Petition — Louisiana Public Service Commission v. Federal Communications Commission

Supreme Court brief1983

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Office -Sugeemee Court, U.S.

le “ D

FEB 9 1983

IN THE

ALEXANDER L. STEVAS,

CLERK

Supreme Court of the United States

OCTOBER TERM, 1982

LOUISIANA PUBLIC SERVICE COMMISSION,

Petitioner

versus

FEDERAL COMMUNICATIONS COMMISSION

AND UNITED STATES OF AMERICA,

Respondents

ON PETITION FOR A WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE DISTRICT OF COLUMBIA CIRCUIT

PETITION FOR A WRIT OF CERTIORARI

Michael R. Fontham

Paul L. Zimmering

Douglas D. Dodd

STONE, PIGMAN, WALTHER,

WITTMANN & HUTCHINSON

1000 Whitney Bank Building

New Orleans, Louisiana 70130

Telephone: (504) 581-3200

Marshall B. Brinkley

General Counsel

Louisiana Public Service Commission

One American Place, Suite 1630

Baton Rouge, Louisiana 70825

Telephone: (504) 389-5867

Attorneys for Petitioner

SES 1 ETT

QUESTION PRESENTED

Where the rate regulation of certain offerings of com-

munications common carriers has historically been the

exclusive prerogative of the states, with a federal regula-

tory agency created by Congress to exercise regulatory

power in those areas that cannot be reached by state regula-

tory agencies, may the federal agency adopt a new policy of

“non-regulation” of these offerings, and while declining to

exercise its own jurisdiction, issue preemption orders that

preclude the states from exercising their regulatory powers? *

* The following parties were petitioners in the consolidated proceed-

ings before the court of appeals:

Computer & Communications Industry Associa-

tion (No. 80-1471); The People of the State of Cali-

fornia and the Public Utilities Commission of the

State of California (No. 81-1193); Independent

Data Communications Manufacturers Association,

Inc. (No. 81-1217); National Association of Regula-

tory Utility Commissioners (No. 81-1222); American

Newspaper Publishers Aasociation (No. 81-1224);

Datapoint Corporation (No. 81-1223); Motorola,

Inc. (No. 81-1226); and U.S. Telephone and Tele-

graph Corporation (No. 81-1227).

The following parties were intervenors in the proceedings before

the court of appeals:

Aeronautical Radio, Inc.; American Telephone &

Telegraph Company; American Petroleum Institute;

Association of Data Processing Service Organizations,

Inc.; Bunker Ramo Corporation; Central Telephone

& Utilities Corporation; Citicorp; Communications

Satellite Corporation; Computer & Business Equip-

ment Manufacturers Association; Comsat General

Corporation; Continental Telephone Corporation;

(Footnote Continued)

Control Data Corporation; GTE Service Corporation;

GTE Telenet Communications Corporation; Hazeltine

Corporation; International Business Machines Corp.;

ISA Communications Services, Inc.; Louisiana Public

Service Commission; MCI Telecommunications Cor-

poration; National Burglar & Fire Alarm Association,

and Alarm Industry Telecommunications Com-

mittee; North American Telephone Association;

RCA Global Communications, Inc.; Satellite Business

Systems; Southern Pacific Communications Com-

pany; Sperry Univac Division of Sperry Corp.; Tym-

net, Inc.; United Computing Systems, Inc.; United

Telephone Systems, Inc.; Utilities Telecommuni-

cations Council; Western Union Telegraph Company;

and Xerox Corporation.

TABLE OF CONTENTS

QUESTIONS PRESENTED .........0ccceceveees

TABLE OF CONTENTS ...ccccscscccccccsecens

TABLE GP AUTHORITIS 6 ic ccccctcccvcccvcces

RTs BE ccc ccccvsccvcctecerscvcsves

JURISDICTIONAL GROUNDS ............05005:

STATUTORY PROVISIONS ..........0.seseee0-

STATEMENT OF THE CASE ......cccccccceceee

1. Preliminary statement ...........--000.

2. Course of proceedings inthe FCC ........

3. Regulatory context of the preemption

GOGMIOM oc cccccccccocnvcesevcccevces

4. Grounds cited as supporting the decision

to prohibit rate regulation of customer

premises equipment by the states.........

5. Decisions of the FCC and the court of

SE caper ebeus Chae sees Cabwne ane

6. Impact of the antitrust settlement between

iii

the United States Department of Justice

CGT 6000.5 00050605 keR oR Soe ORS

REASONS FOR GRANTING THE WRIT

TABLE OF CONTENTS (Continued)

A WRIT SHOULD BE ISSUED TO DETER-

MINE WHETHER PREEMPTION BY A FED-

ERAL AGENCY IS PERMISSIBLE TO FUR-

THER POLICIES NOT MANDATED BY

STATUTE, BUT WHOLLY CREATED BY

FRR GME Si ccewcckdemecrconcvecces

THE COURT SHOULD ISSUE A WRIT TO

DETERMINE WHETHER AGENCY PRE-

EMPTION IS PROPER IN THE FACE OF

CONGRESSIONAL DIRECTIVES GRANT-

ING AUTONOMY TO THE STATES IN THE

AREA SUBJECT TO THE PREEMPTIVE

TABLE OF AUTHORITIES

Cases:

Computer and Communications Industry Association

v. Federal Communications Commission, 693

Page

F.2d 198 (D.C, Cir. 1982) ....2, 5, 13, 14, 16, 17, 18, 22

Florida Lime and Avocado Growers, Inc. v. Paul, 373

U.S. 132, 83 S.Ct. 1210 (1963) .......... 16, 18, 19, 20

General Telephone Co, of the Southwest v, United

States, 449 F.2d 846 (Sth Cir. 1971) ...........055. 14

Houston, East & West Texas Railway v. United

States, 234 U.S. 342, 34 S.Ct. 833 (1914) ........... 24

North Carolina Utilities Commission v. Federal

Communications Commission, 552 F. 2d 1036

Tc ccecbskbe cheer henseesenersseces 24

Smith vy. Illinois Bell Telephone Co., 282 U.S. 133,

i CD é1rd5 66:60:66 600.0: 0008 006008 7, 22, 26

South Central Bell Telephone Co. vy. Louisiana

Public Service Commission, 352 So.2d 964 (La.

PE Thc aaa d hébs cee bb 0b 6 6066000660609 0686 8

State of North Carolina v, United States, 325 U.S.

507, 65 S.Ct. 1260 (1945) ..........0 0s. 16, 18, 20, 21

United States v. Western Electric Co., 1982-2 Trade

Cas. (CCH) 464,900 (D.D.C, 1982) ...........0005- 14

TABLE OF AUTHORITIES (Continued)

Page

Administrative Decisions and Orders:

In the Matter of Amendment of Section 64.702 of

the Commission's Rules and Regulations (Second

Computer Inquiry), Docket No. 20828 (FCC):

Notice of Inquiry and Proposed Rulemaking

in Second Computer Inquiry, 61 F.C.C.2d

age Rape eae ae 5

Suppiemental Notice of Inquiry and Enlarge-

ment of Proposed Rulemaking in Second

Computer Inquiry, 64 F.C.C. 2d 771 (1977) ...... 6

Tentative Decision and Further Notice of

Inquiry and Rulemaking in Second Computer

BE, TE Ps SE POD EEPTO) cccccccccccces 6

Final Decision in Second Computer Inquiry,

77 F.C.C, 2d 384 (1980) ....2, 5,6, 8,9, 10,11, 12

Memorandum Opinion and Order in Second

Computer Inquiry, 84 F.C.C. 2d 50 (1980) .. 2, 5, 6,

Tee Bhe Bae U2

Memorandum Opinion and Order on Further

Reconsideration in Second Computer Inquiry,

ee PEEEOED cicdcededeewdccccces a3

Constitutional Provisions:

eC . cespeeeeesteeecceveses 18

Ries NNN. OBE, VE GES ccc cccccccvcesicecccccccnes 18

vii

TABLE OF AUTHORITIES (Continued)

Page

Statutes:

ST UBL. GUSE GE) 0 oc ccccccccscccccsccescesecs 22,29

BF Un GUGM oc cece cvccspecerbvswsusceves 23, 25

BT UBL, GQROUTAS cc ccccvcvesesevrcvasssceseves 17

BF ids GOOO heed edkdeeesnceseveccveneesses 25, 26

WT Uie BOOO OR ic avd tvssetvereetesasanenaneen 25

es EOE E Sic nh cae ee Denke dae bavaceses 23, 25

B7 UBL. GAZE) cccccccvvscneseseccscvesecees i

PEs HE BOTUUD 00.606 be Reed Seeded penseeceeeunen 2

Regulations:

BFS IOS Cet ccc cctbeccsceeeessevncroncenee 5

Miscellaneous:

NARUC-FCC Separations Manual ............02e+00% 26

1 A. Priest, Principles of Public Utility Regulation (1969) . .9

Legislative Material:

Statement of Representative Rayburn, 78 Cong. Rec.

I Ary ee ar oe ee a ee 24

viii

TABLE OF AUTHORITIES (Continued)

Page

Statement of Senator Dili, Chairman of the Senate

Committee, Hearings on S.2910 Before the Senate

Committee on Interstate Commerce, 73d Cong.,

BE, TP ROMER 6.2 64.02 x be kwaseese sepa 24

No.

IN THE

SUPREME COURT OF THE UNITED STATES

October Term, 1982

LOUISIANA PUBLIC SERVICE COMMISSION,

Petitioner

VS.

FEDERAL COMMUNICATIONS COMMISSION

AND UNITED STATES OF AMERICA,

Respondents

ON PETITION FOR A WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE DISTRICT OF COLUMBIA CIRCUIT

PETITION FOR A WRIT OF CERTIORARI

The Louisiana Public Service Commission, petitioner,

hereby petitions the Court to issue a writ of certiorari to

review the judgment and opinion of the United States Court

of Appeals for the District of Columbia Circuit entered on

November 12, 1982.

OPINIONS BELOW

The opinion of the court of appeals, which is reproduced

in the Appendix commencing at page A-l, is reported as

Computer and Communications Industry Association vy.

Federal Communications Commission, 693 F.2d 198 (D.C.

Cir. 1982).

The ruling of the Federal Communications Commission,

known as the Computer II decision, is set forth in three

reported orders issued in the docket styled /n the Matter

of Amendment of Section 64.702 of the Commission's

Rules and Regulations (Second Computer Inquiry), Docket

No, 20828 (F.C.C.). They are:

“Final Decision,” 77 F.C.C. 2d 384 (1980);

“Memorandum Opinion and Order,” 84 F.C.

C.2d 50 (1980); “Memorandum Opinion and

Order on Further Reconsideration,” 88 F.C.

C.2d 512 (1981).

These orders are voluminous. Rather than reprint them in

the Appendix, we have lodged a copy with the Clerk, subject

to the requirement that the orders be reprinted if the Court

directs.

JURISDICTIONAL GROUNDS

The decision of the United States Court of Appeals for

the District of Columbia Circuit was entered November 12,

1982. No application for rehearing was filed. This Court

has jurisdiction to review the decision of the court of appeals

pursuant to 28 U.S.C. §1254(1).

STATUTORY PROVISIONS

The following statutes, set forth in the Appendix com-

mencing at page A-48, are involved in this case:

47 U.S.C. §152

47 U.S.C. §203

47 U.S.C. §221

STATEMENT OF THE CASE

1. Preliminary statement.

This case presents the issue of whether a federal agency

may broadly preempt state regulatory power over the mar-

keting of telecommunications equipment on the ground that

the exercise of state power might interfere with a federal

“policy” that is newly created by the agency, but neither

embodied nor implied in any federal statute. The Federal

Communications Commission (“FCC”), an agency created

by Congress, determined that “competition” had arisen in

the marketing of “customer premises equipment” and

“enhanced services” by communications common carriers

and others. Therefore, it decided that those offerings should

no longer be regulated.

To implement its new policy, the FCC first determined

that it had no duty to regulate customer premises equip-

ment and enhanced services, either because its statutory

jurisdiction did not encompass these offerings or because

regulatory abstention is permissible under the statute. This

decision in itself could not accomplish deregulation, how-

ever, because the states historically have set the rates for

customer premises equipment that is used jointly for in-

trastate and interstate communications and the services

performed by this equipment, pursuant to the division of

authority envisioned in the Communications Act. Thus,

to avoid any conflict with the agency-created federal “‘poli-

cy,” all state power to tariff this equipment was preempted

by the FCC. 1 This decision was affirmed by the United

1 The decision of the FCC occurred in a rulemaking proceeding

known as the “Second Computer Inquiry,” or “Computer II.” In

the Matter of Amendment of Section 64.702 of the Commission's

Rules and Regulations (Second Computer Inquiry), Docket No. 20828

States Court of Appeals for the District of Columbia Circuit

(“court of appeals”’),?

2. Course of proceedings in the FCC,

The rulemaking proceeding of the FCC, known as the

“Second Computer Inquiry” or “Computer II,” was institut-

ed in 1976 to reexamine determinations made in the First

Computer Inquiry and embodied in Rule 64.702 of the

Rules of the FCC,3 The First Computer Inquiry established

the definitional distinction between “communications”

services and “data processing” services and implemented two

regulatory principles: (1) the FCC would forbear from regu-

lation of data processing services, and (2) carriers could not

provide data processing services, except through a separate

subsidiary.4 Computer II was assertedly required because

of technological advances resulting in “a blurring of the

distinctions between data processing and communications.””®

The notice of inquiry set forth a suggested amendment to

Rule 64.702 that would “positively” define data processing

(1 Continued)

(F.C.C,); “Final Decision,” 77 F.C,C,2d 384 (hereinafter referred to as

“Computer II Final Decision”); “Memorandum Opinion and Order,”

84 F.C.C,2d 60 (1980) (hereinafter referred to as “Computer Il Memo-

randum Opinion and Order"); “Memorandum Opinion and Order on

Further Reconsideration,” 88 F.C,C.2d 512 (1981) (hereinafter re-

ferred to as “Computer II Reconsideration Order"),

2 Computer and Communications Industry Association v, Federal

Communications Commission, 693 F.2d 198 (D.C, Cir, 1982).

8 470C.F.R, 64,702,

4 See Notice of Inquiry and Proposed Rulemaking in Second Com-

puter Inquiry, 61 F.C,C.2d 103, 108 (1976),

5 Id, at 105,

so as to eliminate ambiguities.6 Subsequent notices, and a

tentative decision issued in 1979, indicated that the rule-

making proceeding continued to examine the definitional

demarcation between data processing and communications.”

In its Final Decision released May 2, 1980, the FCC

abandoned its attempt to distinguish communications from

data processing services.® It decided to deregulate the pro-

vision of all enhanced services.? In addition, the FCC deter-

mined that “customer-premises equipment,” the equipment

that receives and sends messages and may perfonn services

on the customer's premises, such as an ordinary telephone,

an office switchboard, or a sophisticated telecommunications

receiver, should be freed from regulation.2° To accomplish

this objective, state power to tariff this equipment was

preempted.!! This action was reaffirmed in the Memoran-

dum Opinion and Order issued December 30, 1980.12

6 Id, at 108,

7 Supplemental Notice of Inquiry and Enlargement of Proposed Rule-

making in Second Computer Inquiry, 64 F.C,C.2d 771 (1977), Tenta-

tive Decision and Further Notice of Inquiry and Rulemaking in Second

Computer Inquiry, 72 F.C.C,2d 358 (1979),

8 Computer Il Final Decision, 77 F.C.C.2d 384, 386-87 . (1980),

9 Id,

10 = /d, at 388, 455,

11 dd,

12 See Computer II Memorandum Opinion and Order, 84 F.C.C,2d

50, 103-05 (1980),

3. Regulatory context of the preemption decision.

The FCC forbearance from rate regulation of enhanced

services and terminal equipment is not a significant departure

from past practice as far as federal tariff regulation is con-

cerned, The FCC has never established the tariffs for most

enhanced services, nor have federal tariffs existed for most of

the customer premises equipment provided to consumers by

common carriers, The establishment of these rates has

pr Ta been the prerogative of state regulatory agen-

cies.

