Petition — A.T.&T. v. Federal Communications Commission

IN THE

Supreme Court of the United States

Ocroser Trnu, 1976

— 8760-18677

AMERICAN TELEPHONE AND TELEGRAPH COMPANY, ET AL.,

Petitioners,

V.

Fron AL COMMUNICATIONS COMMISSION and the

Untrep Srarrs or AMERICA, PT AL.,

Respondents.

PETITION FOR WRIT OF CERTIORARI TO

THE UNITED STATES COURT OF APPEALS

FOR THE FOURTH CIRCUIT

Of Counsel: — —

ruARr C. Stock

K. Man GARLINGHOUSE 38 Sixteenth Street, N. W.

AL D C. PARTOLL W D.C. 20006

195 Broadwa ——

New York, N.Y. 10007 FDpWaRD L. FarepMan

WuLIAM L. Leonarp

195 Broadwa

New York, N. V., 10007

Counsel for the

Bell System Companies

TABLE OF CONTENTS

Page

Z — =F

r V 2

. ED ccc coccccccccccoctsoesesese coe 8

Srarurzs Ax Db Recuiations INVOLVED ................ 4

, EOS Pe ere Trem 4

A. The Nature and Regulation of Telephone Service

and the Provision of Terminal Equipment 4

B. The FCC Registration Program and Other Perti-

TT eee eee 8

. Se cecunépeneune 12

Reasons ror GRaNTING THE Marre 15

I. The Decision Below Presents A Major Question

of Statutory Jurisdiction Which Has Not Been

But Should Be Considered By This Court ...... 16

Il. The FCC Lacks Power To Require Carriers To

Register Their Own Terminal Equipment, and Its

Rationale For Carrier Registration Conflicts with

this Court’s RCA Decision ...............+.4:: 25

III. The Court Below Plainly Violated the Chenery

Doctrine in Substituting its Own Economie Con-

8 for Findings the FCC Erroneously Failed

0

1E 30

D ̃ II.... .. eonens 38

TABLE OF AUTHORITIES

Cases: Page

ATI v. FCC, 487 F.2d 865 (2d Cir. 1973) ........... 27

Atlantic Refining Co. v. Public Service Comm’n, 360

e atlas iad acne ddceadadane 33

Burli 2 Truck Lines v. United States, 371 U.S. 156 2

es

Caminetti v. United States, 242 U.S. 470 (19177 17

Carter Mountain Transmission Corp. v. FCC, 321 F.2d

539 (D.C. Cir), cert. denied, 375 U.S. 951 (1963) .. 33

i’ Table of Authorities Continued

Page

Chemehuevi Tribe of ‘Indians v. FC, 420 US. 375 2

Fe

FCC v. RCA Communications, Inc., 346 U.S. 86

1 eens 8, 16, 28, 29

FPO v..Conway Corp., 44 U.S.L.W. 4777 (U.S. June

RR 20, 21

FPC v. Hunt, 376 U.S. 515 (1964)))))))) 33

FPC vy. Panhandle Eastern Pipe Line Co., 337 U.S.

% cc 27

FTC v. Bunte Bros., 312 U.S. 349 (1941777) 15

FTC v. Raladam Co., 283 U.S. 643 (193177) 27

Gardaer v. Providence Tel. Co., 49 A. 1004 (R. I.) re-

hearing denied, 50 A. 1014 (1901) .............. 5, 22

GTE Service Corp. v. FCC, 474 F.2d 724 (2d Cir.

1717171771777 ͤ—T—A—A . tébedene ¢ uns 27

Hawaiian Telephone Co. v. FCC, 498 F.2d 771 (D.C.

ccc 27, 28, 29

Kitchen v. FCC, 464 F. 2d 801 (D.C. Cir. 19727 23

NARUC v. FCC, 533 F.2d 601 (D.C. Cir. 1976) 23

NLRB v Waterman S. S. Co., 309 U.S. 206 (19400) 37

North Carolina v. United States, 325 U.S. 507 (1945). 15, 20

North Carolina Utilities Comm en v. FCC, 537 F.2d 787

(1976), cert. denied, 45 U.S. L. W. 3432 (U.S. Dec.

c 5, 13, 15, 16

Northern Indiana Public Service Co. v. lsaak Walton

e. i 37

Permian Basin Area Rate Cases, 390 U.S. 747 (1968) .. 31

or © Petroleum Co. v. Wisconsin, 347 U.S. 672

SEED Gnnnceneeennsouenbesecessanevcicseaneeas

Puerto Rico Telephone Company v. FCC, No. 76-1134

4, 9 > 5 een 23

SEC v. Chenery Corp., 318 U.S. 80 (1943) passim

SEC v. Chenery Corp, 332 U.S. 194 (1947) .......... 35

62 Cases v. United States, 340 U.S. 593 (1951 17

Stark v. Wickard, 321 U.S. 288 (1944) .............. 27

United States v. Southwestern Cable Co., 392 U.S. 157

q4•?öhtſſ.!· ĩ ᷣ— m3 20

FCC anp State ApMINistrative AGENCY PROCEEDINGS:

Allocation of Frequency in Bands Above 890 Mc, 29

r pees ee 8

AT&T, 56 F. C. C. 2d 14 (1975), pet. for review ing

sub nom. California v. FCC, D.C. Cir., No. 75-2060. 24

Table of Authorities Continued iii

Page

ATET, ‘‘Foreign Attachment“ Tariff Revisions, 15

F.C.C.2d 605 (1968), recon. dented, 18 F.C.C.2d

DT enen 8

Carterfone, 13 F.C.C.2d 420, recon. denied, 14 F.C.C.2d

r ˙ ˙c————— eee 8

Customer Interconnection, 46 F. C. C. 2d 214 (1974) .... 10

In re MCI, 18 F.C. C. 2d 853 (1969), recon. denied, 21

F ens 8

In re Telephone Companies, P.U.R. 1915A 1032 (S..

e eee 22

In re Telerent Leasing Corp., 45 F.C.C.2d 204 (1974),

aff'd sub. nom. North Carolina Utilities Comm 'n

v. FCC, 537 F.2d 787 (4th Cir. 1976), cert. denied, 45

U.S.L.W. 3432 (U.S. Dee. 13, 1976) ......... 5, 10, 18

Interstate and Foreign MTS and WATS, 35 FC. C. 2d

r es denen ese ese 6 ese 9

Jacobsen v. Northwestern Bell Tel. Co., 61 P. U. R. 2d

541 (S.D. Pub. Util. Comm 'n 19650) 22

King v. Pacific Tel. & Tel. Co., 16 P.U.R. (n.s.) 348

(Ore. Pub. Util. Comm’n 1936) *** 22

Littlepage v. Mosier Valley Tel. Co., P.U.R. 1918E 425

(Ore. Pub. Serv. Comm 'n 1918) n 22

Los Angeles v. Southern California Tel. Co., 2 P. U. R.

— 9 247 (Cal. R. R. Comm 'n 1933) ............ 7, 22

Netsky v. Bell Tel. Co. of Pa., 65 P. U. R.3d 145 (Pa.

1 22

Peters Sunset Beach, Inc. v. Northwestern Bell Tel.

Co., 60 P.U.R.2d 363 (Minn. R.R. & Whse. Comm 'n

1964), aff’d, Minn. Dist. Ct. 8th Jud. Dist., Case No.

, oka enc en ceases 7, 22

Quick Action Collection v. New York Tel. Co., P. U. -

1920D 137 (N.J. Bd. Pub. Util. Comm 'rs 1920) .

Racine Flash Cab Co. v. Wisconsin Tel. Co., 65 PUR.”

3d 321 (Wis. Pub. Serv. Comm 'n 1969) .......... 22

Re Farmers Fountain Tel. Co., P.U.R. 1926C 363 (III.

re eee dees 22

United too Department of Defense v. General Tele-

55 e Co., 38 F.C. C. 2d 803 (1973), review denied,

CC 73-854 (1973), aff’d per curiam sub nom. St.

Joseph Tel. & Tel. Co. v. FCC, 505 F.2d 476 (D.C.

