Appendix — California v. Federal Communications Commission

Supreme Court brief1985

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Text

84-889 ”

No.

In the Supreme anni

OF THE

United States

Octroser Term, 1984

PEOPLE OF THE STATE OF CALIFORNIA AND

Pusuic Utiuitres CoMMISSION OF THE

State or CALirorni,, et al.,

Petttioners,

vs.

FepERAL COMMUNICATIONS COMMISSION AND

Unitep States or AMERICA,

Respondents.

APPENDIX TO

PETITION FOR A WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE FOURTH CIRCUIT

Janice E. Kerr*

General Counsel

J. Carvin Simpson

Assistant General Counsel

GreTCHEN Dumas

Principal Counsel

PEOPLE OF THE STATE OF

CALIFORNIA AND THE

Pusuic Utiuitres ComMIssION

OF THE STATE OF CALIFORNIA

350 McAllister Street

San Francisco, CA 94102

*Counsel of Record

Telephone: (415) 557-0470

BOWNE OF SAN FRANCISCO, INC. * 190 NINTH ST. ¢ S.F., CA 94103 ¢ (415) 864-2300

—_

Appendix A

United States Court of Appeals for the Fourth Circuit

No. 83-1136

[Filed June 18, 1984)

Virginia State Corporation Commission,

Vv.

Federal Communications Commission

and United States of America,

North American Telephone Association,

American Telephone and Telegraph Company,

National Association of Regulatory

Utility Commissioners,

Southern Pacific Communications Company,

Public Service Commission of the

District of Columbia,

Public Utilities Commission of Ohio,

Arkansas Public Service Commission,

Kansas State Corporation Commission,

GTE Service Corporation,

Public Service Commission of Wyoming,

Continental Telecom Inc.,

Washington Utilities and T:

ransportation

United Telephone System, Inc.,

Department of Public Service of the

State of Minnesota,

Arizona Corporation Commission,

Cincinnati Bell Inc.,

Citizens of the State of Florida,

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National Association of State Utility

Consumer Advocates,

Consumer Advocate of South Carolina,

Office of Consumers’ Counsel for the State of Ohio,

Iowa State Commerce Commission,

Public Service Commission of Wisconsin,

Public Service Commission of West Virginia,

New York State Department of Public Service,

The Bell Telephone Company of Pennsylvania,

The Chesapeake and Potomac Telephone Company,

The Chesapeake and Potomac Telephone Company

of Maryland,

The Chesapeake and Potomac Telephone Company

of Virginia,

The Chesapeake and Potomac Telephone Company

of West Virginia,

The Diamond State Telephone Company,

Illinois Bell Telephone Company,

Indiana Bell Telephone Company, Incorporated,

Michigan Bell Telephone Company,

The Mountain States Telephone and

Telegraph Company,

New England Telephone and Telegraph Company,

New Jersey Bell Telephone Company,

New York Telephone Company,

Northwestern Bell Telephone Company,

The Ohio Bell Telephone Company,

Pacific Northwest Bell Telephone Company,

The Pacific Telephone and Telegraph Company,

Bell Telephone Company of Nevada,

South Central Bell Telephone Company,

Southern Bell Telephone and Telegraph Company,

The Southern New England Telephone Company,

Southwestern Bell Telephone Company,

Wisconsin Telephone Company,

Board of Public Utilities of New Jersey,

Louisiana Public Service Commission,

Intervenor./P,

Intervenor./ P,

Intervenor./P,

Intervenor./R,

Intervenor./ Ki,

Intervenor./ RK,

Intervenor./ KR,

Intervenor./R,

Intervenor./ KR,

Intervenor./R,

Intervenor./R.

On Petition for Review from a Decision by the Federal

Communications Commission.

Argued October 7, 1983 Decided June 18, 1984

A-3

Before Widener, Murnaghan, and Sprouse, Circuit Judges.

Russell W. Cunningham (Donald G. Owens, Sherry H.

Bridewell; David E. Blabey, Lawrence G. Malone ; Lynwood

J. Evans; Richard P. Rosenberry, Lawrence F. Barth;

Lloyd N. Moore, Jr.; Donald A. Low, Rosemary O’Leary;

Harris S. Leven, Jonathan L. Heller; Jean E. Heilman;

Lee McCulloch; Jack Shreve, Benjamin H. Dickens, Jr.;

Steven W. Hamm, Raymond E. Lark, Jr., Russell H. Put-

man, Jr.; Joseph I. Lieberman, Peter J. Jenkelunas; Janice

E. Kerr, Gretchen Dumas, J. Calvin Simpson; Douglas N.

Owens; Steven R. Shanahan; Bruce W. Renard; Diane L.

McIntire; Steven M. Schur, Jon E. Kingstad; Paul Rod-

gers, Charles D. Gray; Frank J. Kelly, John M. Demp-

sey; Joel B. Shifman on brief) for Petitioner; John E.

Ingle, Deputy Associate General Counsel (Bruce E. Fein,

General Counsel, Daniel M. Armstrong, Associate General

Counsel on brief) for Respondents; Michael Boudin

(Leonard R. Stein; Raymond F. Scully, Lester G. Stiel, W.

Preston Granbery; Earl R. Huffman, David Horn; Thomas

L. Jones, John Wohlstetter; Richard McKenna, James

Hobson; Albert H. Kramer; John W. Hunter, Carolyn C.

Hill; Maria A. Kendro on brief) for Intervenors Support-

ing Respondents.

Murnaghan, Circuit Judge:

The controversy here presented involves an order of the

Federal Communications Commission (FCC) entitled “Uni-

form System of Accounts and Petition for Declaratory

Ruling on Question of Federal Preemption.” CC Docket No.

79-105, FCC 82-581 (released Jan. 6, 1983). The order

‘provides that, when the FCC has prescribed depreciation

rates and methods for classes of property used by telephone

companies, state regulation of the same matter is thereby

preempted.

Petitioner, Virginia State Corporation Commission,

along with multiple Petitioner-Intervenors representing

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regulatory agencies of other states, argues that the states’

fixing of depreciation rates and accounting methods for

intrastate ratemaking purposes is preempted neither by

the express language of the Federal Communications Act

of 1934, 47 U.S.C. $151 et seq. (1976) (the Act), nor by

FCC rules explicitly governing depreciation of telephone

equipment and facilities that are used interchangeably to

provide both interstate and intrastate service. We agree

with the FCC that its order released January 6, 1983 pre-

empts state regulation of the depreciation rates and

methods here involved, and thereby reemphasize our

recognition in North Carolina Utilities Commission v.

F.C.C., 552 F.2d 1036 (4th Cir. 1977) (“NCUC II”), cert.

denied, 434 U.S. 874 (1977), that “FCC regulations must

preempt any contrary state regulations where the efficiency

... Of the national communications network is at stake... .”

Id. at 1046.

I. Background

Under the current state of the telecommunications art,

local telephone companies provide “telephone plant” (facil-

ities and equipment) that serve both interstate and intra-

state communications needs. Section 152 of the Act provides

in subsection (a) that the statute “shall apply to all inter-

state and foreign communication by wire,” but in subsec-

tion (b) that “nothing in this chapter shall be construed

to apply or to give the Commission jurisdiction with respect

to (1) charges, classifications, practices, services, facilities,

or regulations for or in connection with intrastate com-

munication service by wire ....” Within this framework of

divided authority, the Commission’s statutory mandate is

a broad one, “to make available . . . to all the people of

the United States a rapid, efficient, Nationwide, and world-

wide wire . . . communication service with adequate facili-

ties at reasonable charges... .” 47 U.S.C. § 151.

A-5

In order to achieve the mandated goal, the FCC is spe-

cifically empowered under 47 U.S.C. § 220 to prescribe de-

preciation practices to be followed by interstate carriers.’

At the same time, the Act recognizes the continued vitality

of state regulation of intrastate service. Section 221(b)

provides that “nothing in this chapter shall be construed to

apply, or to give the Commission jurisdiction, with respect

to charges, classifications, practices, services, facilities, or

regulations for or in connection with wire . . . exchange

service ... even though a portion of such exchange service

constitutes interstate ... communication, in any case where

such matters are subject to regulation by a State commis-

sion or by local governmental authority.” Because most of

the nation’s telephone plant is used interchangeably to serve

both interstate and intrastate telecommunications needs,

*Section 220(b) provides that:

The Commission shall, as soon as practicable, prescribe for such

carriers the classes of property for which depreciation charges may

be properly included under operating expenses, and the percentages

of depreciation which shall be charged with respect to each of such

classes of property . . . . The Commission may, when it deems nec-

essary, modify the classes and percentages so prescribed. Such car-

riers shall not, after the Commission has prescribed the classes of

property for which depreciation charges may be included, charge to

operating expenses any depreciation charges on classes of property

other than thuse prescribed by the Commission, or after the Com-

mission has prescribed percentages of depreciation, charge with

respect to any class of property a percentage of depreciation other

than that prescribed therefor by the Commission. . . .

(g) After the Commission has prescribed the forms and manner

of keeping of accounts .. . it shall be unlawful for [the carrier] to

keep any other accounts .. . than those so prescribed . . . or to

keep accounts in any manner other than that prescribed or ap-

proved by the Commission. . . .

A-6

the potential for conflict between federal and state regu-

latory action is obvious.’

The conflict at issue on this appeal had its genesis in two

separate orders issued by the FCC in 1980 and 1981; both

orders were designed to compel carriers to employ depre-

ciation practices that more truly reflected actual deprecia-

tion rates in light of technological reality. After seven years

of study, the FCC first determined in 1980 that the prior

practice of “vintage year” grouping for depreciation pur-

poses was inaccurate, and ordered that the “equal life

group” method be used. See Docket No. 20188, 83 F.C.C.2d

267 (1980). The equal life method permitted greater pre-

cision in allocating costs of service to current consum..’s,

and allowed more rapid capital recovery for plant having a

short useful life.*

Thus, while the prior “vintage year” method was thought

to “stifle innovation and inhibit the introduction of new

technology,” 83 F.C.C.2d at 281, the “equal life” method was

intended to bolster the competitive market structure that

the FCC sought to foster. The same 1980 order also re-

placed the “whole life’? method of depreciation with the

*This Court has already recognized that tandem use of telephone

plant to serve both interstate and intrastate needs is quite commun.

See North Carolina Utilities Commission v. F.C.C., 537 F.2d 787,

794 (4th Cir. 1976) (“NCUC I”), cert. denied, 429 U.S. 1027

(1976) (quoting Katz v. A.T.&T., 43 F.C.C. 1328, 1332 (1953) ), to

the effect that, “[w]Jere the Commission to exercise its jurisdiction

only where the telephone facilities in question were exclusively in-

terstate in character, it would result in virtually complete abdica-

tion from the field of telephone regulation. . . .”

*For example, under the “vintage year” method, all types of tele-

phone cable installed during one year (regardless of variations in

useful lives of the cables) would be classed together and depreci-

ated over the average useful life of the group. By contrast, the

“equal life” method broke plant into smaller subgroups (e.g., indoor

cable as opposed to underground cable) that were depreciated sep-

arately, more in keeping with the plant’s actual useful life.

A-7

“remaining life” method, which allowed a carrier to recoup

the full cost of plant by making corrections in useful life

estimates over time. 83 F'.C.C.2d at 288-90.‘

The FCC’s 1981 order provided that inside wiring in

homes and businesses no longer should be treated as a

capital investment to be depreciated over time, but rather

as a cost to be “expensed” to current users. Again, the

thrust of the rule change was to ensure that consumers ac-

tually requesting and benefitting from installed wiring pay

for that benefit. By expensing the wiring, the burden of

costs associated with such station connections would be

placed on the causative ratepayer, and other consumers

would not be forced to bear rates unduly inflated by a de-

preciation component for wiring services previously pro-

vided. 85 F.C.C.2d 818, 824 (1981).

The two orders were first challenged on April 30, 1981,

when the National Association of Regulatory Utility Com-

missioners (“NARUC”) filed a Petition for Clarification of

the 1981 wiring order. Specifically, NARUC requested that

the FCC issue a statement that the provisions of the wiring

order were not binding upon state regulatory commissions

insofar as intrastate communications service was con-

cerned. The FCC responded to the petition in a Memoran-

dum Opinion and Order of April 27, 1982, in which it con-

cluded that in light of the relevant legislative history of the

Act, “where state [accounting and depreciation] regulation

is reconcilable with federal policies or rules, there is no occa-

sion for us to override state agency actions in furtherance

‘Under the “whole life” method, underrecovery had become a

common problem, since carriers were locked into inaccurate, overly

long estimates of useful life in an industry in which innovation and

resulting obsolescence were the order of the day. See 83 F.C.C.2d at

289-90.

A-8

of legitimate state regulatory objectives.’”* 89 F.C.C.2d

1094, 1108 (1982).

In response to the FCC’s opinion and order, the Ameri-

ean Telephone and Telegraph Company filed a Petition for

Reconsideration on June 7, 1982. General Telephone Com-

pany of Ohio likewise petitioned for a Declaratory Rulirg

that inconsistent state action was foreclosed under the Act.®

After further pleadings and comments, the FCC reversed

its earlier position in a second Memorandum Opinion and

Order of January 6, 1983. C.C. Docket No. 79-105, F.C.C.