Much of the plant devoted to communications service in

this country has both an intrastate and interstate use, Thus,

a piece of customer premises equipment may be used primari-

ly for intrastate calls in the local exchange and intrastate toll

calls, but it may also be used for interstate toll calls. A

similar joint use is made of the inside wiring on the cus-

tomer’s premises, the wiring that connects customers to

switching facilities, the switching facilities, central office

equipment, and other plant. Under the provisions of the

Communications Act (47 U.S.C. §221(c)) and the decision

of this Court in Smith v, Illinois Bell Telephone Co.,14 a

fair apportionment is required of the costs attributable to

each jurisdiction in order to fairly account for these costs.15

Over time, a separations process developed to accomplish

this objective. Of the joint costs, which are apportioned in

13 As the FCC recognized, it has historically set rates only for

customer premises equipment used exclusively for interstate com-

munications, Computer II Memorandum Opinion and Order, 84 F.C.C,

2d at 66-67.

14 =. 282 U.S, 133, 51 S.Ct, 65 (1930),

15 Id, at 148, 61 8,Ct, at 68,

part according to the use of the facilities, the majority have

been assigned to the intrastate jurisdictions.16

While the costs associated with jointly used customer

premises equipment are divided between the state and

federal jurisdictions, the responsibility for tariffing this

equipment has always rested with the state regulatory agen-

cies. Thus, the FCC recognized that the only federal tariffs

for customer premises equipment involve equipment used

exclusively in “interstate or foreign communications”17

and that all customer premises equipment subject to the

separations process is “tariffed at the state level.”18 The

costs assigned to the federal jurisdiction for this equipment

and other jointly used plant historically have been recovered

in interstate toll telephone rates, not in any federal tariffs for

jointly used equipment or plant. The federal “regulation” of

the jointly used equipment has included the adjustment and

the quantification of these interstate costs in determining the

proper level of toll rates, but has not involved the tariffing of

the equipment.

The FCC in its Final Decision recognized that customer

premises equipment is “used predominantly in intrastate

communications.”19 Nevertheless, the power to tariff this

16 Certain issues relating to the separations process are discussed

by the Louisiana Supreme Court in South Central Bell Telephone

Co. v. Louisiana Public Service Commission, 352 So.2d 964, 981-

85 (La, 1977). See also Computer II Memorandum Opinion and Order,

84 F.C.C.2d at 66.

17. Computer II Memorandum Opinion and Order, 84 F.C.C.2d

at 67.

18 Id, at 66.

19 Computer II Final Decision, 77 F.C,C.2d at 456.

equipment was preempted. The FCC noted that the states

“may no longer be able to regulate, as they have in the past,

the charges for [customer premises] equipment used jointly

in the provision of intrastate and interstate services.”2°

The decision thus has the effect of rendering “ ‘meaningless’

the jurisdiction of the State to establish charges for intra-

state use of facilities. . . .”21

4. Grounds cited as supporting the decision to

prohibit rate regulation of customer premises

equipment by the states.

Historically, communications common carriers have

operated under the discipline of state regulatory commis-

sions. These agencies have granted “natural monopoly”

status to these companies and the assurance of a “fair”

return on investment, permitting the carriers to acquire

substantial economic power over time. Simultaneously,

state regulatory agencies exercise the power to protect

consumers through the ratemaking process. As Professor

Priest indicates in his treatise, “‘[every] state has. . . es-

tablished a regulatory agency” and “the early predicates

for regulation were developed under the guidance of state

tribunals.”22 The ratemeking process is designed to set

utility prices at a level that will allow only a fair rate of

return to the utility.23 The overriding principle is the “‘pro-

tection of the public interest.”24

20 Id. at 455,

21 Id. at 457.

22 1 A. Priest, Principles of Public Utility Regulation 25 (1969).

23 = Id. at 191 et seq.

24 = Id. at 193.

The decision to preempt state ratemaking authority was

based largely on the determination of the FCC that the

possible emergence of “competition” in markets for custom-

er premises equipment might provide an adequate substitute

for regulation. The FCC did not determine that competition

exists in these markets. Instead, it prognosticated that com-

petitive markets may develop. Thus, the FCC stated that

“terminal equipment [customer premises equipment] mar-

kets can be workably competitive so long as restraints on

competition are not tolerated,”25 there are “likely competi-

tive trends in the terminal equipment market,”26 the market

has “competitive potential,”27 and the market “is subject

to an increasing amount of competition. . . .”28 These

and similar comments were the basis for forbidding the rate

regulation of customer premises equipment throughout the

United States.

The conclusions of the FCC as to the possible competi-

tive nature of the terminal equipment market are sharply

contradicted by its own analysis relating to the require-

ment that the American Telephone & Telegraph Company

(“AT&T”) provide customer premises equipment through

a separate subsidiary. As an indication of the power of

AT&T, the FCC found that the Bell System receives more

than eighty-one per cent of the total telephone revenue in

the United States.29 These receipts are about ten times

25 Computer II Final Decision, 77 F.C,.C,2d at 454.

26 Id, at 454-55,

27 = Id, at 440,

28 Id, at 439

29 Computer II Final Decision, 77 F.C.C.2d at 471.

the revenues of the second place company, General Tele-

phone & Electronics Corporation (“GTE”), and more than

thirty times larger than the revenues of any other telephone

company .39

The Bell System and GTE were subjected to structural

separation because they have “sufficient market power

to engage in anti-competitive activity on a national scale

. . "31> though the separation requirement was later re-

moved from GTE.32 Other firms offering terminal equip-

ment and enhanced services are not operating nationwide

because the markets are “infant yet promising. . . .”33

Only two telephone companies, the Bell System and GTE,

“have basic manufacturing operations producing large quanti-

ties of a wide range of telephone equipment.”’34 On a nation-

al scale these companies have “substantial market positions,

if not market power, in the provision of certain kinds of

[customer premises equipment] .”"35

On a local level, the FCC determined that the Bell System

and GTE have monopoly status. It referred to their “local

monopoly positions [providing] the opportunity (without

maximum separation) to engage in. . . anticompetitive

conduct. . . .”36 As the FCC stated, “[t] he importance

30d.

31 Id. at 469,

2 Computer I] Memorandum Opinion and Order, 84 F.C.C.2d

at 72.

33 Computer II Final Decision, 77 F.C.C.2d at 467.

34 = Id, at 473.

35 Id. at 467,

36 = Id, at 473,

of the control of local facilities, as well as their location

and number, cannot be overstated.”’37

The convincing demonstration by the FCC of the domi-

nant position of the Bell System did not occur in the context

of an analysis of the potential impact on consumers of the

deregulation decision. Instead, this discussion was deemed

relevant only to the structural determinations necessary to

properly handicap the future participants in the customer

premises equipment market. However, the discussion shows

that customer premises equipment will not be available in

the near future in a true “competitive market.” Instead,

this equipment will be provided by “carriers having signi-

ficant market power and the ability to exercise it to the

detriment of the communications ratepayer. . . .”38

The FCC did not attempt to determine the extent to which

“competition” has emerged in local markets in different

states throughout the country.

5. Decisions of the FCC and the court of appeals.

The decision of the FCC reflects a determination that

(1) it need not exercise regulatory jurisdiction over cus-

tomer premises equipment and (2) it can preclude the states

from doing so. On the first issue, the FCC held that enhanced

services are outside its jurisdiction under Title II of the

Communications Act.29 Thus, they cannot be regulated at

the federal level. In addition, it found that it has “ ‘permis-

sive authority’ ” over customer premises equipment and that

37 = Id. at 468.

38 Id. at 486.

39 Computer II Memorandum Opinion and Order, 84 F.C.C,2d

at 89-90.

“the Act does not mandate its regulation.”49 Therefore,

the “forbearance from its regulation’ assertedly is not

unlawful.41 On the preemption issue, the FCC held that its

“authority over terminal equipment’42 was sufficient to

require the states to adhere to the forbearance from regula-

tion. Thus, the FCC found that under the preemption doc-

trine, it could abstain from exercising jurisdiction and at the

same time preclude the states from exercising their regulatory

authority.

The court of appeals held that the FCC was correct in

finding that customer premises equipment “is not within

the scope of Title II” of the Communications Act.43 There-

fore, it sustained the decision “not to subject enhanced

services or CPE to Title II regulation. . . .”44 However,

the court found that the FCC could exercise “ancillary”

jurisdiction to require that customer premises equipment be

detariffed.45 This exercise of “ ‘elastic’ ” power was deemed

necessary to accommodate “ ‘dynamic new developments in

the field of communications’ ” and eliminate any need for

40 Id. at 99,100.

41 Id, at 99.

42 Id, at 103.

43 Computer and Communications Industry Association v. Federal

Communications Commission, 693 F.2d 198, 209 D. C. Cir. (1982)

(“Computer II Court of Appeals Decision.”’)

44 Id, at 209.

45 Id, at 211.

“ ‘repetitive’ ” authorizing legislation from Congress.4® The

court affirmed the preemption of state power, summarizing

its decision as follows:

We believe that Congress has empowered the

Commission to adopt policies to deal with

new developments in the communications

industry and that the policy favoring regula-

tion by marketplace forces embodied in

Computer II is neither arbitrary, capricious

nor an abuse of discretion. With this holding

our review of the wisdom of state preemption

is at an end,47

6. Impact of the antitrust settlement between the

United States Department of Justice and AT&T.

In 1982, the United States Department of Justice and

AT&T announced a settlement of the antitrust suit that was

pending against the company. This settlement, as approved

by the district court in which the case was pending, requires

the divestiture by AT&T of the operating companies in the

Bell System.48 AT&T will be permitted to market customer

premises equipment, as will the operating companies.

The antitrust settlement does not attempt to preempt

state ratemaking power. If the states choose to regulate

the marketing of customer premises equipment by the

companies formerly comprising the Bell System and by other

communications common carriers, they are prevented from

46 Id, at 213, citing General Telephone Co, of the Southwest v.

United States, 449 F.2d 846, 853 (5th Cir. 1971).

47 693 F.2d at 217.

48 United States v. Western Electric Co., 1982-2 Trade Cas. (CCH)

964,900 (D.D.C, 1982).

doing so only by the Computer II decision, Thus, the pre-

emption issue is fully presented in the context of this case.

REASONS FOR GRANTING THE WRIT

The Court should issue a writ of certiorari to determine

whether a federal administrative agency may engage in

“self-starting” preemption, in which traditional regulatory

laws of the states are eviscerated to further a new agency

“policy” that is beyond the explicit or implicit reach of any

federal statute and contrary to the longstanding division of

federal and state regulatory responsibilities. This issue arises

in the context of a decision that attempts a drastic reordering

of federal-state relations.

The ruling of the FCC and the court of appeals would

prevent the states from setting rates for equipment that is

used primarily in the intrastate jurisdictions, for which costs

have been recovered primarily in the intrastate jurisdictions,

and for which rates have been established exclusively in the

intrastate jurisdictions. It precludes the determination by

the states of the proper regulatory methods of protecting

consumers in light of local conditions, including local de-

terminations regarding the extent to which “competition”

will curb the abuse of monopoly power. Though the states

for decades have permitted the growth of “natural monopo-

lies” in the communications industry only because they

could also assure the fairness of rates through the regula-

tory process, this check on the power of communications

providers is now eliminated.

The decision should be reviewed because it runs counter

to the prior decisions of this Court. According to the court

of appeals, preemption by an administrative agency is proper

so long as Congress contemplated that the agency might

make up an unspecified new policy and the new policy is

neither “arbitrary, capricious, nor an abuse of discretion,”"49

The preemption of state power to accomplish the new

policy is deemed valid without further inquiry.5° This

approach runs counter to precedents restricting the exercise

of the preemption power through the requirement that the

preemption be necessary to further a policy adopted by

Congress.51

Furthermore, the decision of the court of appeals requires

review because the statutes enacted by Congress show an

explicit intention to reserve regulatory autonomy to the

states. Indeed, specific provisions of the Communications

Act were drafted to prevent the FCC from interfering with

ratemaking prerogatives of the states. Prior to the Computer

II decision, the federal-state application of the Congression-

al directive resulted in ratemaking autonomy for the states

and the limitation of FCC ratemaking activities to the inter-

state realm. The departure from this division of power by

an administrative agency, through the device of ignoring

Congressional intent, should be subject to the review of

this Court.

49 Computer II Court of Appeals Decision, 693 F.2d at 217.

50 Id,

51 Florida Lime and Avocado Growers, Inc, v, Paul, 373 U.S, 1382,

83 S.Ct, 1210 (1963); State of North Carolina v, United States, 325

U.S, 507, 65 S.Ct, 1260 (1945),

I, A WRIT SHOULD BE ISSUED TO DETER-

MINE WHETHER PREEMPTION BY A

FEDERAL AGENCY IS PERMISSIBLE TO

FURTHER POLICIES NOT MANDATED BY

STATUTE, BUT WHOLLY CREATED BY

THE AGENCY,

The decision of the court of appeals recognized that the

deregulation ruling of the FCC was a departure from princi-

ples set forth in the Communications Act. Indeed, a primary

issue reviewed by the court of appeals was whether this new

approach is so inconsistent with the law as to be imper-

missible in itself.52 The FCC determined not to exercise the

regulatory authority granted by statute, but instead to adopt

a weeny new approach based on its asserted ancillary juris-

diction.53 This approach included (a) forbearance from

the cost-determination regulation previously exercised by

the FCC; (b) the imposition of certain structural require-

ments on AT&T; and (c) the prohibition of traditional rate

regulation of customer premises equipment and enhanced

services by the states. The policy to be furthered, the de-

regulation of certain activities of common carriers, is not

even remotely suggested as a goal of the Communications

Act.54 It was wholly created by the FCC,

This self-generating determination of federal policy by an

administrative agency presents special problems when the

fulfillment of the policy requires wholesale preemption of

state authority. It is one thing for the court of appeals

52 Computer II Court of Appeals Decision, 693 F.2d 198, 209,

53 Id, at 211-12.

54 See 47 U.S.C, §§201-222,

to hold that an agency has discretion to abstain from per-

forming the duties outlined in a statute;55 it is another

to conclude that this agency's reversal of Congressional

policy can also be imposed by the agency on the states,

Yet the court of appeals affirmed the decision of the FCC

on the ground that the agency policy was permissible under

the statute and was not otherwise “arbitrary, capricious

{or] an abuse of discretion,.”56 This standard for the review

of preemption actions taken to fulfill a self-generated agency

policy runs counter to the decisions of this Court indicating

that an express or implied Congressional directive is necessary

for the preemption of state law. Therefore, a writ should be

issued to review the decision.

Although Congress generally has the power to preempt

state law pursuant to the Commerce Clause5? and the

Supremacy Clause5® of the United States Constitution,

considerations of federalism embodied in the Tenth Amend-

ment have led the Court to require a clear showing that

Congress intended preemption before invalidating state law.

Thus, federal regulations are not deemed preemptive unless

Congress unmistakably ordains this result.59 Before preemp-

tion by an administrative agency will be approved, the agency

must show that each element of its action furthers a Con-

gressional objective.6° This standard was not met by the

55 693 F.2d at 210-11,

56 = Id, at 217,

57 ~—- U.S. Const, art, 1, $8, cl, 3.

58 U.S, Const, art, VI, cl. 2.

59 Florida Lime and Avocado Growers, Inc, v, Poul, 373 U.S.

132, 146-47, 83 S.Ct, 1210, 1219 (1963).

60 State of North Carolina v, United States, 325 U.S, 507, 65 S.Ct.

1260 (1945),

FCC, nor was it applied by the court of appeals.

