Rural Telephone Coalition v. Federal Communications Commission

838 F.2d 1307, 267 U.S. App. D.C. 357
Court of Appeals for the D.C. Circuit·Decided February 5, 1988·No. Nos. 84-1110, 84-1139, 85-1152·Published·Cited by 3 cases

Opinion

BUCKLEY, Circuit Judge:

Petitioners challenge various aspects of two Federal Communications Commission orders relating to the allocation of local exchange costs between the interstate and intrastate regulatory jurisdictions. The challenged decisions are interim measures the Commission has taken as the communications industry continues to adjust to the dissolution of American Telephone and Telegraph Company’s Bell System. Their effect is to shift certain costs from intrastate to interstate telephone service, with the partial objective of avoiding large increases'in local telephone rates and advancing the goal of universal telephone service.* We affirm the orders.

I. Background

Great changes have visited the Nation’s telephone system in recent years. The typical interstate call nonetheless still traces a familiar path. It originates at a home or office, proceeds to the switches of a local exchange telephone company, is connected there to an interexchange carrier, crosses state boundaries, reaches a second local exchange, and is finally connected through to the receiving party. The capital plant of local exchange companies is therefore essential to the functioning of the interstate communications system we have today.

State regulatory agencies have jurisdiction to set rates for local and intrastate telephone service. As telephone rates are generally based on the cost of providing service, it is necessary to separate and allocate the costs of operating local exchanges among the intrastate and interstate jurisdictions before state and federal agencies, respectively, can set rates. See Smith v. Illinois Bell Tel. Co., 282 U.S. 133, 51 S.Ct. 65, 75 L.Ed. 255 (1930); MCI Telecommunications Corp. v. FCC, 750 F.2d 135 (D.C.Cir.1984). Thus, separating costs between the two jurisdictions has the incidental effect of defining the rate base of telecommunications carriers.

This case concerns part of the Commission's attempt to use its power to allocate costs between federal and state jurisdictions in order to cushion the transition to a competitive long-distance communications market. The conversion must be cushioned because during the period American Telephone and Telegraph Company (“AT & T”) was divesting itself of the Bell Operating Companies (“BOCs”), see United States v. AT & T, 552 F.Supp. 131 (D.D.C.1982), aff'd mem. sub nom. Maryland v. United States, 460 U.S. 1001, 103 S.Ct. 1240, 75 L.Ed.2d 472 (1983), the Commission determined that the Bell System had operated with wide disparities between the prices BOCs charged for local service and their operating costs.

Local company costs include certain “non-traffic sensitive” (“NTS”) costs. These do not vary with the volume of calling traffic. The capital plant from which they arise is the line from the customer’s premises to the local exchange company’s central office (the “subscriber loop”), related “customer premises equipment” (“CPE”) such as ordinary hand sets and customer wiring, and part of local exchange companies’ central office switching equipment.

After extensive studies in which it considered various options for eliminating the disparities between local company NTS costs and local customer bills, the Commission concluded that imposing “access charges” on subscribers to recover NTS costs would be the most economically efficient long-term solution. See MTS & [361] WATS Market Structure, 93 F.C.C.2d 241 (1983) (“Access Charge Decision ”), recon., 97 F.C.C.2d 682 (1983), aff'd in principal part sub nom. National Ass’n of Regulatory Util. Comm’rs v. FCC, 737 F.2d 1095 (D.C.Cir.1984), cert. denied, 469 U.S. 1227, 105 S.Ct. 1225, 84 L.Ed.2d 364 (1985) (“NARUC”). As the Commission also determined that an immediate transition to such flat charges might cause some subscribers to forgo telephone service, it settled upon an interim policy consisting of (1) relatively low initial flat charges beginning in June 1985, and (2) recovery of the balance of NTS costs through usage-based charges. See NARUC, 737 F.2d at 1107-10.

A. Non-Traffic Sensitive Cost Allocation

The principal issue in this case is whether the Commission properly allocated twenty-five percent of NTS costs to interstate jurisdiction, to be phased in over an eight-year period. The choice of the particular level of allocation, twenty-five percent, is related to changes that have occurred in the communications industry since 1970. In that year the FCC adopted the “Ozark Plan” to allocate NTS costs between the interstate and intrastate jurisdictions. Under the Ozark Plan, NTS costs were assigned to the interstate jurisdiction at the rate of approximately 3.3 times the proportion of interstate use. See MCI v. FCC, 750 F.2d at 137.

The Commission refers to that calculation as the “subscriber plant factor” or “SPF.” As the proportion of interstate use increased sharply after 1970, the SPF caused NTS costs assigned to the interstate jurisdiction to increase more than three times as fast. The Commission therefore decided, in 1982, to “freeze” at approximately twenty-six percent the proportion of NTS costs allocated to interstate use. We affirmed the freeze order in MCI v. FCC, 750 F.2d at 141, as an interim measure pending fuller resolution of the NTS cost problem.

In 1980, the Commission referred the cost allocation problem to a Federal-State Joint Board (“Board”) for study and recommendations. Three years later, in Joint Board I, supra n. *, the Board recommended that twenty-five percent of NTS costs be deemed interstate costs. In its First Decision, supra n. *, the Commission accepted with minor changes the recommendations in Joint Board I. Thus, although local companies’ NTS costs do not increase as a result of interstate use, the Commission decided to order interstate carriers to absorb some of the cost of local service. The Commission defends its decision primarily because the Board’s recommendation “approximated the existing nationwide average interstate allocation under frozen SPF,” and thereby avoided “substantial dislocations in the industry [which] might have a significant impact on local rates and thus on universal service.” Brief for FCC at 22-23. According to the Commission, the policy it has chosen prevents “future automatic increases” in NTS interstate allocation “under a usage-based formula such as SPF.” Id. at 23.

B. High Cost Apportionment

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Rural Telephone Coalition v. Federal Communications Commission, 838 F.2d 1307, 267 U.S. App. D.C. 357 (D.C. Cir. 1988).

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