No. 82-581, slip op. (Jan. ..... 1983). After it carefully re-

surveyed the legislative history and decisional law, and

reexamined the express language of the Act, the FCC

adopted the view that the most logical and reasonable in-

terpretation of the Act “is that where the Commission pre-

scribes depreciation rates for classes of property [and the

‘Writing for a 4-3 majority of the Commissioners, Secretary Wil-

liam J. Tricarico found that portions of the Act were geared “to

achieve as much uniformity as possible without coercing any state

commission to use ratemaking methods it found unacceptable.” Tri-

carico also emphasized that the Commission had always given “spe-

cial consideration to the needs and views of state commissions in

developing accounting and depreciation rules and most State com-

missions have chosen to follow most accounting and depreciation

rules prescribed by this Commission.” 89 F.C.C.2d at 1106.

Commissioners Fogarty, Jones, and Rivera issued a Joint Dissent-

ing Statement, in which they recognized the “clear preemptive

thrust” of the wiring order and refused to defer to the states on a

“critical capital recovery [issue] affecting the continued viability

and competitiveness of our Nation’s telephone industry in providing

increasingly essential interstate, as well as intrastate, facilities and

services.” Id. at 1111.

*In its petition, General Telephone noted that the Ohio state reg-

ulatory agency had explicitly rejected use of the “remaining life”

and “equal life group” methods adopted in the FCC’s 1980 order.

General Telephone therefore perceived a direct conflict between

federal and state regulatory action, which would frustrate impor-

tation interests of national communications policy.

A-9

depreciation methods to be used], state commissions are

precluded from departing” from those rates and methods.

Id. at 17, 9 44. In reversing itself, the FCC espoused the

notion that the plain terms of section 220 of the Act appear

“clearly to preempt the states in connection with deprecia-

tion expense determinations and the related accounting.”

Id. at 6, 1 17. Moreover, the FCC found that, even if section

220 did not possess a preemptive effect as a matter of law,

the FCC’s own policies and rulings would preempt incon-

sistent state regulatory action as a matter of federal su-

premacy. Jd. at 17, { 45.

Supported by numerous state and local regulatory com-

missions, the Virginia State Corporation Commission

(“VSCC”) filed a Petition for Review of the January 6,

1983 Order. VSCC alleged that preemption was required

neither as a matter of law nor as a resuJt of regulatory

action taken by the FCC.

Relying in part on this Court’s prior decisions in

NCUC I and NCUC II, and relevant decisions of other Cir-

cuits,” we hold that inconsistent state regulation of depre-

ciation methods and classes of property to be depreciated

has been preempted by the rulings of the FCC. Because we

have determined that the affirmative regulatory action

taken by the FCC suffices to preempt inconsistent state ac-

tion, we find it unnecessary to decide whether, as a matter

of law, the language of the Act itself requires preemption.

"See Computer and Communications Industry Ass'n v. F.C.C., 693

F.2d 198 (D.C. Cir. 1982), cert. denied, .. U.S... ., 103 S.Ct. 2109

(1983); New York Telephone Co. v. F.C.C., 631 F.2d 1059 (2nd Cir.

1980); and Puerto Rico Telephone Co. v. F.C.C., 553 F.2d 694 (lst

Cir. 1977), discussed in text infra. Contra Southwestern Bell Tele-

phone Co. v. Arkansus Public Service Comm'n, No. LR C 84 247,

slip op. (Mar. 30, 1984) (Court holds that FCC lacked jurisdiction

to issue the January 6, 1983 Order and refuses to enforce it as ultra

vires).

A-10

II. Discussion

While it is true that the Act does reserve to the states

the authority to prescribe rates for intrastate telephone

service, that reservation is not to be read as preserving the

states’ sphere of intrastate jurisdiction at the expense of

an efficient, viable interstate telecommunications network.

Section 152(b) of the Act does make the broad pronounce-

ment that “nothing in [the] chapter shal) be construed .. .

to give the Commission jurisdiction with respect to . . . in-

trastate communication service.” Section 221(b) further

supports state authority by providing that the FCC shall

have no jurisdiction “even though a portion of [an] ex-

change service constitutes interstate or foreign communi-

cation, in any case where such matters are subject to regu-

lation by a State commission or by local governmental

authority.”

Nonetheless, the foregoing provisions are rendered

against a statutory backdrop that places primary emphasis

upon a “rapid, efficient, Nationwide, and world-wide” com-

munication service.* Given that overriding concern, the

1983 Opinion by the FCC construing the accounting and

wiring orders of 1980 and 1981 is most reasonably inter-

preted as valid exercise of statutory authority by the FCC,

preemmpting inconsistent state action by virtue of the Su-

premacy Clause.* While VSCC and Petitioner-Intervenors

*47 U.S.C. § 151. But see Southwestern Bell Telephone Co. v.

Arkansas Public Service Comm'n, No. LR C 84 247, slip op. at 3

(Mar. 30, 1984) (holding that FCC lacked jurisdiction to issue the

January 6, 1983 Order, the Arkansas District Court refuses to

permit FCC’s mandate to provide efficient, nationwide service to

“allow the FCC to bootstrap itself into preempting” intrastate rate-

making determinations ).

“This Constitution, and the Laws of the United States which

shall be made in Pursuance thereof . . . shall be the supreme Law

of the Land; and the Judges in every State shall be bound thereby,

any Thing in the Constitution or Laws of any State to the Con-

trary notwithstanding.” U.S. Const. art. VI, cl. 2.

A-11

argue that “4 221(b) has been given an unduly narrow

interpretation in recent years,”*® we do not view as “nar-

row” an interpretation which recognizes that the Act does

not sanction a “state regulation, formally restrictive only

of intrastate communication, that in effect encroaches

substantially upon the Commission’s authority” over inter-

state telecommunications. NCUC I, 537 F.2d at 793.

Such a finding comports well with the recent Supreme

Court decision in Fidelity Federal Savings & Loan Co. v. de

la Cuesta, 458 U.S. 141 (1982). The court stated in de la

Cuesta, that “[e]ven where Congress has not completely

displaced state regulation in a specific area, state law is

nullified to the extent that it actually conflicts with federal

law. Such a conflict arises when .. . state law ‘stands as an

obstacle to the accomplishment and execution of the fall

purposes and objectives of Congress.” Id. at 153 (quoting

Hines v. Davidowitz, 312 U.S. 52, 67 (1941) )." Although the

Referring explicitly to this Court’s decision .n NCUC I, counsel

for VSCC requested at oral argument that we “revisit” the doctrine

adopted in that case, which recognized that the FCC’s authority

to regulate had “primacy” over state regulatory action purporting

to affect the interconnection of customer-provided telephone equip-

ment. See NCUC I, 537 F.2d 788 (1976).

“Construing the Federal Alien Registration Act of 1940 in Hines,

the Court recognized that there cannot be any “rigid formula or

rule which can be used as a universal pattern” in determining

Congress’ intention to preempt. 312 U.S. at 67. The factual setting

in which each case arises will thus shape the contours of a pre-

emption determination.

See also Pacific Gas and Electric Co. v. State Energy Resources

Conservation Development Commission, .... U.S. ...., 103 S. Ct.

1713 (1983), in which the Court again noted that preemption is

proper when state law frustrates important federal goals. In

Pacific Gas, the Court found that agency regulations issued pur-

suant to the Atomic Energy Act of 1954, 42 U.S.C. § 2011 et seq.

(1976), did not preempt state authority to curtail the development

of nuclear power for economic reasons. Because the Nuclear Regu-

latory Commission’s regulations dealt with plant safety, while the

A-12

holding in de la Cuesta arose in the context of the Home

Owner’s Loan Act of 1938, 12 U.S.C. § 1461 et seg. (1982),

the basic analysis applies to this appeal as well: an appel-

late court is not to focus narrowly on Congress’ own intent

specifically to supersede state regulation. Rather, the Court

must determine whether the federal agency entrusted with

administering the act meant to preempt, and whether such

preemptive action is within the scope of the agency’s au-

thority. 458 U.S. at 154.”

First, it is quite clear that the FCC did intend to pre-

empt inconsistent state regulation governing depreciation

methods and classes of depreciable property. The 1983

Memorandum Opinion and Order stated in no uncertain

terms that “we find that this Commission’s depreciation

policies and rates, including the expensing of inside wiring,

preempt inconsistent state depreciation policies and rates.”

C.C. Docket No. 79-105, F.C.C. No. 82-581 (Jan. 6, 1983),

slip op. at 17, | 45.

state regulations dealt with plant economy, compliance with both

sets of regulations was possible without thwarting the federal

objective. Id. at .....

The Court explicitly stated in de la Cuesta, 458 U.S. at 153-54:

Federal regulations have no less preemptive effect than fed-

eral statutes. Where Congress has directed an administrator

to exercise his discretion, his judgments are subject to judicial

review only to determine whether he has exceeded his statu-

tory authority or acted arbitrarily. United States v. Shimer,

367 U.S. 374, 381-382 (1961). When the administrator promul-

gates regulations intended to preempt state law, the court’s

inquiry is similarly limited:

“If [h]is choice represents a reasonable accommodation of

conflicting policies that were committed to the agency’s

care by the statute, we should not disturb it unless it appears

from the statute or its legislative history that the accom-

modation is not one that Congress would have sanctioned.”

Id. at 383.

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Second, the regulatory action taken by the FCC was also

within its authority to ensure efficient operation of the

interstate telephone network. In ordering that certain de-

preciation methods be followed, the FCC was merely exer-

cising its power under section 220(b) of the Act to prescribe

classes of property and percentages to be allowed as de-

preciation. To be sure, that prescription does have an

effect on intrastate rates, but the effect will only be ancil-

lary to the FCC’s primary statutory directive to regulate

interstate communications. While Petitioner VSCC would

seek to prohibit even an ancillary effect on intrastate com-

munications, such a result does not harmonize with the

FCC’s broader mission. As the FCC observed in Katz,

supra, it is incumbent upon the FCC to exercise its author-

ity in a manner best calculated to serve the needs of the

public, and “/t]he fact that the same instruments are used

for both interstate and intrastate services and that intra-

state service is subject to state and local regulation does

not alter the Commission’s duties and obligations with

respect to interstate telephone facilities.” 43 F.C.C.2d at

1332.

Although the FCC noted in its 1982 Memorandum Opin-

ion and Order that it had “never attempted to prevent any

State commission from departing from [federal] account-

ing and depreciation rules,” 89 F.C.C.2d at 1106-07, the fact

of the matter is that the FCC never found it necessary to

do so until the current decade. During the years of monop-

oly power, when state commissions tended voluntarily to

follow federal directives, there was no realistic need to

speak in terms of preemption.” In the instant case, how-

“Under section 220(i) of the Act, the FCC is required to give

notice to each state commission involved, and to allow a reasonable

opportunity for each commission to present its views regarding any

requirements prescribed. Moreover, the FCC is required to

“receive and consider such views and recommendations.” Tripartite

A-14

ever, several state commissions refused to follow the FCC’s

determinations concerning depreciation. Although flexibil-

ity in depreciation practice presented little threat to the

efficient operation of a monopolistic telecommunications in-

dustry, improper capital recovery does pose a true threat

in today’s competitive market. Thus, the FCC reasonably

decided to preempt by issuing orders intended to speed

capital recovery and improve accuracy of depreciation cal-

culations, thereby enhancing competition.

VSCC makes much of the argument that the FCC was

silent on the issue of depreciation for some forty-seven

years,” but that prior silence does not vitiate the ongoing

authority of the FCC to act once it decides that industry

conditions merit preemptive regulation. As the Supreme

Court observed in Smith v. Illinois Bell, 282 U.S. 133, 159-

60 (1930), a state’s prerogative to regulate survives “until

meetings were commonly held between the FCC, state carriers, and

state regulatory agencies, with the FCC often able to accommodate

state goals without compromising federal policy. See FCC Order

of January 28, 1982, 88 F.C.C.2d 1223 (1982) (since late 1940s,

FCC prescribed depreciation rates after conferring with carrier

representatives and staffs of respective state commissions).

“Indeed, the FCC itself observed in its initial Memorandum

Opinion and Order of 1982 that it was being asked “to repudiate

nearly forty years of administrative practice and applicable state

court proceedings by adopting an interpretation of Section 220 that

would require an unwilling state commission to follow all account-

ing and depreciation methods prescribed by this Commission. A

very compelling showing would be required to persuade us to

follow such a course.” 89 F.C.C.2d at 1107.

Nonetheless, since the FCC “is not barred from overruling past

precedents when it decides that a previously declared rule is no

longer sound or appropriate,” New York Telephone Co. v. F.C.C.,

631 F.2d 1059, 1065 (2d Cir. 1980), certainly it should not be

bound to maintain silence once it determines that articulation of a

uniform federal policy is warranted.

A-15

action has been taken” by a federal agency vested with

jurisdiction over the matter. (Emphasis added).** Support-

ing the FCC’s decision to regulate is the consideration that

a full seventy-five percent of all investment in new plant

falls within the intrastate services category. If that large

amount of equipment investment should fail properly to

reflect its true, rapid depreciation, interstate service would

then suffer the effects of delayed innovation.

As noted above, decisions of other Circuits have recog-

nized the necessity for federal preemption of inconsistent

state telecommunications policy. In Computer and Com-

munications Industry Ass’n v. F.C.C., 693 F.2d 198 (D.C.

Cir. 1982), cert. denied, ...... US. ......, 103 S. Ct. 2109 (1983),

it was found that state tariffing of customer premises

equipment (“CPE”) “must necessarily yield to the federal

regulatory scheme.” Jd. at 214. The federal scheme required

that charges for CPE (e.g., home computer terminals, data

processing units) be separated from ordinary transmis-

sion service charges. Since CPE is used interchangeably

for both interstate and intrastate service, such a decision

would have a clear anciliary effect on intrastate rates.