In Florida Lime and Avocado Growers, Inc, v, Paul,®) this

Court reviewed a claim that federal standards applicable

to the marketing of avocados should be deemed preemptive

of inconsistent regulations in California, The Court held

that preemption does not occur unless (1) the nature of the

regulated subject matter permits no conclusion except that

Congress intended preemption, or (2) in explicit terms, the

“Congress has unmistakably so ordained,’’62

Paul held that the nature of the subject matter did not

make preemption inevitable, since avocado regulation was

“not a subject by its very nature admitting only of national

supervision,""®3 nor “a subject demanding exclusive federal

regulation in order to achieve uniformity vital to national

interests. . . .”°8* The Court observed: “On the contrary,

the maturity of avocados is a subject matter of the kind

this Court has traditionally regarded as properly within

the scope of state superintendence,”"65

On the question of Congressional purpose, the Court in

Paul applied the rule requiring an unambiguous Congres-

sional mandate. It stated:

The settled mandate governing this inquiry,

in deference to the fact that a state regulation

of this kind is an exercise of the “historic

61 373 U.S, 182, 83 S.Ct, 1210 (1963),

62 373 U.S, at 142, 83 8.Ct, at 1217 (citation omitted),

63 Id, at 143, 83 S.Ct, at 1218 (citation omitted),

64 Id, at 144, 83 8,Ct, at 1218 (citation omitted),

65 Id,

police powers of the States,” is not to decree

such a federal displacement “unless that was

the clear and manifest purpose of Congress

. . In other words, we are not to con-

clude that Congress legislated the ouster of

this California statute by the marketing

orders in the absence of an unambiguous

congressional mandate to that effect. We

search in vain for such a mandate,66

Thus, preemption should not be decreed unless the subject

matter is a type permitting only national regulation or

Congress has unmistakably decreed this result.

When a federal administrative agency takes an action

resulting in the preemption of state law, the action can

only be valid if it satisfies the prerequisites for the exer-

cise of preemptive power by Congress. The power of ad-

ministrative agencies is derived from statutes and the basis

for the power to preempt must be provided by Congress.87

In addition, the administrative agency is required to demon-

strate conclusively that its actions further objectives mandat-

ed by Congress. Thus, in State of North Carolina v, United

States,®8 which involved the Interstate Commerce Act, the

Court overruled a decision of the Interstate Commerce

Commission to supplant a state rate where it was not clearly

shown that the decision furthered the purpose of the Con-

66 373 U.S, at 146, 83 8,Ct, at 1219 (citation omitted),

67 State of North Carolina v, United States, 326 U8, 507, 65 8.Ct,

1260 (1945),

68 325 U.S, 507, 65 S.Ct, 1260 (1945),

gressional legislation.®® The Court stated:

A scrupulous regard for maintaining the

power of the state in this field has caused this

Court to require that Interstate Commerce

Commission orders giving precedence to

federal rates must meet “a high standard of

certainty.” . . . Before the Commission can

nullify a state rate, justification for the

“exercise of the federal power must clearly

appear.” . . . And the intention to inter-

fere with the state’s ratemaking function is

not to be presumed. . ., nor must its in-

tention in this respect be left in serious

doubt, . . . The foregoing cases also stand

for the principle that the Interstate Com-

merce Commission is without authority to

supplant a state-prescribed intra-state rate

unless there are clear findings, supported by

evidence, of each element essential to the

— of that power by the Commission.

These authorities establish that preemptive intent must

flow from Congress. Moreover, the intent is not easily in-

ferred, but must be unmistakably ordained in the Congres-

sional directive. Furthermore, when an administrative agency

attempts preemption, it must provide clear findings linking

each element of its action to the asserted Congressional

authorization.

These standards have not been met in this case. Applying

69 325 U.S, at 510-11, 65 S.Ct, at 1263,

70 Id, at 511, 65 S.Ct, at 1263 (citations omitted),

an “arbitrary, capricious [or] an abuse of discretion’?!

test, the court of appeals approved a wholesale preemption

order designed not by Congress to further a policy mandated

by it, but by an administrative agency to replace that agen-

cy’s statutory duties. Because the decision runs counter to

the principles historically applied by this Court, a writ of

certiorari should issue to review it.

Il. THE COURT SHOULD ISSUE A WRIT TO

DETERMINE WHETHER AGENCY PRE-

EMPTION IS PROPER IN THE FACE OF

CONGRESSIONAL DIRECTIVES GRANT-

ING AUTONOMY TO THE STATES IN THE

AREA SUBJECT TO THE PREEMPTIVE

ACTION.

The preemption of state power to tariff customer premises

equipment and enhanced services is contrary to the language

and intent of the Communications Act, which reserves this

authority to the states. In addition, this action runs counter

to the allocation of regulatory responsibility that has prevail-

ed for half a century pursuant to the directives contained in

the Act and a leading decision of this Court.72 Therefore, a

writ should issue to review the decision.

Section 152 of the Communications Act gives the FCC

jurisdiction over “all interstate . . . communication by

wire or radio. . . .”73 However, this section excludes

FCC jurisdiction over intrastate communications. Section

71 Computer II Court of Appeals Decision, 693 F.2d at 217.

72 Smith v, Mlinois Bell Telephone Co., 282 U.S, 183, 149, 51

S.Ct. 65, 69 (1930).

73 «47 U.S.C, §152(a).

152(b) states in part:

[S]ubject to the provision of section 301

of this title, nothing in this chapter shall be

construed to apply or to give the Commission

jurisdiction with respect to (1) charges,

classifications, practices, services, facilities

or regulations for or in connection with intra-

state communication service by wire or radio

of any carrier... .74

In addition, Section 221(b) excludes from the jurisdiction

of the FCC the power to set rates for jointly used equipment

if the equipment is regulated by a state commission or other

local authority. It provides:

Subject to the provisions of section 301

of this title, nothing in this chapter shall be

construed to apply, or to give the Commission

jurisdiction, with respect to . . . wire, mobile,

or point-to-point radio telephone exchange

service, or any combination thereof, even

though a portion of such exchange service

constitutes interstate or foreign communica-

tion, in any case where such matters are sub-

ject to regulation by a State commission or

by local governmental authority.75

These provisions establish the Congressional intention to

preserve state ratemaking authority over jointly used terminal

equipment. This view is also supported by the legislative

74 47 US.C. § 152(b).

75 47 U.S.C, §221(b).

history of the Act. In enacting the Act, Congress denied the

FCC the kind of jurisdiction over local rates that had been

exercised by the Interstate Commerce Commission in a trans-

portation context in the Shreveport Rate Case.7® Under the

“Shreveport doctrine,” the ICC was permitted to suspend an

intrastate rate in order to correct an alleged discriminatory

relationship between interstate and intrastate rates.77

Section 221 (b) was included in the law at the suggestion

of state regulators who were fearful that, in the absence of

this language, the FCC might have the power to “override

and interfere with State regulations.”78 Rep. Rayburn, who

introduced the bill in the House of Representatives, said

that Section 221 (b) “leaves local exchange service to local

regulators even where a portion of such local exchange ser-

vice constitutes interstate communications,””? 9

The statutory provisions reserving ratemaking power over

jointly used equipment to the states are also consistent with

other provisions of the Communications Act and the practi-

cal division of power existing for the past five decades, Con-

gress intended that the states set rates for intrastate services

76 Houston, East & West Texas Railway v, United States, 234 U.S,

342, 34 S.Ct. 833 (1914). This interpretation of the legislative history

was endorsed even in North Carolina Utilities Commission v, Federal

Communications Commission, 552 F.2d 1036 (4th Cir. 1977), which

Gene a restrictive interpretation of the limitation embodied in

221(b).

77 North Carolina Utilities Commission v, Federal Communications

Commission, 552 F.2d 1036, 1047 (4th Cir, 1977).

78 Statement of Sen. Dill, Chairman of the Senate Committee,

Hearings on 8.2910 Before the Senate Committee on Interstate Com-

merce, 73d Cong., 2d Sess. 156 (1934).

79 78 Cong. Rec, 10314 (1934),

and for all equipment used jointly for intrastate and inter-

state purposes and this power has traditionally been exercised

by the states. The FCC, on the other hand, was given rate-

setting power over interstate communications services -

meaning long distance calls and messages.89 Thus, the

FCC was granted authority only to establish rates “for

interstate and foreign wire or radio communication between

... different points... .”"81

In allocating this limited tariffing responsibility to the

FCC, Congress was aware that most communications plant

is jointly used for intrastate and interstate messages. Al-

though it left to the states the power to tariff this equipment,

Congress did provide for a fair division of the costs associated

with this plant between the jurisdictions.

Thus, Section 221(c) of the Communications Act provides

for the separation of “interstate”’ plant for the purpose of

establishing the regulatory authority of the FCC. It states:

For the purpose of administering this chap-

ter as to carriers engaged in wire telephone

communication, the Commission may classify

the property of any such carrier used for wire

telephone communication, and determine

what property of said carrier shall be con-

sidered as used in interstate or foreign tele-

phone toll service.82

Pursuant to this provision, a process for “separating” costs

80 47 U.S.C, §§152(a) & (b), 203, and 221 (b) & (c).

81 47 U.S.C, §203(a).

82 47 U.S.C. §221(c).

arose and has been in use for decades.83 The costs assigned

to the federal jurisdiction are recovered in interstate toll

rates. The costs assigned to the states have been recovered

in the rates for customer premises equipment and other

services. The provision for the division of costs among

the jurisdictions implements the decision of this Court in

Smith v. Illinois Bell Telephone Co.,84 which requires a

fair division of costs.

The provision for the separation of jointly used plant

establishes that Congress was well aware that the local

plant of telephone companies was partially used for inter-

state communications. This local plant was rate regulated

by the state commissions, except for the rates applicable to

interstate toll services, and Congress intended that this

approach continue. Congress in Section 203 authorized

the FCC to provide tariffs for interstate communications

services,25 thereby filling the regulatory void resulting

from the jurisdictional limits applicable to state agencies.

Congress did not grant power to the FCC over tariffs for

intrastate services, including the various components of basic

local exchange service. This authority was reserved to the

states and was not threatened for nearly half a century,

prior to the adoption of the Computer II decision.

The specific language of the Communications Act, its

legislative history, the overall plan it embodies for the appor-

tionment of regulatory responsibilities in the federal system,

83 See NARUC-FCC Separations Manual.

84 282 U.S. 133, 149, 61 S.Ct. 65, 69 (1930).

85 470U.S.C. § 203.

and its implementation since 1934, establish the Congression-

al intent to reserve to the states ratemaking authority over

jointly used customer premises equipment. No change in

this approach has been decreed by Congress. Therefore, a

writ of certiorari should be issued to determine whether

agency preemption is proper in the face of a Congressional

directive preserving the autonomy of the states in the area

that the agency seeks to preempt.

CONCLUSION

This case involves a drastic reordering of federal-state regu-

latory prerogatives. The preemptive action of the FCC was

taken to implement a new policy not created by Congress.

but fashioned by the agency without any explicit or implicit

Congressional directive. In addition, the intrusion into an

area traditionally occupied by the states runs counter to the

provisions of the Communications Act. A writ should be

issued to determine whether preemption is proper to imple-

ment a self-generated plan of an administrative agency where

Congress has granted autonomy to the states in the area that

is the subject of the preemptive action.

Respectfully submitted,

Ptah R froblurm

Michael R. Fontham

Paul L. Zimmering

Douglas D. Dodd

STONE, PIGMAN, WALTHER,

WITTMANN & HUTCHINSON

1000 Whitney Bank Building

New Orleans, Louisiana 70130

Telephone (504) 581-3200

Wtahahl & furs

Marshall B. Brinkley

General Counsel

Louisiana Public Service Commission

One American Place

Suite 1630

Baton Rouge, Louisiana 70825

Telephone: (504) 389-5867

Attorneys for Petitioner

Notice: This opinion is subject to formal revision before publication

in the Federal Reporter or U.S.App.D.C, Reports, Users are requested

to notify the Clerk of any formal errors in order that corrections may be

made before the bound volumes go to press,

United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

No, 80-1471

COMPUTER AND COMMUNICATIONS INDUSTRY ASSOCIATION,

PETITIONER

Vv.

FEDERAL COMMUNICATIONS COMMISSION

AND UNITED STATES OF AMERICA, RESPONDENTS

NoRTH AMERICAN TELEPHONE ASSOCIATION,

UTILITIES TELECOMMUNICATIONS COUNCIL,

TYMNET, INC.,

CONTINENTAL TELEPHONE CORPORATION,

XEROX CORPORATION,

HAZELTINE CORPORATION,

ALARM INDUSTRY TELECOMMUNICATIONS COMMITTEE OF

THE NATIONAL BURGLAR & FIRE ALARM ASSOCIATION,

RCA GLOBAL COMMUNICATIONS, INC.,,

SATELLITE BUSINESS SYSTEMS,

MOTOROLA, INC.,

U.S, TELEPHONE & TELEGRAPH CORPORATION,

AMERICAN PETROLEUM INSTITUTE,

CITICORP,

CENTRAL TELEPHONE & UTILITIES CORPORATION,

COMSAT GENERAL CORPORATION,

AMERICAN NEWSPAPER PUBLISHERS ASSOCIATION,

GTE SERVICE CORPORATION,

Bills of coats must be filed within 14 days after entry of judgment, The

court looks with disfavor upon motions to file bills uf costa out of time,

A-l

SPERRY UNIVAC DIVISION OF SPERRY CORPORATION,

COMMUNICATIONS SATELLITE CORPORATION,

INTERNATIONAL BUSINESS MACHINES CORPORATION,

AMERICAN TELEPHONE & TELEGRAPH COMPANY,

COMPUTER & BUSINESS EQUIPMENT MANUFACTURERS

ASSOCIATION,

CONTROL DATA CORPORATION,

UNITED TELEPHONE SYSTEM, INC.,

UNITED COMPUTING SYSTEMS, INC.,

SOUTHERN PACIFIC COMMUNICATIONS COMPANY,

WESTERN UNION TELEGRAPH COMPANY,

AERONAUTICAL Rapio, INC.,

ISA COMMUNICATIONS SERVICES, INC.,

INDEPENDENT DATA COMMUNICATIONS MANUFACTURERS

ASSOCIATION, INC.,

ASSOCIATION OF DATA PROCESSING SERVICE

ORGANIZATIONS, INC.,

BUNKER RAMO CORPORATION,

GTS TELENET COMMUNICATIONS CORPORATION,

MUNICIPALITY OF ANCHORAGE d/b/a ANCHORAGE

TELEPHONE UTILITY,

LOUISIANA PUBLIC SERVICE COMMISSION, INTERVENORS

No, 81-1198

THE PEOPLE OF THE STATE OF CALIFORNIA

AND THE PUBLIC UTILITIES COMMISSION OF THE

STATE OF CALIFORNIA, PETITIONERS

Vv.

FEDERAL COMMUNICATIONS COMMISSION

AND UNITED STATES OF AMERICA, RESPONDENTS

INTERNATIONAL BUSINESS MACHINES CorpP., et al.,

INTERVENORS

A-2

No, 81-1217

INDEPENDENT DATA COMMUNICATIONS MANUFACTURERS

ASSOCIATION, INC., PETITIONER

Vv.

FEDERAL COMMUNICATIONS COMMISSION

AND UNITED STATES OF AMERICA, RESPONDENTS

INTERNATIONAL BUSINESS MACHINES Corp., et al.,

INTERVENORS

No, 81-1222

NATIONAL ASSOCIATION OF REGULATORY

UTILITY COMMISSIONERS, PETITIONER

Vv.