EE re ee ee 60 66 7

iv Table of Authorities Continued

Page

STATUTES AND REGULATIONS:

L 2

SUüaaateh eeeee 13

Communications Act of 1934:

Section 1, 47 U.S.C. (1111 33

Section 2(b)(1), 47 U.S.C. § 1526 b)) passim

Section 4(i), 47 U.S.C. 5 1540 ʒ7777ʒʒ) 26

Section 4(j), 47 U.S.C. 5 1540 26

Sections 201-05, 47 U.S.C. §§ 2010555 6, 26

Section 208, 47 U.S.C. C 2999 26

Section 214, 47 U.S.C. § 21Iã́ã—ꝶKn ccc cece ees 6, 25

Section 215, 47 U.S.C. ( ss 26

Section 215(b), 47 U.S.C. § 2150-bk 26

Section 218, 47 U.S.C. § 219999999999. 26, 30

Section 221(b), 47 U.S.C. § 221( b)) passim

Section 301, 47 U.S.C. § 3ᷣ . passim

Sections 313-14, 47 U.S.C. §§ 313-114. 26

Section 402(a), 47 U.S.C, § 402(a) .............. 13

Sections 403-04, 47 U.S.C. §§ 403.) 26

Section 410, 47 U.S.C. § 41 .. 26,

Section 602, 47 U.S.C. § G02 ᷑ ã VMI... 26

Un. eee 20

Interstate Commerce Ae·tluͥkuuu;Q;ʒ 21

Mataval Gas Ast eee see 20

Va. Code Aun, . „% P 5

MISCELLANEOUS:

arne. . eee 28

Table of Authorities Continued *

Page

H.R. 8301, 73d Cong., 2d Sess, (1934) 20, 26

S. Rep. No. 781, 73d Cong., 2d Sess. (1934) .......... 20

H.R. Rep. No. 910, 93d Cong., Ist Sess. (1953) ....... 6

[. S. 2910 before the Senate Finance Com-

ittee on Interstate Commerce, 73d Cong., 2d Sess.

eee eee 622 20

Hearings on 8. 6 before the Senate Committee on Inter-

state Commerce, 71st Cong., Ist Sess. (1930) ..... 20

119 Cong. Ree. 30962 (1973g))))))j erences 19

78 Cong. Rec. 10316 (1934) .... 66... ec cece eee ees 5

78 Cong. Rec. 3275 (193))))))ꝛ e eens 26

78 Cong. Ree. 3367 (1984) .... 66.666 cee e nee 26

re v 6

Letter from Dean FCC Chairman, to Ben Wig-

gins, Chairman, NARUC Committee on Communi-

cations, Aug. 4, 177777 eee eee nees 32

National Academy of Sciences, A Technical Analysis

of the Common Carrier/User Interconnections

eee 7, 12, 30

National Association of Regulatory Utility Commis

sioners, Report After Investigation (1974) .... 10,32

President’s Task Force on Communications Policy,

Final Report (1968) «2... 6666 ccc cece eee newness 21

IN THE

Supreme Court of the United States

Ocroser Term, 1976

No.

AMERICAN TELEPHONE AND TELEGRAPH COMPANY, ET L.

Petitioners,

V.

FeperaL Communications Comission and the

Unrrep States or AMERICA, d AL.,

sespondents.

— C

PETITION FOR WRIT OF CERTIORARI TO

THE UNITED STATES COURT OF APPEALS

FOR THE FOURTH CIRCUIT

Petitioners, the American Telephone and Telegraph

Company and its 23 associated Bell System operating

companies, request that a writ of certiorari issue to re-

view the judgment of the United States Court of Ap-

peals for the Fourth Circuit in this case.

The opinion of the Court of Appeals, which is not yet

officially reported, appears at Appendix A to this peti-

tion.’ It affirmed, by a two-to-one vote, the Federal

Communications Commission’s First Report and Or-

der, which is reported at 56 F.C.C.2d 593 (1975) and

appears at Appendix B; the Commission's Second Re-

‘The appendices are separately bound in a companion volume

which is cited as Pet. App.

9

—

port and Order, which is reported at 58 F.C. C. 2d 736

(1976) and appears at Appendix C; the Commission's

Memorandum Opinion and Order released February

13, 1976 which is reported at 57 F.C.C.2d 1216 and ap-

_ pears at Appendix D; the Commission's Memorandum

Opinion and Order released March 15, 1976, which is re-

ported at 58 F.C.C.2d 716 and appears at Appendix E;

and the Commission’s Memorandum Opinion and

Order released April 28, 1976, which is reported at

59 F.C.C.2d 83 and appears at Appendix F.

The judgment of the Court of Appeals, which was

entered on March 22, 1977, appears at Appendix G.

The jurisdiction of this Court is invoked under 28

U.S.C. § 1254(1).

In this case the Federal Communications Commis-

sion has established a massive new federal regulatory

program requiring, with limited exceptions, FCC regis-

tration of telephone sets and other terminal equipment

supplied by customers in the United States. Almost all

such equipment is used for intrastate and exchange

service, and the FCC program will displace long stand-

ing and pervasive state regulation of such equipment

as well as drastically alter the way in which telephone

service has long been provided in this country. The

FCC’s program will also require registration and modi-

fication of telephone company supplied terminal equip-

ment, although such equipment has been safely con-

nected to the telephone network for over three quarters

of a century without prior federal registration (or

other form of prior federal approval) and the program

will impose vast direct costs on the carriers. In adopt-

3

ing the program, the FCC expressly declined to con-

sider the potentially enormous increases this program

will cause in telephone rates paid by the publie. Never-

theless, the Court of Appeals sustained the program

based on its on analysis of the potential [economic]

impact of the . . . program.“ Pet. App. 34a-35a. The

questions presented are:

1. Whether the FCC“ program, in requiring fed-

eral registration of terminal equipment used for intra-

state and exchange service, violates the explicit limits

on the FCC’s jurisdiction under the Communications

Act where Congress specifically declined te grant the

FCC jurisdiction which would have encompassed such

equipment and instead expressly provided in Section

2(b)(1) that (apart from radio licensing) nothing

in [the] Act” shall apply or give the Commission

jurisdiction with respect to facilities . . . for or in

connection with intrastate communication service’’—a

prohibition on FCC jurisdiction confirmed in Section

221 (b) „with respect to facilities . . . for or in con-

nection with . . telephone exchange service . . . even

though a portion of such exchange service constitutes

interstate or foreign communications“!

2. Whether, even if the express terms of the Com-

munications Act do not preclude a claim of general

FCC jurisdiction over terminal equipment, inclusion

of carrier equipment in the registration program re-

flects an unlawful assertion of FCC authority over

carrier equipment where the Communications Act

grants the FCC no authority to require its approval

of carrier equipment before it is attached to the tele-

phone network and where the FCC has acted without

any valid, rational reasons!

4

3. Whether the FCC erred in expressly refusing

to consider the multimillion-dollar adverse impact of

the program on telephone rates paid by the public and

whether the reviewing court violated the rule of SEC

v. Chenery Corp., 318 U.S, 80 (1943), by sustaining

the program based on the court’s own ad hoc economic

analysis ?*

STATUTES AND REGULATIONS INVOLVED

Pertinent provisions of the Communications Act ap-

pear at Appendix H. Pertinent portions of Part 68

of the FCC rules, setting forth the FCC’s registration

regulations, appear at Appendix I.

STATEMENT OF THE CASE

A. The Nature and Regulation of Telephone Service and the

Provision of Terminal Equipment

Telephone service in this country is provided

through a series of local telephone exchanges in in-

dividual cities. Within the local exchange area, service

is provided by using local lines to link “terminal

equipment“ — telephone sets, PBXs, answering de-

vices, ete.—ordinarily located at the customer“ home

or business to exchange switching facilities located at

the telephore company’s central office serving that ex-

change. Telephones or other terminal equipment are

connected with one another through the central office

switching facilities, which are controlled by the dial

or other signals generated by the terminal equipment.’

* If certiorari is granted, petitioners may also brief related ques-

tions involving the inadequacy of the registration program to pro-

tect the telephone network against harm from customer equipment

and the power of the FCC to regulate manufacturers of customer

supplied equipment.

* The local exchanges are connected with one another through ¢

complex network of intercity lines. Ordinarily, long distance calls

5

Terminal equipment is mainly used for intrastate

and exchange service.’ Consonantly, the states have

regulated the provision of terminal equipment vir-

tually from the outset of regulated service in this

country. E. g., Gardner v. Providence Tel. Co., 49 A.

1004 (R. I. 1901). Tariffs filed with the states have

long set forth the rates and conditions on which termi-

nal equipment is provided by the telephone companies ;

likewise, state tariffs contain regulations governing

the use of customer provided equipment with tele-

phone company facilities (see pp. 8-9, below). State

commissions exercise pervasive regulatory authority

over such tariffs and the terms for the use of customer

equipment. See, .., Va. Code Ann, Title 56.

When Congress passed the Communications Act in

1934 and established the FCC to regulate interstate

communications, it was well aware that facilities such

as terminal equipment were used mainly for intrastate

service (see p. 5, n. 3, above) and it ineluded Section

2000 () to preserve existing state regulatory juris-

diction over such facilities against possible federal

encroachment. Congress also included Section 221(b)

to preserve state jurisdiction over local exchange ser-

vice and facilities even though such service and facili-

ties may be used for interstate communications (e. 9.

are routed between exchanges along these lines by toll switching

facilities designed to handle interexchange (i.¢., intercity) traffic.

At the time the Communications Act was passed, the figure

was estimated at 97½ or 98% of all telephone communication”’

(78 Cong. Ree. 10316 (1934)). The figure has most recently been

estimated at approximately 97 percent. In re Telerent Leasing

Corp., 45 F.C.C.2d 204, 211 (1974), cd sub nom. North Carolina

Utilities Comm’n v. FCC, 537 F.2d 787 (4th Cir, 1976), cert.

denied, 45 U.S. L. W. 3432 (U.S. Dec. 13, 1976).

