# Petition — Louisiana Public Service Commission v. Federal Communications Commission > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385010_0455%3A1 ## Record - **Collection:** Supreme Court brief - **Document type:** Petition - **Published:** January 1, 1983 - **Citation:** 461 U.S. 938 ## Text 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 [Text truncated at 120,000 characters. The full text is on the page linked above.] --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385010_0455%3A1. Public record. Not legal advice.