among the different types of service, the FCC has adopted guidelines that it has set out in a Separations Manual. The Separations Manual, 47 C.F.R. Pt. 67 (1987), begins by establishing principles for allocating costs between interstate service (subject to FCC regulation) and intrastate service (subject to state regulation). After this initial division, the interstate service is further divided into various categories, including special access. The Separations Manual does not subdivide costs among the nine types of channels or the three components.

As providers of the regulated services, the LECs submitted tariff proposals that the FCC approved subject to some modifications. The allocation decisions at issue in this case required further investigation, and eventually the FCC issued its final determination. Investigation of Special Access Tariffs of Local Exchange Carriers, FCC 86-52 (released Jan. 24, 1986) ("Special Access Order "), Joint Appendix ("J.A.") at 771. Western Union petitioned the FCC for partial reconsideration, which the FCC denied. Order Denying Reconsideration, 1 FCC Rcd. 427 (1986).

In petitioning for review, Western Union's challenges can be grouped into three principal categories. First, it complains that the LECs have included, in their computation of the rate to be charged for voice-grade loop service, categories of investment that are properly attributable to the provision of trunk rather than to loop-related services. Second, Western Union asserts that the rate base for the metallic channel used for its telex services contains cost elements properly attributable to higher grades of service. The third challenge concerns the alleged inequity of charging users of 2-wire metallic circuits a higher rate than that charged users of other kinds of 2-wire circuits. Western Union claims in each instance that the FCC acted in an arbitrary and capricious manner in failing to give adequate consideration to the evidence introduced by Western Union in support of its positions and in the Commission's failure to provide reasoned explanations for its conclusions.

II. DISCUSSION

A. Standard of Review

We apply the traditional standard of review for ratemaking cases: The agency's decisions will only be overturned if found to be arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law. 5 U.S.C. Sec. 706(2)(A) (1982). "[T]he FCC must demonstrate a 'rational connection between the facts found and the choice made.' " City of Brookings Mun. Tel. Co. v. FCC, 822 F.2d 1153, 1165 (D.C.Cir.1987) (quoting Farmers Union Cent. Exch., Inc. v. FERC, 734 F.2d 1486, 1499 (D.C.Cir.), cert. denied, 469 U.S. 1034, 105 S.Ct. 507, 83 L.Ed.2d 398 (1984)). As we have repeatedly stressed, this connection must appear in the agency decision and the record; post hoc rationalizations by agency counsel will not suffice. City of Brookings, 822 F.2d at 1165. The agency must consider responsible alternatives; if they are rejected, it must explain why. Id. at 1169.

B. Western Union's Challenges

1. Misallocation of Costs In Determination of Loop Rates

The FCC permitted the LECs to include two items of cost in setting loop rates: Voice Grade Performance ("VGP") and Facilities Interface ("FACIF"). Western Union claims that these costs should be charged to trunk users but not to loop users. Western Union argues that the VGP and...