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American Telephone and Telegraph Co. v. United States

decided: July 22, 1971.


Lumbard, Smith and Kaufman, Circuit Judges.

Author: Lumbard

LUMBARD, Circuit Judge:

Petitioners seek review of a decision of the Federal Communications Commission, adopted June 10, 1970, released June 18, 1970, and reported at 23 F.C.C.2d 606, and a memorandum opinion and order of the Commission on reconsideration, adopted December 9, 1970, released December 15, 1970, and reported at 26 F.C.C.2d 862. Those decisions involve certain provisions in tariffs applicable to a bulk private-line communications service offered by American Telephone and Telegraph Company and its Associated Bell System Companies (hereinafter collectively referred to as AT&T) and Western Union Telegraph Company (Western Union) at rates lower than those applicable under the general private-line tariffs. The tariff provisions in question here allow certain categories of customers to combine their communications requirements to qualify for these lower rates. The service itself is known as "Telpak" and the tariff provisions at issue are called the "Telpak sharing provisions." The Federal Communications Commission held that these provisions were unlawfully discriminatory in violation of section 202(a) of the Communications Act of 1934, as amended, 47 U.S.C. § 202(a), and by a prescription order under section 205 of the Act, 47 U.S.C. § 205(a), required the carriers to cure the discrimination by extending Telpak sharing to all privateline customers.

We affirm the Commission's holding that the Telpak sharing provisions are unlawfully discriminatory; but we reverse its prescription of unlimited sharing for failure to conform to the requirements of § 205(a) that the prescribed practice be found to be "just, fair, and reasonable" and that the prescribed rates be found to be "just and reasonable." We therefore remand this case to the Commission for a hearing and determination as to what remedy for the discriminatory sharing would satisfy those statutory requirements.


The normal private-line service offered by the common carriers, AT&T and Western Union, provides a customer with a means of continuous communication between specified locations without the carrier having to establish connections for each call or message, that is to say, without having to go through the usual call-and-hook-up process. Such service is not limited to conventional telephone apparatus; it also includes, at long or short distances, reproduction of documents and photographs, data transmission, remote metering, signaling, and other highly sophisticated communications services. The Telpak service is a rate offering under which private-line customers with sufficient bulk communications needs may obtain private-line communications circuits from AT&T or Western Union at substantial discounts below the rates which they would have to pay for the equivalent number of circuits at the ordinary private-line rates.

AT&T initiated the Telpak service in 1961 in order to be competitive with private point-to-point microwave communications systems which had emerged to meet the growing industrial and governmental demand for bulk communications. These private microwave systems had become generally available to large communications users in 1960 as a result of a liberalized licensing policy adopted by the F.C.C. in Allocation of Frequencies in the Bands Above 890 Mc, 27 F.C.C. 359 (1959), 29 F.C.C. 825 (1960). In the Above 890 Mc case, the Commission allocated frequencies for the use of private microwave systems by private firms and permitted the licensing of those systems. As part of this new policy, the Commission in Above 890 Mc allowed certain specified private microwave customers--regulated entities such as common carriers, pipeline companies, and other public utilities, as well as federal, state, and local governmental agencies--to build and operate shared private microwave systems. Shared use of the same facilities by other users was not permitted.

AT&T offered Telpak in order to match generally the cost and service characteristics of private microwave systems. At that time, Telpak consisted of four categories of service between any given pair of points designated by the customer. Those categories were called Telpak A, B, C, and D and were discount offerings for users of the equivalents of 12, 24, 60, and 240 voice channels respectively.

As part of the Telpak offering, and again in order to compete with private microwave, AT&T included provisions in the tariff, which allowed certain private line users, whose communications requirements were not large enough to qualify them for Telpak on their own, to combine their needs and thus to become eligible to receive the benefit of the Telpak rates. It limited this Telpak sharing to those groups eligible under the Above 890 Mc decision to share private microwave facilities, in order to offer common carrier service comparable to private system alternatives, and because it seemed likely that private microwave competition would be most severe in the portion of the market represented by those eligible to share private systems. Thus, Telpak sharing was available only to governmental agencies, right-of-way companies such as pipelines and railroads, common carriers, public utilities, and other organizations whose rates and charges were regulated by a governmental entity. It is these sharing provisions that are the subject of the instant case.