**In Smith, the Court found that, in the absence of federal reg-

ulatory action “which could be deemed validly to affect the amount

to be charged in connection with intrastate business so as to affect

intrastate rates,” the jurisdiction of the state is “not to be gainsaid”

in determining depreciation amounts for intrastate telephone busi-

ness. 282 U.S. at 159-60.

See also Northwestern Bell Telephone Co. v. Nebraska State Rail-

way Commission, 297 U.S. 471 (1936), in which the Court found

that pending action by the FCC to establish depreciation rates,

state control over such rates remained unimpaired. The Act “con-

templated no restriction of state control over depreciation rates

until the [FCC] had prescribed its own rates.” Id. at 478.

Whereas the decisions in Smith and Northwestern Bell were

predicated upon the FCC’s inaction, the instant appeal presents a

clear case of affirmative, preemptive action properly taken by the

agency.

A-16

Nonetheless, the Court refused to perceive any distinc-

tion between the preemption principles to be applied in

the case of state ratemaking issues, and those applicable

to other state powers. Jd. at 216. Thus, ancillary effect on

intrastate rates was permitted in order to achieve the

federal goals of unfettered CPE selection, market com-

petition, and a greater number of equipment and payment

options.

The Court in Computer and Communications Industry

relied in large part on this Cireuit’s decisions in NCUC I

and NCUC II to support preemption. In NCUC I, we held

that state regulation that “encroaches substantially” upon

federal authority was preempted. 537 F.2d at 793. The

conflict in that case dealt directly with policies concerning

physical interconnection of non-carrier provided CPE to

transmission facilities used jointly for interstate and intra-

state needs. Preemption was required, even though we

recognized that the FCC had no authority “over local

services, facilities and disputes that in their nature and

effect are separable from and do not substantially affect

the conduct or development of interstate communications.”

Id.

While it may be true that the effects of depreciation

policies are more attenuated than the very direct effect

produced by physical connection of equipment to inter-

changeable lines, it cannot be said that depreciation poli-

cies are “separable from” interstate communications.

Indeed, the conduct and development of interstate com-

munications would undoubtedly be affected by the states’

imposition of depreciation policies that slowed capital

recovery and innovation. See also NCUC II, in which we

recognized the preemptive effect, or “federal primacy,”

of the Commission’s registration program for terminal

equipment subject to interchangeable use: “If it is

admitted—as we think it must be—that the FCC has full

statutory authority to regulate joint terminal equipment

A-17

to ensure the safety of the national network, then we

can discover no statutory basis for the argument that

FCC regulations serving other important interests of

national communications policy are subject to approval by

state utility commissions.” 552 F.2d at 1046-47.

The finding of federal primacy was echoed by the Court

of Appeals for the Second Circuit in New York Telephone

Co. v. F.C.C., 631 F.2d 1059 (2d Cir. 1980), a case which

involved an assertion of federal jurisdiction over local

exchange service when used in connection with interstate

foreign exchange services. Citing Northwestern Bell for

the proposition that state regulation continued unabated

only when the federal agency “had not regulated in [the]

area,” 631 F.2d at 1066, the Court held that once the FCC

acted to impose its own tariff regulations, inconsistent

state regulation was necessarily preempted.

Finally, the Court of Appeals for the First Circuit ex-

plicitly adopted the rationale of NCUC I in Puerto Rico

Telephone Co. v. F.C.C., 553 F.2d 694 (1st Cir. 1977). The

Court first acknowledged that federal primacy would have

the “anomalous” result of ousting Puerto Rico’s jurisdiction

over equipment used primarily for intrastate calls. How-

ever, the Court found it “even more anomalous, in light of

FCC’s broad [statutory] mandate .. . that § 152(b) ousts

federal jurisdiction over all facilities that are also used for

intrastate telephone service.” Jd. at 700.”

It is true that Puerto Rico Telephone, like NCUC I, in-

volved a federal policy relating to physical interconnection

of CPE that was nonseverable from the interstate com-

munications system. By contrast, the instant appeal raises

no question of actual physical impossibility of complying

**Section 152(b) provides, “[N]othing in this chapter shall . . .

give the Commission jurisdiction with respect to . . . charges, classi-

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

nection with intrastate communication service. .. .”

A-18

with dual federal and state regulation; presumably, the

carriers could keep accounts in which assets would be sep-

arately depreciated for intrastate and interstate purposes.”

Nonetheless, physical impossibility is but one ground for

preemption; frustration of federal objectives provides a

rationale at least equally valid. Since inconsistent state

regulation poses an impediment to rapid development of

interstate facilities, preemption is justified in this case even

if “physical impossibility” is not at issue.

In deciding the case, we have been mindful of an observa-

tion made by Chief Justice Burger when a member of the

Court of Appeals for the District of Columbia in General

Telephone Company of California v. F.C.C., 413 F.2d 390

(D.Cir. 1969), cert. denied, 396 U.S. 888 (1969). Applying

the Act in the context of cable television broadcasting, Chief

Justice Burger stated that “(t]he Act must be construed in

light of the needs for comprehensive regulation and the

practical difficulties inhering in state by state regulation of

parts of an organic whole.” Jd. at 398. To be sure, practical

difficulties have come to abound in this age of technological

innovation since Chief Justice Burger rendered his opinion

almost fifteen years ago. In response to some of the diffi-

culties, the FCC’s decision to preempt inconsistent state

depreciation practices emerges as a reasonable one, de-

signed to foster the statutory goal of an efficient nationwide

telecommunications service. Our review satisfies us that the

FCC’s Memorandum Opinion and Order of January 6, 1983

should be AFFIRMED.

1'But see People of the State of California v. F.C.C., 567 F.2d

84, 86 (D.C. Cir. 1977), cert. denied, 434 U.S. 1010 (1978). In that

case, the Court observed that requiring the maintenance of “ ‘two

redundant facilities or [investment] in expensive additional equip-

ment’ would frustrate the Commission’s responsibility ‘to make

available, so far as possible . . . a rapid, efficient, Nationwide and

world-wide wire . . . communications service with adequate facili-

ties at reasonable charges,” (quoting 47 U.S.C. § 151). Likewise,

the expense associated with dual accounting could needlessly in-

flate the cost of services provided to consumers.

A-19

Widener, Circuit Judge, dissenting :

I respectfully dissent.

I am unable to agree that the FCC orders prescribing

depreciation practices for common carriers’ interstate op-

erations require or wayrant preemption of state regulation

prescribing different depreciation methods for carriers’ in-

trastate operations. Such preemption conflicts with the

FCC’s jurisdictional limitations and with this court’s read-

ing of the Supremacy Clause in North Carolina Utilities

Commission v. FCC (NCUC 1), 537 F.2d 787 (4th Cir.),

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

Utilities Commission v. FCC (NCUC II), 552 F.2d 1036,

cert. denied, 434 U.S. 874 (1977). The FCC properly recog-

nized these limitations in its order of April 27, 1982, in

which it specifically found that its prescription of new ac-

counting procedures “does not preclude state commissions

from using other accounting or depreciation procedures for

intrastate ratemaking proceedings.” In re Amendment of

Part 31, 89 F.C.C.2d 1094, 1095 (1982), rev’d, CC Docket

No. 79-105 (F.C.C. Jan. 6, 1983). Its order of January 6,

1983, finding that the States were preempted after all, not

only violates statutory strictures on the FCC but also legal

limitations on any agency making such a dramatic change

in policy.

The Communications Act explicitly deprives the FCC of

jurisdiction to regulate directly “charges, classifications,

practices” and “facilities,” among other things, for or in

connection with intrastate communication service. 47 U.S.C.

§§ 152(b), 221(b). Unlike other areas of the law in which

the term “intrastate” has come to include virtually nothing,

communication carrier accounting has until now retained a

clear division between its intrastate and interstate com-

ponents, and this because of the Communications Act itself.

Equipment and facilities used for intrastate communica-

tions are segregated on the carriers’ books from those used

A-20

for interstate communications, and the States and the FCC

have regulated accounting for such equipment and facilities

concurrently within their respective intrastate and inter-

state spheres. About 75% of depreciable assets are con-

sidered intrastate. The section of the Communications Act

giving the FCC authority to prescribe depreciation prac-

tices for carriers, 47 U.S.C. 4 220(b), therefore cannot be

read to “require preemption” of state-imposed depreciation

practices for the intrastate portion of carriers’ operations.

More directly put, the FCC does not have jurisdiction to

prescribe directly the depreciation practices to be followed

as to equipment and facilities allocated to intrastate com-

munications.’

The proper analysis of this case, then, is whether the

state regulation of depreciation practices as to carriers’

intrastate operations conflicts with the FCC regulation of

such practices for carriers’ interstate operations to a degree

that it requires preemption of the state regulation under

the Supremacy Clause of the Constitution. This court set

forth the rule in NCUC II that FCC regulation of facilities

and equipment must preempt contrary state regulation

where the efficiency or safety of the national communica-

tions network or “other important interests of national

communications policy” are at stake. NCUC II, 552 F.2d at

1046-47. NCUC I and NCUC II involved FCC deregulation

of equipment such as subscribers’ telephones used jointly

in interstate and intrastate communication. When the FCC

rescinded its interstate tariff preventing subscribers from

providing their own telephones on the ground that the

tariff violated the FCC’s statutory mandate to prevent un-

*As this court noted in NCUC I, “[T]he provisions of section

2(b) [47 U.S.C. § 152(b)] deprive the Commission of regulatory

power over local services, facilities and disputes that in their nature

and effect are separate from and do not substantially affect the

conduct or development of interstate communications.” NCUC I,

537 F.2d at 793.

A-21

reasonable and unjustifiably discriminatory rates, see

NCUC II, 552 F.2d at 1042; NCUC I, 537 F.2d at 792, some

States rejoined that they could prescribe rules forbidding

consumers to connect their own telephones unless the tele-

phones were used exclusively in interstate communication.

See NCUC II, 552 F.2d at 1043; NCUC I, 537 F.2d at 790.

This court found that the FCC action preempted the in-

consistent state regulation, since the same telephones were

used in interstate and intrastate communication and since

state regulation prohibiting such connection would negate

the federal tariff permitting such connection. NCUC II,

552 F.2d at 1043. “Something had to give.” Id.

This sort of conflict simply is not present here. As this

court noted in NCUC I, “[R]jate making typifies those activ-

ities of the telephone industry which lend themselves to

practical separation of the local from the interstate in such

a way that local regulation of one does not interfere with

national regulation of the other.” NCUC I, 537 F.2d at 793

n. 6.

The supposed conflict here is at least more attenuated, as

the majority admits; in my view it is for all practical pur-

poses nonexistent, and has been created by the FCC to

rationalize a base for its decision. The Commission claims

that if the States do not follow the FCC’s depreciation

methods they will frustrate the FCC’s policy of “encourag-

ing competition” where market conditions will support such

a policy. The FCC’s claim in essence is that its newly pre-

scribed depreciation methods, which give the carriers more

revenue in earlier years, more closely reflect economic

reality and thus will increase market efficiency, encourage

technological innovation, and otherwise promote competi-

tion. Even if this theorizing is correct as to the effect that

the FCC’s prescribed depreciation procedures for the car-

riers’ interstate operations will have on the highly com-

petitive interstate communications market, I cannot see

how nonconforming depreciation methods for the carriers’

A-22

intrastate operations can frustrate competition in the in-

terstate communications markets within which there is com-

petition. The only rationale I can find for the FCC’s posi-

tien is that the States, if not required to follow the FCC’s

| 4, will allow the carriers less revenue from the carriers’

noncompetitive intrastate operations which the carriers

could use to be aggressive in the small area in which they

compete with the competitive interstate carriers.’ Besides

being undesirable from the standpoint of the Communica-

tions Act, this fact strikes me as encouraging to the point

of requiring the use of intrastate monopoly power to finance

competition with the competitive interstate market, a prac-

tice as dangerous as it is unauthorized, for monopoly should

depend for its existence on serving all at reasonable rates

and should not be permitted to become a financing tool for

competitive ventures.

Moreover, and more fundamentally, if the FCC can

achieve preemption of state-prescribed depreciation meth-

ods by reciting the shibboleth of encouraging competition

with as little showing of federal-state conflict as it has made

here, it has effectively written 47 U.S.C. §§ 152(b) and 221

(b) out of the Communications Act. It seems to me that any

ratemaking changes that the carriers want can be adopted,

if they can persuade the FCC that they need the money, for

any FCC adoption may be imposed on the States by virtue

of the Supremacy Clause on the ground that the resultant

additional revenue will help the carriers in some theoretical

way to compete in some market that need not even be spec-

ified, as it was not here. The logical result of this decision

is to permit the FCC to abrogate completely the state regu-

lation of intrastate ratemaking for the carriers’ intrastate

operations in violation of the Communications Act.

*] have not even considered that most of the carriers are only

marginally engaged in long distance (interstate) communication,

that field being dominated by AT&T and its new found competitors.

A-23

Ironically, the FCC recognized established law and

practice in holding, before it reverse! itself only a little

more than eight months later, that

“(where state regulation is ceconcilable with federal

policies or rules, there is no occasion for us to over-

ride state agency actions in furtherance of legitimate

state regulatory objectives. Section 2(b) [47 U.S.C.

§ 152(b)] makes clear that Congress did not intend

this Commission to foreclose state ratemaking actions

unless those actions imperiled ‘important interests of

national communications policy. .. .’ NCUC IT, 552 F.2d

at 1047. We have found in this instance that federal

regulation will not be frustrated if carriers maintain

additional records for intrastate ratemaking pur-

poses.” In re Amendment of Part 31, 89 F.C.C.2d 1094,

1108 (1982), rev’d, CC Docket No. 79-105 (F.C.C. Jan.

