Petition — Louisiana Public Service Commission v. Federal Communications Commission

Office-Supre: Court U.S

82-1350 | res]

No. | FEB 10 ia:

IN THE

Supreme Court of the United States

OCTOBER TERM, 1982

NATIONAL ASSOCIATION OF REGULATORY

UTILITY COMMISSIONERS, THE PEOPLE OF THE

STATE OF CALIFORNIA AND THE PUBLIC

UTILITIES COMMISSION OF THE STATE OF

CALIFORNIA,

Petitioners,

Vv

FEDERAL COMMUNICATIONS COMMISSION

AND THE UNITED STATES OF AMERICA, ET AL.,

Respondents.

PETITIO!x FOR WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS

FOR THE DISTRICT OF COLUMBIA CIRCUIT

WILLIAM PAUL RODGERS, JR., General Counsel

CHARLES D. GRAY, Assistant General Counsel

DEBORAH A. DUPONT, Deputy Assistant

General Counsel

1102 Interstate Commerce Commission Building

Post Office Box 684

Washington, D.C. 20044

(202) 628-7324

Attorneys for the National Association of

of Regulatory Utility Commissioners

JANICE E. KERR

J. CALVIN SIMPSON

GRETCHEN DUMAS

5066 State Building

San Francisco, California 94102

(415) 557-0470

Attorneys for the People of the State of California and

the Public Utilities Commission of the State of California

February 10, 1983

TE RANE SEE TRE AE EIS SNAP DIRT ate TE ve

THE CASILLAS PRESS, INC. — 1717 K Street N.W. — Washington, D.C. — 223-1220

QUESTION PRESENTED FOR REVIEW

Whether the Court below erred in holding that the

Federal Communications Commission’s preemption of

State regulatory authority to tariff customer premises

telephone equipment is a legitimate exercise of the Com-

mission’s jurisdiction under the Federal Communications

Act of 1934, 47 U.S.C. § 151 et seg. (1976).

PARTIES BELOW

Aeronautical Radio, Inc.

Alabama Public Service Commission

Alarm Industry Telecommunications Committee of the

National Burglar & Fire Alarm Association

American Business Press, Inc.

American Newspaper Publishers Association

American Petroleum Institute

American Telephone & Telegraph Company

Association of Data Processing Service Organizations,

Inc.

Bunker Ramo Corporation

Central Telephone & Utilities Corporation

Citicorp

Computer & Business Equipment Manufacturers

Association

Computer and Communications Industry Association

Communications Satellite Corporation

Comsat General Corporation

Continental Telephone Corporation

Control Data Corporation

Datapoint Corporation

Department of Public Service of the State of Minnesota

Department of Public Utility Control Authority of the

State of Connecticut

(ii)

Federal Communications Cominission

Henry Geller

GTE Service Corporation

GTE Telenet Communications Corporation

Hazeltine Corporation

Honeywell, Inc.

Independent Data Communications Manufacturers

Association, Inc.

International Business Machines Corporation

ISA Communications Services, Inc.

Louisiana Public Service Commission

The Maine Public Utilities Commission

MCI Telecommunications Corporation

Motorola, Inc.

Municipality of Anchorage d/b/a Anchorage Telephone

Utility

National Association of Regulatory Utility

Commissioners

National Newspaper Association

New York State Consumer Protection Board

North American Telephone Association

Office of Consumers Utility Counsel, State

of Georgia

Office of People’s Counsel of Maryland

Oklahoma Corporation Commission

The People of the State of California and the

Public Utilities Commission of the State of California

Public Advocate of Delaware

The Public Service Commission of Wisconsin

RCA Global Communications, Inc.

Satellite Business Systems

Southern Pacific Communications Company

Sperry Univac Division of Sperry Corporation

State of Arkansas

(iii)

The State Corporation Commission of the State

of Kansas

Tymnet, Inc.

United Computing Systems, Inc.

United States Department of Justice

United Telephone Systems, Inc.

U.S. Telephone and Telegraph Corporation

Utilities Telecommunications Council

Western Union Telegraph Company

Wisconsin Telecommunicatons

Contractors Association

Xerox Corporation

(vy)

TABLE OF CONTENTS

Page

QUESTION PRESENTED FOR REVIEW ........ 0.0000 ceeeeee i

LBP EOPTTUTT PETTITT TTT TUTTI TET TUTTE Tie i

EE PEED piss ivcanesccdetesessexebereecse vi

OPINIONS AND ORDERS BELOW ..........:0csceeeeeeeees 2

PUNO So Sicsavecssrsevessdevesescdsesvessuccoeens 3

SEN NTE chorea casseaerecisvénetsiscenboesss 3

SEAS EE CP CHU GAD cc ccccacsscccenescesnceccnccses 3

A. The Communications Act and Preservation

SNE ob bc sebesscbecceresnwacéedxressesece 4

B. The FCC’s New Regulatory Treatment of

PUREE CRIES dc vedcccroceccsentcccsescesscncees 7

REASONS FOR GRANTING THE WRIT ........ 66600 e eee eee 10

COINCLUGION cccccccccccccccccccccscvccccceccescccoccece 17

(vi)

TABLE OF AUTHORITIES

Cases: Page

Brookhaven Cable TV, Inc. v. Kelly,

573 F.2d 765 (2d Cir. 1978), cert. denied,

Ri I 14

California v. Federal Communications Commission,

567 F.2d 84 (D.C. Cir. 1977), cert. denied,

ere ceeseseeneesstesereeesees 14

Houston, East & West Texas Railway Company v.

