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New York Telephone Co. v. United States

decided: September 17, 1980.


Telephone company petitioned for review of an FCC order prohibiting the company from imposing a surcharge applicable only to interstate FX/CCSA telephone customers without first filing a tariff with the FCC. The court of appeals held that the FCC had jurisdiction over the charges in question; that these charges must be filed with the FCC; and that the FCC order was not arbitrary, capricious, or an abuse of discretion. Petition to review denied.

Before Oakes and Meskill, Circuit Judges, and Neaher, District Judge.*fn*

Author: Oakes

New York Telephone Company (NYT), by this petition to review, seeks to overturn an order of the Federal Communications Commission (FCC) asserting jurisdiction over local exchange service when used in connection with interstate foreign exchange (FX)*fn1 and common control switching arrangement (CCSA)*fn2 services. The order also required that any charges concerning the local distribution of FX and CCSA services that apply only to interstate customers must be filed with the FCC pursuant to section 203 of the Communications Act of 1934, 47 U.S.C. § 203.

NYT had, at the suggestion of the New York State Public Service Commission (PSC), filed a tariff with the PSC to recover $39.867 million in annual revenue requirements associated with local telephone exchange service accessed by interstate FX and CCSA lines. NYT was to collect the $39.867 million solely from interstate FX/CCSA customers because the PSC, over a sharp dissent, had ordered that these previously local exchange costs be reclassified as interstate costs. When the FCC disallowed this tariff, NYT found itself a stakeholder in what appears at first blush to be a jurisdictional dispute between the PSC and the FCC.

NYT has sought to fight the PSC in the state courts and the FCC in the federal courts. NYT argues here that the FCC cannot preempt a charge provided for in a state tariff without at the same time making effective an alternative tariff providing for such a charge; that the FCC's reversal of prior precedents was unlawful, arbitrary, capricious, and an abuse of discretion; and that the FCC has no right to cancel a tariff presently in effect with the FCC without making a finding after notice and hearing that the tariff on file is unjust or unreasonable. We hold that the FCC had jurisdiction over local exchange service when used in connection with interstate FX and CCSA services, and that the FCC could properly forbid NYT from collecting the charge in question pursuant to the tariff filed with the PSC.


A. Telephone Industry Separations Procedures

Originally, local telephone companies did not receive any compensation from long distance carriers for originating or terminating calls. In Smith v. Illinois Bell Telephone Co., 282 U.S. 133, 149-51, 51 S. Ct. 65, 69-70, 75 L. Ed. 255 (1930), however, the Supreme Court held that the rate base and expenses of a telephone company must be allocated between interstate and intrastate uses for purposes of fixing just and reasonable rates for interstate and intrastate telephone service. Faced with the problems such allocation presented, the telephone companies, state public utility commissions, and federal agencies came to an accommodation in the form of a "Separations Manual" standardizing allocations procedures. The Manual, which is published by the National Association of Regulatory Utility Commissioners (NARUC) and approved by the FCC, has been revised and is incorporated into the FCC's rules, 47 C.F.R. § 67.1 (1979). See Jurisdictional Separations of Telephone Companies, 16 F.C.C.2d 317, 331 (1969). In 1970 it was revised pursuant to the "Ozark Plan," which was recommended by a Federal-State Joint Board convened under section 410(a) of the Communications Act of 1934, 47 U.S.C. § 410(a). See Separation Procedures, 26 F.C.C.2d 247 (1970).

Under section 410(c) of the Communications Act, 47 U.S.C. § 410(c), the FCC is required to refer any rulemaking proceeding regarding the jurisdictional separation of common carrier property and expenses between interstate and intrastate operations to a Federal-State Joint Board for a recommended decision. See S.Rep.No.362, 92d Cong., 1st Sess. 5 (1971), reprinted in (1971) 2 U.S.Code Cong. & Admin.News, pp. 1511, 1515 (statute achieves "joint participation without abandoning Federal superintendence in the field"). Under the separation procedures, AT&T and several other large independent telephone companies provide long-distance public services like MTS (message toll service), which is the regular long distance service available to every home subscriber, and WATS (wide area telecommunication service), which allows business and government subscribers to make interstate calls at fixed volume rates, and the Manual designates a portion of the local exchange costs to be borne by those services. Interstate FX and CCSA private lines, however, are treated differently. Their costs have been assigned wholly to interstate revenue requirements, while the costs of the local exchange service accessed by such lines have been assigned wholly to intrastate revenue requirements.*fn3 Thus business subscribers to FX/CCSA pay one bill for their private line and another bill for the business local exchange service in the area accessed by that line.

Recently, the so-called Execunet decisions,*fn4 opening up toll services to specialized common carriers, led the FCC to accept an agreement negotiated between AT&T and other telephone company representatives, and the major specialized carriers, which established temporary arrangements for the use of local facilities. See Exchange Network Facilities for Interstate Access (ENFIA), 71 F.C.C.2d 440 (1979). This ENFIA agreement provides "rough justice" for services like MTS and WATS until other compensation arrangements can be prescribed. As for FX and CCSA, the Commission said that "some form of rulemaking or interpretive proceeding would appear necessary," id. at 457, and has recently put forth a tentative plan for prescribing arrangements to compensate local exchange carriers for these and other interstate services by determining the amounts interstate exchange carriers will pay for the use of exchange plant to originate and terminate interstate traffic.*fn5

B. The New York State PSC Proceedings

In December 1978 NYT filed a request for a $240.3 million intrastate revenue increase for the twelve-month period ending November 30, 1980, and the New York PSC investigated this request. The PSC staff recommended that $39.867 million of local exchange costs be reclassified as interstate costs associated with interstate FX and CCSA services. Evidently the staff thought that FX and CCSA were comparable to MTS and WATS services and should be allocated a share of the cost of local exchange facilities as in the case of MTS and WATS. In an evidentiary hearing before two state administrative law judges, NYT opposed this change and argued that Congress had vested preemptive authority over the federal-state allocation of joint interstate-intrastate plant in the FCC. See New York Telephone Co. (Recommended Decision), NYPSC 27469, at 88 (Aug. 13, 1979). Although the judges' decision supported NYT, the PSC overturned their ruling and agreed with its staff that interstate FX/CCSA services should be required to bear a share of the costs of local exchange plant computed upon the same basis as the Separations Manual provided for MTS and WATS. See New York Telephone Co. (Final Decision), NYPSC Case 27469, at 25 (Nov. 9, 1979). The PSC gave the telephone company the option of filing a tariff with the PSC to cover the identified costs from FX/CCSA subscribers, thus permitting the PSC to order intrastate toll and message unit decreases totaling almost $40 million on an annual basis. As a result of the PSC order, interstate FX and CCSA subscribers were to be charged with this $40 million while intrastate FX and CCSA subscribers continued to pay a low rate for their local exchange service. A dissenting Commissioner to the PSC order argued that the majority decision was in breach of the agreement entered into by the States with the FCC.

On December 4, 1979, NYT filed the tariff revisions which are now in question with the PSC. These require the interstate FX/CCSA customers to pay a much higher surcharge, in addition to the local service charge, then the intrastate FX/CCSA customers. The surcharge for interstate FX/CCSA users is to be $75 monthly, as of February 1, 1980, and $160 a month as of September 1, 1980,*fn6 while the surcharge for intrastate FX/CCSA users remains at $9.23 per month. The PSC approved these new surcharges. Meanwhile, several FX/CCSA users and competitors filed complaints with the United States District Court for the Southern District of New York, requesting the court to enjoin NYT from collecting the surcharge in absence of a lawful tariff filed with the FCC. United ...

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