6, 1983).”

The Supreme Court requires that “an agency changing

its course . . . supply a reasoned analysis,” Motor Vehicle

Manufacturers Association v. State Farm Mutual Auto-

mobile Insurance Co., 51 U.S.L.W. 4953, 4960 (1983), which

must include a “rational connection between the facts

found and the choice made.” 51 U.S.L.W. at 4956, citing

Burlington Truck Lines v. United States, 371 U.S. 156, 168

(1962). The FCC’s post-hoc reinterpretation of legislative

history, on which the majority here quite properly does

not depend, combined with the unsupported and unsup-

portable statements as to the effect on competition of

inconsistent state depreciation methods, do not provide

even a modicum of reasoned analysis supporting the

FCC’s decision to interfere in state ratemaking after

several decades of affirmatively espousing the opposite

conclusion.

The upshot of the case is that the FCC decided that

the carriers needed more revenue than the state regulatory

A-24

agencies were willing to provide, so it decided to impose

different depreciation rates on intrastate equipment for

the very purpose of, and thus effectively, raising the intra-

state rates of the subscribers* just as surely as if it had

done so directly. I can find neither justification nor

authority in the Communications Act for this action. The

final irony is the FCC justification of its action on the

ground that it will “. . . bring the benefits of competition

to the ratepayers of this country.” The “benefits of compe-

tition” are higher telephone bills for local ratepayers, and

I feel confident that, like the man being ridden out of

town on a rail, were it not for the honor of the thing, they

had rather walk.

*Remarkable as it may seem, these facts are either expressly or

implicitly acknowledged in para. 37 of the FCC order as well as

other parts.

I note in passing that, as late as NCUC I (1976) 97% of the tel-

ephone calls in the country were local. The proportion could not be

too different today.

A-25

United States Court of Appeals

for the Fourth Circuit

No. 83-1136

Virginia State Corporation Commission,

Petitioner,

versus

Federal Communications Commission

and United States of America,

Respondent.

[Filed Oct. 3, 1984]

ORDER

The petitions for rehearing and suggestions for rehear-

ing in bane have been submitted to the Court. Upon the

request for a poll of the Court on the suggestions for

rehearing in banc, Judge Russell, Judge Phillips, Judge

Murnaghan, and Judge Sprouse voted to deny the peti-

tions for rehearing in banc; Judge Widener voted in favor

of rehearing in banc; Chief Judge Winter, Judge Hall,

Judge Ervin and Judge Chapman are disqualified. Judge

Wilkinson abstains from voting.

IT IS ADJUDGED and ORDERED that the petitions

for rehearing and suggestions for rehearing in bane are

DENIED.

Entered at the direction of Judge Murnaghan, with the

concurrence of Judge Sprouse. Judge Widener dissents.

For the Court,

JOHN M. GREACEN

Clerk

A-26

Before the

Federal Communications Commission

Washington, D.C. 20554

FCC 82-155

31078

CC Docket 79-105

In the Matter of

Amendment of Part 31,

Uniform System of Accounts

for Class A and Class B

Telephone Companies, of the

Commission’s Rules and Regulations

with respect to accounting for

station connections, optional

payment plan revenues and

related capital costs, customer

provided equipment and sale of

terminal equipment.

Memorandum Opinion and Order

Adopted: April 1, 1982 Released: April 27, 1982

By the Commission: Commissioners Fogarty and Jones

dissenting and issuing a joint state-

ment.

1. We have before us a petition for clarification of our

First Report and Order in this proceeding (85 FCC 2d 818

1981)) filed by the National Association of Regulatory Util-

ity Commissioners (NARUC) and a petition for reconsid-

eration of that Report and Order filed by the People of the

State of California and the Public Utilities Commission of

the State of California (California). The First Report and

Order, commonly known as “Expensing of Station Connec-

tions,” adopted a number of changes in Part 31 of this Com-

mission’s Rules (Uniform System of Accounts for Class A

and Class B Telephone Companies). The principal changes

A-27

required that future costs of installing new inside wiring

and similar costs be included as an expense in Account 605

(Repair of Station Equipment). Such costs have previously

been capitalized in Account 232 (Station Connections). The

First Report and Order also required that the present net

investment in inside wiring and investment that will be

added during a transition period be amortized over a period

of 10 years. That requirement superseded existing depre-

ciation prescriptions for such investment.

2. Both petitions raise the question of whether, and to

what extent the adoption of the First Report and Order

limits the discretion of state commissions to follow differ-

ent accounting and depreciation procedures for purposes of

computing revenue requirements for intrastate telecom-

munications services. NARUC seeks a clarification of the

First Report and Order declaring that it does not restrict

the discretion of the state commissions and California seeks

reconsideration of our decision to the extent that it pur-

ports to restrict the discretion of state commissions. GTE

Service Corporation (GTE) and American Telephone and

Telegraph Company (AT&T) have filed oppositions to the

petitions. Those companies contend that the First Report

and Order does and should restrict the discretion of the

state commissions.

3. We have concluded that the First Report and Order

does not preclude state commissions from using other ac-

counting or depreciation procedures for intrastate rate-

making proceedings. Thus we are granting the NARUC

petition insofar as it seeks such a clarification. In view of

our conclusion that state commissions are not precluded

from using their own accounting and depreciation proce-

dures for intrastate ratemaking purpose it is unnecessary

to consider further the California petition and it will be

dismissed as moot.

A-28

I. Nature of the First Report and Order

4. In our Phase II Final Decision and Order in Docket

19129, 64 FCC 2d 1, 54-56 (1977), we concluded that it would

be desirable to place costs associated with station connec-

tions on the causative ratepayer. We accordingly ordered

AT&T to submit a plan for changing the accounting treat-

ment of station connection costs that would be consistent

with that objective. Jd. at 110. AT&T responded by filing

a petition for rulemaking (RM-3017) that propesed amend-

ments to Part 31 of our Rules. After reviewing that peti-

tion, we instituted this proceeding by inviting comments

upon a somewhat different proposal to modify accounting

for station connections."

o. After reviewing the comments, we concluded that any

changes in the accounting or other regulatory treatment of

station connections should not include drop or block lines

and protectors. We also concluded that changes in account-

ing procedures would not be sufficient in and of themselves

to place other station connection costs on the causative rate-

payer. This is the case because costs associated with the

provision of inside wiring necessarily must be apportioned

between the federal and state jurisdictions as long as inside

wiring is provided as a tariffed service subject to dual regu-

lation. Complete unbundling cannot be achieved by ex-

pensing rather than capitalizing such costs because both

the telephone operations investment and telephone opera-

tions expenses are apportioned for purposes of computing

an interstate and an intrastate telecommunication service

revenue requirement. Complete unbundling could be

achieved by determining that the provision of inside wiring

should be provided on a detariffed basis. We have, of

‘Notice of Proposed Rulemaking (CC Docket 79-105), 44 F.R.

48988 (August 14, 1979). We also invited comment upon some

other proposed accounting changes that are closely related to sta-

tion connections.

A-29

course, made such a determination with respect to customer

premises equipment and have adopted rules to separate

that business from the telephone operations that are subject

to tariff regulation. We concluded that it would be pre-

mature to adopt such a fundamental change in the regu-

latory status of inside wiring without conducting further

inquiry.

6. Nevertheless, we concluded that changes in account-

ing and depreciation procedures that would facilitate

implementation of any decision to change the regulatory

status of inside wiring would be desirable in the absence

of such a change. We accordingly issued a First Report and

Order adopting changes in accounting and depreciation

rules and a separate Further Notice of Inquiry (86 FCC

2d 885(1981)) inviting additional comments with respect

to possible changes in the regulatory status of inside wir-

ing. The First Report and Order does not vroduce any

change in regulatory status. The interstate portion of the

embedded net investment will be reflected iu the return

component of the interstate telecommunication service

revenue requirement and the interstate portion of the

annual amortization and the new installation expenses will

be reflected in the expense component of that revenue

requirement. Unless and until we determine that inside

wiring should not be provided as part of a tariffed service,

the new accounting rules will not have a greater or

different effect than any other accounting rules we have

prescribed for th purpose of computing the interstate

telecommunication service revenue requirement.

7. Insofar as the petitions seek a determination with

respect to this Commission’s purpose and intent, we con-

*See Primary Instrument Concept (PIC ), 68 FCC 2d 1157 (1978);

Second Computer Inquiry Final Decision, 77 FCC 2d 384 (1980),

recon., 84 FCC 2d 50 (1980); further recon., (FCC 81-481, released

October 30, 1981).

A-30

clude that the First Report and Order was not intended

to have any preemptive effect that does not arise by opera-

tion of law. The discussion of the effects of expensing

upon intrastate rates and revenue requirements in that

Order was based upon the assumption that all or most

state commissions would choose to follow those rules for

purposes of computing intrastate telecommunication ser-

vice rates. Our decision to permit carriers to accelerate

the transition to expensing with the approval of state

regulatory commissions was also based on the assumption

that few, if any, of the state commissions would choose

to prohibit expensing for intrastate ratemaking purposes.

Such assumptions appeared reasonable because most state

commissions have followed most accounting and deprecia-

tion procedures prescribed by this Commission in the past

and the considerations that led us to conclude that expens-

ing will benefit both carriers and consumers in the long run

are equally applicable to intrastate ratemaking. No policy

of this Commission would be furthered by requiring state

commissions to adhere tp the rules we have adopted for

purposes of computing the interstate revenue requirement.

If carriers adhere to our rules for purposes of computing

the interstate revenue requirement, our purpose will be

achieved.

8. The participants in this proceeding may not view

the preemption issue as a question of intent, but rather

as a matter of statutory interpretation. The petitioners

may be contending that this Commission could not require

state commissions to follow our accounting or depreciation

rules for intrastate ratemaking purposes and AT&T and

GTE apparently contend that Section 220 of the Commu-

nications Act precludes state commissions from departing

from any accounting or depreciation rule that has been

prescribed by this Commission. To the extent this is the

case, this controversy might more appropriately be charac-

terized as a request for a declaratory ruling with respect

A-31

to the meaning and effect of Section 220 that is not limited

to these particular rules. We do not propose to deny relief

because the petitions or oppositions may not be properly

labeled. We have concluded, for reasons explained in

Part II, that Section 220 does net preclude state commis-

sions from departing from accounting or depreciation rules

prescribed by this Commission for purposes of regulating

intrastate telecommunication service rates.

Il. Effect of Section 220

9. AT&T and GTE rely primarily upon Subsection

220(g) to support their contention that Section 220 pre-

cludes the states from departing from our accounting and

depreciation rules for purposes of computing intrastate

telecommunication service revenue requirements. Subsec-

tion (g) provides:

(g) After the Commission has prescribed the forms

and manner of keeping of accounts, records, and mem-

oranda to be kept by any person as herein provided,

it shall be unlawful for such person to keep any other

accounts, records, or memoranda than those so pre-

scribed or such as may be approved by the Commis-

sion or to keep the accounts in any other manner than

that prescribed or approved by the Commission. Notice

of the alterations by the Commission in the required

manner or form of keeping accounts shall be given

to such persons by the Commission at least six months

before the same are to take effect. (Emphasis added)

10. Subsection (g) does not literally impose any restric-

tion upon the power of the states to regulate intrastate

rates or the methods state commissions use to determine

whether a particular rate will be approved or prescribed.

_A state commission could theoretically adjust information

derived from a carrier’s system of accounts for purposes

of its own ratemaking without creating any conflict with

obligations that Subsection (g) imposes upon carriers.

A-32

Nevertheless, it would be extremely difficult as a practical

matter for a state commission to perform such ratemaking

computations without requiring a carrier to collect and

eompile some data in some form that might be described

as “accounts, records or memoranda.” Thus, AT&T and

GTE may be contending that Subsection (g) implicitly

precludes the use of other accounting methods or systems

for other regulatory purposes when this Commission has

prescribed methods that must be used for interstate rate-

making purposes.

11. Subsection (a)-(g) of Section 220 were in the main

a reprint of provisions contained in Section 20 of the

Interstate Commerce Act.’ Although the Interstate Com-

merce Act was designed for the regulation of railroads,

many of the provisions were extended to communications

common carriers and the Interstate Commerce Commission

was in the process of developing accounting and deprecia-

tion rules for telephone companies at the time the Commu-

nications Act was adopted. In the absence of statutory

changes or indications to the contrary, it is assumed that

whenever the legislature enacts or reenacts a provision

in an existing statute it has in mind the previous statute

relating to the same subject matter.‘ Unless the context

indicates otherwise, words and phrases in a provision that

were used in a prior act pertaining to the same subject

matter will be construed to be used in the same sense.*

At the time of adoption of Section 220( g) of the 1934 Communi-

cations Act, Section 20(5) of the Interstate Commerce Act provided

that “. . . it shall be unlawful for such carriers to keep any other

accounts, records, or memoranda than those prescribed by the Com-

mission . . .” 41 Stat. 493 (1920). See 49 U.S.C. § 20(5).

‘Courts have attached great weight to interpretations of Interstate

Commerce Act provisions in interpreting the Communications Act.

See e.g., American Telephone and Telegraph Company v. F.C.C.,

487 F.2d 864, 873-874 (2d Cir. 1973).

See Sutherland, Statutory Construction, Section 51.02 (C. Sands

ed. 1972) and cases cited therein.

A-33

12. The parallel Section 20 language was added to

the Interstate Commerce Act by the Hepburn Act of 1906,

34 Stat. 584. The legislative history of the Hepburn Act

does not shed any light upon Congressional reasons for

prohibiting railroads from maintaining accounts, records

on memoranda other than those prescribed by the ICC.