United States, 234 U.S. 342, 34 S.Ct. 833,

PRUE EEPUED oi cesecrcccssvscces 4, 5,6, 12, 13, 14, 15, 16

National Association of Regulatory Utility

Commissioners v. Federal Communications

Commission, 525 F.2d 630 (D.C. Cir.), cert. denied,

Neen eee cee ececebeeeeseCenensaes 14

New York Telephone Company v. Federal Communications

Commission, 631 F.2d 1059 (2d Cir. 1980) .6 6. ee 14

North Carolina Utilities Commission v. Federal

Communications Commission, 537 F.2d 787

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

ats ne SL REL OLE ela bene ieeeae 8, 10, 11, 12, '3. 14, 16

North Carolina Utilities Commission v. Federal

Communications Commission, 552 F.2d 1036

(4th Cir.), cert. denied, 434 U.S, 874

CEL Pes rowed beneeneceste 8, 10, 11, 12, 13, 14, 15, 16

Puerto Rico Telephone Company v. Federal

Communications Commission, 553 F.2d 694

NUN 6 cb b:5 v.94 6o40000004 Ce sets eCeeecceesses tenons 14

(vii)

Administrative Decisions:

Interstate and Foreign MTS and WATS,

$6 F.C.C. 2d S93 (1975) 2. ccscccccvcvvvvcvvens

In the Matter of Amendment of Section 64.702 of

the Commission's Rules and Regulations (Second

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

{Notice of Inquiry and Proposed Rulemaking] .....

In the Matter of Amendment of Section 64.702 of

the Commission's Rules and Regulations (Second

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

{Supplemental Notice of Inquiry and Proposed

EE conc ahhbse66oo00e6eesseseecccoese

In the Matter of Amendment of Section 64.702 of

the Commission's Rules and Regulations (Second

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

[Tentative Decision and Further Notice of Inquiry

ED cccebsdccverccsécscsesscnccese

In the Matter of Amendment of Section 64.702 of

the Commission's Rules and Regulations (Second

Computer Inquiry), 77 F.C.C. 2d 384 (1980)

SPUR UPEUEEDD sc cnccscctoccsccovecceccocccecs

In the Matter of Amendment of Section 64.702 of

the Commission's Rules and Regulations (Second

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

{Memorandum Opinion and Order] ..............

In the Matter of Aniendment of Section 64.702 of

the Commission's Rules and Regulations (Second

Computer Inquiry), 88 F.C.C, 2d $12 (1981)

{Memorandum Opinion and Order on Further

Es ce cksecdeceéveeseseseuvececes

Telerent Leasing Corporation,

4S F.C.C. 2d 204 (1974) 2... cccccccccccccccvccvecs

Use of the Carterfone Device,

13 F.C.C, 2d 420 (1968) 2... . 6. cece cece eee e eens

(viii)

Page

Constitutional Provision:

United States Constitution, Article I,

no cate reap esben baeeesseueweeenees 16

Statutes:

Administrative Procedure Act of 1946, as

amended by Pub. L. 89-544 (1966):

ee oa a oer ce) dc cheb hanes wShEEO ERD S 10

a SD ce cnc yey sua casdees salebedbaennekbe 10

PE EE 5 Cockotdeaeviuebevasb okedoessesuoeens 10

Federal Communications Act of 1934:

a Me OPO CiviwecspoevViderececcwusscaseavcas 2,3

RE Re cicccccepckcobeteaboeseecees 5,6, 7, 11, 15

Pe to oc. Clvsdeceasesbe ce e¥akeepenue ene 7,11

SP EE cess el cGubellswnceessécauuctauerreleds 10

Mann-Elkins Act of 1910:

a. CCL UG Alten ceo cae aead ea deak ys es bbw Mees 4

Transportation Act of 1920:

ME cee cae ce cio cakes Kick kbou aN Rie ees baer eke woke 4

Miscellaneous:

Cs Ss ET GEDED 6 hb bs co citcsccnsiessecdsessaudesnre 6

Hearings on H.R. 8301 Before the House Committee

on Interstate and Foreign Commerce, 73d Congr.,

2 ee pita hadn cone e ere OKA ODS RECARO ROME 5

Hearings on S. 2910 Before the Senate Committee

on Interstate Commerce, 73d Congr., 2d Sess.

SE ranks ecds nes shashaehesase sosdree puebdcecceswae 4, 5,6

IN THE

Supreme Court of the United States

OCTOBER TERM, 1982

NATIONAL ASSOCIATION OF REGULATORY

UTILITY COMMISSIONERS, THE PEOPLE OF THE

STATE OF CALIFORNIA AND THE PUBLIC

UTILITIES COMMISSION OF THE STATE OF

CALIFORNIA,

Petitioners,

Vv

FEDERAL COMMUNICATIONS COMMISSION

AND THE UNITED STATES OF AMERICA, ET AL.,

Respondents.

PETITION FOR WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS

FOR THE DISTRICT OF COLUMBIA CIRCUIT

The National Association of Regulatory Utility Com-

missioners (“NARUC”), the People of the State of

California and the Public Utilities Commission of the

State of California (“California”), petitioners in the court

below, petition for a writ of certiorari to review the

November 12, 1982 decision of the United States Court of

Appeals for the District of Columbia Circuit in Computer

and Communications Industry Association v. Federal

Communications Commission and the United States of

America, Case No. 80-1471, and in six cases consolidated

therewith.' The Court’s decision upheld the Memorandum

' The People of the State of California and the Public Utilities Com-

mission of the State of California v. Federal Communications Com-

mission and the United States of America, Case No. 81-1193; In-

2

Opinion and Order, released December 30, 1980 by the

Federal Communications Commission (“FCC” or “the

Commission”) in Docket No. 20828, entitled Jn the Matter

of Amendment of Section 64.702 of the Commission’s

Rules and Regulations (Second Computer Inquiry), based

on its interpretation of the scope of the Commission’s

authority under the Federal Communications Act of 1934,

U.S.C. § 151 et seq. (1976).

OPINION AND ORDERS BELOW

The opinion of the United States Court of Appeals for

the District of Columbia Circuit is reported at 693 F. 2d

198, and is reprinted at Appendix A. The Commission’s

Memorandum Opinion and Order is reported at 84 F.C.C.

2d 50 (1980). Other documents issued by the FCC which

set forth the issues and bases for decision in the FCC’s

order below include the following, all in the same-entitled

administrative proceeding in FCC Docket 20828: Notice

Of Inquiry and Proposed Rulemaking (released August 9,

1976), reported at 61 F.C.C. 2d 103 (1976); Supplemental

Notice of Inquiry and Proposed Rulemaking (released

March 8, 1977), reported at 64 F.C.C. 2d 771 (1977); Ten-

tative Decision and Further Notice of Inquiry and

Rulemaking (released July 2, 1979), reported at 72 F.C.C.

dependent Data Communications Manufacturers Association, Inc. v.