FEDERAL COMMUNICATIONS COMMISSION

AND UNITED STATES OF AMERICA, RESPONDENTS

INTERNATIONAL BUSINESS MACHINES CorpP., et al.,

INTERVENORS

No, 81-1228

DATAPOINT CORPORATION, PETITIONER

FEDERAL COMMUNICATIONS COMMISSION

AND UNITED STATES OF AMERICA, RESPONDENTS

INTERNATIONAL BUSINESS MACHINES Corp., et al.,

INTERVENORS

No. 81-1224

AMERICAN NEWSPAPER PUBLISHERS ASSOCIATION,

PETITIONER

FEDERAL COMMUNICATIONS COMMISSION

AND UNITED STATES OF AMERICA, RESPONDENTS

INTERNATIONAL BUSINESS MACHINES CorpP., et al.,

INTERVENORS

No. 81-1226

MOTOROLA, INC., PETITIONER

Vv.

FEDERAL COMMUNICATIONS COMMISSION

AND UNITED STATES OF AMERICA, RESPONDENTS

INTERNATIONAL BUSINESS MACHINES Corp., et al.,

INTERVENORS

Petitions for Review of Orders

of the Federal Communications Commission

- .

| Jotgrrt onter:

Argued March 22, 1982

Decided November 12, 198

John H. Chapman and Herbert E. Marks, with whom

Laurel R. Bergold, Bernard M, Beerman, Brian E. Moran,

and Daniel A. Huber were on the joint briefs, for peti-

tioners Computer and Communications Industry Associa-

tion and Independent Data Communications Manufac-

*hia @ate

* wi"

- —*

May

turers Association, Inc., and intervenors Association of

Data Processing Service Organizations, Inc., Alarm In-

dustry Telecommunications Committee of the National

Burglar & Fire Alarm Association, and Southern Pacific

Communications Company.

Deborah A. Dupont, Deputy Assistant General Counsel,

National Association of Regulatory Utility Commis-

sioners (NARUC), with whom Charles D. Gray, Assist-

ant General Counsel, NARUC, Janice E. Kerr, J. Calvin

Simpson, and Gretchen Dumas, Attorneys, Public Utilities

Commission of the State of California, and Michael R.

Fontham were on the briefs, for petitioners NARUC,

State of California, and Public Utilities Commission of

the State of California, and for intervenor Louisiana

Public Service Commission.

Michael Yourshaw, with whom Aloysius B. McCabe,

Kevin R. Jones, Robert J. Butler, W. Terry Maguire, and

Pamela Riley were on the brief, for petitioner/intervenor

American Newspaper Publishers Association (ANPA).

Douglas R. Watts and Rodney L. Joyce also entered ap-

pearances for ANPA.

John N. McCamish, Jr., and Andrew S. Viger were on

the brief for petitioner Datapoint Corporation.

John L. Bartlett, Danny E. Adams, Susan Patrick

Inzeo, Michael Yourshaw, Howard D, Polsky, and John F.

Lyons were on the brief for petitioner/intervenor Moto-

rola, Ine.

N. Frank Wiggins, with whom Edwin B. Spievack,

David M. Rickless, and Victor J. Toth were on the brief,

for intervenors North American Telephone Association

(NATA) and Wisconsin Telecommunications Contractors

Association (WTCA). Jan D. Volner also entered an ap-

pearance for NATA and WTCA.

James H. Laskey, Attorney, U.S. Department of Jus-

tice, with whom Barry Grossman, Attorney, U.S. Depart-

ment of Justice, was on the brief, for respondent USA.

A-5

John E. Ingle, Deputy Associate General Counsel, Fed-

eral Communications Commission (FCC), with whom

Stephen A. Sharp, General Counsel, Daniel M. Arm-

strong, Associate General Counsel, Jane E. Mago, and

Michael D. Sullivan, Counsel, FCC, were on the brief,

for respondent FCC. Jack David Smith, Counsel, FCC,

also entered an appearance for respondent FCC.

Joseph Mordecai Kittner, with whom Carl R. Ramey, Ed-

ward P, Taptich, Lawrence J. Movshin, and John S. Voor-

hees were on the brief, for intervenor Computer & Busi-

ness Equipment Manufacturers Association (CBEMA).

Virginia S. Carlson also entered an appearance for

CBEMA.

Michael Boudin, with whom J. Mark Iwry, Carolyn F.

Corwin, Alfred A. Green, and Howard J. Trienens were

on the brief, for intervenor American Telephone & Tele-

graph Company (AT&T). Stuart A. Stock also entered

an appearance for AT&T.

J. Roger Wollenberg, with whom David R. Anderson,

William T. Lake, Roger M. Witten, Jane Tucker Dana,

and Jonathan Becker were on the brief, for intervenor

IBM Corporation.

James R. Hobson was on the brief for intervenors GTE

Service Corporation and GTE Telenet Communications

Corporation. Philip M. Walker, Donald E. Ward, Wil-

liam R. Malone, and Richard McKenna also entered ap-

pearances for intervenor GTE Telenet Communications

Corporation.

Joseph P. Markoski was on the brief for intervenor

Honeywell, Inc. Thomas J. Gallagher also entered an

appearance for Honeywell, Inc.

Arthur B. Sackler was on the brief for intervenor Na-

tional Newspaper Association.

Bernard M. Beerman and Brian E. Moran were on

the brief for intervenor Alarm Industry Telecommunica-

A-6

tions Committee of the National Burglar & Fire Alarm

Association (AITC).

Stephen R. Bell entered an appearance for intervenor

Tymnet, Inc.

Charles M. Meehan and Shirley S. Fujimoto entered

appearances for intervenor Utilities Telecommunications

Council.

Thomas L. Jones and John Wohlstetter entered appear-

ances for intervenor Continental Telephone Corporation.

John R. Murphy and Lawrence W. Secrist, III, entered

appearances for intervenor Xerox Corporation.

Lawrence M. DeVore entered an appearance for inter-

venor Communications Satellite Corporation.

John B. Gantt entered an appearance for intervenor

COMSAT General Corporation.

Alan Raywid entered an appearance for intervenor

Sperry Univac Division of Sperry Corporation.

Victor E. Ferrall, Jr., and Linda K. Smith entered

appearances for intervenors Control Data Corporation

and Hazeltine Corporation.

John M. Lathschuetz, Carolyn C. Hill, and John W.

Hunter entered appearances for intervenor United Com-

puting Systems, Inc. and United Telephone Systems, Inc.

John V. Kenny entered an appearance for intervenor

Southern Pacific Communications Company.

Joel Yohalem entered an appearance for intervenor

Western Union Telegraph Company.

John L. Bartlett entered an appearance for intervenor

Aeronautical Radio, Inc.

Norman P. Leventhal entered an appearance for in-

tervenor ISA Communications Services, Inc.

A-7

Tedson J, Meyers, Michael W. Faber, and Robert J.

Miller entered appearances for intervenors Bunker Ramo

Corporation and Citicorp.

Michael L. Glaser, Kathy J. Bible, and Francis E.

Fletcher, Jr., entered appearances for intervenor Munici-

pality of Anchorage d/b/a Anchorage Telephone Utility.

Theodore D. Frank entered an appearance for inter-

venor Central Telephone & Utilities Corporation.

Wayne V. Black, Larry S. Solomon, Stark Ritchie, and

David E. Lindgren entered appearances for intervenor

American Petroleum Institute.

John A. Ligon entered an appearance for intervenor

U.S. Telephone & Telegraph Corporation.

William D. English, Harold David Cohen, and Jack N.

Goodman entered appearances for intervenor Satellite

Business System.

Alexander P. Humphrey, IV, entered an appearance

for intervenor RCA Global Communications, Inc.

William J. Byrnes, John M. Pelkey, and Ruth S. Baker

Battist entered appearances for intervenor MCI Tele-

communications Corporation.

Stephen M. Feldman entered an appearance for inter-

venor American Business, Press, Inc.

_ Nathan M. Norton, Jr., Chairman, Arkansas Public

Service Commission, was on the brief for amicus curiae

State of Arkansas, urging that the FCC’s decision be set

aside.

Philip J. Mause, Norman A. Pedersen, and Steven M.

Schur were on the brief for amicus curiae The Public

Service Commission of Wisconsin, urging that the FCC’s

decision be set aside.

A-8

Horace S. Libby and David Moskovitz were on the brief

for amicus curiae The Maine Public Utilities Commission,

urging that the FCC’s decision be set aside.

Carl L. Evans, Stanley W. Foy, and Gary A. Tomlin

were on the brief for amicus curiae Alabama Public Serv-

ice Commission, urging that the FCC’s order be reversed

and remanded with instructions.

Henry Geller was on the brief for amicus curiae Henry

Geller, urging affirmance.

Warren Spannaus, Attorney General of the State of

Minnesota, was on the statement in lieu of brief for

amicus curiae Department of Public Service of the State

of Minnesota, urging that the FCC’s decision be set aside.

Evan Wilner and Sandra Minch Hodes were on the

statement in lieu of brief for amicus curiae Office of

People’s Counsel of Maryland, urging that the FCC’s de-

cision be set aside.

Donald A. Law, Assistant General Counsel for the State

of Kansas, .was on the brief for amicus curiae The State

Corporation Commission of the State of Kansas, urging

that the FCC’s decision be set aside.

William B. Gundling and Robert S. Golden, Jr., Assist-

ant Attorneys General for the State of Connecticut, were

on the statement in lieu of brief for amicus curiae De-

partment of Public Utility Control of the State of Con-

necticut, urging that the FCC’s decision be set aside.

Before TAMM and Epwarps,* Circuit Judges, and

JaMEs F, Gorpon,** U.S. Senior District Judge for the

Western District of Kentucky.

Opinion for the court filed by Circuit Judge TAMM.

* Circuit Judge Edwards did not participate in the dispo-

sition of this case.

** Sitting by designation pursuant to 28 U.S.C. § 294(d)

(1976).

A-9

TAMM, Circuit Judge: This is a review of a Federal

Communications Commission (Commission) rulemaking

proceeding known throughout the telecommunications in-

dustry as the Second Computer Inquiry or simply Com-

puter I/,.'' Responding to monumental changes in the

technological and economic conditions of the communica-

tions marketplace, the Commission in Computer I] over-

hauled the regulatory regime governing the interrelation-

ship of telecommunications and data processing. Eight

petitioners und scores of intervenors challenge the Com-

mission’s new rules on myriad grounds, In our view, the

Commission’s action in adopting these rules was neither

arbitrary nor capricious, nor did it constitute an abuse of

discretion. We are convinced that the regulatory scheme

established in Computer I] is a reasonable one within the

scope of the Commission’s authority under the Federal

Communications Act of 1934, 47 U.S.C. § 151 et seq.

(1976) (the Act). Accordingly, we affirm the Commis-

sion’s decision in its entirety.

I. BACKGROUND

The FCC first addressed the regulatory and policy

problems posed by the growing interdependence of com-

1The Federal Communications Commission (Commission)

orders comprising the Computer IJ decision are as follows:

Final Decision, In re Amendment of Section 64.702 of the

Commission’s Rules and Regulations (Second Computer In-

quiry), 77 F.C.C.2d 884 (1980) (Computer II Final Deci-

sion); Memorandum Opinion and Order, Jn re Amendment

of Section 64.702 of the Commission’s Rules and Regulations

(Second Computer Inquiry), 84 F.C.C.2d 50 (1980) (Com-

puter II Reconsidered Decision) ; Memorandum Opinion and

Order on Further Reconsideration, Jn re Amendment of Sec-

tion 64.702 of the Commission’s Rules and Regulations (Sec-

ond Computer Inquiry), 88 F.C.C.2d 512 (1981) (Computer

Il Further Reconsidered Decision). These orders will be

referred to by their designated short forms in the text and

footnotes that follow.

A-10

munications and data processing in a proceeding known

as the First Computer Inquiry or Computer J,° begun in

1966. The proceeding culminated in 1971 with the adop-

tion of rules delineating the circumstances in which com-

puter use by common carriers constituted common carrier

communication subject to regulation under Title II of the

Act* and when such use constituted unregulated data

processing.® Under the Computer I regime, the Commis-

sion looked at the manner in which computerization was

employed to determine how a service would be regulated.

To facilitate this functional approach, the Commission

distinguished between communications services using com-

* Tentative Decision of the Commission, Jn re Regulatory

and Policy Problems Presented by the Interdependence of

Computer and Communication Services and Facilities, 28

F.C.C.2d 291 (1970) (Computer I Tentative Decision) ; Final

Decision and Order, Jn re Regulatory and Policy Problems

Presented by the Interdependence of Computer and Com-

munication Services and Facilities, 28 F.C.C.2d 267 (1971)

(Computer I Final Decision), aff'd in part and rev'd in part

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

1978), decision on remand, 40 F.C.C.2d 298 (1978).

* See Notice of Inquiry, Jn re Regulatory and Policy Prob-

lems Presented by the Interdependence of Computer and

Communication Services and Facilities, 7 F.C.C.2d 11 (1966) ;

Supplemental Notice of Inquiry, Jn re Regulatory and Policy

Problems Presented by the Interdependence of Computer and

Communication Services and Facilities, 7 F.C.C.2d 19 (1967).

*The Communications Act of 1984, 47 U.S.C. § 151 et seq.

(1976), is composed of three titles. Title I contains general

provisions of the Act. Jd. §§ 151-155. Title III provides for

Commission regulation of broadcasting. Jd. §§ 801-397. Title

II, id. §§ 201-222, gives the Commission authority over com-

mon carrier interstate or foreign communication by wire or

radio. The Commission has the power under Title II to

adjudge the lawfulness of proposed charges, classifications,

regulations, and practices, id. § 204, and if it finds them

unlawful, to prescribe just and reasonable ones, id. § 205.

a a rules are found at 86 Fed. Reg. 5345, 5353-54

( 1 .

A-11

puters to perform message or circuit switching, which

were regulated, and data processing services, which were

left to marketplace competition.* The regulatory status of

“hybrid” services, which combined both communications

and data processing functions, was to be determined on a

case-by-case basis depending upon which function was

predominant.’

In Computer I the Commission also set forth the condi-

tions under which a common carrier could enter the data

processing marketplace. The rules required “maximum

separation” of a common carrier’s communications activi-

ties from its unregulated data processing services.* This

requirement was designed to prevent common carriers

from unfairly burdening their regulated communications

services with costs properly attributable to unregulated

data processing services.°

*The Commission defined data processing as “use of a

computer for the processing of information as distinguished

from circuit or message-switching.” Computer I Tentative

Decision, 28 F.C.C.2d at 295. “Message-switching” was de-

fined as “[t]he computer-controlled transmission of messages,

between two or more points, via communications facilities,

wherein the content of the message remains unaltered.” Jd.

at 296.

™See Computer I Final Decision, 28 F.C.C.2d at 276-79;

Computer I Tentative Decision, 28 F.C.C.2d at 305.

® The “maximum separation” requirement meant that com-

mon carriers could offer data processing services only through

a separate corporate entity having separate accounting rec-

ords, personnel, and equipment and facilities. See Computer

Il Final Decisien, 77 F.C.C.2d at 391 n.2.

* Computer I Final Decision, 28 F.C.C.2d at 270-71. The

Commission forbade AT&T to offer data processing even

through a separate subsidiary because the Commission then

assumed that AT&T’s 1956 consent decree, sce discussion

infra pages 45-47, precluded the company from offering data

processing services. Jd. at 282; see Computer I Tentative De-

cision, 28 F.C.C.2d at 298-99, 305.

A-12

The Computer I rules were sustained by the Second

Circuit,” but even as they were being implemented, tech-

nological developments rendered them nearly obsolete.”

As computer and communications technology continued to

merge, the line between regulated and unregulated activi-

ties became increasingly blurred, and the Computer I

definitions became unworkable."? In addition, both the

data processing and the communications industries were

becoming increasingly competitive and therefore less

10 GTE Service Corp. v. FCC, 474 F.2d 724 (2d Cir. 1973).

Certain provisions involving regulation of data processing

services were set aside. Jd. at 732-86, 737.