Congress may have wished to inhibit the railroads from

defrauding investors through fraudulent or sloppy account-

ing practices or to prevent the railroads from concealing

unlawful rebates. There is no indication in the legislative

history of the Hepburn Act that the 1906 Congress wished

to curb state regulation of railroads. That Act was appar-

ently motivated solely by a desire to make railroad regula-

tion more effective.

13. ICC accounting rules that were promulgated pur-

suant to Section 20 of the Interstate Commerce Act were

challenged in Int. Com. Commission v. Goodrich Trans. Co.,

224 U.S. 194 (1912) (hereinafter cited as Goodrich). The

railroad contended that the ICC had exceeded its authority

by prescribing the form of accounts for activities that

were not subject to ICC rate regulation. The Supre’se

Court sustained the ICC accounting rules on the theory

that the ICC needed information about such activities in

order to regulate the activities that were subject to ICC

rate regulation. The Court said (td. at 211):

If the Commission is to successfully perform its duties

in respect to reasonable rates, undue discriminations

and favoritism, it must be informed as to the business

of the carriers by a system of accounting which will

not permit the possible concealment of forbidden

practices in accounts which it is not permitted to see

and concerning which it can require no information.

It is a mistake to suppose that the requiring of infor-

mation concerning the business methods of such cor-

porations, as shown in their accounts, is a regulation

of business not within the jurisdiction of the Com-

A-34

mission, as seems to be argued for the complainants.

The object of requiring such accounts to be kept in

a uniform way and to be open to the inspection of the

Commission is not to enable it to regulate the affairs

of the corporations not within its jurisdiction, but

to be informed concerning the business methods of

the corporations subject to the act that it may properly

regulate such matters as are really within its juris-

diction.

14. Goodrich is of limited relevance because that case

did not raise any question with respect to the effect of

ICC accounting rules upon the regulation of activities that

were not subject to ICC rate regulation. Nevertheless, a

construction of Section 20 that would have limited the

states’ discretion to regulate intrastate rail rates would

have been inconsistent with the Court’s description of the

nature and function of the accounting rules.

15. The adoption of an interpretation of Section 20(5)

of the Interstate Commerce Act or Section 220(g) of the

Commerce Act that restricts state accounting practices for

purposes of intrastate ratemaking would also restrict other

forms of state or federal regulation that might require

accounting records or information that differ from data

generated by the rules prescribed for interstate rate-

making. Indeed such an interpretation would appear to

preclude carriers from using accelerated depreciation meth-

ods for purposes of computing their income taxes since

such methods differ from the depreciation methods that

have been prescribed for ratemaking purposes.

16. The question of the effect of ICC accounting

requirements upon railroad tax accounting did arise before

the Communications Act was enacted. The Interstate Com-

merce Commission had required a railroad to amortize

the value of certain abandoned property over a period of

15 years and to charge the amortized amounts as an oper-

A-35

ating expense for accounting purposes. The railroad con-

tended in Kansas City Southern Ry. Co. v. Commissioner

of Int. Rev., 52 F.2d 372 (8th Cir. 1931) that the Commis-

sioner was required to accept the amortized expenses as a

deduction from income because failure to do so would

violate Section 20 of the Interstate Commerce Act. The

Court summarily rejected that contention.

The Court said (Jd. at 378):

The Commission did not purport in requiring the loss

for abandonment to be charged to operating expenses

to provide any standards for tax authorities to follow.

This would be beyond its province. . . . Systems of ac-

counting for railroads under the control of the Com-

mission cannot interfere with the government’s system

of taxation. The Commission has no power to direct

how the Revenue Laws of the United States shall be

interpreted or by its orders provide standards to

govern the tax authorities.

17. AT&T apparently contends that providing stand-

ards for state regulators to follow was within the Inter-

state Commerce Commission’s province and that the ICC had

specifically rejected contentions that Section 20 of the Inter-

state Commerce Act did not give it that power. AT&T’s

reliance on Depreciation Charges of Telephone Com-

panies, 118 1.C.C. 295 (1926), is misplaced. In the Deprecta-

tion Charge proceeding, NARUC had argued that the words

“as soon as practicable” contained in section 20(5) gave the

ICC latitude to refrain from prescribing depreciation re-

quirements for the local telephone companies engaged only

to an insignificant extent in interstate commerce. In re-

jecting NARUC’s position, the ICC merely held that its

obligation under Section 20(5) to prescribe depreciation

rates for telephone companies was mandatory, not discre-

tionary.* In dicta, the Commission additionally appeared to

118 LC.C. at 332-33.

A-36

suggest that its authority under Section 20(5) extended to

all property “open for use in interstate commerce.” Peti-

tioners in CC Docket No. 79-105, however, do not appear to

dispute the authority of the FCC, under section 220 of the

Communications Act, to extend its accounting and deprecia-

tion prescriptions to cover assets used for primarily intra-

state purposes. The ICC’s 1926 telephone depreciation

charge proceeding is silent on the issue of whether federal

prescription of depreciation rates preempts the states from

prescribing additional and distinct depreciation rates and

classifications covering the same property for regulatory

purposes.’

18.- AT&T further cites Accounting Rules For Tele-

phone Companies, 203 ICC 13 (1934), in support of its con-

tention that state commissions lack jurisdiction over tele-

phone company accounts insofar as intrastate service is

concerned. Here, again, we disagree with AT&T’s reading

of this opinion. In Accounting Rules For Telephone Com-

panies (an advisory opinion for the benefit of the newly

created Federal Communications Commission) the ICC

concluded, over the objections of the states, only that the

federally-prescribed system of accounts should be uniform

in its treatment of telephone companies operating among

the several states.* Indeed, far from preempting the states

from independently prescribing separate additional ac-

counts, the ICC expressly recognized that the states might

have additional accounting needs and sought to assist the

states in this respect by permitting state-prescribed sub-

accounts within the federally-required books of account.

The ICC stated:

"Indeed, the Supreme Court has placed this same construction on

the ICC’s order in the Depreciation Charge proceeding. Smith v.

Illinois Bell Tel. Co., 282 U.S. 133, 159 (1930).

"See also, Kansas City So. Ry. v. United States, 231 U.S. 423

(1931); and Int. Com. Comm. v. Goodrich Trans. Co., supra.

ee ee

A-37

In the measures adopted with respect to the uniform

ey@lem, we are acting in pursuance of the direction of

Congress, Uniformity is the desired and important

object. The nature of the undertaking necessarily pre-

cludes the incorporation of special provisions covering

the requirements of the several State commissions.

We have, however, recognized the needs of the sev-

eral State commissions in the intrastate regulation

which is their duty and have, endeavored to help them

in the securing of all necessary information by leaving

it open to them to require subdivision of the accounts

prescribed.

Since the ICC may not delegate any of its authority under

the Interstate Commerce Act to the individual states,’ ICC

acceptance of these state-prescribed sub-accounts may be

construed as recognition of the power of the states to re-

quire accounts for this own regulatory purposes indepen-

dent of the scope of the Commission’s authority to pre-

scribe accounts for federal purposes.”

19. That Commission’s conclusion that states may sup-

plement a uniform system would not preclude a conclusion

that Section 20 of the Interstate Commerce Act or Section

220 of the Communications Act forecloses states from de-

parting from a federally prescribed accounting system by

*See, 49 U.S.C.A. Section 17(2); and Davis, Administrative Law

Treatise, Ch. 3 (1978).

Significantly, the FCC also has permitted state-prescribed sub-

accounts in the USOA books, 47 C.F.R. Section 31.01-2(f) provides

the following:

Nothing contained in the part shall prohibit or excuse any car-

rier or receiver or operating trustee of any carrier from subdi-

viding the accounts hereby prescribed in the manner ordered

by any State commission having jurisdiction or to the extent

necessary to secure the information required in the prescribed

reports to such conimission. (Emphasis added. )

A-38

adopting accounting methods that are inconsistent with the

federal system. That ICC opinion does contain language

that indicates that the ICC believed such departures from

uniformity would be undesirable, but the ICC did not con-

clude that such departures are precluded by statute.

20. Supreme Court decisions relating to Section 20 of

the Interstate Commerce Act never squarely addressed the

question of the extent of the states’ power to prescribe ac-

counting and depreciation rules that supplement or deviate

from rules prescribed by the ICC. A telephone company did

challenge certain state-prescribed depreciation require-

ments in N.W. Bell Tel. Co. v. Ry. Comm’n, 297 U.S. 471

(1936). The Court concluded that Section 20 clearly did

not preclude a state commission from adopting and enfore-

ing depreciation rules prior tv the adoption of the ICC

depreciation rules. The Court expressly declined to deter-

mine what effect the adoption of ICC depreciation rules

would have upon the state commission’s powers.

21. Inasmuch as Section 20 had never been construed to

restrict state commissions from requiring carriers to keep

additional records for purposes of intrastate ratemaking

and court decisions in analogous contexts did not adopt an

expansive interpretation of that provision, the reenactment

of that language should rot be interpreted to restrict state

commissions from keeping such additional records in the

absence of clear evidence that the 1934 Congress intended

to produce that result. AT&T and GTE would infer such an

intent from that Congress failure to enact a proposed sub-

section 220(j) that would have provided:

Nothing in this section shall (1) limit the power of a

State commission to prescribe, for the purposes of the

exercise of its jurisdiction with respect to any carrier,

the percentage rate of depreciation to be charged to

any class of property of such carrier, or the composite

depreciation rate, for the purpose of determining

charges, accounts, records, or practices;

A-39

(2) relieve any carrier from keeping any accounts,

records, or memoranda which may be required to be

kept by any State commission in pursuance of author-

ity under State Law.”

22. This version of section 220(j) passed the House but

was eliminated from the Senate bill. The revised Senate

version of section 220(j) provided instead:

The Commission shall investigate and report to the

Congress whether in its opinion legislation is desir-

able (1) authorizing the Commission to except the

carriers of any particular class or classes in any State

from any of the requirements under this section in

cases where such carriers are subject to State com-

mission regulation with respect to matters to which

this section relates; and (2) permitting the State com-

missions, in pursuance of authority granted under

State Law, to prescribe their own percentage rates of

depreciation or systems of accounts, records, or mem-

oranda to be kept by carriers.”

23. The Conference Committee drafted a compromise

that retained the House version of subsection 220(h) and

substituted a new subsection 220(j) for both the House and

Senate versions. The Conference Committee version of

Section 220, which was enacted without further modifica-

tion, also included a subsection (i) that did not parallel

Interstate Commerce Act language. Subsections (h)-(j)

provided :

(h) The Commission may classify carrier subject

to this Act and prescribe different requirements under

this section for different classes of carriers, and may,

if it deems such action consistent with the public in-

“§. 2910, 73d Cong., 2d Sess. Section 220(j) (February 20, 1934);

H.R. 8301, 73d Cong., 2d Sess. Section 220(j) (February 27, 1934).

12§, 3285, 73d Cong., 2d Sess. Section 220(j) (March 8, 1934).

A-40

terest, except the carriers of any particular class or

classes in any state from any of the requirements under

this section in cases where such carriers are subject to

State commission regulation with respect to matters to

which this section relates. (Emphasis added)

(i) The Commission, before prescribing any require-

ments as to accounts, records, or memoranda, shall

notify each State commission having jurisdiction with

respect to any carrier involved, and shall give reason-

able opportunity to each such commission to present

its views and recommendations.

(j) The Commission shall investigate and report to

Congress as to the need for legislation to define further

or harmonize the powers of the Commission and of

State commissions with respect to matters to which

this section relates.

24. AT&T and GTE argue that statements by witnesses

at the committee hearings both in favor of and in opposi-

tion of the original version of Section 220(j) support the

position that Congress intended in dropping this provision

to preempt the states for all purposes. They contend that

statements by witnesses from both sides were premised on

the believe that absent a provision similar to original sec-

tion 220(j) the states would be bound by federal accounting

and depreciation prescriptions in their local regulation.

We disagree.

25. The record of the Congressional hearings indicates

little more than that the supporters of original section

220(j) believed that the provision was desirable to resolve a

previous unsettled point of law under the predecessor pro-

vision of the Interstate Commerce Act. This desire on the

part of the state commissions to have Congress explicitly

recugnize the authority of the states to prescribe accounts

and depreciation rates for local regulatory purposes is

A-41

reflected in the following statements of J.E. Benton,

NARUC’s general solicitor (emphasis added).

Section 220, which is the section giving the Commission

jurisdiction to prescribe accounts and reports, also

takes account of local conditions and safeguards the

powers of State commissions in the matters of depre-

ciation and of accounting regulations. The State com-

missions are very solicitous that the act shall be so

phrased that it cannot be construed as imposing any

depreciation regulation promulgated by the Federal

Commission upon the regulatory agencies of the States.

Ever since the power to fix depreciation rates was

given to the Interstate Commerce Commission in 1920,

the State commissions have been apprehensive that

when an order finally came to be fixed by a Federal

Commission it would be pointed to by the utilities as

depriving the State commissions thereafter of going

into the question of depreciation in rate cases...

[W]e do not ask for any particular form of words, but

there should go into the act a provision which makes

it clear that in the administration of their laws for the

regulation of rates, the State commissions shall have

the power in rate cases to determine what allowances

shall be made for depreciation in the rates which are

fixed.

[T]he State Commissions believe that it is not in the

public interest that the act shall contain a mandate

to the Federal commission to fix rates of depreciation

unless it shall be made entirely clear in the act that

such determination is for the use of the Federal com-

mission only and is not to affect the State commissions

in their regulatory work.

A-42

That section merely proposes to provide, in plain

terms, that the control of intrastate telephone business

as now exercised by the States, shall continue to be

exercised by them without interference by the Federal

Commission.”