Federal Communications Commission and the United States of

America, Case No. 81-1217; National Association of Regulatory Utili-

ty Commissioners v. Federal Communications Commission and the

United States of America, Case No. 81-1222; Datapoint Corporation

v. Federal Communications Commission and the United States of

America, Case No. 81-1223; American Newspap., Publishers

Association v. Federal Communications Commission and the United

States of America, Case No. 81-1224; and Motorola, Inc. v. Federal

Communications Commission and the United States of America, Case

No. 81-1226.

3

2d 358 (1979); and Final Decision (released May 2, 1980),

reported at 77 F.C.C. 2d 384 (1980).

JURISDICTION

The judgment of the United States Court of Appeals for

the District of Columbia Circuit was entered on November

12, 1982 (App. A). This Court’s jurisdiction is invoked

under 28 U.S.C. § 1254(1).

STATUTES INVOLVED

The statute upon which the Court of Appeals’ decision

is based is the Federal Communications Act of 1934, 47

U.S.C. § 151 et seg. (1976) (“Communications Act” or

“the Act”). Relevant portions of the Act are reprinted at

Appendix B.

STATEMENT OF THE CASE

This case is concerned with the FCC’s interpretation of

its jurisdiction under the Communications Act in such a

way as to deprive the States of a portion of their historical-

ly exclusive authority over local telephone rates, specifical-

ly, the power to tariff customer premises equipment

(“CPE” or “terminal equipment”) used in the provision of

intrastate communications services. The Act’s legislative

history as well as the course of Federal and State

regulatory activity with respect to terminal equipment

which led to the FCC’s preemptive order are therefore

necessary background for a full appreciation of the

jurisdictional issue at stake here.

7A copy of all of the referenced FCC documents has been lodged

with the Clerk of this Court.

4

A. The Communications Act and Preservation of

State Authority

Prior to passage of the Communications Act, individual

States pervasively regulated all aspects of intrastate and

local exchange telephone service. Regulation of the in-

terstate rates of telephone, telegraph and cable companies

was included among the Interstate Commerce Commis-

sion’s (ICC’s) responsibilities with enactment of the Mann-

Elkins Act of 1910. Virtually all of the communications

market was local in character during this period,‘

however, and the ICC was chiefly concerning itself with

regulation of the railroad industry. Even after this Court’s

decision in the Shreveport Rate Cases® established that the

ICC’s jurisdiction extended to ordering adjustments in

State rates for intrastate rail service when such charges

produce an injurious effect upon interstate traffic, the

Federal agency refrained from exercising such authority in

intrastate telephone matters. °®

When Congress was considering comprehensive com-

munications legislation for the first time in the early

1930’s, State representatives repeatedly urged that the

ICC’s Shreveport authority be expressly denied to the new

Federal communications regulatory body to be created by

536 Stat. 544,

“See, e.g., Hearings on S. 2910 Before the Senate Commitee on In-

terstate Commerce, 73d Congr., 2d Sess. 9 (1934) (statement of Sen.

Dill), wherein it was noted that intrastate communications service

comprised approximately 98 percent of the market.

5Houston, East & West Texas Railway Company v. United States,

234 U.S. 342, 34 S.Ct. 833, 58 L.Ed. 1341 (1914).

*The Shreveport holding was later codified in the Transportation

Act of 1920, 41 Stat. 484, and that portion of the Interstate Commerce

Act has to date only been applied to rail regulation.

5

the legislation.’ Their concerns were acknowledged by

sponsors of the bill during the hearings and debate which

preceded passage of the Communications Act. Senator

Clarence Dill, for example, who was Senate manager of

the communications bill, raised the issue of the Shreveport

decision’s effect in a dialogue with Mr. K.F. Clardy,

Chairman of the Legislative Committee of the National

Association of Railroad and Utilities Commissioners

(former appellation of the current NARUC) during the

hearings. Senator Dill commented upon Section 210 of the

Senate bill,* which is substantially identical to 47 U.S.C.

§ 152 (b\{1), as follows:

. . » The reason why the State representatives of

the State commissions wanted this language [in

Section 210 of the bill] in addition to the

language of the Interstate Commerce Act —

. . . we have added some language — is that the

interpretation placed upon the language of the

Interstate Commerce Act in connection with

railroads has gone so far that the State commis-

sions fear that this commission, using the same

7Hearings on S. 2910 Before the Senate Committee on Interstate

Commerce, 73d Congr., 2d Sess. 153, 155, 178 (1934) (statements of

Messrs. Clardy, McDonald and Benton); and Hearings on H.R. 8301

Before the House Committee on Interstate and Foreign Commerce,

73d Congr., 2d Sess. 70, 134 (1934) (statements of Messrs. Benton and

Clardy).

*Section 210 read as follows:

Nothing in this act shall be construed to apply, or to give

the Commission, jurisdiction, with respect to charges,

classifications, practices or regulations for or in connec-

tion with intrastate communication service of any carrier,

or to any carrier engaged exclusively in intrastate com-

merce

Hearings on S. 2910 Before the Senate Committee on Interstate Com-

merce, 73d Congr., 2d Sess. 8 (1974).

6

language, . . . might override and interfere with

State regulation.

Hearings Before the Senate Committee on Interstate Com-

merce (cited in full, infra at footnote 8) at 154. Mr. Clardy

concurred in Senator Dill’s assessment of the perceived

need for Section 210, and further clarified the NARUC’s

support for the addition of Section 210, denying to the

FCC powers found granted to the ICC by the Interstate

Commerce Act. Mr. Clardy specified the NARUC’s objec-

tion to transferring the powers of the ICC to the FCC

without the inclusion of the restriction in Section 210 of

the bill:

I speak now, of course, of the Shreveport deci-

sion in the railroad situation, which has enabled

the ICC to regulate all intrastate freight rates in

the rail field.

Id, at 155.