6

exchange facilities in the Washington, D.C., metro-

politan area).“ Congress thus sought in the Communi-

cations Act to complement, not supersede, existing

state regulatory jurisdiction. The FCC was given au-

thority to regulate certain aspects of telecommunica-

tions—such as the rates for “ interstate“ calls (See-

tions 201-05, 47 U.S.C.§§ 201-05) and the construction

or operation of new ‘‘interstate lines“ (Section 214,

47 U.S.C. § 214)—which the states could not or did not

effectively control. However, the language and legis-

lative history of Section 2(b)(1) as well as of Section

221(b) confirms (see p. 17, below) that Congress ex-

pressiy withheld from the FCC any jurisdiction over

matters—such as terminal equipment used for intra-

state and exchange service—which are subject to effec-

tive state regulation.

In the decades since the Act was passed, states have

continued to regulate terminal equipment pervasively

and such equipment has continued to be provided by

telephone companies under tariffs filed with the state

agencies, See pp. 22-23, below.’ Equipment has not gen-

erally been provided under tariffs filed with the FCC;

nor has the FCC ever sought in past years to assert

Both Sections 2(b) (1) and 221(b) preserve the FCO power to

license radio frequencies under Section 301 (47 U.S.C, § 301) to

ensure that carriers, like any other users of the limited number of

available radio frequencies, do not use frequencies allocated to

others. See, e.g., H.R. Rep. No. 910, 83d Cong., Ist Sess. 1 (1953).

Section 221(b) also requires, as a condition of exemption, that state

regulation exists, which it does in every state.

Thus, AT&T's FCC Tariff No. 263, which offers long-distance

telephone service, makes no offering of telephones or other terminal

equipment; rather, it provides (para. 1.1) that the station equip.

ment is ‘‘furnished in accordance with Telephone Exchange Service

Tariffs, that is, tariffs filed with state regulatory agencies,

7

any general regulatory jurisdiction over terminal

equipment.“

Historically, in offering telephone service under

state regulation, the telephone companies provided

and maintained all the parts of the telephone system,

ineluding the telephone sets and other terminal equip-

ment connected to the local exchanges. By providing

and maintaining all the facilities necessary for tele-

phone service, the telephone companies sought to pro-

tect the telephone network from any harm and to

assure the highest quality of service possible.’ This

policy of “‘end-to-end service“ by regulated utilities

was followed with the explicit or implicit approval

of the state regulatory agencies,” and it comported

® For decades, the FPO never claimed any general jurisdiction

over terminal equipment merely because such equipment might oc-

casionally handle interstate calls. Only in relatively rare situations

iavolving equipment with a uniquely interstate communications

function—such as certain military facilities used in the interstate

military defense network—is terminal equipment tariffed with the

FCC. F.., United States Dept. of Defense v. General Telephone

Co., 38 F.C.C, 2d 803 (1973), review denied, FCC 73-854 (1973),

aff’d per curiam sub nom. St. Joseph Tel. & Tel. Co. v. FCC, 505

F.2d 476 (D.C. Cir, 1974).

7 As the National Academy of Sciences has reported to the FCC,

uncontrolled connection of customer supplied equipment would

create a variety of hazards including“ voltages dangerous to human

lite, impaired transmission quality, and improper network con-

trol signaling that could cause malfunctions in vital switching

machinery. National Academy of Sciences, A Technical Analysis

of the Common Carrier /User Interconnections Area 2-3, 4-7 /1970).

E.., Peters Sunset Beach, Inc. v. Northwestern Bell Tel. Co.,

60 P.U.R.3d 363 (Minn. R.R. & Whse Comm'n 1964), d, Minn.

Dist. Ct. 8th Jud. Dist. Case No, 8529 (Aug. 17, 1966); Los

Angeles v. Southern California Tel. Co., 2 P. U. R. (us.) 247 ( Cal.

R.R. Comm 'n 1933); Quick Action Collection Co. v. New York

Tel. Co., P.U.R. 1920D 137 (NJ. Bd. Pub. Util. Comm'rs 1920).

8

with the basie approach adopted in the Communica-

tions Act for interstate service, where Congress de-

termined that regulation rather than abstract and

mechanical reliance on competition would best serve

the public interest in the field of telecommunications.

See FCC v. RCA Communications, Inc., 346 U.S. 86,

92-97 (1953).

B. The FCC Registration Program and Other Pertinent Proceedings

Since the 1960's, the FCC has begun to substitute

a new policy of restricted competition for the regu-

lated utility concept of telephone service. It thus took

steps to promote competition in the field of interstate

private lines which the FCC regulates under Sections

214 and 301 of the Act.’ It took a further step in its

Carterfone decision” invalidating interstate tariff

provisions as applied to prohibit use of a non-carrier

device connecting two communications systems for

“interstate or foreign telephone service.“

Carterfone did not purport to interfere with intra-

state tariffs or the states’ historie jurisdiction over

terminal equipment in general, and the FCC subse-

quently made clear that its decision in Carterfone did

not authorize a customer to “substitute his own equip-

ment or facilities . . . for that furnished by the tele-

phone company. . . . Nevertheless, the Bell System

Allocation of Frequency in Bands Above 890 Me, 29 F.C. C. 825

(1960); In re MCI, 18 F.C.C.2d 953 (1969), recon. denied, 21

F.C.C.2d 190 (1970).

Carterfone, 13 F.C.C.2d 420, 441, recon. denied, 14 F.C. C 2d

571 (1968).

“ AT&T “‘Foreign Attachment Tariff Revisions, 15 FCC. 2d

605, 609-10 (1968), recon. denied, 18 F.C.C.2d 871 (1969).

9

and other telephone companies filed with the states

new tariffs that generally permitted customer provided

terminel equipment to be connected to the telephone

line through ‘‘protective connecting arrangements”’

which safeguard telephone company employees and

facilities against improper transmission of signals or

excessive voltages. As a further safeguard, the new

tariffs also required that the telephone companies pro-

vide the network control signaling units—the devices

which generate the control signals to operate the ex-

change switching equipment at the telephone com-

pany's central office.“

In June 1972, the FCC instituted the present pro-

ceedings to create opportunities for customers to sub-

stitute their own terminal equipment for carrier sup-

plied equipment. Interstate and Foreign MTS and

WATS, 35 F.C.C.2d 539 (1972). The FCC proposed

to eliminate the requirements that carrier connecting

arrangements and network control signaling units be

used where customers substituted thei: own terminal

equipment. Id. In a supplemental notice, the FCC

represented that the economic issues posed by its new

approach would be “‘cover[ed] . . . by further supple-

mental notices in the near future“ (40 F.C.C.2d 315,

318 (1973) ), and it requested comment on a proposed

registration program as a substitute for the carrier

connecting-arrangement requirements prescribed by

applicable tariffs. Id. at 316-17.

12 While connecting arrangements and network control signaling

units normally are furnished pursuant to state tariffs (except for

those uniquely interstate situations in which terminal equipment

is tariffed on an interstate basis, see p. 7, n. 6, above), the tele-

phone companies revised their interstate tariffs as well as their

state tariffs since the FCC had ordered them in Carterfone to re-

move existing restrictions with respect to interstate communications.

10

While the FCC was proceeding with its proposals,

state authorities were becoming increasingly con-

cerned about the economic consequences. The National

Association of Regulatory Utility Commissioners

(““NARUC”’) undertook a study which concluded that

expanded customer substitution would increase tele-

phone rates for ordinary local residential and business

telephone users by $360-740 million annually by 1980

and by almost $1 billion annually by 1984.“ Several

state regulatory authorities began to consider propo-

sals to limit the expansion of customer substitution

of intrastate and exchange facilities and services for

those provided by the telephone companies. See In re

Telerent Leasing Corp., supra, 45 F.C.C.2d at 204-05.

In response the FCC made a general declaration in

the Telerent case that the states could not disregard

FCC policy established within the ambit of FCC juris-

diction and that FCC jurisdiction extended to the

regulation of terminal equipment connected to local

exchanges. 45 F.C.C.2d at 221. Yet, in Telerent, the

FCC once again promised to expend its registration

case to consider the economic consequences of ex-

panded customer substitution. Id. at 222-23. Shortly

thereafter, the FCC established Docket No. 20003 as

a separate inquiry into the economic impact of inter

alia customer provision of terminal equipment,

acknowledging that the use of customer provided

facilities in lieu of those offered by the carriers may

affect the rates for services to other customers.“ Cus-

tomer Interconnection, 46 F.C.C.2d 214, 215 (1974).

* NARUC, Report After Investigation 19 (1974). NARUC is the

national organization of state commissioners responsible for utility

regulation in the states.

11

On November 7, 1975, with the economic inquiry in

Docket No. 20003 uncompleted, the FCC released its

First Report and Order in the registration p1oceed-

ing.“ 56 F.C.C.2d 593 (Pet. App. 1b). The First

Report and Order promulgated FCC regulations es-

tablishing a sweeping new program for federal regis-

tration of all types of terminal equipment with the

exception of certain categories of equipment including

PBXs, key telephone systems, and main station tele-

phones. A few months later, these last three categories

of equipment were also made subject to the program

by the FCC’s Second Report and Order, 58 F.C.C.2d

736 (Pet. App. 1c).”