11 See Computer II Final Decision, 77 F.C.C.2d at 391-93.

12 For example, technological advances made it possible for

significant data processing functions to be performed ia

numerous computer terminals distributed throughout the

communications network rather than in just one central

computer. See id. It therefore became increasingly difficult

to classify terminals and services as either communications

or data processing. AT&T’s proposal in 1975 to market a

sophisticated terminal device, the Dataspeed 40/4, highlighted

the problems inherent in the Computer I definitional ap-

proach, The Dataspeed 40/4 had data processing capabilities

that enabled it to perform some functions that would have

been performed in a central computer at the time the 1971

rules were adopted. Thus, many argued that the Commission

should reject AT&T’s proposal because it was offering a

hybrid data processing service. Although the Commission

ultimately classified the Dataspeed 40/4 as a communications

service, it recognized the inadequacy of the 1971 rules for

dealing with new technologies. See In re American Telephone

and Telegraph Co. (AT&T), 62 F.C.C. 2d 21, 80-81 (1977),

aff'd sub nom. International Business Machines Corp. v. FCC,

570 F.2d 452 (2d Cir. 1978). Between 1975, when the Data-

speed 40/4 was first offered, and 1977, when the Commission

determined that the Dataspeed 40/4 was primarily a commu-

nications service, consumers were deprived of this valuable

new technology.

18 See Computer II Final Decision, 77 F.C.C.2d at 483-34.

A-13

susceptible to the type of abuses the Commission had

sought to discourage through its Computer /] rules."*

Thus, in 1976 the Commission instituted the Second

Computer Inquiry to reexamine its definitional structure

and to find a more workable regulatory approach."* Five

years and thousands of pages of comments later, the Com-

mission ended its study by making major changes in the

regulatory regime. The Commission hopes that these

changes will provide greater certainty and predictability

of regulation for the subject companies and will enhance

competition in communications and data processing.’®

In Computer II the Commission abandoned the attempt

to classify activities as either communications or data

processing based on the nature of the processing per-

4 In the telecommunications marketplace, the increase in

competition is, in part, a result of Commission decisions al-

lowing customer premises equipment (CPE) provided by non-

common carriers to be directly connected to the interstate

communications network. Traditionally, common carriers lim-

ited access to their transmission services to customers with

carrier-provided CPE. In its 1968 Carterfone decision, how-

ever, the Commission required carriers to provide access to

transmission services to customers with non-carrier-provided

CPE. Carterfone, 18 F.C.C.2d 420, reconsid. denied, 14 F.C.C.

2d 571 (1968) ; see Interstate and Foreign Message Toll Tele-

phone, 56 F.C.C.2d 698 (1975), clarified, 59 F.C.C.2d 838

(1976), aff'd sub nom. North Carolina Utilities Comm’n v.

FCC, 552 F.2d 1086 (4th Cir.), cert. denied, 484 U.S. 874

(1977) ; see also Computer II Final Decision, 77 F.C.C.2d at

439-40. CPE includes the basic telephone, answering ma-

chines, key systems, and PBX switchboards.

18 See Notice of Inquiry and Proposed Rulemaking, In re

Amendment of Section 64.702 of the Commission’s Rules and

Regulations, 61 F.C.C.2d 108, 107 (1976) (Notice of Inquiry) ;

see also Supplemental Notice of Inquiry and Enlargement of

Proposed Rulemaking, Jn re Amendment of Section 64.702 of

the Commission’s Rules and Regulations (Computer Inquiry),

64 F.C.C.2d 771 (1977) (Supplemental Notice of Inquiry).

16 Computer II Final Decision, 77 F.C.C.2d at 423, 428-30.

A-14

formed. The respective technologies had become so inter-

twined, according to the Commission, that it had become

impossible to draw an “enduring line of demarcation”

between them.” In the course of its Second Computer

Inquiry, the Commission concluded that the only clear and

lasting distinction would be one between basic transmis-

sion service on the one hand and enhanced services and

customer premises equipment (CPE) on the other.”* Ac-

cording to the Commission, drawing the regulatory line in

this way would minimize the type of ad hoc adjudication

that had taken place under the 1971 rules.’* In addition,

such a distinction would make it possible to eliminate un-

needed regulation and thereby promote efficient use of the

telecommunications network.”

Under the Computer II scheme, the Commission con-

tinued to require common carriers to provide basic trans-

mission services under tariff on an equal basis to all

customers. The Commission found that enhanced services

and CPE were not within the scope of its Title II juris-

17 Id. at 430.

18 Basic service is the offering of “a pure transmission capa-

bility over a communications path that is virtually trans-

parent in terms of its interaction with customer supplied in-

formation.” Id. at 419-20. Enhanced service is any service

other than basic service. Enhanced service “combines bazic

service with computer processing applications that act on the

format, content, code, protocol or similar aspects of the sub-

scriber’s transmitted information, or provide the subscriber

additional, different, or restructured information, or involve

subscriber interaction with stored information.” Id. at 387.

An example of enhanced service is AT&T’s Dial It service,

whereby subscribers dial a certain number to gain access to

stored information such as the scores of professional sports

contests. See Computer II Reconsidered Decision, 84 F.C.C.2d

at 565.

19 Computer II Final Decision, 77 F.C.C.2d at 425, 434-35;

see note 12 supra.

*” Computer II Final Decision, 77 F.C.C.2d at 887.

A-15

diction but were within its ancillary jurisdiction.** Ac-

cordingly, the Commission discontinued Title II regulation

of enhanced services and, with the exception of AT&T,”

relieved common carriers of the “maximum separation”

requirement upon which their offerings of enhanced serv-

ices were conditioned under Computer I.” Similarly, the

Commission “unbundled” CPE from basic transmission

services by discontinuing rate regulation of CPE and

ordering that CPE be sold separately from basic com-

munications service in a competitive market.* The Com-

puter II rules also required common carriers to keep sepa-

rate accounts of their regulated basic service and their

competitive services. Thus, the carriers must sell their

basic service to themselves at the tariff rate when they

provide enhanced services to their customers. These re-

quirements were designed to prevent “cross-subsidization”

of a carrier’s unregulated services by its regulated

services.”*

The Commission declared that its regulatory policy re-

specting interstate facilities or services preempted in-

21 Jd, at 431-35, 450-52; see notes 38-40 & 53-55 infra and

accompanying text.

22 Because of AT&T’s pervasive market power, the Com-

mission decided to permit it to offer enhanced services only

through a separate subsidiary. Originally the Commission

decided to also subject GTE to this separate subsidiary re-

quirement, Computer II Final Decision, 77 F.C.C.2d at 474,

but, on reconsideration, exempted GTE, Computer II Recon-

sidered Decision, 84 F.C.C.2d at 72.

2% Computer II Final Decision, 77 F.C.C.2d at 388-89; see

note 8 supra.

*% Computer II Final Decision, 77 F.C.C.2d at 388-89.

25 Cross-subsidization occurs when a carrier misattributes

costs incurred in the provision of unregulated services to the

provision of regulated services. Because rates for regulated

services are based partially upon the cost of providing those

services, misattribution of costs results in the carrier’s mo-

nopoly ratepayers’ bearing a part of the cost of unregulated

services. See id. at 445, 476-77.

A-16

consistent state regulation of those services or facilities.”

Although the Commission was careful to limit the area of

preemption, some preemption of state regulation was

deemed necessary because the same facilities are usually

used for both interstate and intrastate communications.”

For the federal program of deregulation to work, state

regulation of CPE and enhanced services had to be cir-

cumscribed.”*

During its proceedings, the Commission considered the

effect of the proposed regulatory changes on AT&T’s con-

tinued offering of CPE and enhanced services in light of

a 1956 consent decree limiting AT&T to providing services

that are “subject to public regulation” and activities “in-

cidental” thereto.” The Commission recognized that it

could not definitively construe the decree ™ but stated its

view that AT&T’s participation in the new regulatory

scheme would be consistent with the decree.”

II, ANALYSIS

The arguments supporting and challenging the Com-

puter II decision are as numerous as the parties before

this court. Seemingly, every argument ever made in an

administrative law case is pressed here in some form. We

26 Computer II Reconsidered Decision, 84 F.C.C.2d at 104;

Computer II Further Reconsidered Decision, 88 F.C.C.2d at

523-24, 541-42.

27 Computer II Final Decision, 77 F.C.C.2d at 455-57.

28 Computer II Further Reconsidered Decision, 88 F.C.C.2d

at 541 n.34,

2 United States v. Western Electric Co., 1956 Trade Cas.

(CCH) {| 68,246, at 71, 187-88 (D.N.J. 1956) ; see Computer

II Reconsidered Decision, 84 F.C.C.2d at 106.

® Computer II Final Decision, 77 F.C.C.2d at 492.

*! Computer II Reconsidered Decision, 84 F.C.C.2d at 106;

see generally id. at 105-09; Computer II Final Decision, 77

F.C.C.2d at 490-95.

A-17

consider it unnecessary to uddress al] the arguments pre-

sented to us, and grounds for challenging the Commis-

sion’s decision not mentioned herein should be considered

rejected. We will, however, address four of the most

controversial aspects of the Commission’s decision.

First, many contend that the Commission erred in con-

cluding that CPE and enhanced services are not appro-

priate subjects for Title II regulation. Others argue that

in its Computer II orders the Commission gave an unsup-

portably expansive reading to its ancillary jurisdiction to

regulate non-Title II activities.

Second, many parties—particularly the state regulatory

commissions—view the Commission’s preemption of in-

consistent state regulation as an invasion of ratemaking

authority reserved to the states under the Communica-

tions Act. These parties urge us to declare that the states

continue to have authority to regulate CPE used jointly

in interstate and intrastate commerce. In addition, these

parties argue that the Commission failed to give adequate

notice of its intention to preempt state regulation.

Third, some argue that the “maximum separation” re-

quirement should have been imposed on other carriers in

addition to AT&T. Various parties also believe that

AT&T should have been subjected to tighter regulation

than that contemplated under Computer II.

Finally, some parties contend that the Commission

based its decision on a misinterpretation of the 1956 con-

sent decree between AT&T and the United States. This

issue has apparently been mooted by vacation of the con-

sent decree as part of the recent settlement of the Justice

Department’s antitrust suit against AT&T. Nevertheless,

we will address it briefly.

A. The Deregulation of Enhanced Services and CPE

The most fundamental challenge to the Computer II de-

cision is the claim that the Commission has impermis-

A-18

sibly deregulated enhanced services, CPE, or both. Al-

though framed in different ways by the various parties,

the point of the argument is that the Commission is re-

quired to regulate carrier-provided enhanced services and

CPE under Title II of the Act. We believe that the Com-

mission’s reading of the Act is supportable and that its

concomitant regulatory scheme is a rational and amply ex-

plained policy choice.

We turn first to the Commission’s treatment of en-

hanced services. Title II of the Act empowers the Com-

mission to impose rate regulation only upon common car-

riers “engaged in interstate or foreign communication by

wire or radio.” ** As the relationship between data proc-

essing and communications became increasingly close, the

Commission decided in the First Computer Inquiry not

to regulate the rates charged for data processing serv-

ices." This decision forced the Commission to evaluate

case by case the character of new services combining data

processing and communications to determine whether the

new services were to be regulated.™ By the time of the

Second Computer Inquiry, this task had become practi-

cally impossible.** Consequently, the Commission was

compelled to choose a new regulatory path to fulfill its

statutory duty “to make available . . . to all the people

of the United States a rapid, efficient, Nationwide, and

world-wide wire and radio communication service.” *

Two paths were available to the Commission: regulate

all combined data processing and communications services

under Title II, or regulate none.*" Electing the first path

%2 47 U.S.C. § 201(a) (1976) (emphasis added).

%8 See Computer II Final Decision, 77 F.C.C.2d at 390.

™ See id.

Id. at 393.

* 47 U.S.C. § 151 (1976).

8' Computer II Final Decision, 77 F.C.C.2d at 428.

A-19

would have required the Commission to reverse its policy,

established in Computer /, of not regulating data proc-

essing services and would also have required the Commis-

sion to confront the issue of its authority to exert Title II

jurisdiction over data processing. Instead, the Commis-

sion chose the alternative course and decided not to im-

pose Title II regulation on any combined data processing

and communications services, which the Commission

termed “enhanced services.”

Although the Commission did not impose Title II regu-

lation on enhanced services, it determined that it has an-

cillary jurisdiction over enhanced services under sections

152 and 153 of the Act. Section 152 gives the Commission

jurisdiction over “all interstate and foreign communica-

tion by wire or radio,” ** and section 153 defines ‘“com-

munication by wire” as “the transmission of writing,

signs, signals, pictures and sounds of all kinds. . . inci-

dental to such transmission.” *® The Commission found

that enhanced services fall within its ancillary jurisdic-

tion as incidental transmissions over the interstate tele-

communications network.*°

Nevertheless, the Commission declined to institute a

comprehensive regulatory scheme for enhanced services.

Because the Commission found that the market for en-

hanced services is “truly competitive,” *' it believes that

market forces will protect the public interest in reasonable

rates and availability of services. Therefore, in the Com-

mission’s view, comprehensive regulation of enhanced serv-

ices would not be permissible because it would not be “di-

8847 U.S.C. § 152(a) (1976).

8° Jd. § 153(a)-(b).

* Computer II Final Decision, 77 F.C.C.2d at 482.

** Jd. at 483.

A-20

rected at protecting or promoting a statutory purpose.” *

The one exception to the Commission’s policy of not regu-

lating enhanced services is its imposition of a structural

separation requirement on AT&T under which AT&T

can offer enhanced services to consumers only through a

separate subsidiary.

In dealing with CPE the Commission faced a dilemma

similar to the one it confronted in the case of enhanced

services. Traditionally, the Commission required CPE

provided by common carriers to be included in the tariffs

for their transmission services under Title II. This

“bundling” of equipment charges into transmission rates

was, in effect, Title II regulation of CPE, justified on the

ground that equipment like the telephone handset was part

of an “end-to-end” common carrier service.“ In recent

years, however, CPE has evolved from the “plain old

telephone,” which merely sends and receives communica-

tions signals, into sophisticated home computer terminals

like the Dataspeed 40/4** that incorporate both com-

munications and data processing elements. Additionally,

non-common carriers are now competitively furnishing

CPE for connection with common carrier transmis-

sion lines.** These developments cast doubt on the propri-

ety of the continued bundling of CPE charges into car-

rier transmission rates since, as the Commission found,

bundling limits the range of CPE available to con-

sumers.**

42 Jd.,; see United States v. Southwestern Cable Co., 392

U.S. 157, 175-78 (1968).

*8 See Computer II Final Decision, 77 F.C.C.2d at 446;

Computer II Reconsidered Decision, 84 F.C.C.2d at 99.

“ See note 12 supra.

“5 See Computer II Final Decision, 77 F.C.C.2d at 489-41.

Td. at 442.

A-21

Thus, the Commission again faced a regulatory cross-

roads. Because the Commission had decided in Computer

I not to regulate data processing services,*’ it first con-

sidered an approach that would have determined the

regulatory status of CPE by classifying it as either com-

munications or data processing.** Finding that such a de-

marcation would inhibit innovation in the production and

marketing of CPE by fostering regulatory uncertainty,

the Commission discarded the definitional approach, as it

had with enhanced services.“ The Commission was then

left with the choice of regulating all CPE under Title II

or regulating none. The Commission made the same choice

it had made in the case of enhanced services: no CPE

would be regulated under Title II. The Commission de-

termined that CPE is not common carrier communications

within the scope of Title II® and further found that

charges for CPE provided by carriers need no longer be

regulated via bundling because of the competitive market

conditions now prevailing.”