In the subsequent debates preceding passage of the bill,

Senator Dill reiterated the intended effect of the restriction

now codified in 47 U.S.C. § 152(b):

We have attempted in Title II to reserve to the

State commissions the control of intrastate

telephone traffic. We have kept in mind the fact

that the Interstate Commerce Commission,

through the Shreveport decision and the decision

in other similar cases, has gone so far in the

regulation of railroads that the so-called “State

regulation” amounts to very little.

78 Cong. Rec. 8823 (1934).

Congress thereafter passed the Communications Act,

retaining those provisions denying the FCC power to in-

terfere with State regulation of rates and charges incident

7

to intrastate communications service. Thus, Sections 2(b)

and 221(b) of the Act [47 U.S.C. §§ 152(b) and 221(b)}

provide that, apart from radio licensing, “nothing in this

Act shall be construed to apply or give the Commission

jurisdiction with respect to (1) charges, classifications,

practices, services, facilities, or regulations for or in con-

nection with intrastate communications service” (Section

2(b)) [47 U.S.C. § 152(b)], or “in connection with...

telephone exchange service . . . even though a portion of

such exchange service constitutes interstate or foreign

communications” (Section 221(b)) [47 U.S.C. § 221(b)}.

The regulatory framework which has governed provi-

sion of CPE from 1934 until the effective date of the

FCC's Computer I1 decision reflected this statutory man-

date. Rates and charges for CPE provided by carriers as a

part of basic telephone service have been set exclusively by

the States. Such CPE has been tariffed by the States in

that rates and charges for it have been included in the

tariffs filed with the State commissions.

B. The FCC’s New Regulatory Treatment of Ter-

minal Equipment

In the 1960s, the FCC began to reevaluate its policies

applicable to terminal equipment. Under the Commis-

sion’s decision in Use of the Carterphone Device,’

American Telephone and Telegraph Company (“AT&T”)

was ordered to file tariffs allowing customers to use inter-

connection devices purchased from competing equipment

manufacturers that did not actually cause harm to the net-

work.'® When equipment manufacturers complained that

AT&T’s technical standards for interconnection devices

°13 F.C.C, 2d 420 (1968).

'Jd, at 425-426,

8

were not reasonably related to actual harm to the network,

the Commission instituted a registration program for the

inspection and certification of such equipment.'' This

program was challenged by numerous parties as an en-

croachment upon State jurisdiction over intrastate com-

munications facilities, since under its aegis the FCC

preempted State authority regarding the interconnection

of registered terminal equipment. '?

The Fourth Circuit uhimately upheld the FCC’s

registration program as a valid exercise of the Commis-

sion’s authority under the Communications Act.'?

Nonetheless, the court emphasized that the States remain-

ed free under the FCC’s program to establish rates for

carrier-provided CPE.

It was this jurisdictional line, the importance of which

was underscored by the Fourth Circuit’s opinions, that

was transgressed in the instant case. The FCC’s order at

issue here had its genesis on August 9, 1976, when the

Commission released a Notice of Inquiry and Proposed

Rulemaking in FCC Docket 20828. In that Notice, the

FCC proposed, inter alia, not to assert regulatory authori-

ty over data processing services. In a Supplemental Notice

of Inquiry and Enlargement of Proposed Rulemaking,

released on March 8, 1977, the Commission proposed to

modify the definition of data processing proposed in the

original Notice.

'' Interstate and Foreign MTS and WATS, 56 F.C.C, 2d 593 (1975).

'2Telerent Leasing Corp., 45 F.C.C, 2d 204, 219 (1974).

'INorth Carolina Utilities Commission v. FCC, 537 F, 2d 787 (4th

Cir.), cert. denied, 429 U.S. 1027 (1976); and North Carolina Utilities

Commission v, FCC, 552 F. 2d 1036 (4th Cir.), cert. denied, 434 U.S.

874 (1977),

9

More than two years later, the FCC released its Ten-

tative Decision and Further Notice of Inquiry and

Rulemaking in Docket 20828 on July 2, 1979. In the Ten-

tative Decision, the FCC proposed, inter alia, to

distinguish basic CPE from devices capable of serving in-

formation processing functions. The Commission ten-

tatively concluded that equipment capable of information

processing need not be offered on a tariffed basis.

This definitional distinction was abandoned when the

FCC released its Final Decision in Docket 20828 on May 2,

1980. There, the Commission required that a// CPE,

regardless of function, be offered on a non-tariffed basis,

and that CPE which is currently tariffed by the States as a

part of telephone service be detariffed and removed from

the rate bases of all carriers. The FCC directed all carriers

to file new local exchange tariffs, excluding CPE, with the

State commissions by March 1, 1981. All CPE was to be

detariffed and removed from the rate bases of carriers by

March 1, 1982. In its subsequent Memorandum Opinion

and Order, released on December 30, 1980, the Commis-

sion modified the schedule for detariffing'* but reiterated

its intent to preempt State tariff regulation of CPE.

In Computer and Communications Industry Associa-

tion v. F.C.C., the United States Court of Appeals for the

District of Columbia Circuit had before it eight petitions

'4Under the modified schedule, the States could not tariff CPE in-

stalled after March 1, 1982, and were to detariff CPE in-place on

March 1, 1982, pursuant to a schedule and manner to be determined

by the FCC in a subsequent implementation proceeding. The date for

detariffing was subsequently changed to January 1, 1983, pursuant to

the FCC’s Memorandum Opinion and Order on Further Reconsidera-

tion (released October 30, 1981), 88 F.C.C. 2d 512 (1981).

10

for review of the Commission’s December 1980 Order, in-

cluding those of the petitioners here.'* On the question of

the FCC’s jurisdiction to preempt State regulation of

CPE, the court found that preemption was justified

“because the objectives of the Computer II scheme would

be frustrated by State tariffing of CPE.” App. A at 35a. It

rejected the arguments of the NARUC and various States

and State commissions that the Fourth Circuit’s decisions

in the North Carolina Utilities Commission cases'®

preclude such an interpretation of the FCC’s authority vis-

a-vis the States under the Communications Act. App. A at

36a-40a.'’ Petitioners respectfully request this Court to

issue a writ of certiorari to review the Court of Appeals’

affirmance of this aspect of the FCC’s Computer II deci-

sion.