Under the registration program, customer supplied

terminal equipment registered with the FCC may—

contrary to most existing state tariffs—be direct!)

connected to a carrier's exchange facilities without

the use of either a connecting arrangement or a car-

rier supplied network controlling signaling unit as is

presently required to protect the network and tele-

phone company employees from harm.” Pet. App. 6i.

„The FCC issued a First Report in Docket No. 20003, belittiing

the potential impact of customer substitution, only after the present

ease had been argued and submitted to the court below. Although

apprised of the decision in Docket No. 20003, the majority opinion

placed no reliance on it (see p. 36, n. 62, below) and—given the

procedural errors and gross disregard of the evidence in Docket

No. 20003—the FCC could not have permissibly rested its registra-

tion program upon that decision. See pp. 35-36, below.

15 Two commissioners dissented from the FCC’s Second Report

and Order, one of whom explicitly argued that the Commission

should not extend the registration requirement to PBX equip-

ment without first having examined the social and economic impact

of this deeision. Pet. App. 24e.

Moreover, to facilitate the substitution of customer equipment,

12

Carriers must also register their own terminal equip-

ment before connecting it to their own network (Pet.

App. 15b-16b), even though they have safely utilized

their own equipment for decades and even though

this will require carriers to modify their equipment

needlessly and expend millions of dollars for registra-

tion. See pp. 27-28, below.“ Finally, despite its earlier

promise to consider the economic impact of expanded

customer substitution (see pp. 9-10, above), the FOC

declined to address this issue before adopting its regis-

tration program. See Pet. App. 14b, 6e-7e; pp. 32-33,

below.

C. The Decision Below

The FCC’s registration orders were affirmed by the

Court of Appeals for the Fourth Circuit by a two-to-

one vote. Pet. App. Ia.“ However, prior to reviewing

carriers must generally arrange their facilities so that connection

can readily be made through ‘‘standard plugs and standard tele-

phone company-provided Jacks. Pet, App. 61, Yet, even while the

registration program purports to establish technical requirements

that justify permitting easy, direct connection of customer equip-

ment, thereby facilitating customer substitution, the program con-

tains serious omissions in terms of adequate procedures and stand-

ards for quality control in the manufacture of terminal equipment

and for the maintenance and repair of such equipment after in-

stallation. The National Academy of Science has independently de-

termined that adequate procedures and standards in these areas are

essential to any program which would permit the direct electrical

connection of terminal equipment to the telephone network. Na.

tional Academy of Seienee, A Technical Analysis of the Common

Carrier / User Interconnections Area 5051 (1979),

One Commissioner dissented free ‘iy ix an of carrier

equipment, pointing out that the esr. 4 nut- in ineentive

to protect their own network from ha: a oe th own equipment

and thus carrier registration was merely ‘‘regulatory overkill

which cannot be supported by logie or experience, Pet. App. 540.

The orders affirmed by the Court of Appeals were the FCC's

13

the orders, the Court of Appeals stayed the major as-

pects of the registration program, recognizing that

the program’s impact would be largely irreversible.

Pet. App. 1j-12j. The court has continued that stay in

effect pending petitions for certiorari.” Pet. App. 13).

Prior to the decision below, another panel of the

Fourth Circuit had affirmed the FCC's Telerent deci-

sion in North Carolina Utilities Comm'n v. FCC, 537

F.2d 787 (1976), cert. denied, 45 U.S.L.W. 3432 (U.S.

Dec. 13, 1976) (“North Carolina 1“) and had ruled

that Sections 2(b)(1) and 221(b) do not bar the FCC

from claiming regulatory jurisdiction over terminal

equipment connected to local changes. This case,

however, involves not merely some abstract declara-

tion of FCC jurisdiction but rather a major federal

regulatory program displacing existing state author-

ity. Against this background, the panel below agreed

to reexamine the holding of North Carolina I, empha-

sizing that the FCC's action ‘‘implicat[ed] significant

state and federal interests. Pet. App. 12a. Neverthe-

less, on the merits, the panel adhered to North Caro-

lina I by a two-to-one vote.“

First and Second Reports and Orders and three supplemental or-

ders that were released February 13, 1976, March 15, 1976, and

April 28, 1976 and are set forth in Appendices D. K and F. The

court 's jurisdiction was invoked by petitions for review filed pur:

suant to 47 U.S.C, § 402(a) and 28 U.S.C, § 2342(1).

% The court s stay, which continues in effect, prevents the FCC

from implementing its registration program for all carrier equip-

ment and for PBXs, key systems, main stations and extension tele-

phones; the program has been allowed to commence only for cus

tomer provided data and ancillary equipment (e, answering de-

viees) other than extension telephones—a phase of ‘he program

having significantly less impact. Pet. App. 1)-12).

„ Because of disqualifications in the Fourth Cireuit, the dert

sion in North Carolina I was rendered by Judge Hastie, joined by

14

The majority also rejected the claim that the FCC’s

inelusion of carrier equipment in the registration pro-

gram was an irrational and unjustifiable exercise of

a non-existent power. Pet. App. 25a-26a, 27a-29a. The

majority could not cite any provision of the Act ex-

pressly granting the FCC authority to require prior

federal approval of carrier equipment. Nor did the

majority opinion address the carriers’ detailed argu-

ments that the FCC decision to require carrier-

equipment registration rested on irrational and im-

proper reasons, even assuming the FCC did possess

the requisite prior-approval power.

Finally, although the FCC explicitly refused to re-

solve the eeonomie impact of expanded customer sub-

stitution, the majority opinion found that this failure

to consider a pertinent public interest issue was not

fatal. Unable to point to any reasoned analysis by the

FCC of the registration program's economic impact

on the public, the majority opinion itself

despite the rule clearly established by SEC v. Chenery

Corp., 318 U.S. 80 (1943)—to provide the analysis

which the FCC should have performed. Pet. App. 30a-

Aa. Not surprisingly, the court's own post hoc con-

clusion that the registration program's economic im-

pact will not be severe rests on untested and ineorrect

analysis and assertions. See pp. 35-36, below.

Judge Tuttle; Judge Widener, the only available member of the

Fourth Cireuit, dissented. The decision in this case was rendered

hy Judge Tuttle, joined by Judge Rives; Judge Widener again

dissented. En bane consideration by the Fourth Cireuit has been

unavailable in both cases because of disqualifications.

15

This case involves the validity of one of the most

significant and far reaching administrative programs

ever undertaken by a federal agency. With the regis-

tration program, the FCC seeks to regulate generally

and pervasively over 100 million pieces of terminal

equipment which have routinely been the subject of

state—not federal—regulation for over 50 years. The

FCC's extraordinary action is premised on an er-

roneous claim to a regulatory jurisdiction which is

explicitly prohibited by the plain language of the

Communications Act, is directly contrary to Congress’

express intent in enacting the Act, and will have a

wide-ranging and severe impact on the way in which

telephone service has traditionally been provided and

regulated in the United States.

An abstract assertion of such regulatory jurisdic-

tion was considered in North Carolina I. It is only

with this case, however, that the FCC has sought to

adopt a specifie regulatory program based on its juris-

dictional claim over terminal equipment. Thus, this

ease, for the first time, brings into sharp focus the

extraordinary reach of the FCC's attempted regula-

tory grasp (see Pet. App. 11-391) and the immediate

displacement of state authority that has endured for

decades. Moreover, since the FCC has now adopted

a specific program, this case arises in the concrete

context in which this Court is accustomed to consider-

ing important issues involving allocation of regulatory

jurisdiction between state and federal authorities.”

—

n See, , Chemehuevi Tribe of Indians v. FPPC, 420 U.S. 395

(1975); FTC v. Bunte Bros., Inc, 312 US, 349 (1941); North

Carolina v. United States, 325 U.S. 507 (1945).

16

Ip short, the registration program presents a far dif-

ferent—and far stronger—case for certiorari than did

North Carolina I.”

Furthermore, unlike North Carolina I, this case

raises two other extremely important issues indepen-

dently warranting review by this Court. First, the

FCC is seeking to exercise an unprecedented and non-

existent regulatory power over carrier terminal equip-

ment simply to attain competition for competition's

sake, without regard to whether such competition is

consistent with the public interest. See FCC v. RCA

Communications, Inc., 346 U.S. 86, 97 (1953). Second,

the lower court’s attempt to sustain the program on

the basis of its own analysis of the potential [eco-

nomie] impact of the... program“ (Pet. App. 34a-

Wa) violates this Court’s long-standing rule that

agency action can be sustained solely on the basis of

“what the Commission did“ and not by what it

might have done. SEC v. Chenery Corp, 318 U.S. 80,

93-94 (1943).

I. The Decision Below Presents A Major Question of Statutory

Jurisdiction Which Has Not Been But Should Be Considered

By This Court.

1. The FCC's registration program is a major ex-

tension of agency jurisdiction in direct defiance of

Congress’ express statutory prohibition.” The statu-

This is emphasized by the fact that even the lower court com-

eluded that full reconsideration of the jurisdictional issue—as

starkly posed for the first time by the registration program—was

warranted in this case although the issue had previously been con-

sidered by another panel of the same court in North Carolina I.