Soon after Telpak's inauguration in 1961, the F.C.C. began an investigation of Telpak rates, which resulted in findings which compared common carrier private-line charges with private microwave costs. Eventually, in 1964, the Commission held that the rates for Telpak A and B, the two categories of Telpak designed for relatively low-volume users, were unlawfully low and not justified in terms of cost or the competition of private microwave, but that Telpak C and D were justified on grounds of competitive necessity. 38 F.C.C. 370 (1964), 37 F.C.C. 1111 (1964), 38 F.C.C. 761 (1965), aff'd, American Trucking Ass'ns v. F.C.C., 126 U.S.App.D.C. 236, 377 F.2d 121 (1966), cert. denied, 386 U.S. 943, 87 S. Ct. 973, 17 L. Ed. 2d 874. Following judicial affirmance of the Commission's decision, Telpak A and B were eliminated, and Telpak is now limited to the C and D classifications for 60 and 240 voice channels respectively. To obtain Telpak C or D bulk rates, customers must pay for 60 or 240 voice channels, even though their actual channel requirements may be less. For those that can take advantage of the Telpak rates, the discount is substantial--53.4% for Telpak C and 57.4% for Telpak D.

Although Telpak C and D were found to be competitively justified in the original Telpak proceeding, the Commission did not determine whether these rates were compensatory. The rates for Telpak C and D subsequently have been increased on two different occasions, but the Commission has not yet decided whether Telpak C and D are compensatory. That question is before the Commission in Docket No. 18128--a proceeding which now involves the rates for most AT&T interstate private-line services, including Telpak. Docket No. 18128 is currently in a hearing status before the Commission and involves questions as to the structure and level of Telpak rates, as well as the competitive justification for the Telpak rate offering.

On July 13, 1966, the Commission amended its private microwave rules to permit wider sharing of private microwave systems, on the grounds that there was no evidence that it would cause an undesirable proliferation of private microwave systems so as to cause substantial injury to the carriers or the public, but that it would result in the fuller and more efficient utilization of microwave frequencies.*fn1 In response to this change, several communications users who were excluded from Telpak sharing made an informal complaint to the F.C.C.,*fn2 and the Commission requested AT&T to advise it as to AT&T's intentions concerning revisions in the Telpak sharing provisions to provide for wider sharing in light of the Commission's action in eliminating sharing restrictions on private microwave. AT&T advised the Commission of its conclusion that there was no competitive justification for any selective extension of Telpak to the complaining users and that unlimited Telpak sharing equivalent to that permitted by the Commission's new private microwave sharing rules would ultimately result in the elimination of the Telpak service offering. AT&T argued that the amendment of the Commission's private microwave sharing rules did not by itself justify a modification of the Telpak sharing regulations.

As a result of AT&T's refusal to permit a limited extension of sharing, the Commission, on May 19, 1967, began on its own motion an investigation which resulted in the orders now under review. The purpose of this investigation, according to the Commission, was to determine whether under § 201(b) or 202(a) of the Communications Act the present Telpak sharing limitations constituted an unlawful discrimination in favor of a specified class of users to the prejudice of all other users, and if so, whether the Commission should prescribe different sharing regulations under § 205(a) of the Act.*fn3 The relatively narrow issue did not include a determination of the propriety of Telpak itself or of any existing or proposed rate structure, which are at issue in Docket No. 18128.*fn4 At the same time, the Commission ordered that the Hearing Examiner presiding at the hearing was not to prepare an initial or recommended decision, but was merely to certify the record to the Commission, and that the Chief of the Commission's Common Carrier Bureau was thereafter to issue a recommended decision, to be subject to exceptions and oral argument.