REASONS FOR GRANTING THE WRIT

This case presents a jurisdictional issue of wide-ranging

importance to the telecommunications industry, its

regulators, and to all American telephone users: to what

extent does the FCC’s authority under the Communica-

'SThe basis for the jurisdiction of the United States Court of Ap-

peals for the District of Columbia Circuit in this case is 47 U.S.C. §

402(a) (1976).

'6North Carolina Utilities Commission v. FCC, 537 F.2d 787 (4th

Cir.), cert. denied, 429 U.S. 1027 (1976) (““NCUC I”); and North

Carolina Utilities Commission v. FCC, 552 F.2d 1036 (4th Cir.),

cert. denied, 434 U.S. 874 (1977) (“NCUC II”).

'? The court below also rejected petitioners’ contentions that the

FCC’s order was unlawful for failure to give adequate notice of its in-

tent to detariff CPE and preempt State tariffing thereof as required by

5 U.S.C. §§ 553 and 706(2)(D), and was “arbitrary, capricious, and an

abuse of discretion” for failure to give full consideration to all issues

relevant to its decision as required by 5 U.S.C. § 706(2)(A). App. A

at 4la.

11

tions Act allow it to override State regulatory authority

over setting rates for terminal equipment used in the provi-

sion of local telephone service? It is not, however, a case

of first impression, since the Fourth Circuit has twice ex-

haustively examined the same issue and has determined

that Congress preserved ratemaking authority over such

CPE with the States. The FCC order in Computer II,

upheld by the court below, directly counters this principle.

Certiorari is warranted in order to resolve this conflict bet-

ween the Courts of Appeals and to clarify the Federal-

State division of regulatory responsibilities in an area of

paramount and continuing public significance.

The express terms and relevant legislative history of the

Communications Act make it abundantly clear that Con-

gress intended to set a limit on what Federal regulatory

authority would be permissible with respect to intrastate

communications service. Not only was the objective of

preserving State authority over matters incident to such

service explicitly acknowledged by the Act’s sponsors dur-

ing its congressional consideration, but the scenario

sought to be avoided was consistently the same: applica-

tion of the Shreveport doctrine to permit Federal control

of local telephone rates.'* The language of Sections 2(b)

and 221(b)'® (App. B) could hardly have been phrased to

better effect a prohibition on Federal preemption of such

State authority.

The Fourth Circuit’s opinions in the NCUC cases repre-

sent an effort to refine the meaning of this statutory

limitation upon FCC jurisdiction. Those opinions,

establishing the right of telephone subscribers to intercon-

'§See discussion of legislative history supra, at 4-6; NCUC I, 537 F.

2d at 793, n. 6; and NCUC II, 552 F. 2d at 1047.

'947 U.S.C. §§ 151(b) and 221(b) (1976).

12

nect their own terminal equipment with the national

telephone network, recognized on/y the authority of the

FCC to implement an interconnection policy via the pro-

mulgation of technical standards for terminal equipment.

In both NCUC decisions, the court carefully distinguished

the interconnection policy from the authority of the States

to establish charges for terrninal equipment. In NCUC /,

at footnote 6, the Court discussed citations to the

legislative history of the Act, specifically those portions

dealing with 47 U.S.C. § 152(b), as follows:

These references certainly show concern that,

as a result of the so-called Shreveport rate deci-

sion, Houston, E. & W. Texas Ry. v. United

States, 1914, 234 U.S. 342, 34 S.Ct. 833, 158

L.Ed. 1341, the Interstate Commerce Commis-

sion had been able to deprive State authorities of

almost all regulatory power over intrastate rail

transportation. And there was rather general

agreement that this should not be done by the

new federal commission in the communications

field. However, it is equally clear that such little

particularization as appears in the various

statements of State concerns focuses upon the

desire of State authorities to regulate /ocal

telephone rates and charges... Of course,

ratemaking typifies those activities of the

telephone industry which lend themselves to

practical separation of the local from the in-

terstate in such a way that local regulation of one

does not interfere with national regulation of the

Other...

537 F.2d at 793 (emphasis added).

In NCUC II, the court once again recognized that “in

enacting the Communications Act, Congress sought to

deny the FCC the kind of jurisdiction over local rates ap-

proved by the Shreveport Rate Case.” 552 F.2d at 1047.

13

The court further focused upon the distinction between

jurisdiction over interconnection policies and jurisdiction

over the pricing of terminal equipment:

Congress’ dissatisfaction with the Shreveport

doctrine was that it permitted the ICC to control

the rates for exclusively local service because of

the relationship between those rates and the in-

terstate rates. But the FCC’s registration pro-

gram in no way purports to prescribe charges for

local services; State commissions remain unfet-

tered in their discretion to set rates for all local

services and facilities provided by the telephone

companies... The States remain free to ap-

prove the pricing of carrier-supplied terminal

equipment above or below unit cost.

Id. at 1047-1048 (emphasis added).

Thus, the Fourth Circuit found the FCC’s interconnec-

tion policy to be a legitimate exercise of its jurisdiction

under the Communications Act because the policy did not

rise to the impermissible level of intruding upon State

authority to set CPE charges. In contrast, the District of

Columbia Circuit in the instant case upheld an FCC order

which accomplished precisely what the court in NCUC II

determined to be beyond the pale of the Commission’s

legitimate jurisdiction. The FCC’s order in Computer II

did not leave the States “free to approve the pricing of

carrier-supplied terminal equipment,” because the Com-

mission therein preempted the States and decreed that in-

trastate carriers can no longer offer terminal equipment to

customers on a tariffed basis. Despite the clear controlling

principle to the contrary enunciated by the Fourth Circuit,

the decision below nonetheless affirmed the FCC’s order,

declaring that the result “is in accord with” the Fourth Cir-

cuit’s analysis in the NCUC cases. App. A at 36a.