Pet. App. lla-12a.

The issue is whether Coagress by statute prohibited the FCC's

exercise of authority and not whether Congress could have per-

17

tory language is the concrete expression of Congress’

purpose and the hinge of any sound interpretation.”

Here, the statutory language is unequivocal:

“Subject to the provisions of Section 301 [regard-

ing the licensing of radio frequencies], nothing tn

this Act shall be construed to apply or to give

the Commission jurisdiction with respect to...

charges, classifications, practices, services, facili-

ties, or regulations for or in connection with in-

trastate communication service ...’’ (emphasis

added). Section 2(b)(1).”

No one denies that terminal equipment constitutes

„facilities“ or that the FCC’s registration program

asserts “jurisdiction” over and seeks to apply“ the

Act to such facilities. It is equally beyond rational dis-

pute that the vast preponderance of terminal equip-

ment embraced by the registration program is used

„for or in connection with’ intrastate“ (Section

2(b)(1)) and exchange“ (Section 221(b)) services:

generally, terminal equipment is connected directly to

local exchanges, is provided under terms contained in

state tariffs, and is used mainly for intrastate and

local service. See pp. 4-5, above.

mitted the FCC to displace state registration. Accordingly, the

question presented is one of Congressional intent, not one of power

„ Caminetti v. United States, 242 U.S. 470, 485 (1917) ; 62 Cases

v. United States, 340 U.S. 593, 596 (1951).

„ Similarly, Section 221(b) provides:

„Subject to the provisions of Section 301, nothing in this Act

shall be construed to apply, or to give the Commission juris-

diction, with respect to charges, classifications, practices, serv-

ices, facilities, or regulations for or in connection with...

tele erchange service... even though a portion of such

telephone exchange service constitutes interstate or foreign

communications .. (emphasis added).

18

The majority opinion did not directly deny that

Congress meant to prevent FCC regulation (apart

from Section 301) of all facilities embraced by Sec-

tions 2(b)(1) and 221(b); but it purported to find

latent in the provisions a question whether terminal

equipment constitutes ‘ ‘intrastate’ facilities over

which state jurisdiction is to be primary.“ Pet. App.

Ida, The majority then reasoned that the equipment

subject to the registration program was within the

FCC's jurisdiction since such equipment may be used

both for interstate and intrastate communication. Ac-

cording to the majority, the withdrawal of jurisdic-

tion over one [intrastate communications] cannot be

read to mean the withdrawal as to the other [inter-

state communications].“ Pet. App. 14a.

The lower court clearly misconstrued the statute—

contrary to its plain language—when it proceeded to

resolve the jurisdictional question by deciding that

terminal equipment should be treated as “ interstate“

rather than intrastate“ facilities (Pet. App. 14a) be-

cause such equipment may be occasionally used for

interstate as well as intrastate communication.” Under

the statute’s express terms, jurisdiction is allocated

on the basis of whether the facilities are used “ for or

in connection with“ intrastate or exchange service.

Not even the majority below denied that terminal

Even if the statute did pose a question as to whether termina!

equipment should be treated as interstate or ‘‘intrastate’’ fa-

cilities, it is inconceivable that such equipment should be deemed

interstate rather than ‘‘intrastate’’ in character when it is con-

nected directly into local exchanges as a part of the exchange

plant (see In re Telerent Leasing Corp., supra, 45 F.C.C2d at

215), is utilized almost all of the time for intrastate and exchange

calls (see p. 5, n. 3, above) and has been generally provided under

state tariffs for over 50 years (see pp. 22-23, below),

19

equipment is integrally employed for that purpose.

Once it is acknowledged that terminal equipment is

in fact used“ for or in connection with“ intrastate and

exchange service, the overriding prohibition of Section

2(b)(1) as well as of Section 221(b) explicitly ap-

plies and it is then irrelevant that intermittent inter-

state use might otherwise permit FCC regulation.”

Consistently with this construction, the FCC itself,

as recently as 1973, advised Congress that:

. .. lack primary jurisdiction over tele-

phone sets which are a primary part of the facili-

ties used in providing exchange telephone service,

As you know, the Communications Act specifically

excludes the Federal Communications Commis-

sion from any authority with respect to charges,

classifications, practices, services, facilities or reg-

ulations for or in connection with intrastate and

exchange telephone services of any telephone com-

ny.“ Letter from the FCC Chairman, 119 Cong.

Nec, 30962 (1973) (emphasis added).

The present subject of the FCC’s registration program

includes this same telephone set’’over which the FCC

disclaimed jurisdiction less than four years ago in

language borrowed directly from Sections 2(b)(1)

and 221(b).

This reading is confirmed by the express reservation in Section

2(b) as well as in Scetion 221(b) preserving the FCC's radio li-

censing authority under Section 301, A reservation clearly was

needed to preserve this otherwise applicable power from being eut

off for facilities, such as radio telephones, which use radio frequen-

cies. This express Section 301 reservation confirms that all other

FCC powers otherwise allegedly applicable to Seetion 2(b) (1) and

221 h) facilities are preeluded by the nothing in this Act prohi-

hit ion of these two sections. See also p. 25, n. 37, below.

20

The very purpose of the reservation of state juris-

diction in the Act was to protect the State commis-

sions against being overridden’’ by the FCC and to

preserve for the states exclusive“ jurisdiction in the

sphere expressly reserved to them by statute.” After

protests by thirty-seven state commissioners and the

state commissioners’ national association,” early ver-

sions of draft bills proposing the Act were revised to

omit language that would have facilitated federal con-

trol and to include the specifie prohibitions that

emerged as Sections 2(b)(1) and 221(b).” The legis-

lative history of the Act thus confirms Congress’ spe-

cifie intent to prevent the FCC from displacing exist-

ing state jurisdiction over terminal equipment.

The lower court’s failure to follow the plain lan-

guage of a governing jurisdictional statute is, stand-

ing alone, ample basis for review here. The court’s

error is multiplied by its disregard of the FCC’s own

prior disclaimer of jurisdiction and of Congress’ clear

intent. This case is the epitome of an important ques-

tion of regulatory authority’’ normally considered on

certiorari. United States v. Southwestern Cable Co.,

392 U.S. 157, 161 (1968).“

** Hearings on S. 2910 Before the Senate Comm. on Interstate

Commerce, T3d Cong., 2d Sess. 179 (1934); S. Rep. No. 781, 73d

Cong., 2d Sess. 3 (1934).

See Hearings on S. 6 Before the Senate Comm. on Interstate

Commerce, 7Ist Cong., Ist Sess. 2167 (1930).

See S. 2910, § 210, 73d Cong., 2d Sess. (1934), introduced 78

Cong. Ree, 3275 (1934); H.R. 8301, § 210, 73d Cong., 2d Sess.

(1934), introduced 78 Cong. Ree, 3367 (1934).

Sc also FPC v. Conway Corp., 44 U.S.L.W. 4777 (U.S. June

7, 1976) (Federal Power Act); Philiips Petroleum Co. v. Wiscon-

sin, 347 U.S, 672 (1954) (Natural Gas Act); North Carolina v.

21

2. The immediate impact and continuing implica—

tions of the FCC’s registration progran also argue

strongly for plenary review by this Court. This pro-

gram is one of the most far-reaching ever undertaken

by the FCC—affecting over 1600 telephone companies,

thousands of equipment suppliers, ultimately millions

of customers, and over 100 million pieces of terminal

equipment.” Even if the adverse impact on telephone

rates is only a fraction of the sums predicted by

NARUC (see p. 10, above), the program will result in

the increase of telephone bills by millions of dollars

over the next decade.

The registration program is certain to change dra-

matically the way in which telephone service has long

been provided in this country. It will permit massive

direct connection of customer equipment to the car-

riers’ network. See p. 31 & p. 34, u. 59, below. In every

realistic sense, the FCC’s plug-in“ registration pro-

gram will effectively destroy the policy of end-to-end

telephone service (see p. 7, above)—long encouraged

by regulatory authorities—which has given „the

United States. .. the finest telephone system in the

world.“ “

United States, 325 U.S. 507 (1945) (Interstate Commerce Act).

The majority opinion relied directly on FPPC v. Conway, supra

(Pet. App. 17a-18a), but Conway dealt only with the question

whether the FPC, in exercising its authority over matters clearly

within its jurisdiction, might consider matters outside its jurisdic-

tion. Here, by contrast, the question is whether the FCC may ex-

tend its jurisdiction over matters expressly excluded from its juris-

dietion by Congress.

* A evrsory review of the FCC's new regulations (see Pet. App.

11-391) confirms the magnitude of the registration program.

President's Task Force on Communications Policy, Final Ne-

port, ch. 6, p. 5 (1968).

22

In addition, the registration program will effect a

major upheaval in the present allocation of regula-

tory jurisdiction over terminal equipment, displacing

authority long exercised by state regulatory agencies.