96. Several witnesses opposed original section 220(j)

on the various grounds that it would create the possibility

of unreasonably burdening the carriers with the cost of

multiple sets of books,“ that it would destroy the uniform

system of accounts” and that it would create conflicts in the

exercise of federal and state jurisdiction.”* Only one oppos-

ing witness, however, specifically expressed the view that

the then-current law prohibited the states from prescribing

accounts and depreciation rates for their own purposes, and

this statement was tentative.”

‘8Hearings on H.R. 8301, Before the Committee on Interstate and

Foreign Commerce, U.S. House of Representatives, 73d Cong., 2d

Sess. (April 10, 1934), pp. 136-44 (Emphasis added.); see also,

Hearings on S. 2910 Before the Committee on Interstate Commerce,

United States Senate, 73 Cong., 2d Sess., (March 9-10, 13-15, 1934)

pp. 178-84.

“See, e.g., Hearings on S. 2910, p. 96; and Hearings on H.R. 8301,

p. 191. (Statements of W.S. Gifford, President, AT&T. )

18See, e.g., Hearings on S. 2910, p. 208; and Hearings on H.R.

8301, p. 96. (Letters of F. McManamy, Commissioner, ICC)

'8See, e.g., Hearings on H.R. 8301, p. 243 (Statement of F-.B.

MacKinnon, President, United States Independent Telephone Asso-

ciation. How this version of section 220(j) would undermine the

uniformity of the federal accounting system or result in conflict

between federal and state authorities was not explained.

MR. GIFFORD. [Section 220(j)] throws the whole uniform

accounting of the telephone industry out of line too, as I see it. It

would make it necessary to keep two sets of accounts, one for the

Federal Commission and one for the State commission, because

each State may provide for a different system of accounting. The

States will require one system of accounting, and we will also have

A-43

27. Even if all the witnesses who testified concerning

original section 220(j) had consistently and clearly ex-

pressed the view that the states lacked authority to pre-

scribe additional accounts and depreciation rates absent

this provision, we could accord little weight to the state-

ments given the silence contained in the Congressional

reports. In striking the compromise which became the

law, Congress was completely silent as to its intent in elim-

inating the House version of Section 220/( j).

28. H. Rep. No. 1918 describes the Conference provi-

sions as follows (p. 47):

to keep accounts for the Federal system of accounting. I do not

think it is workable.

MR. MAPES. Do the States now require you to keep accounts of

any kind?

MR. GIFFORD. No. The present law, the interstate commerce

law, calls for accounts and that controls, as against the State laws.

MR. MAPES. Exclusively.

MR. GIFFORD. Exclusively, and has since 1913, I think, when

the act was passed. I think the matter ought to be given very seri-

ous consideration before we go into that.

Hearings on H.R. 8301, pp. 191-92. (Emphasis added).

**Generally, statements made by interested parties as to the nature

and effect of a bill are accorded to little or no weight if not incor-

porated into a committee report. These statements are very weak

evidence that the legislature adopted the assumed interpretation, in

view of the possibility that the committee believed the changes

were unnecessary because the assumed interpretation was erro-

neous. See, Sutherland Statutory Construction, Section 48.10, and

cases cited therein.

Similarly, contrary to the contention of AT&T, the mere exis-

tence of provisions in the Natural Gas Act, 15 U.S.C.A. Section

717(g) and the Federal Power Act, 16 U.S.C.A. Section 825(a)

specifically reserving to the states the right to prescribe addi-

tional accounting regulations does little to assist its cause in this

case. See, e.g., Keifer & Keifer v. Reconstruction Finance Corp..

306 U.S. 381 (1939).

A-44

Section 220(j) of the Senate bill (accounts and depre-

ciation charges) authorizes the Commission to investi-

gate and report to Congress upon the desirability of

legislation authorizing the Commission to except the

earriers of any particular class or classes in any State

from the requirements of the section and permitting

State commissions to prescribe their own percentage

rates of depreciation and systems of accounts for

earriers. The House amendment (sec. 220(h)) specifi-

cally authorizes the Commission to except carriers

of any particular class or classes in any State and

provides (in sec. 220(j)) that the section shall not limit

the power of the State commissions to prescribe per-

centage rates of depreciation or to require the keeping

of accounts.

29. At most this legislative history indicates that the

1934 Congress was not sure whether reenactment of the

Interstate Commerce Act language would or would not

preempt state accounting and depreciation rules and did

not choose to resolve the question at that time. One might

infer that Congress believed Subsection (g) did not pre-

empt inconsistent state commission accounting and depre-

ciation practices. If Subsection (g) produced that effect,

any further legislation to “harmonize” the powers of the

regulatory commissions might be superfluous.

30. The carriers’ contention that Subsection (i) demon-

strates that the 1934 Congress believed it had preempted

State commission accounting and depreciation rules is not

persuasive. Congress undoubtedly correctly anticipated

that most State commissions would not choose to create a

complete system of accounts and would be vitally inter-

ested in any rules developed by this Commission. The adop-

tion of special notice and consultation requirements does

not demonstrate that Congress assumed all states would

be required to adhere to all federal accounting or depreci-

ation rules.

A-45

31. Subsections (h)-(j) indicate that the 1934 Congress

wished to achieve as much uniformity as possible without

coercing any state commission to use ratemaking methods

it found unacceptable. This Commission has proceeded in

a manner that is consistent with that purpose for nearly

four decades. We have always given special consideration

to the needs and views of state commissions in developing

accounting and depreciation rules and most State commis-

sions have chosen to follow most accounting and deprecia-

tion rules prescribed by this Commission. Departures have

nonetheless occurred from time to time.’® This Commis-

sion has never attempted to prevent any State commission

from departing from our accounting and depreciation rules.

Indeed we have expressly recognized that State commis-

sions have a right to do so.

For example, our Order on Reconsideration (FCC 79-678, re-

leased November 6, 1979) with respect to our Docket 21230 deci-

sion adopting revised accounting rules for plant under construction

noted that many states have adopted different accounting proce-

dures for plant under construction. We expressly acknowledged in

paragraph 9 of that order that our decision would not inhibit the

desecration of the state commissioners. We said:

As our Final Order in Docket 21230 makes clear, we have in no

way attempted to influence, or interfere with, the rate making

prerogatives of the New York PSC or any other state commis-

sion. The states remain free to establish intrastate rates on

whatever lawful basis they choose. The fact that separate ac-

counting information will have to be retained to accomplish

this and the fact that the gathering and retention of this infor-

mation may involve additional cost does not, in our view, in-

volve any significant interference with state control over intra-

state rates. ;

States have also departed from accounting practices we have pre-

scribed in other situations. Florida requires full nomalization of

taxes, this Commission does not. Many states have authorized or

required a deferral of expenses when we do not.

A-46

32. NARUC correctly notes that this Commission pre-

viously has recognized that states are not obligated to

follow F.C.C. prescribed accounts in intrastate ratemaking

proceedings. Thus, Jn the Matter of Amendment of Part 31,

Uniform Systems of Accounts for Class A and Class B

Telephone Companies. 68 F.C.C. 2d 902, 906-07 (1978),

we stated:

It should be pointed out that we are not in any

way attempting to influence the intrastate ratemaking

decisions the several state commissions may make in

this area. Of course, they are free to adopt the same

ratemaking treatment for plant under construction

and interest during construction as we adopted in

Docket 19129, or they may prefer to follow a different

treatment. We are familiar with at least one state

that by statute must follow a different treatment.

We do not believe, nor is it intended, that the

accounting changes adopted in this proceeding im-

pinge upon the ratemaking prerogatives of any state

commission. Further, as everyone is aware, different

treatment is already given to a number of items for

intrastate vs. interstate ratemaking as well as among

the several state commissions for intrastate rate-

making.

See also, Notice of Proposed Rulemaking, in CC Docket

No. 79-105, at para. 7; and 47 C.F.R. Section 31.01-2(f).

33. Telephone companies have rarely challenged past

state commission departures from accounting or deprecia-

tion rules prescribed by this Commission. Such challenges

have not been successful. Pacific Telephone did challenge

a California Public Utility Commission rate order on the

grounds that it was invalid because it was based upon

depreciation methods that departed from methods pre-

scribed by this Commission. The California Supreme Court

A-47

rejected that contention in Pacific Tel. and Tel. Co. v.

California, 401 P.2d 353, 372-73 (1965).?°

34. Thus, AT&T and GTE are asking us to repudiate

nearly forty years of administrative practice and appli-

cable state court precedents by adopting an interpretation

of Section 220 that would require an unwilling state

commission to follow all accounting and depreciation

methods prescribed by this Commission. A very compelling

showing would be required to persuade us to follow such

a course.

35. GTE appears to argue that the existence of such

state accounting and depreciation departures would make

impossible a federal scheme of accounting and deprecia-

tion prescriptions. Past departures have not produced such

an effect. If carriers maintain the records we require for

purposes of interstate ratemaking, federal regulation will

not be frustrated if carriers maintain additional records

for other purposes.

36. Unlike GTE, AT&T appears to concede this point.

AT&T argues, however, that the sanctioning of state

accounting and depreciation departures from the prescrip-

tions contained in the First Report and Order would permit

the states to burden the carriers with the costs of main-

taining multiple sets of records. We, of course, are not

free to preempt the states on the theory that they other-

wise may impose administrative costs on the carriers in

the course of engaging in intrastate ratemaking.

37. Our analysis of Section 220 is supported elso by

Section 2(b) of the Act, 47 U.S.C. §152(b), which pro-

vides in pertinent part that “nothing in this Act shall be

*°The Florida Public Service Commission concluded that it is not

required to use depreciation methods prescribed by this Commis-

sion. Southern Bell Telephone and Telegraph Co., 66 PUR 3d 1,

57-58 (1966).

A-48

construed to apply or to give the Commission jurisdiction

with respect to (1) charges . . . for or in connection with

intrastate communication service by wire or radio of any

carrier . . .” Section 2(b) does not prohibit preemption

of state regulatory actions that might interfere with or

tend to frustrate policies or rules we have adopted to

carry out statutory objectives with respect to interstate

and foreign communications. North Carolina Utilities

Commission v. FCC, 552 F.2d 1036 (4th Cir. 1977), cert.

denied 434 U.S. 874 (1977) [hereinafter cited as NCUC

II\; North Carolina Utilities Commission v. FCC, 537

F.2d 787 (4th Cir. 1976), cert. denied 429 U.S. 1027 (1976) ;

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

1977); People of California v. FCC, 185 U.S. App. D.C.

217, 567 F.2d 282 (1966), cert. denied 325 U.S. 837 (1966).

But where state regulation is reconcilable with federal

policies or rules, there is no occasion for us to override

state agency actions in furtherance of legitimate state

regulatory objectives. Section 2(b) makes clear that Con-

gress did not intend this Commission to foreclose state

ratemaking actions unless those actions imperiled “im-

portant interests of national communications policy. . . .”

NCUC II, 552 F.2d at 1047. We have found in this instance

that federal regulation will not be frustrated if carriers

maintain additional records for intrastate ratemaking

purposes.

Ordering Clauses

38. Accordingly, IT IS HEREBY ORDERED THAT

the petition for clarification of the National Association of

Regulatory Utility Commissioners, filed Apri! 30, 1981, IS

GRANTED to the extent reflected herein.

39. IT IS FURTHER ORDERED THAT the petition

for reconsideration of the People of the State of California

and the Public Utilities Commission of the State of Cali-

fornia, filed April 30, 1981, IS DISMISSED as moot.

A-49

40. IT IS FURTHER ORDERED THAT the Secre-

tary of the Federal Communications Commission shall

cause this Memorandum Opinion and Order to be published

in the Federal Register and in the Federal Communications

Reports.

41. IT IS FURTHER ORDERED THAT the Secre-

tary shall cause to be served on each party of record in

CC Docket No. 79-105 and each state commission having

jurisdiction over intrastate communication service a copy

of this Memorandum Opinion and Order.

FEDERAL COMMUNICATIONS COMMISSION*

/s/ William J. Tricarico

Secretary

*See attached joint dissenting statement of Commissioners

Joseph R. Fogarty and Anne P. Jones.

A-50

April 1, 1982

Joint Dissenting Statement

Commissioners Joseph R. Fogarty and Anne P. Jones

In Re: Expensing of Station Connections (CC Docket No.

79-105)—Petitions for Clarification and Reconsid-

eration.

We dissent from today’s majority decision that the First

Report and Order in this proceeding does not preempt

State regulators from imposing accounting and deprecia-

tion rules for inside wiring which are inconsistent with

those prescribed by this Commission.

In its First Report and Order the Commission required

that account 232 of the Uniform System of Accounts be

separated into two subclasses, “Station Connections—in-

side wiring” and “Station Connections—Other”. We fur-

ther required that the existing investment in Station Con-

nections—inside wiring be amortized over a period of ten

years, which represents an accelerated depreciation in con-

trast to past practices, and that all new investment for in-

side wiring be expensed rather than capitalized.

Because we wished to ameliorate the effect such an ex-

pensing plan could have upon local rates, the Commission

required that expensing take place over a four-year period.

In discussing this phase-in approach, the Commission stated

that “. . . we want to allow all carriers and state regulatory

agencies as much flexibility as possible in shifting from

capitalization to expensing. Hence, for those carriers who

feel that a flash-cut approach will not be too disruptive to

their operations and who gain state regulatory approval,

we will allow them to use a flash-cut approach”.’ It is clear

from this discussion that the Commission intended its

decision to be binding upon the States. Since only approxi-

‘First Report and Order, 85 FCC 2d 818, 829 (Emphasis added).