14

Even a cursory reading of the District of Columbia Cir-

cuit’s opinion in this case reveals that it in fact differs

dramatically from those of the Fourth Circuit’s in the

NCUC cases. In place of the latter’s careful evaluation of

the relevant provisions and legislative history of the Com-

munications Act, the District of Columbia Circuit’s

analysis of the preemption issue is launched with the un-

qualified proposition that “when state regulation of in-

trastate equipment or facilities would interfere with

achievement of a federal regulatory goal, the Commis-

sion’s jurisdiction is paramount and conflicting state

regulations must necessarily yield to the federal regulatory

scheme.” App. A at 35a (footnote omitted). None of the

prior decisions of the Courts of Appeals relied upon as

support for this tenet involved Federal preemption of

State power to set rates for equipment or facilities essential

to basic transmission service.?° Moreover, the court below

wrongly attributes to the Fourth Circuit its vastly over-

simplified notion of State regulatory subordinance to the

Federal regulatory scheme with respect to intrastate com-

munications. App. A at 36a. In reality, as shown supra,

the NCUC cases display a commendable recognition of the

20New York Telephone Co. v. F.C.C., 631 F. 2d 1059 (2d Cir. 1980)

(State commission’s attempt to force changes in separations pro-

cedures legitimates FCC preemption); California v. F.C.C., 567 F. 2d

84 (D.C. Cir. 1977), cert. denied, 434 U.S. 1010 (1978) (joint

FX/CSAA facilities “technically and practically difficult to separate”

for purposes of assertion of Federal jurisdiction are within FCC pur-

view); Puerto Rico Telephone Co. v. F.C.C., 553 F. 2d 594 (ist Cir.

1977) (FCC has jurisdiction to prescribe terms for interconnection

of PBX equipment); Brookhaven Cable TV, Inc. v. Kelly, 573 F. 2d

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

preempt State price regulation of pay cable television programming

under its broadcasting regulatory authority); and NARUC v. F.C.C.,

525 F. 2d 630 (D.C. Cir.), cert. denied, 425 U.S. 992 (1976) (FCC may

preempt State regulation of noncommon carrier spectrum allocation).

15

sensitive congressional balancing of Federal-State con-

cerns that is embodied in the Communications Act — an

awareness that is manifestly lacking in the decision below.

Although the decision below did acknowledge that Con-

gress “may well have intended § 2(b) of the Communica-

tions Act?! to prevent” extension of the Shreveport doc-

trine so as to permit intrastate communications rates to be

revised by Federal fiat, App. A at 38a, its application of

this Congressional intent is arbitrarily narrow at best. Ac-

cording to the District of Columbia Circuit, Congress in-

cluded Section 2(b) in the Act because it “feared

[Shreveport] would be read to permit Federal agencies to

set local rates based on the indirect effects such rates must

have on interstate service.” App. A at 37a (emphasis add-

ed). Therefore, following the court’s analysis, the plain

language of Section 2(b) that the FCC has no jurisdiction

over “charges, classifications, practices, services,

facilities . . . in connection with intrastate communication

service”2? does not bar Commission action preempting the

States from setting rates and charges for CPE used in the

provision of local charges, since in so doing the FCC has

not directly substituted its own rates for State-established

tariffs. Such a reading distorts the fact that preemption

for the purpose of eliminating a// CPE tariffing is just as

much a usurpation of State authority to regulate the rates

and charges of such equipment as would be direct Federal

determination of the rates. Both would, as the Fourth Cir-

cuit put it, “jeopardize state ratemaking prerogatives,”

NCUC II, 552 F. 2d at 1048, in contravention of the

Federal-State jurisdictional line in communications

regulation which has been specified by Congress.

2147 U.S.C. § 152(b) (1976) (App. B).

2247 U.S.C. § 152(b) (1976) (App. B).

16

Petitioners do not dispute that Congress could have ex-

ercised its authority under the Commerce Clause of the

U.S. Constitution?? and transferred the ICC’s broad,

albeit unexercised, Shreveport power to the FCC when it

enacted the Communications Act. Congress purposely

chose not to do so, however, and it has yet to reverse its

judgment on this score. The FCC remains bound by the

Act as it is written and is not free to disregard Congres-

sional pronouncements that appear to it as outmoded or

counterproductive.

In contrast to the Fourth Circuit’s NCUC opinions, the

decision below obliterates this distinction between what

Congress may do and what the Federal agency may do. Its

affirmance of the FCC’s preemptive order in Computer IT

has sanctioned the creation of a new jurisdictional

framework which not only lacks the requisite congres-

sional stamp of approval, but flies in the face of a contrary

congressional mandate. The unacceptable consequences of

countenancing such unauthorized Federal administrative

action were presumably clear to the Fourth Circuit. This

Court should issue a writ of certiorari to correct the

District of Columbia Circuit’s inappropriate acquiescence

to the FCC’s unlawful action in Computer II, so that the

Fourth Circuit’s sounder approach will remain uncon-

troverted and the Federal-State balance of power in com-

munications matters will continue to reflect the considered

will of Congress.

23Art. 1. § 8, cl. 3.

17

CONCLUSION

For the foregoing reasons, the NARUC and California

urge this Court to grant this petition for writ of certiorari.

February 10, 1983

Respectfully submitted,

WILLIAM PAUL RODGERS, JR.,

General Counsel

CHARLES D. GRAY, Assistant

General Counsel

DEBORAH A. DUPONT, Deputy

Assistant General Counsel

1102 Interstate Commerce

Commission Building

Post Office Box 684

Washington, D.C. 20044

(202) 628-7324

Attorneys for the National

Association of of Regulatory Utility Com-

missioners

JANICE E. KERR

J. CALVIN SIMPSON

GRETCHEN DUMAS

5066 State Building

San Francisco, California 94102

(415) 557-0470

Attorneys for the People of the State of

California and the Public Utilities

Commission of the State of California

APPENDIX A

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 SE2vICE CORPORATION,

Bills of costs must be filed within 14 days after entry of judgment. The

court looks with disfavor upon motions to file bills of costs out of time.