The majority opinion itself conceded that [the vast

majority of terminal equipment has been—and is—

regulated by the states. Pet. App. 23a. Since reg-

ulated telephone service began, state tariffs have con-

tained the rates, conditions and regulations governing

provision of almost all terminal equipment (including

the ordinary home telephone), as well as the regula-

tions governing the use of customer provided equip-

ment. Both before and after enactment of the Com-

munications Act, it is state authorities,“ not federal

authorities,” who have actively regulated nearly every

The following are merely a small sampling of the myriad of

state regulatory decisions concerning terminal equipment: see e..

Gardner v. Providence Tel. Co., 49 A. 1004 (R. I.), rehearing de-

nied, 50 A. 1014 (1901) ; In re Telephone Companies, P. U. R. 1915A

1032, 1046 (S.D. Bd. R.R. Comm ers 1915); Littlepage v. Mosier

Valley Tel. Co., P.U.R 1918E 425 (Ore. Pub. Serv. Comm 'n 1918)

Quick Action Collection Co. v. New York Tel. Co., P. U. R. 1920D 137

(N.J. Bd. Pub. Util. Comm ers 1920); Re Farmers Fountain Tel.

Co., P.U.R. 1926C 363 (Ill. Comm. Comm 'n 1926) ; Los Angeles v.

Southern California Tel. Co., 2 P.U.R. (ns.) 247 (Cal. R. R.

Comm 'n 1933); King v. Pacific Tel. & Tel. Co., 16 PUR. (n

348 (Ore. Pub. Util. Comm’n 1936) ; Peters Sunset Beach, Inc,, v.

Northwestern Bell Tel. Co., 60 P.U.R. 3d 363 (Minn. RR. & Whse

Comm 'n 1964), fd Minn. Dist. Ct. 8th Jud. Dist. Case No. 8529

(Aug. 17, 1966) ; Jacobsen v. Northwestern Bell Tel. Co., 61 P. UR.

3d 541 (S.D. Pub. Util. Comm 'n 1965) ; Netsky v. Bell Tel. Co. of

Fa., 65 P. UR. 3d 145 (Pa. Pub. Util. Comm 'n 1966); Racine

Flash Cab Co. v. Wisconsin Tel. Co., 65 P. U. R. 3d 321 (Wis. Pub.

Serv. Comm'n 1966).

In a few instances involving devices with a peculiarly inter-

state function (such as interstate defense facilities), terminal

equipment has been tariffed with the FCC, but until recently the

FCC has never asserted, much less exercised, any general regula-

aspect of terminal equipment, including the connection

of customer equipment.

The jurisdictional issue raised by the registration

program with respect to facilities will be a recurring

problem for the lower federal courts unless an au-

thoritative construction of Section 2(b)(1) as well as

of Section 221(b) is provided by this Court. The First

Cireuit has only recently been confronted with a ques-

tion of FCC jurisdiction over certain intrastate and

exchange facilities.” The District of Columbia Circuit

has had to resolve a similar question in a decision in

which it recognized the preclusive effect of the Act’s

reservation of state jurisdiction.”

tory jurisdiction over terminal equipment. See pp. 6-7, above. In

addition, the few FCC decisions claiming to regulate specific pieces

of terminal equipment for quite limited purposes normally framed

the claim of FCC authority—as the lower court admitted—to ap-

ply to the use of equipment for interstate purposes. Pet. App.

21a-23a.

„Hu rt Rico Telephone Company v. FCC, No. 76-1134 (ist

Cir. March 31, 1977). The First Circuit upheld FCC jurisdiction,

relying on North Carolina I. However, the First Cireuit opinion

also acknowledges that [read literally, these provisions [Sections

2(b)(1) and 221(b)] do appear to preclude the federal jurisdic-

tion extended elsewhere in [the Act! (p. 7) and—so far as See-

tion 2(b)(1) is concerned—*‘ [t]he conflicting statutory language

leaves the matter far from free of doubt (p. 8).

* Kitchen v. FCC, 464 F.2d 801 (D.C.Cir. 1972). There, the

court concluded that Section 221(b) barred FCC jurisdiction over

an exchange building despite the assertion that some traffic

switched through the facility was interstate and brought it within

the FCC’s authority under Section 214. Citing the statutory lan-

guage and legislative history, the court determined that even“

if Seetion 214 otherwise applied, ‘‘an exercise of jurisdiction would

still be preeluded by Section 221(b).’’ Id. at 803, See also NARUC

vy. PCC, 533 F.2d 601, 610-11, 617 (DC. Cir. 1976) (Section

2(b)(1)).

24

Nor is the impact of the jurisdictional issue limited

simply to „facilities.“ Sections 2(b)(1) and 221(b)

also apply to services“ and rates“ for and in con-

nection with intrastate or exchange services. The logic

of the jurisdictional claim will inevitably be invoked

beyond ‘‘facilities,”’ and in fact the FCC has already

begun to usurp state jurisdiction over intrastate serv-

ice“ and to threaten state jurisdiction over intrastate

rates.” The underlying jurisdictional issue should be

resolved now to avoid years of bitter and continuing

dispute about the reach of FCC authority under this

keystone jurisdictional limitation.

In fact, review of the jurisdictional issue cannot

be further delayed if it is to be truly meaningful.

Apart from future extensions of the FCC’s jurisdic-

tional claim, the registration program once fully im-

plemented will become irreversible; after millions of

pieces of customer terminal equipment have been di-

rectly attached to telephone lines, no one seriously

imagines that this process can or will be undone. Mil-

lions of dollars in costs for carrier equipment will be

incurred in the first year alone. See pp. 27-28, below.

The lower court’s stay implicitly acknowledges that

review must oecur now before the massive registration

program fully takes effect.

In AT&T, 56 F.C.C.2d 14 (1975), pet. for review pending sub

nom. California v. FCC, D.C. Cir., No. 75-2060, the FCC ordered

AT&T to allow a private line carrier to provide a particular type

of intrastate service specifically barred by California, in addition

to authorized interstate services.

In the course of examining the separation of interstate and

intrastate revenues, the FCC has just revealed that it is consider-

ing requiring revision of local telephone rates to insure that busi-

ness vertical services are not benefited by any increases in intra-

state revenues. FCC 76-1008, released Nov. 8, 1976.

Il. The FCC Lacks Power To Require Carriers To Register Their

Own Terminal Equipment, and Its Rationale For Carrier Regis-

tration Conflicts with this Court's RCA Decision.

1. Apart from the jurisdictional issue, certiorari

is warranted to review the FCC's unprecedented claim

of power to require registration of carrier equipment.

Most terminal equipment in the United States is still

provided by carriers so the registration program has

its most immediate and severe impact on the carriers

themselves.“ Under the registration program the FCC

would require carriers to obtain FCC approval before

they attach their own terminal equipment to their own

network.

The Communications Act does not confer any statu-

tory power on the FCC to require such prior approval

of carrier terminal equipment. Title II of the Act ex-

plicitly states the circumstances in which the FCC has

authority to require prior approval of common carrier

facilities, whether such prior approval is described

as licensing, certification or ‘‘registration’’: under Se-

tion 214, certificates of public convenience are required

where a carrier proposes to construct or operate any

new interstate line.“ No such power was conferred

with respect to carrier terminal equipment, and—since

Congress clearly knew how to confer this power when it

% For this reason most of the immediate multimillion dollar costs

of the program stem from carrier registration (see pp. 27-28, he-

low); by contrast, the ultimate economie impact of the program,

amounting to hundreds of millions of dollars in inereased rates,

derives from customer substitution. See pp. 31-32, below.

“Similarly, under Title III, where Congress delineated the

FCC’s authority over radio, prior approval is required before any

apparatus for transmitting radio signals is employed. See Seetion

301, 47 U.S.C. § 301.

26

wished to do so—the compelling inference is that it did

not wish to do so here.

The legislative history of the Communications Act

confirms this inference. In early drafts, the statute

did include provisions requiring any subsidiary or

parent of an interstate carrier to obtain FCC approval

prior to furnishing equipment“ to the carrier itself.

These provisions are as close as Congress came to

authorizing prior FCC approval of carrier equipment.

The concept was not accepted and the provisions were

not enacted.”

Neither the FCC nor the court below has provided

any firm statutory basis for requiring registration of

earrier terminal equipment. Without discussion, the

FCC provided only a string citation of miscellaneous

statutory provisions. Pet. App. 37b.“ Apparently even

the lower court did not find most of these provisions of

any help; it relied solely on Section 205 of the Act.

But that section does not even mention carrier facilities

or apparatus, and the court did not—and could not—

See Section 215(b) of S. 2910, 73d Cong., 2d Sess., and H.R.

8301, 73d Cong., 2d Sess., 78 Cong. Ree, 3275, 3367 (Feb. 27, 1994).

Compare the present Section 215(b), 47 U.S.C. § 215(b).