Although the Commission discontinued Title II regula-

tion of CPE, it exerted ancillary jurisdiction over carrier-

provided CPE. As it had with enhanced services, the Com-

mission found that CPE is within the scope of sections 152

and 158 of the Act, which gives the Commission juris-

diction over “all instrumentalities, facilities, apparatus,

and services . . . incidental to” * “interstate and foreign

communication by wire or radio.”™ The exertion of

47 See text accompanying notes 2-9 supra.

48 See Computer II Final Decision, 77 F.C.C.2d at 436.

4 Jd,

51 Computer II Reconsidered Decision, 84 F.C.C.2d at 61, 65.

52 Computer II Final Decision, 77 F.C.C.2d at 439.

847 U.S.C. §158(a) (1976).

8 pes Sy § 152; see Computer II Final Decision, 77 F.C.C.2d at

A-22

jurisdiction over CPE pursuant to these sections was

justified, the Commission found, because including CPE

charges in tariffs has a direct effect upon interstate

transmission rates.** The Commission therefore ordered,

first, that all CPE be unbundled from transmission serv-

ices; that is, no carrier can offer CPE as part of a trans-

mission offering. Second, the Commission ordered that

AT&T can offer CPE only through a separate subsidiary.

These requirements were designed to ensure fair compe-

tition in the CPE market and to prevent AT&T from

cross-subsidizing its competitive services through its

monopoly services.

Clearly, the Commission’s decisions with regard to en-

hanced services and CPE are complementary. In both

cases the Commission confronted rapid technological and

market changes and attempted to draw definitional bound-

aries for the purpose of limiting Title II regulation. In

both cases this task proved impossible, and the Commis-

sion therefore decided to treat all enhanced services and

all CPE alike and remove them from the scope of Title II.

The Commission relied in both cases on newly emergent

market forces and the exercise of its own ancillary ju-

risdiction to protect the public interest by assuring avail-

ability of enhanced services and CPE at reasonable prices.

The parties’ challenges to the Commission’s regulatory

scheme rest primarily on two bases: first, that the Com-

mission is guilty of impermissible forbearance from Title

II regulation in discontinuing rate regulation of all en-

hanced services and CPE, and second, that the Commission

overreached its ancillary jurisdiction in imposing the sep-

aration requirement on AT&T and ordering the unbund-

ling of CPE. We view the Commission’s decision in Com-

puter II as a demarcation of the scope of Title II juris-

diction in a volatile and highly specialized field and a con-

comitant substitution of alternative regulatory tools for

5 Computer II Final Decision, 717 F.C.C.2d at 441-46.

A-23

traditional Title II regulation in this field. Our analysis

proceeds from this foundation,

We first address the Commission’s finding that en-

hanced services and CPE ure not common carrier services

within the scope of Title I]. As we understand it, the

Commission’s finding in regard to enhanced services has

two alternative bases. First, the Commission found that

the provision of an enhanced service is not a common car-

rier activity and, thus, is outside the scope of Title II."*

Alternatively, the Commission found that even if some

enhanced services might be common carrier communica-

tions activities within the reach of Title II, it is not re-

quired to identify those services and subject them to Title

II regulation.” A policy of identifying regulable en-

hanced services would, in the Commission’s view, be a re-

version to the futile Computer I case-by-case approach

that inhibited technological innovation and diverted Com-

mission resources from more beneficial activities.”

Likewise, the Commission’s decision that CPE is

not within the scope of Title II rests on two bases. First,

the Commission determined that CPE is not itself a com-

mon carrier communication service regulable under Title

II, In reaching this conclusion, the Commission noted that

competition in the CPE market and innovation in the

CPE industry occurring apart from the telecommunica-

tions network demonstrate that CPE is severable from

communications transmission services. Second, the Com-

mission determined that charges for carrier-provided

CPE, which traditionally have been regulated in connec-

tion with the carrier’s provision of transmission services,

need no longer be regulated because the new competition

in the CPE industry will assure the availability of CPE

at reasonable prices.

5° Id. at 480-82.

57 Id. at 434-35.

581d, at 426-27, 434-35.

A-24

We believe the Commission’s decision not to subject

enhanced services or CPE to Title II regulation is sus-

tainable on either of the grounds asserted by the Com-

mission. The Commission’s finding that enhanced services

and CPE are not common carrier communications activ-

ities within Title II is reasonable. Although the Act au-

thorizes regulation of the rates charged for common car-

rier services, it does not define the term “common car-

rier.” We have noted previously that “the term ‘common

carrier’ has a coherent legal meaning which courts can

grasp and apply in reviewing the Commission construc-

tion of its own Act.” ™ In National Association of Regula-

tory Utility Commissioners v. FCC, 525 F.2d 680 (D.C,

Cir.), cert. denied, 425 U.S. 992 (1976) (NARUC I), we

observed that the essential element of common carriage is

the carrier’s undertaking “ ‘to carry for all people indif-

ferently.’”® In the communications context, this means

providing a service whereby customers may “ ‘transmit

intelligence of their own design and choosing.’” ™

In Computer II the Commission found that enhanced

services are not the kind of general public offerings this

court regarded as common carriage in NARUC I. Inher-

ent in enhanced service offerings is the ability of vendors

to tailor their services to meet the particularized needs of

individual customers.” In the Commission’s view, this

5* National Ass’n of Regulatory Utility Comm’rs v. FCC,

583 F.2d 601, 618 (D.C. Cir. 1976) (NARUC 11) (opinion of

Wilkey, J.) (footnote omitted). It is clear that an entity can

be a common carrier with respect to only some of its activities.

Id. at 608. In this opinion the term “common carrier” will

be used to indicate not an entity but rather an activity as to

which an entity is a common carrier.

526 F.2d 630, 640 (D.C. Cir. 1976) (NARUC 1) (quoting

san v. Royal Indemnity Co., 279 F.2d 737, 789 (5th Cir.

1960) ).

" Id, at 641 n.68 (quoting Industrial Radiolocation Service,

5 F.C.C.2d 197, 202 (1966) ).

@ Computer II Final Decision, 77 F.C.C.2d at 431.

A-25

characteristic distinguishes enhanced services from basic

services, which are subject to traditional Title II regula-

tion. Further, the Commission found that the severability

of CPE from transmission services and the competitive

nature of the CPE market demonstrated that CPE is not

within the definition of common carriage.

We believe the Commission’s judgment that enhanced

services do not constitute common carrier communications

activities is reasonable and amply supported. The Com-

mission’s finding was based upon intensive study of a

rapidly changing and highly technical field and was in-

formed by the comments of a large number of participants

in the communications and data processing industries.

Given the great variety of specialized enhanced services

now available to consumers, it is reasonable to find that

providers of these services generally are not common car-

riers because they will “make individualized decisions in

particular cases whether and on what terms to serve.” ®

Likewise, the Commission’s judgment that CPE is not

a common carrier service within Title II is clearly sup-

ported. CPE was originally regulated under Title II be-

cause regulation was thought necessary for the effective

functioning of the interstate communications network, a

premise that the Commission has now rejected as fallaci-

ous.“ The severability of CPE from underlying common

carrier transmission services, demonstrated by the healthy

competition in the CPE market by non-common carrirs,

supports the Commission’s conclusion that CPE is not a

common carrier activity within Title II. Moreover, as in

any competitive market, provision of CPE is based upon

“individualized decisions, in particular cases, whether and

on what terms to deal,” ® the hallmark of a non-common

carrier service.

* NARUC II, 688 F.2d at 609 (footnote omitted).

“% Computer II Final Decision, 77 F.C.C.2d at 446.

% NARUC I, 525 F.2d at 641 (footnote omitted).

A-26

We also find that the Commission’s decision is sustain-

able on the alternative policy ground. We agree with the

Commission that even if some enhanced services could be

classified as common carrier communications activities,

the Commission is not required to subject them to Title II

regulation where, as here, it finds that it cannot feasibly

separate regulable from nonregulable services. To the

extent that certain enhanced services could lawfully be

regulated under Title II once they were identified as com-

mon carrier services, we sanction the Commission’s for-

bearance from Title II regulation. We emphasize, how-

ever, that our sanction is a very narrow one, given in

light of the peculiar nature of the communications and

data processing industries and the alternative regulatory

scheme adopted by the Commission.

The Commission’s announced policy is to promote the

“efficient utilization and full exploitation of the interstate

telecommunications network.” ® This can be best accom-

plished, in the Commission’s view, by regulating the rates

of only those activities clearly within the scope of Title II.”

This policy, combined with the Commission’s decision in

Computer I not to regulate data processing services under

Title II, compelled the Commission’s decision to repudi-

ate an ad hoc approach to determining which enhanced

services were regulable as common carrier services. Such

case-by-case determinations, the Commission found, would

defeat the purpose of the Communications Act, first, by

creating regulatory uncertainty that would inhibit market

entry and thus limit the range of services available to

consumers and, second, by absorbing Commission resources

that would be better employed elsewhere.”

% Computer II Final Decision, 77 F.C.C.2d at 429.

* Id.

* That decision was largely upheld by the Second Circuit

in GTE Service Corp. v. FCC, 474 F.2d 724 (2d Cir. 1973).

The two rules struck down in GTE Service Corp. are not

relevant here.

* Computer II Final Decision, 77 F.C.C.2d at 429-30, 434-35.

A-27

Instead of reguluting enhanced services under Title II,

the Commission used its ancillary jurisdiction to impose

upon AT&T a structural regulation scheme that requires

AT&T to offer enhanced services only through a separate

subsidiary. The Commission found that this separation

requirement will effectively protect the public interest by

limiting the power of AT&T to gain an unfair advantage

in the marketplace by cross-subsidizing its competitive

services by its monopoly ones. We believe this to be a

sufficient basis to support the Commission’s decision not

to regulate enhanced services under Title II. Once the

difficulty of isolating activities subject to Title II regula-

tion outweighs the benefits to be gained by that regula-

tion, then the Commission is justified in conserving its

energies for more efficacious undertakings, at least when

it establishes an alternative regulatory scheme under its

ancillary jurisdiction.

As it did in the case of enhanced services, the Commis-

sion decided on policy grounds not to regulate some CPE—

carrier-provided CPE—that it could have permissibly

regulated under Title II. This forbearance is lawful. We

have already upheld the Commission’s finding that provi-

sion of CPE is not itself a common carrier activity within

Title II. Thus, the Commission could regulate the rates

for carrier-provided CPE only if it were necessary to

ensure the availability of Title II-regulated communica-

tions service at reasonable rates. The Commission found

that CPE is now available in an increasingly competitive

market, which indicates that CPE will be available at rea-

sonable prices. The Commission further found that dis-

continuing Title II regulation of all CPE will create eco-

nomic incentives for carriers to structure services so that

customers pay only for what they need.” These findings

amply support the Commission’s conclusion that regula-

tion of charges for carrier-provided CPE is not necessary

to protect the public interest.

0 Td. at 429-30.

A-28

Instead of regulating charges for CPE, the Commission

has, as in the case of enhanced services, exercised its

ancillary jurisdiction to forbid carriers from offering CPE

as part of a transmission service and to require AT&T to

provide CPE only through a separate subsidiary. The

Commission believes that these regulations will ensure

healthy competition in the CPE market and will protect

the free market forces which will ensure the availability

of CPE at reasonable prices by preventing AT&T from

cross-subsidizing its competitive services through its

monopoly services. We have previously noted our re-

luctance “ to declare that free market forces must be sup-

planted by rate regulation when neither Congress nor the

[agency] has found it essential.” ™ We do not believe that

Congress required the Commission to regulate carrier-

provided CPE under Title II when the agency has de-

termined that an alternative regulatory scheme would

more effectively further the goals of the Act. Since the

agency’s view on this point is reasonable and well sup-

ported, we refuse to require the Commission to regulate

carrier-provided CPE under Title II.

Our approval of limited forbearance from Title II reg-

ulation of common carrier services by the Commission

does not give the Commission unfettered discretion to

regulate or not regulate common carrier services. This is

not a case in which the Commission has attempted to end

Title II regulation without substituting other regulatory

tools. In Philadelphia Television Broadcasting Co. v. FCC,

359 F.2d 282 (D.C. Cir. 1966), we upheld the Commis-

sion’s decision to regulate CATV systems as “adjuncts of

the nation’s broadcasting system” rather than as com-

mon carriers under Title II, even though we assumed that

CATV systems were common carriers. We concluded that

™ National Ass’n of Theatre Owners v. FCC, 420 F.2d 194,

204 (D.C. Cir. 1969), cert. denied, 897 U.S. 922 (1970).

72 359 F.2d at 284,

A-29

the latitude accorded the Commission by Congress in

dealing with new communications technology includes the

discretion to forbear from Title II regulation.” Here, as

in Philadelphia Television, we are faced only with the

issue whether the Commission’s discretion extends to de-

ciding what regulatory tools to use in regulating common

carrier services:

In a statutory scheme in which Congress has given

an agency various bases of jurisdiction and various

tools with which to protect the public interest, the

agency is entitled to some leeway in choosing which

jurisdictional base and which regulatory tools will

be most effective in advancing the Congressional

objective.”

The Second Circuit recently addressed a regulatory

scheme similar to that established in Computer II and

upheld the Commission’s action. In Western Union Tele-

graph Co. v. FCC, 674 F.2d 160 (2d Cir. 1982), the court

reviewed a Commission order requiring international rec-

ord carriers to remove their offerings of Telex terminal

equipment from tariff. The court upheld the deregulation

on alternative grounds. The Commission determined that

provision of terminal equipment is not a common carrier

communications service in the traditional sense, and the

court held this to be reasonable. In the court’s view, the

petitioners had offered “nothing which casts doubt on the

Commission’s conclusion that the manufacture and provi-

sion of terminal equipment are highly competitive and in-

volve many firms which are not communications carriers.

To find in such circumstances that providing terminal

equipment is not a communications service is hardly

irrational.”

"Id.

™ Id. at 284 (emphasis added).

674 F.2d at 166-67.

A-30

Moreover, the court rejected petitioners’ allegation that

continued Title II regulation of terminal equipment was

necessary to realize the Commission’s statutory goals:

“While [petitioners] might believe that IRC transmission

rates could be better controlled if equipment remained

tariffed, the Commission has broad discretion to choose

which regulatory tools to employ . . . and its decision

must be upheld unless it is irrational ....”" The regula-

tory tools that the court found reasonable were newly un-

leashed market forces buttressed by the likely future entry

of Western Union into the international Telex market.”

Because the Commission did not attempt to exercise ancil-

lary jurisdiction over the provision of Telex terminal

equipment, the regulatory scheme upheld by the Second

Circuit was even less stringent than the regulatory scheme

established in Computer II.

The Commission’s exercise of ancillary jurisdiction to

impose the separation requirement on AT&T is an integral

part of the Computer II regulatory scheme. Several par-

ties attack the validity of this assertion of ancillary jui*-

diction by the Commission. In United States v. South-

western Cable Co., 392 U.S. 157 (1968), it was settled

beyond peradventure that the Commission may assert

jurisdiction under section 152(a) of the Act over activi-

ties that are not within the reach of Title II. In that

case, however, the Supreme Court limited the Commis-

sion’s jurisdiction to that which is “reasonably ancillary

to the effective performance of the Commission’s various

responsibilities.” * One of those responsibilities is to as-

sure a nationwide system of wire communications services

at reasonable prices.”

7 Id. at 165-66 (citations omitted).

7 Id. at 166.

7 United States v. Southwestern Cable Co., 392 U.S. at

172-78.

7 Id. at 178.

A-31

In Computer II the Commission found that the exercise

of ancillary jurisdiction over both enhanced services and

CPE was necessary to assure wire communications serv-

ices at reasonable rates. Regulation of enhanced services

was deemed necessary to prevent AT&T from burdening

its basic transmission service customers with part of the

cost of providing competitive enhanced services. This con-

clusion was based upon detailed findings on AT&T’s

market power and its ability to underwrite its competitive

offerings with profits from its monopoly services." We

believe this conclusion is well founded. Because rates for

services provided under tariff are based partly upon the

costs of providing those services, any misallocation of costs

between an entity’s competitive and monopoly services

would allow the carrier to justify higher rates for its

monopoly services. Given this potentially symbiotic re-

lationship between competitive and monopoly services, the

agency charged with ensuring that monopoly rates are

just and reasonable can legitimately exercise jurisdiction

over the provision of competitive services.