2a

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 RADIO, INC.,

ISA COMMUNICATIONS SERVICES, INC.,

INDEPENDENT DATA COMMUNICATIONS MANUFACTURERS

ASSOCIATION, INC.,

ASSOCIATION OF DATA PROCESSING SERVICE

ORGANIZATIONS, INC.,

BUNKER RAMO CORPORATION,

GTE TELENET COMMUNICATIONS CORPORATION,

MUNICIPALITY OF ANCHORAGE d/b/a ANCHORAGE

TELEPHONE UTILITY,

LOUISIANA PUBLIC SERVICE COMMISSION, INTERVENORS

No. 81-1193

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

3a

No, 81-1217

INDEPENDENT DATA COMMUNICATIONS MANUFACTURERS

ASSOCIATION, INC., PETITIONER

V.

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

V.

FEDERAL COMMUNICATIONS COMMISSION

AND UNITED STATES OF AMERICA, RESPONDENTS

INTERNATIONAL BUSINESS MACHINES Corp., et al.,

INTERVENORS

No. 81-1223

DATAPOINT CORPORATION, PETITIONER

Vv.

FEDERAL COMMUNICATIONS COMMISSION

AND UNITED STATES OF AMERICA, RESPONDENTS

INTERNATIONAL BUSINESS MACHINES Corp., et al.,

INTERVENORS

4a

No, 81-1224

AMERICAN NEWSPAPER PUBLISHERS ASSOCIATION,

PETITIONER

Vv.

FEDERAL COMMUNICATIONS COMMISSION

AND UNITED STATES OF AMERICA, RESPONDENTS

INTERNATIONAL BUSINESS MACHINES Corp., et al.,

{NTERVENORS

No. 81-1226

MOTOROLA, INC., PETITIONER

V.

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

Argued March 22, 1982

Decided November 12, 1982

John H. Chupman and Herbert FE. 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-

Sa

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 FE. 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 Burry Grossman, Attorney, U.S. Depart-

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

6a

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-

7a

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.

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 FE. 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 Corporatica.

Stephen M. Feldman entered an appearance for inter-

venor American Business, Press, Ine.

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 Sieven M.

Schur were on the brief for amicus curiae The Public

Service Commission of Wisconsin, urging that the FCC’s

decision be set aside.

9a

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).

10a

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 II... 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 and 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 II 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-

1 The Federal Communications Commission (Commission)

orders comprising the Computer II 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 384 (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

fcotnotes that follow.

munications and data processing in a proceeding known

as the First Computer Inquiry or Computer I,’ begun in

1966.2 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-

2 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.

1973), decision on remand, 40 F.C.C.2d 293 (1978).

8% 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, In 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 1934, 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. §§ 301-397. 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.

5 These rules are found at 36 Fed. Reg. 5345, 5353-54

(1971).

12a

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.

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

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

8 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 Decision, 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, see 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.

13a

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 732-36, 737.

11 See Computer II Final Decision, T7 F.C.C.2d at 391-93.

12 For example, technological advances made it possible for

significant data processing functions to be performed in

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, 30-31 (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.

l4a

susceptible to the type of abuses the Commission had

sought to discourage through its Computer IJ 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 IT the Commission abandoned the attempt

to classify activities as either communications or data

processing based on the nature of the processing per-

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) ; sce Interstate and Foreign Message Toll Tele-

phone, 56 F.C.C.2d 598 (1975), clarified, 59 F.C.C.2d 83

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

FCC, 552 F.2d 10386 (4th Cir.), cert. denied, 434 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.

'5 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 I°.C.C.2d 771 (1977) (Supplemental Notice of Inquiry).

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

15a

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-

1TJTd. 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.” Jd. at 419-20. Enhanced service is any service

other than basic service. Enhanced service “combines basic

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.” Jd. 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 55.

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

see note 12 supra.

20 Computer II Final Decision, 77 F.C.C.2d at 387.

16a

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 J.** 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 IT 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 GTF 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.

23 Compuier Il Final Decision, 77 F.C.C.2d at 388-89; see

note 8 supra.

2 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.

17a

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 cunsistent 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 Il 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

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

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

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

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

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

consider it unnecessary to address all 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

hased 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 IT de-

cision is the claim that the Commission has impermis-

19a

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

8247 U.S.C. § 201(a) (1976) (emphasis added).

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

84 See id.

35 Jd. at 393.

5647 U.S.C. § 151 (1976).

*? Computer II Final Decision, 77 F.C.C.2d at 428.

20a

would have required the Commission to reverse its policy,

established in Computer I, 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-

47 U.S.C, § 152(a) (1976).

8 Jd. § 153(a)-(b).

49 Computer Il Final Decision, 77 F.C.C.2d at 432.

‘' Jd. at 433.

2la

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).

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

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

“4 See note 12 supra.

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

Id. at 442.

22a

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 CPF 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 [J"' 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 153 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

4” See text accompanying notes 2-9 supra.

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

49 Td.

5° Td. at 439.

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

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

5347 U.S.C. §153(a) (1976).

54 Td. § 152; see Computer II Final Decision, 77 F.C.C.2d at

450-52.

23a

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

58 Computer II Final Decision, 77 F.C.C.2d at 441-46.

24a

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 are not common carrier services

within the scope of Title II. 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.

™ Td. at 430-32.

57 Td. at 434-35.

"Id, at 426-27, 434-35.

25a

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 630 (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,

533 F.2d 601, 618 (D.C. Cir. 1976) (NARUC II) (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.

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

525 I'.2d 630, 640 (D.C. Cir. 1976) (NARUC I) (quoting

Semon v. Royal Indemnity Co., 279 F.2d 737, 739 (5th Cir.

1960) ).

" Jd, at 641 n.58 (quoting Industrial Radiolocation Service,

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

62 Computer Il Final Decision, 77 F.C.C.2d at 431.

26a

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 carriers,

supports the Commission’s conclusion that CPE is not a

common varrier 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, 533 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).

27a

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 hoe 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.

* Td.

*§ That decision was largely upheld by the Second Circuit

in GTE Service Corp. v. FCC, 474 F.2d 724 (2d Cir. 1978).

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.

28a

Instead of regulating 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 Il-regulated communica-

tions service at reasonable rates. The Commission fount

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.