** Sections 4(i), 4(j), 201-05, 208, 215, 218, 313-14, 403-04, 410

and 602, 47 U.S.C. §§ 154(i), 154(j), 201-05, 208, 215, 218, 319-14,

403-04, 410, and 602. Section 4/i) merely empowers the FCC to

make rules implementing authority otherwise conferred. Seetion

4(j) authorizes the Commission to ‘‘conduct its proceedings. See.

tions 201-05 conspicuously omit ‘‘facilities’’ in any respeet perti-

nent here. Section 208 allows anyone to complain to the Commis-

sion. Section 215 directs the Commission to examine and report to

Congress. Section 218 authorizes the Commission to ‘‘inquire inte

the management’’ of carriers. Sections 313-14 deal with radio ap-

paratus and transmissions. Sections 403-04 and 410 empower the

Commission to conduct inquiries and to establish joint beards, See.

tion 602 sets forth various repeals and amendments,

*

explein how the provision authorized the FCC to re-

quire prior registration of carrier terminal equip-

ment.“

The power of the FCC, like that of any administra-

tive agency, is cireumseribed by the authority

granted by Congress. Stark v. Wickard, 321 U.S.

288, 309 (1944). When the ageney summons vast new

powers out of thin air, it is the court's obligation to

restrain it.“ In the present case, review by this Court

is required because, just as the FCC has forgotten

that non-existent powers ‘‘cannot be merely assumed,”’

so the majority opinion has ignored the warning that

neither can such powers be ‘‘created by the courts in

the proper exercise of their judicial functions. FTC

v. Raladam Co., 283 U.S. 643, 649 (1931).”

2. The immediate direct costs of carrier registra-

tion are a further exigent reason why review is war-

ranted. Carrier registration will cost the Bell System

itself over $88 million in the first year alone,“ quite

*The fact that the FCC has never before claimed such a power

under Seetion 205, or under any other provision, is further potent

evidence that the power is imaginary. See PPC v. Panhandle Fast.

ern Pipe Line Co, 337 U.S, 498, 513 (1949),

The FCC, in its zeal to advance its new policy of restricted com-

petition, has repeatedly exceeded or misapplied its powers. See

AT@T v. FCC, 487 F.2d 865 (24 Cir, 1973); Hasan Telephone

Co. v. PC, 498 F.2d 771 (D.C. Cir, 1974); Gr Service Corp. v.

FCC

tupre, where the court found that a prior permiion power to har

rate changes could not be implied.

* Affidavit of Joe HI. Hunt, para. 6, filed with the Court of Ap-

peals, April 8, 1977. The cost estimate has changed several times

28

apart from the costs inflicted on 1600 other telephone

companies and continuing costs after the first year.

Tais Court has traditionally given weight to the prae-

tical impact of cases being considered for review; and

the impact of $88 million in first year costs, much of

which will ultimately be borne by the public through

increased rates, cannot be ignored when the statutory

basis for inflicting the loss is non-existent.

3. Even if the FCC had power to require prior

registration of carrier equipment, its basic reason for

exercising that power in this case conflicts in principle

with this Court’s decision in FCC v. RCA Communi-

cations, Inc., 346 U.S. 86 (1953) and that of the Dis-

trict of Columbia Circuit in Hawaiian Telephone Co.

v. FCC, 498 F.2d 771 (1974). Such a conflict is a set-

tled ground fer certiorari. Sup. Ct. R. 19(1).

The registration program was designed to facilitate

substitution of customer supplied equipment by allow-

ing registered customer sets to be used without con-

necting arrangements or carrier network control signal-

ing units. See p. 11 & n. 16, above. The FCC's reason

for also requiring registration of carrier equipment

was simply to ‘equalize’? competitive positions of car-

riers and non-carriers as equipment suppliers and

thereby—as the dissenting judge below observed—

[promote]... competition in the terminal equipment

market” (Pet. App. 43a). The FCC expressly stated

simply because the FCC keeps modifying its registration program

(see id. at para. 5), but all of the estimates involve multimillion

dollar costs. Nowhere has the FCC ever provided any analysis to

refute these detailed computations (see Pet. App. 15b-16b) despite

its generalized and incorrect claims that the expense will be mini-

mal. See, e.g., Pet. App. 4d.

that when one participant in a competitive market is

subject to regulatory constraints (c., registration of

equipment) while another is not, there exists the possi-

bility of using . . . [registration procedures] for com-

petitive advantage. Pet. App. 15b-16b.

Apart from the fact that this rationale for carrier

registration is patently illogical,” it defies the basic

principal of carrier regulation under the Communica-

tions Act: the touchstone of FCC action must be the

public interest and not mere enhancement of compe-

tition. FCC v. RCA Communications, Inc., supra, 346

U.S. at 97. Here, the FCC has sacrificed the public

interest by imposing a minimum of $88 million in first

year costs merely to pursue abstract goals of competi-

tive equality. As the District of Columbia Circuit said

in striking down another FCC order:

[I]t is all too embarrassingly apparent that the

Commission has been thinking about competition,

not in terms rily as to its benefits to the pub-

lie but i y with the objective of equalizing

ition among com petitors.”” Hawaiian Tele-

Co. v. FCC, 498 F.2d 771. 775-76 (1974)

(emphasis in original).

“Carrier registration would not lessen the delay in customer

registration but expand it by adding more, unnecessary applica-

tions to clog the bureaucratic gristmill. Moreover, as a dissenting

Commissioner observed : The FCC has ample means short of mean-

ingless carrier] registration’’ to preelude ** possible anticom peti-

tive practice. which are not in any case established by the record.

Pet. App. 54b-55b. And, in any event, carrier registration cannot

in fact equalize couspetitive opportunities: customer suppliers have

including the opportunity to

; yet, the PCC has not

i

j

|

1

Fi

3

30

This conflict in applying a central principle of the

Act warrants certiorari. The remaining explanations

given by the FCC for requiring carrier registration are

so plainly fabricated that they lend no support to the

requirement whatever.” In fact, so far as they are

considered at all, their makeweight character under-

scores the FCC’s main object to “‘equalize” competi-

tion and their irrationality further condemns its re-

quirement of carrier registration.

III. The Court Below Plainly Violated the Chenery Doctrine in

Substituting its Own Economic Conjectures for Findings the

FCC Erroneously Failed To Make.

The basic rules for judicial review of administra-

tive action are that an agency must consider all perti-

The FCC asserted that carrier equipment has the ame b

tential for harm as customer equipment (Pet. App. 15b); but it

also mitted that the carriers themselves have both the incentive

and to protect their own network from being harmed by

their own terminal equipment (Pet. App. 15b), and it made a

f any cakes of potential harm by *gvandtuthering 100

LRD

safely for years.

31

nent factors and consequences of its action, Permian

Basin Area Rate Cases, 3999 U.S. 747 (1968), and that

a reviewing court may sustain the agency only on the

basis of the agency’s own proper resolution of such

issues. SEC v. Chenery Corp., supra. In this case,

violation of these precepts is so patent that summary

reversal would be justified if plenary review on other

issues were not granted.

In eliminating connecting arrangements and net-

work control signaling units designed to protect the

network and telephone company employees from harm,

the registration program creates an open door“ to

customer substitution of terminal cquipment.” In-

creased replacement of carrier supplied equipment

threatens to cause substantial increases in the rates

paid by the publie for ordinary telephone service. Be-

cause certain carrier supplied terminal equipment,

such as complex business PBXs and key telephone

systems, is priced to provide revenues in excess of costs,

this contribution offsets common overhead for the tele-

phone system and helps to hold rates for basie residen-

tial telephone service below the levels that would

otherwise be necessary to produce the required over-

all return.”

Studies submitted to the FCC showed that the ag-

gregate impact of increased customer substitution will

The program requires carriers to permit direct connection of

customer supplied equipment, prohibits carriers from requiring

carrier connecting arrangements or network control signaling omits,

and requires (with narrow exceptions) that new line terminations

and registered equipment be equipped with standard plugs and

jacks for plug in installation. Pet App. 6i.

"See Response of the Bell System Companies, Third Supple-

mental Response of the Bell System Companies, and Bell Exhibits

1, 1A, 1B, 18 and 18A, in FCC Docket No. 20003.

32

be enormous. An investigation by the state commis-

sioners’ organization—not the telephone companies—

forecasts increased intrastate and exchange rates rep-

resenting 60-740 million annually by 1970 and $900

million to $1 billion annually by 1984." Lengthy analy-

ses made by the Bell System, Continental, and other

telephone companies consistently revealed that in-

creased rates would flow from customer substitution.”

This burden threatens to fall with special force on low-

income customers.

Initially, the FCC promised to consider in this case

the economic impact of increased customer replacement

of carrier terminal equipment (see pp. 9-10, above) ;

deed, its Chairman wrote to the state commissioners

that an in-depth study”’ of the ‘‘economie impact of

liberalized interconnection’? was a question “integral

to a fair resolution“ of the present docket." The FCC

then reversed course and established its new program

without considering this basic economic issue. In fact,

"NARUC, Report After Investigation 18-19 (1974). The

NARUC study concluded that:

[The effect of interconnection is likely to be equally ‘as sig-

nificant, if not more significant, for the independent industry

as for the Bell System, and further, that interconnection may

me yg Ay any the availability of service at reasonable

ae the less developed or rural areas of the country.

. at 0.