A-51

mately one-quarter of inside wiring costs are apportioned

to the interstate jurisdiction, a phase-in which embraced

only these costs would result in about 614, 1214, 1834 and

25 percent of all new inside wiring costs being expensed

instead of capitalized in each of the four years respectively.

Surely this is not what the Commission intended. It would

be nonsensical to order such a time-and resource-consuming

process to achieve only such a limited effect.

We also intended the decision in our First Report and

Order to be binding upon the States for the sound policy

reason that telephone operating companies need to obtain

a more rapid recovery of capital in order to modernize

their plant to meet consumer needs and increased competi-

tion in the future.

Further, the FCC may ultimately order the complete

detariffing and deregulation of inside wiring. The Commis-

sion anticipated this possibility in the First Report and

Order when we said:

“. .. we believe that the final answer rests not with

accounting changes but rather with the ultimate

deregulation of this activity. This is nothing more than

a logical extension of the recommendations made by

parties, our decision in Docket 20828 and our overall

regulatory scheme to introduce competition whenever

technological and economic circumstances are condu-

cive to such a change.”

As the Commission has seen in the deregulation of

customer premises equipment, asset valuation is a very

difficult problem. If inside wiring is similarly deregulated,

asset valuation will be made more difficult if this account

is not capped. Furthermore, if there are two sets of

accounting books required (one Federal and one State),

any eventual detariffing of the inside wiring account will

*Ibid, 827.

A-52

be made all the more difficult, since inside wiring must be

deregulated in toto or not deregulated at all (unless the

Commission contemplates deregulating only the first one-

fourth of the length of wire between the protector block

and the wall outlet).

Disregarding these important considerations of Federal

policy, the majority has decided that the Commission did

not intend to preempt inconsistent State accounting and

ratemaking practices and procedures with respect to the

Station Connections-inside wiring account. At the same

time, the majority allows that the Federal Communications

Act—and, in particular, Section 2(b) thereof—“does not

prohibit preemption of state regulatory actions that might

interfere with or tend to frustrate policies or rules we have

adopted to carry out statutory objectives with respect to

interstate and foreign communications.” The continued

capitalization of inside wiring by State regulatory authori-

ties will in fact imperil and frustrate “important interests

of national communications policy . . .*—enhanced capital

recovery and the effective implementation of any ultimate

FCC decision on ordering the detariffing and deregulation

of inside wiring’.

We would not—and the majority should not—“defer to

the States” on critical capital recovery issues affecting the

continued viability and competitiveness of our Nation’s

telephone industry in providing increasing essential inter-

state, as well as intrastate, facilities and services. This

*MO&O, para. 37 (Citations omitted).

‘North Carolina Utilities Commission v. FCC, 552 F.2d 1036,

1047 (4th Cir. 1977), cert. denied 434 U.S. 874 (1977).

‘Several State commissious have already acted to deny the appli-

cation of FCC policy on inside wiring and related depreciation at

the State level, and others appear to be in the process of following

suit. Alabama (Sept. 4, 1981), Nebraska (Sept. 1, 1981), South

Dakota (Feb. 2, 1982), and Missouri (Nov. 27, 1981) have dis-

approved carrier filings seeking the expensing of inside wiring.

A-53

Commission has thrust the telephone industry into the

brave new world of telecommunications competition and

in doing so has overidden the strenuous and in many cases

intransigent objections of many State commissions. It is

therefore oddly inappropriate for this same Commission

now to be so reticent about preempting the State jurisdic-

tions from denying the industry the capital recovery

necessary for its full and fair participation in this new

competitive world. Here, the Commission curiously appears

to have lost the courage of its pro-competitive convictions.

Because the majority’s decision is inconsistent with the

clear preemptive thrust and intent of the Commission’s

First Report and Order in this proceeding and, further,

fails to recognize and support the integrity of our pro-

competitive policies, we dissent.

A-54

Before the

Federal Communications Commission

Washington, D.C. 20554

CC Docket No. 79-105

In the Matter of

Amendment of Part 31, Uniform System of Accounts

for Class A and Class B Telephone Companies,

of the Commission’s Rules and Regulations

with respect to accounting for station connections,

optional payment plan revenues and related capital costs,

customer provided equipment and sale

of terminal equipment.

ERRATUM

Released: April 30, 1982

The Memorandum Opinion and Order, FCC 82-155,

released April 27, 1982, in the above-entitled matter is

corrected to include Commissioner Rivera dissenting after

the phrase “By the Commission”.

FEDERAL COMMUNICA-

TIONS COMMISSION

/s/ William J. Tricarico

William J. Tricarico

Secretary

A-55

Before the

Federal Communications Commission

Washington, D.C. 20554

CC Docket No. 79-105

RM-3017

In the Matter of

Amendment of Part 31, Uniform System of Accounts

for Class A and Class B Telephone Companies,

of the Commission’s Rules and Regulations

with respect to accounting for station connections, optional

payment plan revenues and customer provided equipment

and sale of terminal equipment.

Petition for Declaratory Ruling on Question

of Federal Preemption Involving Order of the Public

Utilities Commission of Ohio in Conflict

with (i) FCC Prescriptions Under Section 220 of the

Communications Act and (ii) Established FCC Policies

MEMORANDUM OPINION AND ORDER

Adopted: December 22, 1982 Released : January 6, 1983

By the Commission: Commissioner Fogarty issuing a

separate statement.

1. The Commission has before it a Petition for Recon-

sideration filed on June 7, 1982, by the American Telephone

and Telegraph Company, on behalf of itself and the asso-

ciated Bell System Operating Companies (AT&T). AT&T

seeks reconsideration of the Commission’s decision in

Amendment of Part 31, 89 FCC 2d 1094 (1982) (herein-

after cited as Preemption Order), in which the Commission

determined that Sections 220(a) and 220(b) of the Commu-

nications Act of 1934, as amended, 47 U.S.C. 220(a) and

A-56

220(b), did not preempt state commissions from applying

different accounting and depreciation procedures for pur-

poses of intrastate ratemaking proceedings’ The Preemp-

tion Order was a reconsideration of Amendment of Part 31,

85 FCC 2d 818 (1981) (hereinafter cited as Expensing

Order).

2. The Commission also has before it a Petition for De-

claratory Ruling filed on June 7, 1982, by General Tele-

phone Company of Ohio (GTE of Ohio). This petition re-

quests that the Commission preempt an order of the Public

Utilities Commission of Ohio (Ohio) that denied GTE of

Ohio the same depreciation rates for intrastate purposes

as had been prescribed by this Commission. GTE of Ohio

contends that Section 220(b) established the rate prescribed

by the Commission as the only depreciation rate the com-

pany could utilize.

3. The Commission established a joint reply period for

the two petitions, utilizing the pleading cycle for comments

in response to the Petition for Reconsideration, and allowed

parties to cross-reference their pleadings where appropri-

ate. In addition to pleadings filed by the petitioners and the

GTE parties, comments or reply comments were filed by

the Arkansas Public Service Commission (Arkansas), Ohio,

the People of the State of California and the Public Utili-

ties Commission of the State of California (California), the

Virginia State Corporation Commission (Virginia), the Na-

tional Association of Regulatory Utility Commissioners

1On June 8, 1982, GTE Service Corporation, on behalf of itself,

United Telephone System, Inc., and Continental Telecom, Inc.

(hereinafter referred to as GTE), filed a Petition for Clarification

of the Commission’s Preemption Order. This petition was dismissed

as untimely. Amendment of Part 31, Mimeo No. 4766 (released

June 24, 1982). However, the Commission stated that it would

consider the substance of the petition in connection with AT&T's

petition.

A-57

(NARUC), the United States Independent Telephone As-

sociation (USITA), the Office of Consumers’ Counsel, State

of Ohio (Consumers’ Counsel), the United States Telephone

System Inc. and the Idaho Public Utilities Commission

(Idaho). A summary of the comments is contained in Ap-

pendix A. Below we consider the issues raised on reconsid-

eration, after which we shall consider the question pre-

sented by GTE of Ohio’s Petition for Declaratory Ruling.

I. Background

4. In Docket No. 19129, 64 FCC 2d 1, 54-56 (1977), we

concluded that it would be desirable to have the causative

rate payer bear the costs associated with station connec-

tions. We directed AT&T to file a plan for accomplishing

this objective. Following AT&T’s submission we initiated

this proceeding, albeit with a somewhat different approach

for modifying the accounting for station connections than

proposed by AT&T.

5. After reviewing the comments, we concluded that the

drop, block and protector portion of station connections

should not be included in any accounting or regulatory re-

visions. We also concluded that our objective of placing the

costs of station connections on the cost causative customer

could not be achieved by means of an accounting change

alone. This is so because costs associated with the provi-

sion of inside wiring must be apportioned between the

federal and state jurisdictions as long as inside wiring is

provided as a tariffed service subject to dual jurisdiction.

Complete unbundling could be achieved by requiring inside

wiring to be provided on a detariffed basis, as was done

with customer premises equipment. Accordingly, we initi-

ated a further inquiry to explore the detariffing concept

further, Amendment of Part 31, 86 FCC 2d 885 (1981).

6. Nevertheless, we concluded that changes in account-

ing and depreciation procedures that would begin expens-

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the inside wiring portion of the station connection account

would be in the public interest, and would facilitate the de-

regulation of the provision of inside wiring if the Commis-

sion should later decide to take that approach. The princi-

pal changes required that future costs of installing inside

wiring and similar costs be included as an expense in Ac-

count 605, Repair of Station Equipment. Such costs were

previously capitalized in Account 232, Station Connections.

The expensing of these costs would be phased in over a four

year period unless a carrier obtained state commission ap-

proval to expense one hundred percent immediately. The

Expensing Order also required that the present net invest-

ment in inside wiring and the investment capitalized during

the phase-in period be amortized over a ten year period.

These expensing and amortization rules replaced the de-

preciation procedures that had previously applied to the

inside wiring portion of the station connections account.

7. On reconsideration, we concluded that the Expensing

Order was not intended to preempt state commissions from

utilizing other depreciation or accounting procedures for

intrastate ratemaking proceedings, unless such preemption

occurs as a matter of law. Our discussion was based in part

on an assumption that most or all of the state commissions

would follow our lead. We also indicated that Section 220

does not preclude state commissions from departing from

accounting and depreciation rules prescribed by this Com-

mission for purposes of regulating intrastate communica-

tions services. In reaching this conclusion, we reviewed

Section 20(5), the Interstate Commerce Act predecessor

of the accounting and depreciation provisions contained in

Section 220. We concluded that nothing in the history of

Section 20(5) provided any indication of whether that pro-

vision had been intended to preempt state commissions

from prescribing divergent depreciation rates when the In-

terstate Commerce Commission (ICC) had prescribed a

rate. We stated:

A-59

{iJnasmuch as Section 20 had never been construed to

restrict state commissions from requiring carriers to

keep additional records for purposes of intrastate

ratemaking and court decisions in analagous contexts

did not adopt an expansive interpretation of that pro-

vision, the reenactment of that language should not be

interpreted to restrict state commissions from keep-

ing such additional records in the absence of clear evi-

dence that the 1934 Congress intended to produce that

result.

Preemption Order, supra at 1102.

8. We also reviewed the legislative history of the Com-

munications Act and concluded that Congress had been un-

certain of the preemptive effect of reenacting the Interstate

Commerce Act language and that it apparently did not want

to resolve the question at that time. We concluded that Con-

gress had been attempting to obtain as much uniformity as

possible without coercing any state commission to use rate-

making methods which it might find unacceptable. We found

that we had proceeded in a manner consistent with this

purpose for nearly four decades, noting that we had rec-

ognized divergent practices by state commissions from

time-to-time. The language of Section 2(b)(1) was found to

support the interpretation that state commissions are not

precluded from applying different accounting and depre-

ciation procedures from this Commission. The Preemption

Order concluded by finding that nothing in the Act pre-

cluded us from preempting state commission actions that

might interfere with or tend to frustrate policies or rules

we have adopted to carry out statutory objectives with re-

spect to interstate or foreign communications, but we also

found that federal regulation would not be frustrated if

carriers maintain additional records for intrastate rate-

making purposes.

Il. Discussion

9. The question presented in the reconsideration peti-

tion is a clearly delineated controversy over whether Sec-

tion 220(b) preempts state depreciation prescriptions that

are inconsistent with the rates prescribed for classes of

property by this Commission, or, whether Section 2(b) (1)

or Section 221(b) reserve to the states the right to prescribe

their own depreciation rates for intrastate regulatory pur-

poses. Alternatively, it is argued that the Commission

should preempt inconsistent state depreciation rates pur-

suant to its authority to preempt state actions which would

frustrate or interfere with the accomplishment of federal

objectives. See North Carolina Utilities Commission v.

FCC, 537 F.2d 787 (4th Cir. 1976), cert. denied, 429 U.S.

1027 (1976) (hereinafter cited as NCUC I). The Preemp-

tion Order was the first time the Commission had squarely

addressed the preemptive effect of a prescribed deprecia-

tion rate, despite having prescribed rates for more than

thirty years. No federal court has addressed the question

of the preemptive effect of a Commission prescribed depre-

ciation rate.’

10. It is argued that the Commission erred in the earlier

decision by concentrating on Sections 220(a) and 220(g)

rather than properly analyzing Section 220(b), the provi-

sion dealing directly with depreciation. A careful review of

AT&T’s and GTE’s pleadings and a thorough reevaluation

*The United States Supreme Court has held that state commis-

sions may prescribe depreciation rates where the empowered fed-

eral commission has not prescribed rates. Northwestern Bell Tele-

phone Co. v. Nebraska State Railway Comm., 297 U.S. 471 (1936).