Likewise, we believe the Commission acted reasonably

in ordering, pursuant to its ancillary jurisdiction, that

CPE be removed from tariff. The Commission found that

bundling CPE charges into transmission rates has a direct

effect upon rates for interstate transmission services.”

The Commission therefore concluded that exercising juris-

diction over CPE was necessary to carry out its duty to

assure the availability of transmission services at reason-

able rates. We believe that both the Commission’s finding

and its conclusion were reasonable. Because CPE charges

are not based on usage, including the costs of providing

CPE in the calculus for determining the reasonableness of

a carrier’s rates makes it difficult to identify accurately

the costs of providing transmission services, which are

81 See Computer II Final Decision, 77 F.C.C.2d at 466-70.

8 Jd. at 441, 444-46.

A-32

priced according to usage. It was therefore reasonable

for the Commission to exercise jurisdiction over carrier-

provided CPE to ensure that rates for carrier transmis-

sion services are not based upon costs associated with the

provision of CPE. Thus we conclude that the Commis-

sion’s exertion of jurisdiction over enhanced services and

carrier-provided CPE was “reasonably ancillary” under

the Southwestern Cable standard.

In designing the Communications Act, Congress sought

“to endow the Commission with sufficiently elastic powers

such that it could readily accommodate dynamic new de-

velopments in the field of communications.” Congress

thus hoped “to avoid the necessity of repetitive legisla-

tion.” In Computer IJ the Commission took full ad-

vantage of its broad powers to serve the public interest

by accommodating a new development in the communica-

tions industry, the confluence of communications and data

processing. Because the Commission’s judgment on “how

the public interest is best served is entitled to substantial

judicial deference,” * the Commission’s choice of regula-

tory tools in Computer I7 must be upheld unless arbitrary

or capricious.” Our review of the Commission’s decision

convinces us that the Commission acted reasonably in de-

fining its jurisdiction over enhanced services and CPE.

We therefore uphold the Computer 1] scheme.

* General Telephone Co. of the Southwest v. United States,

449 F.2d 846, 858 (6th Cir. 1971).

™ National Ass’n of Theatre Owners v. FCC, 420 F.2d 194,

199 (D.C. Cir. 1969) (footnote omitted), cert. denied, 397

U.S. 922 (1970) ; see General Telephone Co. of California v.

tio — F.2d 890, 398 (D.C. Cir.), cert. denied, 396 U.S. 888

* FCC v. WNCN Listeners Guild, 4560 U.S. 682, 696 (1981).

* 5 U.S.C. § 706(2) (a) (1976) ; see, ¢.g., Malrite Television

v. FCC, 652 F.2d 1140, 1149 (2d Cir, 1981), cert. denied, 102

8. Ct. 1002 (1982).

A-33

B. Preemption of State Regulation of CPE

Some parties argue that the Commission's decision to

order the states to remove CPE charges from their tariffs

is an unjustifiable invasion of the authority to regulate

intrastate communications services reserved to the states

by the Act. To determine whether the Commission acted

properly in preempting state tariffing of CPE, we must

examine the Commission’s powers under the Act and the

asserted justification for preempting state regulation.

We have already held that the exertion of ancillary

jurisdiction over carrier-provided CPE was proper under

section 2(a) of the Act, which gives the Commission broad

authority over “all interstate and foreign communication

by wire or radio,” and section 8(a) of the Act, which

defines “communication by wire” to include not only

transmission but also “all instrumentalities, facilities,

{and) apparatus . . . incidental to such transmission.” “

Many parties argue, however, that the Commission can-

not exercise its ancillary jurisdiction so as to preempt

state regulation of CPE. The conflict between federal and

state power over CPE arises because most CPE in this

country is used interchangeably for both interstate and

intrastate communication and has traditionally been sub-

ject to both state and federal regulation. The cost of pro-

viding CPE has been apportioned between interstate and

intrastate use and then bundled into the appropriate

transmission rates.” Thus, it is argued, the Commission's

assertion of its ancillary jurisdiction to require removal

of CPE charges from state tariffs conflicts with section

2(b) of the Act, which confers on the states jurisdiction

over instrumentalities of intrastate communication.”

47 U.S.C. § 162(a) (1976).

“Id. § 168(a).

® See Computer II Final Decision, 717 F.C.C.2d at 441-42.

” 47 U.S.C. § 162(b) (1976).

A-34

The Commission asserts that preemption of state regu-

lation is justified in this case because the objectives of

the Computer II scheme would be frustrated by state

tariffing of CPE. We agree. Courts have consistently held

that when state regulation of intrastate equipment or fa-

cilities would interfere with achievement of a federal

regulatory goal, the Commission’s jurisdiction is para-

mount " and conflicting state regulations must necessarily

yield to the federal regulatory scheme.” In Computer I/

the Commission found that its policy of promoting the

“efficient utilization and full exploitation of the interstate

telecommunications network” is furthered by fostering

competition in the CPE market and giving consumers an

unfettered selection of CPE. According to the Commis-

sion, competition in the equipment market has had the

beneficial effects of stimulating innovation, making avail-

able a wider range of equipment, improving maintenance

and reliability, and increasing purchase, payment, and

installation options.“ When charges for CPE are bundled

into transmission charges, the Commission found, the

benefits of a competitive market are partially lost because |

consumers’ freedom of choice is limited. Only if charges

for CPE are entirely separate from charges for trans-

mission service will consumers be free to select the CPE

that best suits their individual needs and preferences.”

* See, e.g., New York Telephone Co, v. FCC, 681 F.2d 1059,

1066 (2d Cir. 1980); California v. FCC, 667 F.2d 84, 86-87

(D.C. Cir. 1977), cert. denied, 484 U.S. 1010 (1978); Puerto

po an Co, v. FCC, 558 F.2d 694, 698-700 (1st Cir.

* Brookhaven Cable TV, Inc. v. Kelly, 578 F.2d 765, 767

(2d Cir, 1978), cert. denied, 441 U.S. 904 (1979); NARUC I,

625 F.2d at 646-47.

* Computer II Final Decision, T7 F.C.C.2d at 429.

“Jd. at 4389.

% See id. at 442-48.

A-35

The Commission therefore concluded that the only way

to give consumers an unfettered choice of CPE was to

require that charges for CPE be completely severed from

transmission rates on both the federal and state levels.

Since consumers use the same CPE in both interstate and

intrastate communications and generally wish to purchase

both interstate and intrastate transmission services, the

inclusion of CPE in charges for intrastate transmission

service will certainly influence the consumer’s choice of

CPE. The Commission believes this restriction will be

detrimental to both the consumer and the interstate com-

munication system. Given the Commission’s detailed and

logical findings on this point, we cannot say the Com-

mission’s conclusion is irrational.

Our decision today is in accord with two leading cases

in which the Fourth Circuit recognized that state regula-

tion which impedes a federal regulatory goal must yield

to the federal scheme. The Fourth Circuit also confirmed

the Commission’s jurisdiction over CPE used jointly in

interstate and intrastate communications and rejected the

argument that section 2(b) of the Act absolutely pro-

hibits federal jurisdiction over jointly used CPE. In

North Carolina Utilities Commission v. FCC, 587 F.2d

787 (4th Cir.), cert. denied, 429 U.S. 1027 (1976)

(NCUC I), the court upheld the Commission’s authority

to determine the terms on which consumers may attach

non-carrier-provided CPE to transmission facilities used

for both interstate and intrastate communications.” The

court also held that section 2(b) deprives the Commission

of power over local services or facilities only where

their nature and effect are separable from and do

not substantially affect the conduct or development

* North Carolina Utilities Comm’n v. FCC, 537 F.2d 787,

798-95 (4th Cir.), cert. denied, 429 U.S. 1027 (1976) (NCUC

I); North Carolina Utilities Comm’n v. FCC, 552 F.2d 1036,

gay (4th Cir.), cert. denied, 484 U.S. 874 (1977) (NCUC

A-36

of interstate communications. But beyond that, we

are not persuaded that section 2(b) sanctions any

state regulation, formally restrictive only of intra-

state communication, that in effect encroaches sub-

stantially upon the Commission’s authority under

sections 201 through 205.”

In the second leading case the Fourth Circuit reaffirmed

its ruling in NCUC I:

[We] correctly reasoned that if section 2(b) (1) were

construed to give the states primary authority over

joint terminal equipment, i.e., equipment used inter-

changeably for interstate and intrastate service,

then—whenever state regulations conflicted with

federal rules applicable to interstate calls—the FCC

would necessarily be prevented from discharging its

statutory duty under sections 1 and 2(a) to regu-

late interstate communication.”

Computer II is, we believe, just such a case in which con-

flicting state regulations would impede the Commission in

its effort to fulfill its statutory duty.

Several parties attempt to distinguish the NCUC cases

on the ground that they did not involve Commission at-

tempts to preempt state ratemaking authority. They

argue that section 2(b) prohibits preemption of state

tariffing of CPE. They point out that section 2(b) was

designed to protect state authority over intrastate rates,

enacted as it was in response to a Supreme Court decision

that Congress feared would be read to permit federal

agencies to set local rates based on the indirect effects

such rates might have on interstate service.” We do not

* NCUC I, 587 F.2d at 793.

% NCUC II, 552 F.2d at 1045.

* Houston, E. & W. Texas Ry. Co. v. United States, 234

U.S. 342 (1914) (Shreveport). In Shreveport the Supreme

Court upheld an ICC order that, in effect, required the revi-

sion of intrastate railroad rates that were lower than rates

for comparable interstate rail services so as to remove the

A-37

believe that section 2(b) prohibits preemption in this case.

In Computer II the Commission has neither attempted to

set rates for intrastate communications services or facili-

ties nor asserted jurisdiction over matters of state con-

cern because of intrastate discrimination against inter-

state business. Rather, the Commission here exercised its

direct authority to determine the regulatory treatment of

CPE used for interstate communications.

We fail to see any distinction in this case between pre-

emption principles applicable to state ratemaking author-

ity and those applicable to other state powers. The op-

erative principle in this case is precisely the principle

that demanded state preemption in the NCUC cases.

There, the preemption of state regulations that restricted

interconnection was justified because those regulations

impeded the validly adopted federal policy of unrestricted

interconnection. Similarly, in Computer II preemption of

state tariffs on CPE is justified because state tariffs would

interfere with the consumer’s right to purchase CPE

separately from transmission service and would thus frus-

trate the validly adopted federal policy. In Computer II

the federal-state conflict would stem, as it did in the

NCUC cases, from the practice of using CPE jointly for

interstate and intrastate communication. The conflicting

state policy, meant to affect only intrastate use, would

unavoidably affect the federal policy adversely. There-

fore, here, as in NCUC I and II, the state regulatory

power must yield to the federal.

In addition, the Act itself does not distinguish between

authority over rates and authority over other aspects of

resulting discrimination against interstate commerce. Con-

gress may well have intended § 2(b) of the Communications

Act to prevent such a result in the communications area. See

Federal Communications Commission: Hearings on S. 2910

Before the Senate Comm. on Interstate Commerce, 73d Cong.,

2d Sess. 158, 155 (1934) (statement of K.F. Clardy) ; id. at

155-56 (statement of Andrew R. McDonald); NCUC II, 552

F.2d at 1047.

A-38

communications. Sections 2(a) and (b) of the Act allo-

cate federal and state authority with regard to both

“charges [and] . . . facilities.”’* Therefore, conflicting

federal and state regulations regarding dual use CPE are

no more acceptable under the Act when equipment rates

are involved, as here, than when interconnection policies

are involved, as in the NCUC cases.

In the NCUC cases, the Fourth Circuit also found that

section 221(b) of the Act'” did not constitute a bar

to federal control of dual use CPE. That section pro-

vides that the Commission has no jurisdiction over state-

regulated charges, facilities, or other matters “for or in

connection with . . . telephone exchange service . . . even

though a portion of such exchange service constitutes in-

terstate or foreign communication.” * The Fourth Circuit

found on the basis of the legislative history that this provi-

sion was merely intended to preserve state regulation of

local exchanges that happened to overlap state lines." We

have reviewed the legislative history and also conclude that

section 221(b) is inapplicable in the circumstances of this

case. Both the Senate and House committee reports spe-

cifically note that section 221(b) is intended to enable

states “to regulate exchange services in metropolitan areas

overlapping State lines.” ** To the extent we appeared in

Kitchen v. FCC, 464 F.2d 801 (D.C. Cir. 1972), to take

109 47 U.S.C. §152(b)(1) (1976).

101 Jd, § 221(b).

102 Td.

108 See NCUC II, 652 F.2d at 1945; NCUC I, 587 F.2d at

795. The Fourth Circuit’s interpretation of § 221(b) has been

followed by the First Circuit, Puerto Rico Telephone Co. v.

FCC, 553 F.2d 694, 698-99 (1st Cir. 1977), and by the Second

Circuit, New York Telephone Co. v. FCC, 681 F.2d 1059,

1064-65 (2d Cir. 1980).

14S. REP. No. 781, 73d Cong., 2d Sess. 5 (1984); H.R.

REP. No. 1850, 78d Cong., 2d Sess. 7 (1984).

A-39

a different view of the meaning of section 221(b), we now

reject the Kitchen analysis and adopt what we believe to

be the more sound interpretation of that section expounded

by the Fourth Circuit in the NCUC cases.

Some parties also argue that the Commission has un-

lawfully attempted to preempt state regulation of dual

use CPE by creating a vacuum of deregulation. They

contend that preemption can be accomplished only by

affirmative regulation that occupies the field. These parties

misapprehend the Commission’s actions. Although the

Commission has discontinued Title II regulation of CPE,

it has substituted a different, affirmative regulatory

scheme through its ancillary jurisdiction.“ Furthermore,

we perceive no critical distinction between preemption by

Title II regulation and preemption by the exercise of

ancillary jurisdiction.” It is clear to us that the Com-

puter II regulations embody a comprehensive federal reg-

ulatory scheme, including rules governing the marketing

of CPE by common carriers. We agree with the Second

Circuit: “Federal regulation need not be heavy-handed

in order to preempt state regulation.” '”

Some parties argue forcefully that the states, like the

Commission, have a responsibility to protect the interests

of consumers and that the best way to do this is to con-

tinue to .uriff CPE. We cannot engage in debate about

whether a policy of price control through tariffing or a

policy of free competition best serves the public interest

165 This scheme includes continued regulation of intercon-

nection for all CPE and strengthening of all interconnection

opportunities, establishment of unbundled charges, and struc-

tural separation to guard against cross-subsidization where

necessary.

106 Accord Brookhaven Cable TV, Inc. v. Kelly, 578 F.2d

765 (2d Cir. 1978), cert. denied, 441 U.S. 904 (1979).

107 New York State Comm'n on Cable Television v. FCC,

669 F.2d 68 (2d Cir. 1982).

A-40

in this area, All we are empowered to do is to determine

whether the Commission had the statutory authority to

adopt the policy it did and whether that policy is ar-

bitrary or capricious or an abuse of discretion. We be-

lieve that Congress has empowered the Commission to

adopt policies to deal with new developments in the com-

munications industry and that the policy favoring regula-

tion by marketplace forces embodied in Computer II is

neither arbitrary, capricious, nor an abuse of discretion.

With this holding our review of the wisdom of state

preemption is at an end.