AT&T, Western Union, and all carriers concurring in the Telpak tariffs of either company were made respondents. In addition, six intervenors representing those presently eligible to share (the government, the airlines, the railroad, the truckers, the motor bus owners, and the public utilities) appeared at the hearing in support of the existing limited sharing provisions, and six groups of intervenors not presently eligible to share (representing the aerospace industry, the hotel and motel industry, the petroleum industry, manufacturers, retail merchants, and the press) appeared in support of a limited extension of sharing restricted to themselves alone.

The Chief of the Common Carrier Bureau of the Commission appeared by counsel, who later participated in the proceedings by cross-examining witnesses, by expressing views and submitting pleadings on disputed interlocutory rulings, by requesting data from the respondent carriers and other parties which were offered for the record, and by submitting the testimony of Dr. William H. Melody, a member of the Bureau's economic studies division. From the beginning, the petitioners objected to the multiple role of the Common Carrier Bureau in preparing the order of investigation, in actively participating in the hearing, in issuing a recommended decision through its Bureau Chief, in privately presenting its views to the Commission on the final decision, and in participating in the draft of the final decision. They particularly objected to the participation of Dr. Melody who was the only witness offered by the Bureau at the hearing and who recommended that the Commission require unlimited Telpak sharing--the course of decision ultimately adopted.

During the twenty-seven days of hearings, AT&T and the other parties supporting the existing Telpak sharing regulations offered evidence to show that the discrimination in those regulations between the customers eligible to combine their communications requirements to qualify for Telpak and those ineligible to share Telpak was justified by the nature and extent of existing private microwave competition. Specifically, they attempted to show that the sharing regulations had been designed to meet such competition at the time they were introduced; that customers eligible to share were by far the most significant users, both actual and potential, of private microwave systems since such customers had unique communications needs and capabilities which made them likely users of such systems; that other customers who were ineligible to share Telpak were less likely to turn to private microwave systems; and that the Commission's 1966 expansion of the private microwave sharing privileges had not measurably enhanced the general appeal of private microwave to customers ineligible to share Telpak. The petitioners did not allege that there was a cost differential between the private-line service provided under Telpak sharing rates and the private-line service provided under the nonsharing rates. As stated above, the Bureau offered the testimony of Dr. Melody who advocated unlimited sharing of Telpak.

About seven months after the hearings closed, the Bureau Chief issued his recommended decision. He concluded that the existing limited Telpak sharing provisions were unlawfully discriminatory under § 202(a) of the Communications Act, and he recommended that the carriers be ordered to file tariff revisions eliminating the discrimination. With respect to the prescription question, however, he concluded that "the record in this proceeding does not establish an adequate basis for a definitive prescription by the Commission of specific measures that should be taken by the carriers to eliminate the unlawful discriminations and preferences found herein to exist." 23 F.C.C.2d 639, 658 (1969). Finally, he found that the Telpak sharing practices were not in accord with the provisions of the tariff, since the tariff referred to shared use of facilities, while in fact the customers did not share the same facilities.*fn5

Petitioners filed exceptions to the recommended decision, attacking the conclusion that the existing Telpak sharing regulations were unlawfully discriminatory. They also argued that the commingling by the Bureau of its function as an advocate in the hearings and its role as decision-maker was prejudicial and caused an erroneous result, and that the Commission should have consolidated this proceeding with those concerning the overall rate levels of Telpak and its compensatory justification.

After hearing oral argument on these exceptions, the Commission issued its decision on June 18, 1970. It adopted the Bureau Chief's finding that the existing Telpak sharing provisions were unlawfully discriminatory. It held that the petitioners had the burden of presenting "some persuasive and tangible evidence" that "those benefiting from the discrimination have an alternative of satisfying their communications requirements from a substitute source of supply and that they will shift to the substitute source unless the discrimination is maintained," 23 F.C.C.2d at 613, and it concluded that:

"it has not been shown that shared private microwave, has been an attractive alternative for certain groups, i.e., the airlines, truckers, and motor bus carriers and that at best, it possibly has been attractive for other groups, such as the railroads, power, and petroleum industries because of their particular ...

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