Comments of GTE Service Corp., April 21, 1975, App. I-A,

p. 10, in Doeket No. 20003; Bell System Ex. 45, p. 31, in Docket

No, 20003; Economic Impact of Competition on Telephone Opera-

tions in the Continental Telephone System, p. 6, submitted by Con-

tinental Telephone Corporation in Docket No, 20003.

“Letter from Dean Burch, FCC Chairman, to Ben Wiggins,

Chairman, NARUC Committee on Communications, Aug. 4, 1972

(emphasis added ).

it expressly declared that its decisions promulgating

and implementing the registration program are con-

cerned ‘‘only’’ (Pet. App. 14b) and solely“ (Pet.

App. 7e) with the mechanics of the program and not

its economic impact. As Judge Widener observed in a

dissent below, this case involves nothing less than a

‘stout refusal [by the FCC] to conduct a reasoned in-

quiry into the economic implications’’ of its actions.

Pet. App. 36a.”

Clearly the FCC was obligated to consider the eco-

nomie impact of its registration program before adopt-

ing a major new federal program that, onee fully im-

plemented, will be largely irreversible. The Communi-

ent ions Act makes service nt reasonable charges“ a

specific goal (Section 1, 47 U.S.C, 6151) and decisions

under the Act and under allied statutes make plain

that it is reversible error for a regulatory agency to

refuse to consider a significant adverse economic im-

pact on the public.” The majority opinion admitted

"The majority opinion attempts in fact to convey the impres-

sion that the FCC actually did give some consideration to economic

impact and thus asserts that [what the FCC has done is make

reasonable assumptions about economic impact based on the evi-

dence currently available. Pet. App. 35a. The majority opinion

nowhere indicates what evidence formed the basis for the supposed

FCC “‘assumptions’’; nor does it cite any portion of the FCC's

orders where the asserted assumptions were made. The fact is that

the FCC did not make any such assumptions, much less pursue the

requisite analysis of economic impact. Rather, the FCC explicitly

refused to consider the economic issues, clearly stating that it con-

sidered such issues not (to] fall within the scope of |the registra-

tion] proceedings.’’ Pet. App. Te.

F. g., Atlantic Refining Co. v. Public Service Comm’n, 360 US.

378 (1959); PPC v. Hunt, 376 US. 515 (1964); Carter Mountain

Transmission Corp. v. FCC, 321 F.2d 359 (D.C. Cir.), cert. denied,

375 U.S. 951 (1963).

34

that it would be ‘‘remiss”’ if it permitted a registration

program having major effects on telephone rates to

be implemented“ without even considering that poten-

tial economic impact.“ Pet. App. 33a.

However, since the FCC had conspicuously failed

to analyze the economic impact, the majority opinion

was forced to supply this deficiency itself. To fill this

gap, the court sought to provide its own conjectures

and assumptions in its own attempt to show that the

economic impact of the registration program would

be slight. Pet. App. 30a-32a. Not surprisingly, its at-

tempt—unsupported by facts and untested by ad-

ministrative proceedings—is riddled by unproved

premises,”, faulty logie“ and even disregard of the

program’s full consequences.”

For example, to construct its analysis the lower court was

forced to brush aside the significant direct costs of registration

and engage in guesswork about the costs of connecting arrange-

ments and network control signaling units, the costs for non-carrier

suppliers in registering their equipment, and possible future price

changes by such suppliers. Pet. App. 28a-29a, 30a-32a.

In an astonishing leap of imagination, the court asserted that

past substitution of customer equipment had not been shown to

diminish carrier terminal equipment sales. Pei. App. 32a, Not

only have such replacements necessarily diminished carrier rev-

enues but there is no basis for reasoning that past experience in

any way measures the economic consequences of the FCC’s new

registration program providing for ‘‘plug in’’ substitution of eus-

tomer supplied equipment. See pp. 31-32, above.

Without support, the lower court made the incredible asser-

tion thet the registration program can hardly be expected to cause

a significant ‘substitution effect’’’ Pet. App. 32a (emphasis in

original). This is simply untenable, for—as the dissenting judge

below emphasized—the registration program for the first time

accords each telephone subscriber . . . a right of virtually un-

restricted interconnection of his own equipment. Pet. App. 39a.

35

Regardless of the merits or demerits of the majority

opinion’s reasoning and assumptions, they are an im-

permissible surrogate for agency findings made in this

case and themselves subject to judicial review. At least

since this Court’s decision in SEC v. Chenery Corp.,

supra, 318 U.S. at 93-94, it has been settled that ad-

ministrative action must be measured by what the

[agency] did, not by what it might have done.“ The

registration program must be upheld, if at all, on the

same basis articulated in the order[s]’’ of the Commis-

sion. Burlington Truck Lines v. United States, 371

U.S. 156, 169 (1962). Since the grounds set forth in

those orders were ‘‘inadequate,”’ the court below was

„powerless to affirm the administrative action.“ SEC

v. Chenery Corp., 332 U.S. 194, 196 (1947). Neverthe-

less, the court proceeded to affirm the FCC’s orders

on the basis of its own analysis which is filled with the

very sort of errors that the Chenery doctrine was in-

tended to prevent.

Realizing the error it had committed, the FCC itself,

after briefing and argument in this case, rushed out

an initial report in Docket No. 20003 and transmitted

it to the court below.” Predictably, the initial report

sought to belittle claims of economic impact from cus-

tomer substitution. But even this report, manifestly

shaped as a litigation document, admits that any loss

of terminal equipment ‘‘can’’ produce ‘‘a net redue-

tion in local operating company revenues“ (para. 27);

that any impact would probably be felt most severely

by small independent telephone companies’’ (para.

28); that revenue shifts might possibly’’ result where

„small independent telephone companies might be

* First Report in Docket No. 20003, released September 27, 1976,

and sent to the court by the FCC on October 22, 1976.

36

most seriously affected“ (para. 31); and that there is

„the possibility“ of an adverse impact on the smaller

companies. Para. 260."

The report cannot provide any support for the

FCC’s refusal to consider the economic impact of its

registration program. It was hurriedly produced, after

the court below stayed the registration program, with-

out any opportunity for parties to the proceeding to

comment on the validity or correctness of the studies

relied upon; no proposed findings were ever prepared ;

and no briefing or argument to the Commission has

ever occurred. Most important, the report—carefully

framed not to include an order—has never been sub-

ject to judicial review and its unreviewed findings

cannot be smuggled into this case through the back

door.”

The FCC’s error in refusing to consider the ultimate

economic impact of its registration program is both

manifest and virtually self confessed; it alone would

warrant certiorari. In addition, the lower court’s af-

firmance of the FCC’s error, based on the court’s own

substituted analysis, has frustrated the proper alloca-

tion of responsibility between court and agency. Such

a departure from established practice by a reviewing

court ‘‘;aises questions of high importance“ requiring

action by this Court to ensure that the bounds of judi-

As a dissenting commissioner correctly summarized the mat-

ter: ‘‘[T]he majority herein recognizes for the first time that the

fears voiced by the independent telephone companies of serious

financial harm and those voiced by the state regulators of the likely

necessity for increased residential rates could have a valid basis

if the Commission’s recent policies are completely successful.

(Emphasis in original.)

“= Even the lower court expressly diselaimed any relianee on the

report in Docket No. 20003. Pet. App. 10a n.6.

37

cial review remain both understood and respected. Cf.

NLRB v. Waterman S.S. Co., 309 U.S. 206, 209 (1940).

Indeed, this Court has previously concluded that

where a court has strayed as clearly as has the court

below from established principles governing judicial

review of administrative action, summary reversal of

the lower court’s decision is appropriate. See Northern

Indiana Public Service Co. v. Isaak Walton League,

423 U.S. 12 (1975). Consistently with this view, we

submit that even if this Court should conclude that the

other issues raised by this petition do not warrant re-

view on certiorari, the Court should at the very least

grant certiorari and summarily reverse the majority’s

decision insofar as it sustains the registration program

through its own independent analysis of the program’s

economic consequences.

CONCLUSION

The Court should grant certiorari and the case

should be set for plenary review of the issues posed

by (1) the FCC’s attempt to promulgate its registra-

tion program in clear violation of the limits expressly

fixed on its jurisdiction by Section 2(b)(1) as well as

of Section 221(b) of the Communications Act, (2) the

FCC’s unlawful inclusion of carrier equipment in the

program and (3) the lower court’s clear failure to

adhere to the limits on judicial review of administra-

tive action fixed by this Court’s decision in SEC v.

Chenery Corp., supra. Alternatively, the decision below

should be summarily reversed on the third issue to en-

sure that the established limits on judicial review re-

main clear and unimpaired.

Respectfully submitted,

Of Counsel: MICHAEL —

„er STUART C. Stock

F. MARK GARLINGHOUSE 88 Sixteenth Street, N. W.

ALFRED C. PARTOLL Washi D.C. 20006

195 Broadway ashington, D.C.

New York, N.Y. 10007 Epwarp L. FrrepMan

WuLIXu L. Leonarp

195 Broadway

New York, N. V., 10007

Counsel for the

Bell System Companies

May 1977