79 Td. at 429-30.

29a

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 casc 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

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

204 (D.C. Cir. 1969), cert. denied, 397 U.S. 922 (1970).

72 359 F.2d at 284.

30a

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 terininal 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.”

78 Jd.

™ Id. at 284 (emphasis added).

75674 F.2d at 166-67.

3la

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 juris-

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.”

76 Jd. at 165-66 (citations omitted).

77 Jd. at 166.

™% United States v. Southwestern Cable Co., 892 U.S. at

172-73.

7 Id. at 178.

47 U.S.C. § 152 (1976).

32a

In Computer 17 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

8! See Computer Il Final Decision, 77 F.C.C.2d at 466-70.

82 Jd. at 441, 444-46.

33a

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 II 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 IJ must be upheld unless arbitrary

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

convinces us that the Commission acted reusonably in de-

fining its jurisdiction over enhanced services and CPE.

We therefore uphold the Computer !] scheme.

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

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

** National Ass'n of Theatre Owners v. FCC, 420 F.2d 194,

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

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

FCC, 413 F.2d 390, 398 (D.C. Cir.), cert. denied, 396 U.S. 888

(1969).

% FCC v. WNCN Listeners Guild, 450 U.S. 582, 596 (1981).

665 U.S.C. § 706(2) (a) (1976) ; see, e.g., Malrite Television

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

S. Ct. 1002 (1982).

34a

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 3(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.”

87 47 U.S.C. § 152(a) (1976).

87d. § 153(a).

8° See Computer II Final Deci: on, 77 F.C.C.2d at 441-42.

” 47 U.S.C. § 152(b) (1976).

35a

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 II

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, 631 F.2d 1059,

1066 (2d Cir. 1980); California v. FCC, 567 F.2d 84, 86-87

(D.C. Cir. 1977), cert. denied, 434 U.S. 1010 (1978); Puerto

Rico Telephone Co. v. FCC, 553 F.2d 694, 698-700 (1st Cir. .

1977).

* Brookhaven Cable TV, Inc. v. Kelly, 573 F.2d 765, 767

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

525 F.2d at 646-47.

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

* Id. at 439.

% See id. at 442-43.

36a

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 1), the court upheld the Commission’s authority

to determine the terms on which consumers may attach

non-carrier-provided CPF. 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,

793-95 (4th Cir.), cert. denied, 429 U.S. 1027 (1976) (NCUC

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

1044-52 (4th Cir.), cert. denied, 434 U.S. 874 (1977) (NCUC

II).

37a

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. 842 (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

38a

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 I] 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

Federol Communications Commission: Hearings on S. 2910

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

2d Sess. 158, 166 (1984) (statement of K.F. Clardy) ; id. at

155-56 (statement of Andrew R. McDonald); NCUC II, 6:2

F.2d at 1047.

39a

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

10° 47 U.S.C. § 152(b)(1) (1976).

101 Td. § 221(b).

102 Td.

108 See NCUC II, 552 F.2d at 1045; 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, 631 F.2d 1059,

1064-65 (2d Cir. 1980).

14S. Rep. No. 781, 78d Cong., 2d Sess. 6 (1984); H.R.

REP. No. 1850, 73d Cong., 2d Sess. 7 (1984).

40a

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 IJ 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 federa! 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 tariff 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

105 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.

16 Accord Brookhaven Cable TV, Inc. v. Kelly, 573 F.2d

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

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

669 F.2d 58 (2d Cir. 1982).

4la

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.” 2” 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."?®

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

10° Td. at 441.

119 For example, in its Reconsidered Decision the Commis-

sion adopted a bifurcation plan that should ameliorate state

42a

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 r>gulation of

existing CPE. In its Further Reconsidered Decision the Com-

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

tional accounting requirements and structural separation for

carriers other than AT&T.

43a

common carrier having “sufficient market power to en-

gage in effective 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, (3) 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

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

112 Jd, at 389.

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

114 Id.

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

44a

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.” ''7 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 IJ 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.

7 Jd. at 75 n.19.

18 Computer II Final Decision, 77 ¥.C.C.2d at 476.

19 Computer II Furiher Reconsidered Decision, 88 F.C.C.2d

at 541.

4Sa

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 I] 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 Jersey.'** The con- .

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

into unregulated non-communications markets.'” In de-

2 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).

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

all of its subsidiaries, except Western Electric and Western

46a

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

IT 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 1934,” id. at 71,137.

128 Computer Il Final Decision, 77 F.C.C.2d at 492.

14 Jd. at 492-93.

123 (pinion, United States v. American Telephone & Tele-

graph Co., Civ. Action No. 74-1698, at 88-100 (D.D.C. Aug. 11,

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

1982).

Ala

proper for the Commission to take these circumstances

into account in formulating the Computer IT 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 foregoing reasons, the decision of the Commis-

sion is

Affirmed.

48a

APPENDIX B

RELEVANT STATUTORY MATERIAL

From Federal Communications Act of 1934, 47 U.S.C.:

§ 152. Application of chapter

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

tle, 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

regulation for or in connection with intrastate com-

munication service by wire or radio of any carrier, or (2)

any carrier engaged in interstate or foreign communica-

tion 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 indirectly controlling or controlled

by, or under direct or indirect common control with such

carrier, or (4) any carrier to which clause (2) or clause (3)

of this subsection would be applicable except for fur-

nishing 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, ap-

ply to carriers described in clauses (2) - (4) of this subsec-

tion. June 19, 1934, c. 652, Titie 1, § 2, 48 Stat. 1064; 1946

Proc. No. 2695, eff. July 4, 1946, 11 F.R. 7517, 60 Stat.

1352; Apr. 27, 1954, c. 175, § 1, 68 Stat. 63.

49a

§ 221. Telephone companies; consolidation; state

jurisdiction over services, charges, etc., unaf-

fected; determination of property used in in-

terstate toll service; valuation

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

tle, 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

combination thereof, even though a portion of such ex-

change service constitutes interstate or foreign com-

munication, in any case where such matters are subject to

regulation by a State commission or by local governmental

authority.