It is also contended that the Commission failed to give

adequate notice of its intention to detariff CPE and to

preempt state tariffing. We reject this argument. In the

Tentative Decision issued almost a year prior to the

Final Decision, the Commission retained tariff regula-

tion of “basic” CPE, but queried “whether it would be

more advantageous to the consumer for all customer-

premises equipment to be provided solely on a non-tariffed

basis.” ** The Commission solicited comments on six op-

tions, including “deregulation of . . . all customer-premises

equipment.” * The Commission did not, in the Tentative

Decision, explicitly state that preemption of state regula-

tions was under consideration. Such a statement was

not necessary, for preemption of any inconsistent state

regulatory scheme would follow automatically under the

Supremacy Clause and other principles discussed above.

In any event, preemption was explicit in the Final De-

cision. The state parties had—and took full advantage

of—opportunities to voice their objections to the Com-

mission’s decision. The Commission entertained petitions

for reconsideration of the Final Decision and in fact made

changes to accommodate concerns expressed by the states."°

106 Computer II Tentative Decision, 72 F.C.C.2d at 438.

109 Td, at 441,

119 For example, in its Reconsidered Decision the Commis-

sion adopted a bifurcation plan that should ameliorate state

A-41

We thus reject the parties’ challenges to the Commission’s

power to preempt state regulation of CPE that is incon-

sistent with the Computer II rules.

C. Separation

A number of parties attack the Commission’s decision

by contending that the separate subsidiary requirement

should have been imposed on at least some common car-

riers in addition to AT&T. Others challenge the separa-

tion aspect of the Computer II rules on the basis that

the separate subsidiary requirement imposed on AT&T

is not sufficiently rigorous. In our view both of these

arguments represent, in essence, disagreement with a

choice made by the Commission among several reason-

able policy options. Those who disagree with the Com-

mission’s decision on how and where to draw the line

regarding the separation question would have this court

substitute its judgment for that of the Commission. This

we are neither authorized nor inclined to do.

In Computer II the Commission sought to strike a

reasonable balance between competing concerns; this task

was specifically delegated to the agency by Congress and

should be accorded special deference by the judiciary.

Our function here is only to ensure that the Commission’s

action in adopting the separation scheme did not con-

stitute an abuse of discretion. We are convinced that the

Commission engaged in reasoned decisionmaking well

within the scope of its discretion, and we therefore up-

hold the separation portion of the Computer II rules.

In its decision the Commission explained that the max-

imum separation requirement would apply only to AT&T

since, in the Commission’s judgment, AT&T is the only

concerns regarding immediate impact on state regulation of

existing CPE. In ita Further Reconsidered Decision the Com-

mission stated that it would allow the states to establish addi-

tional accounting requirements and structural separation for

carriers other than AT&T.

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common carrier having “sufficient market power to en-

gage in eifective anti-competitive activity on a national

scale and . . . sufficient resources to enter the competi-

tive market through a separate subsidiary.” *' Origi-

nally, the Commission decided to subject GTE to the sep-

aration requirement also,” but after receiving additional

comments from the industry, decided to exempt GTE.’”

We believe this to be a reasonable judgment on the

Commission’s part. The Commission’s task of developing

a policy to carry out its goal of encouraging competition

was a difficult one. Through the separation requirement

the Commission sought to protect the public from unfair

competition by powerful carriers. At the same time the

Commission tried to ensure that competition would be

strengthened by the entry of less powerful carriers into

the market by exempting from the separation require-

ment those carriers that cannot engage in significant anti-

competitive conduct.

In reaching its decision to impose separation only on

AT&T, the Commission considered four factors: (1) the

carrier’s ability to engage in anti-competitive activity

through its control of local exchange facilities, (2) the

carrier’s ability to cross-subsidize its competitive activi-

ties through its monopoly services, (8) the degree to

which the carrier possesses integrated research and man-

ufacturing capabilities, and (4) the carrier’s economic

ability to enter the market through a separate subsid-

iary."* The Commission also noted statistics regarding

each carrier’s revenues, market share, and market size.’

It seems to us that the basis for the Commission’s decision

11 Computer II Final Decision, 77 F.C.C.2d at 469.

12 Td. at 389.

8 Computer II Reconsidered Decision, 84 F.C.C.2d at 72.

14 Td.

18 Computer II Final Decision, 77 F.C.C.2d at 469-71.

A-43

is rational and adequately explained. We are not in-

clined to quarrel with the expert agency’s judgment, es-

pecially when, as here, the Commission exhibited thought-

ful deliberation by exempting GTE from the separation

requirement after receiving more information about the

nature and extent of GTE’s resources.''®

Moreover, certain safeguards were adopted with regard

to the exempt carriers. For example, if such carriers

wish to offer enhanced services, they must sell themselves

the basic transmission service “pursuant to the terms and

conditions embodied in their tariff.” ‘'' Exempt carriers

are also required to adopt adequate accounting measures

to ensure that costs and revenues from their regulated

and unregulated activities are not improperly commin-

gled.“* The Commission noted its readiness to impose the

separation requirement more broadly in the future if cir-

cumstances warrant." We therefore hold that limiting

the separation requirement to AT&T was not arbitrary,

capricious, or an abuse of discretion.

Likewise, we reject the argument that the structural

separation requirement imposed on AT&T is impermis-

sibly lenient. We need not discuss the mechanical details

of the separation scheme. It is sufficient to note that the

scheme relies upon corporate separateness, accounting

procedures, and resale requirements to ensure that no

cross-subsidization or unfair competitive practices occur.

No aspect of the Computer II rules more warrants our

deference than these requirements. The Commission, hav-

ing chosen a permissible regulatory tool—structural sep-

aration—set out detailed plans for implementing it.

116 Computer II Reconsidered Decision, 84 F.C.C.2d at 72-73.

117 Td. at 75 n.19.

"8 Computer II Final Decision, 77 F.C.C.2d at 476.

4° Computer II Further Reconsidered Decision, 88 F.C.C.2d

at 641.

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These plans were based upon the Commission’s own exper-

tise and experience in regulating the communications in-

dustry and upon the comments of the members of that

industry. This court is ill-prepared to decide which me-

chanical requirements would best implement the structural

separation scheme. Our only province is to determine

whether the separation requirements were “based on a

consideration of the relevant factors and whether there

has been a clear error of judgment.” **°

Among the factors considered by the Commission in

formulating the details of the separation scheme were the

comments of various parties, business practices in the

communications industry, the costs and benefits of various

degrees of separation, and the efficacy of various separa-

tion tools. We have perused the Commission’s decision

carefully, and we find that these requirements were based

upon consideration of the relevant factors. In addition,

we find no clear error of judgment in the Commission’s

choice of the degree of separation necessary and its re-

liance upon certain separation tools in preference to

others. Therefore, we uphold the Computer II separation

regulations in their entirety.

D. Consent Decree Issues

In 1949 the Justice Department sued AT&T and its

manufacturing subsidiary, Western Electric, alleging

various antitrust violations. The litigation ended in 1956

when a consent decree was approved by the United States

District Court for the District of New Jersey2™' The con-

sent decree placed severe restrictions on AT&T’s entry

into unregulated non-communications markets.” In de-

12 Citizens to Preserve Overton Park, Inc. v. Volpe, 401

U.S. 402, 416 (1971).

121 United States v. Western Electric Co., 1956 Trade Cas.

(CCH) { 68,246 (D.N.J. 1956).

123 Section V of the consent decree prohibits AT&T and

all of its subsidiaries, except Western Electric and Western

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signing the Computer II regulatory scheme, the Commis-

sion concluded that AT&T’s participation in the new re-

gime would be compatible with the consent decree. Al-

though the Commission recognized that it could not de-

finitively construe the decree,’ it expressed its belief that

the separate subsidiary requirement set forth in the Com-

puter II decision constituted sufficient “public regulation”

of AT&T’s offerings of CPE and enhanced services to sat-

isfy the demands of the consent decree.'™

Several parties urge this court to reverse the Commis-

sion’s decision in Computer II on the theory that it rests

upon an ultra vires and incorrect interpretation of the

1956 consent decree. They suggest that this court should

review and reject the Commission’s reading of the decree.

This issue has been largely mooted by vacation of the con-

sent decree as part of the settlement of the Justice De-

partment’s 1974 antitrust suit against AT&T.”

However, we do note that the Commission’s considera-

tion of the effect of the consent decree upon the Computer

II rules was not improper and did not taint the regula-

tions. The Commission did not purport to construe the

decree; rather, the existence of the decree and its mean-

ing in the Commission’s view were simply circumstances

affecting the communications industry. It was entirely

Electric subsidiaries, from engaging in any business activities

aside from “the furnishing of common carrier communica-

tions services,” id. at 71,138, defined by Section II(i) as “‘com-

munications services and facilities ... the charges for which

are subject to public regulation under the Communications

Act of 1984,” id. at 71,137.

128 Computer II Final Decision, T7 F.C.C.2d at 492.

14 Td. at 492-93.

125 Opinion, United States v. American Telephone & Tele-

graph Co., Civ. Action No. 74-1698, at 83-100 (D.D.C. Aug. 11,

1982), as modified, Civ. Action No. 82-0192 (D.D.C. Aug. 24,

1982).

A-46

proper for the Commission to take these circumstances

into account in formulating the Computer II rules. Even

though vacation of the decree has now changed these cir-

cumstances, it is clear to us that considerations prompted

by the decree are not so fundamental to the Computer II

scheme that the decree’s vacation vitiates the basis for the

regulations. Thus, we reject the challenges based on the

consent decree issue.

III, CONCLUSION

For the {‘oregoing reasons, the decision of the Commis-

sion is

Affirmed.

A-47

STATUTES

47 U.S.C. § 152. Application of chapter

(a) The provisions of this chapter shall apply to all

interstate and foreign communication by wire or radio and

all interstate and foreign transmission of energy by radio,

which originates and/or is received within the United States,

and to all persons engaged within the United States in such

communication or such transmission of energy by radio,

and to the licensing and regulating of all radio stations as

hereinafter provided; but it shall not apply to persons engag-

ed in wire or radio communication or transmission in the

Canal Zone, or to wire or radio communication or trans-

mission wholly within the Canal Zone.

(b) Except as provided in section 224 of this title and

subject to the provisions of section 301 of this title, nothing

in this chapter shall be construed to apply or to give the

Commission jurisdiction with respect to (1) charges, classi-

fications, practices, services, facilities, or regulations for or

in connection with intrastate communication service by wire

or radio of any carrier, or (2) any carrier engaged in inter-

state or foreign communication solely through physical

connection with the facilities of another carrier not directly

or indirectly controlling or controlled by, or under direct

or indirect common control with such carrier, or (3) any

carrier engaged in interstate or foreign communication solely

through connection by radio, or by wire and radio, with

facilities, located in an adjoining State or in Canada or

Mexico (where they adjoin the State in which the carrier

is doing business), of another carrier not directly or indirect-

ly controlling or controlled by, or under direct or indirect

common control with such carrier, or (4) any carrier to

A-48

which clause (2) or clause (3) of this subsection would be

applicable except for furnishing interstate mobile radio

communication service or radio communication service

to mobile stations on land vehicles in Canada or Mexico;

except that sections 201-205 of this title shall, except as

otherwise provided therein, apply to carriers described in

clauses (2)—(4) of this subsection.

47 U.S.C. §203. Schedules of charges; filing with Com-

mission; changes in schedules; overcharges

and rebates; penalty for violations

(a) Every common carrier, except connecting carriers,

shall, within such reasonable time as the Commission shall

designate, file with the Commission and print and keep open

for public inspection schedules showing all charges for itself

and its connecting carriers for interstate and foreign wire or

radio communication between the different points on its

own system, and between points on its own system and

points on the system of its connecting carriers or points

on the system of any other carrier subject to this chapter

when a through route has been established, whether such

charges are joint or separate, and showing the classifications,

practices, and regulations affecting such charges. Such

schedules shall contain such other information, and be

printed in such form, and be posted and kept open for

public inspection in such places, as the Commission may

by regulation require, and each such schedule shall give

notice of its effective date; and such common carrier shall

furnish such schedules to each of its connecting carriers,

and such connecting carriers shall keep such schedules open

for inspection in such public places as the Commission may

require.

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(b)(1) No change shall be made in the charges, classifica-

tions, regulations, or practices which have been so filed and

published except after ninety days notice to the Commission

and to the public, which shall be published in such form and

contain such information as the Commission may by regu-

lations prescribe.

(2) The Commission may, in its discretion and for good

cause shown, modify any requirement made by or under

the authority of this section either in particular instances

or by general order applicable to special circumstances or

conditions except that the Commission may not require

the notice period specified in paragraph (1) to be more

than ninety days.

authority of this chapter, shall engage or participate in such

communication unless schedules have been filed and publish-

ed in accordance with the provisions of this chapter and with

the regulations made thereunder; and no carrier shall (1)

charge, demand, collect, or receive a greater or less or dif-

ferent compensation for such communication, or for any

service in connection therewith, between the points named

in any such schedule than the charges specified in the sched-

ule then in effect, or (2) refund or remit by any means or

device any portion of the charges so specified, or (3) extend

to any person any privileges or facilities in such communica-

tion, or employ or enforce any classifications, regulations,

or practices affecting such charges, except as specified in

such schedule.

(d) The Commission may reject and refuse to file any

schedule entered for filing which does not provide and give

lawful notice of its effective date. Any schedule so rejected

A-50

by the Commission shall be void and its use shall be un-

lawful.

(e) In case of failure or refusal on the part of any carrier

to comply with the provisions of this section or of any regu-

lation or order made by the Commission thereunder, such

carrier shall forfeit to the United States the sum of $500 for

each such offense, and $25 for each and every day of the

continuance of such offense.

47 U.S.C. §221. Telephone companies; consolidation; state

jurisdiction over services, charges, etc.,

unaffected; determination of property used

in interstate toll service; valuation

(a) Upon application of one or more telephone com-

panies for authority to consolidate their properties or a part

thereof ipto a single company, or for authority for one or

more such companies to acquire the whole or any part of

the property of another telephone company or other tele-

phone companies or the control thereof by the purchase

of securities or by lease or in any other like manner, when

such consolidated company would be subject to this chapter,

the Commission shall give reasonable notice in writing to

the governor of each of the States in which the physical

property affected, or any part thereof, is situated, and to

the State commission having jurisdiction over telephone

companies, and to such other persons as it may deem advis-

able, and shall afford such parties a reasonable opportunity

to submit comments on the proposal. A public hearing shall

be held in all cases where a request therefor is made by a

telephone company, an association of telephone companies,

a State commission, or local governmental authority. If the

Commission finds that the proposed consolidation, acquisi-

tion, or control will be of advantage to the persons to whom

A-51

service is to be rendered and in the public interest it shall

certify to that effect; and thereupon any Act or Acts of Con-

gress making the proposed transaction unlawful shall not

apply. Nothing in this subsection shall be construed as in

anywise limiting or restricting the powers of the several

States to control and regulate telephone companies.

(b) Subject to the provisions of section 301 of this

title, nothing in this chapter shall be construed to apply,

or to give the Commission jurisdiction, with respect to

charges, classifications, practices, services, facilities, or

regulations for or in connection with wire, mobile, or point-

to-point radio telephone exchange service, or any combina-

tion thereof, even though a portion of such exchange service

constitutes interstate or foreign communication, in any case

where such matters are subject to regulation by a State

commission or by local governmental authority.

carriers engaged in wire telephone communication, the

Commission may classify the property of any such carrier

used for wire telephone communication, and determine

what property of said carrier shall be considered as used in

interstate or foreign telephone toll service.Such classification

shall be made after hearing, upon notice to the carrier, the

State commission (or the Governor, if the State has no

State commission) of any State in which the property of said

carrier is located, and such other persons as the Commission

may prescribe.

(d) In making a valuation of the property of any wire

telephone carrier the Commission, after making the classifi-

cation authorized in this section, may in its discretion value

only that part of the property of such carrier determined to

be used in interstate or foreign telephone toll service.

A-52

This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.