The Court specifically reserved judgment on the effect of prescribed

rates by the federal commission.

A-61

of the entire question of the Commission’s depreciation

jurisdiction leads to the conclusion that the evaluation in

the Preemption Order did not sufficiently consider the ef-

fect of Section 220(b). Accordingly, we shall undertake to

evaluate anew the scope of the Commission’s jurisdiction

under Section 220(b).

11. Before turning to the analysis of the statutory pro-

visions, it is necessary to understand the relationship be-

tween capitalizing and expensing a transaction or economic

event. When an event is capitalized, its cost is recorded on

the company’s books to be recovered over some future pe-

riod through depreciation charges to operating expense.

Depreciation as used here is an accounting convention for

allocatively spreading the original cost, less net salvage,

over the useful life of a capital asset. Thus, for there to be

depreciation there must be costs that are to be recovered

over more than one accounting period. However, when the

decision to expense is made, all costs are to be recovered at

one time. Thus, the decision to expense is a determination

that there is no category of asset for which depreciation

expense will be allowed. It is therefore clear that the deci-

sion to commence expensing the inside wiring portion of

station connections involves questions of depreciation

policy

12. The law is clear that federal regulation should not

be presumed to preempt state regulations without clear

evidence of either congressional design to preempt the field

or that state regulatory activities would obstruct the ac-

complishment and execution of the full purposes and ob-

jectives of Congress. Florida Lime and Avocado Growers,

Inc. v. Paul, 373 U.S. 132, 141 (1963), Hines v. Davidowitz,

312 U.S. 52, 67 (1941). Our review reveals that both crite-

A-62

ria are satisfied in this case. In reaching this conclusion we

analyzed the language of Section 220, the legislative history,

relevant court cases, and our regulatory objectives.

A. Statutory Language

13. The Commission’s express jurisdiction with respect

to depreciation is set forth in Section 220(b). That section

provides:

The Commission shall, as soon as practicable, prescribe

for such carriers the classes of property for which de-

preciation charges may be properly included under op-

erating expenses, and the percentages of depreciation

which shall be charged with respect to each of such

classes of property, classifying the carriers as it may

deem proper for this purpose. The Commission may,

when it deems necessary, modify the classes and per-

centages so prescribed. Such carriers shall not, after

the Commission has prescribed the classes of property

for which depreciation charges may be included, charge

to operating expenses any depreciation charges on

classes of property other than those prescribed by the

Commission, or, after the Commission has prescribed

percentages of depreciation, charge with respect to any

class of property a percentage of depreciation other

than that prescribed therefor by the Commission. No

such carrier shall in any case include in any form under

its operating or other expenses any depreciation or

other charge or expenditure included elsewhere as a

depreciation charge or otherwise under its operating

or other expenses.

14. The plain language of the statute is express and

unequivocal. Section 220(b) says the Commission “shall”

make depreciation prescriptions, and that carriers “shall

not” charge depreciation different than that prescribed

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by the Commission. That this preempts inconsistent state

action is further indicated in Section 220(h) which gives

the Commission discretion to “except” carriers from the

requirements of Section 220 “where such carriers are

subject to state commission regulation.”

15. The requirement of Section 220(i) that states be

given an opportunity to comment before the Commission

prescribes “any requirements as to accounts, records and

memoranda” is consistent with an interpretation that

states are preempted when the Commission has acted in

the depreciation area. By providing that states be given

notice, Congress ensured that state needs for accounts,

records and memoranda brought to the Commission’s

attention would be considered. Such a procedure assures

that the states’ needs and legitimate interests are met.

16. In setting the duties of the Commission and the

prohibitions on the carriers subject to the Act, Congress

spoke of depreciation in general terms without any attempt

to make distinctions between either “intrastate” or “inter-

state” property. This is significant because when Congress

wanted to make such distinctions in the Act it did so.

See, e.g., 47 U.S.C. 221(c) and (d), and 410(c). The fact

that Congress did not make such a distinction here indi-

cates that it intended no distinction.

17. Taken as a whole, the language of Section 220

appears clearly to preempt the states in connection with

depreciation expense determinations and the related ac-

counting. The language strongly implies that the states

may not depart from depreciation rules prescribed by

the FCC unless the Commission in its discretion allows

them to do so. Otherwise, the federal statute would govern

state depreciation practices in form only, allowing the

states to treat substantive depreciation matters as they

A-64

might choose. While that might be a plausible construction

of Section 220, after full analysis we do not believe that

Congress intended such a feeble gesture. There would be

little purpose to require the carriers to keep all their books

pursuant to an FCC prescription, and then allow the states

to require the carriers to follow inconsistent depreciation

practices. Instead, the language of the section and the

_comprehensive treatment given to this matter by the

Congress demonstrate that more was intended. Accord-

ingly, we find that the statutory language indicates that

FCC depreciation prescriptions are to be followed in

both the federal and state jurisdictions unless the FCC

provides otherwise. As demonstrated below, this construc-

tion is also consistent with the legislative history.

B. Legislative History

18. In the Preemption Order we found that the legisla-

tive history of Section 220 was inconclusive and at most

indicated that Congress was “not sure” about the pre-

emptive effect of the new legislation. 89 FCC 2d at 1106.

However, the reconsideration petition and comments sup-

_ porting it show that Congress believed that the language

ultimately adopted would preempt the states from pre-

scribing depreciation rates for subject carriers when the

Commission had prescribed rates.

19. In our Preemption Order, we observed that Sec-

tion 220 of the Communications Act had been adopted

from Section 20 of the Interstate Commerce Act, and our

review of the few ICC cases touching upon preemption

did not reveal the ICC to have possessed the kind of broad

preemptive power now urged by GTE and AT&T. How-

ever, after reviewing the pre-1934 cases again, we find

that, while not dispositive, they lean more toward GTE

and AT&T’s views than against them.

A-65

20. The closest the ICC came to delineating its position

on this matter came in Depreciation Charges of Telephone

Companies, 118 1.C.C. 295, 332 (1926), where it said:

It seems to be well established that where a local

telephone company undertakes to originate or deliver

toll messages, and most of them do so undertake,

practically all of its property is open for use in inter-

state commerce and at any time may be so used.

Under such circumstances, no doubt would seem to

exist as to the power of Congress to regulate the

accounting practices of such companies with respect

to their property, including the accounting for depre-

ciation.

In the Preemption Order we focused on the fact that the

ICC had not actually prescribed depreciation rates and

thus there was uncertainty regarding the ICC’s actual

authority. However, after reviewing that case again we

find that the better and more sensible interpretation is

that if the ICC had prescribed depreciation rates, the

state commissions would have been precluded from pre-

scribing rates that diverged from those it prescribed. We

cited Smith v. Illinois Bell Tel. Co., 282 U.S. 133, 159

(1930), in the Preemption Order as supporting our con-

clusion that the ICC decision did not preempt the states.

In that decision the Supreme Court held that absent ICC

action prescribing depreciation rates, Section 20(5) did

not preclude states from prescribing depreciation rates.

Since the ICC proceeding did not actually prescribe depre-

ciation rates, but only began a proceeding looking toward

the ultimate prescription of depreciation rates, there were

no depreciation rates prescribed that could have pre-

empted state-prescribed depreciation rates. Thus Smith

only stands for the proposition that until the ICC actually

prescribed rates, there was no basis for preempting the

A-66

states. It did not reach the question of whether Section

20(5) would preempt the states if the ICC prescribed

depreciation rates.*

91. At the hearings pertaining to the Communications

Act the then chairman of the ICC indicated his belief that

the ICC depreciation rulings would govern both federal

and state depreciation practices:

Paragraph (j) ... should be most carefully considered.

It unquestionably directly conflicts with, and destroys

the uniformity of systems of accounts and deprecia-

tion accounting required by the preceding provisions

of the section. That is not true under the present

law.*

22. Other witnesses who appeared at the hearings

repeated the same view. See statements of Mr. Gifford,”

Mr. Benton," and Dr. Irvin Stewart.’

‘Similarly, Interstate Commerce Commission v. Goodrich Trans-

portation Co., 224 U.S. 194 (1912) and Kansas City Southern Ry.

Co. v. LRS., 52 F. 2d 372 (8th Cir. 1931) do not appear to have

any pertinance to the issue at hand. As noted in 89 FCC 2d at

1099, Goodrich did not raise any question with respect to the effect

of ICC accounting rules upon activities not subject to ICC rate

regulation. The Kansas holding simply reconciles two federal

statutes, the Internal Revenue Code and the Interstate Commerce

Act. It did not purport to establish new law on state preemption.

‘Ltr. of F. McManamy, Hearings on S. 2910, p. 208.

‘Hearings on H.R. 8301, pp. 191-192 (See 89 FCC 2d at 1105, fn.

17). The Preemption Order had indicated that Mr. Gifford’s pre-

emption views were tentative. However, careful review of that

testimony reveals that Mr. Gifford’s uncertainty may have con-

cerned the date Section 20(5) was enacted, not preemption.

“Hearings on S. 2910, 73rd Cong., 2d Sess., p. 181 (1943).

"Hearings on H.R. 8301, 73rd Cong., 2d Sess., p. 17 (1934).

A-67

23. The Preemption Order relied heavily on the “silence

contained in the Congressional Reports,” 89 FCC 2d 1105,

in concluding that the legislative history did not support

a finding that Section 220 was intended to preempt state

commissions from prescribing their own depreciation rates

for intrastate purposes. However, a reexamination of the

legislative history in light of the comments on reconsidera-

tion indicates that the committee reports accompanying the

bills did contain language indicating that the committees

believed that the predecessor provision had pree:pted the

states. The House Report, in discussing the Section 220(j)

provision (which was not adopted) that would have

reserved jurisdiction over depreciation rates to the states

for purposes of intrastate ratemaking, stated that the

provision was “responsive to the requests of the State

commissions that the present law be changed so as to

permit those bodies to exercise, for State purposes, certain

jurisdiction over . . . depreciation accounting.”

24. In remarks on the House floor, Representative

Rayburn, Chairman, Hou Committee on Interstate and

Foreign Commerce explained Section 220 of the proposed

bill as follows:

[paragraphs (a) to (g), relating to accounts records,

memoranda, and depreciation, is based upon sections

*H.R. Rep. No. 1850, 73rd Cong., 2d Sess. 7 (1934) (emphasis

added). The section (j) proposed by the House would have pro-

vided: “Nothing in this section shall (1) limit the power of a State

commission to prescribe, for the purposes of the exercise of its jur-

isdiction with respect to any carrier the percentage rate of deprecia-

tion to be charged to any class of property of such carrier, or the

composite depreciation rate, for the purpose of determining charges,

accounts, records, or practices; (2) relieve any carrier from keeping

any accounts, records, or memoranda which may be required to be

kept by any State commission in pursuance of authority granted

under State Law.” H.R. 8301, 73rd Cong., 2d Sess. Section 220( i)

(February 27, 1934).

A-68

20(5) to (8) of the Interstate Commerce Act with

changes necessary to permit State commissions to

prescribe the systems of accounts for the intrastate

operation of carriers. Paragraphs (h) to (j) are new

. .. paragraph (j) removes any limitation upon the

power of a State commission to prescribe, for the

purposes of the exercise of its jurisdiction, rates of

depreciation. The last three paragraphs named were

placed in the bill at the request of the State commis-

sions which feel that their task of regulating intrastate

communications will be greatly facilitated by the

adoption of these paragraphs.°

25. The Senate version of Subsection (j) took a totally

different approach than the House version. It called “for

investigation and report to Congress instead of immedi-

ately turning over these matters to the State.” S. Rep.

No. 781, 73rd Cong., 2d Sess. 5 (1934).*° The version of

Section 220(j) finally enacted was the result of agreement

in the conference committee. The conferees agreed to adopt

the House provisions as to Sections 220(h) and (i), but

decided against the House Section 220(j), proposap to

remove any limitation upon the power of states to prescribe

rates of depreciation. Instead, Section 220(j) was modified

°78 Cong. Rec. 10314 (1934) (emphasis added).

The Senate version of Section 220(j) provided: “The Commis-

sion shall investigate and report to the Congress whether in its opin-

ion legislation is desirable (1) authorizing the Commission to ex-

cept the carriers of any particular class or classes in any State from

any of the requirements under this section in cases where such car-

riers are subject to State commission regulation with respect to

matters to which this section relates; and (2) permitting the State

commissions, in pursuance of avthority granted under State Law, to

prescribe their own percentages rates of depreciation or systems of

accounts records, or memoranda to be kept by carriers.” S. 3285,

73rd Cong., 2d Sess. Section 220(j) (March 23, 1934).

A-69

along the lines of the Senate proposal to require the Com-

mission to “investigate and report to Congress as to the

need for legislation to define or further harmonize the

powers of the Commission and of State commissions with

respect to other matters to which this section relates.”

Conf. Comm. Rep. No. 1918, 73rd Cong. 2d Sess. 17 (1934).

The obvious inference to be drawn is that the conferees

were not prepared at that time to allow the states to

prescribe depreciation rates different than those estab-

lished at the federal level, but that matter might be con-

sidered later if the report required by Section 220(j)

indicated it to be appropriate.

26. The hearing testimony and Committee reports

therefore indicate that the language being recodified from

Section 20(5) of the Interstate Commerce Act preempted

the state commissions’ jurisdiction over depreciation. The

rules of statutory construction provide that where Con-

gress reenacts a provision from an existing statute, it

intends that the construction applicable to the existing

provision apply as well to the new provision." The legisia-

tive history thus supports the actual language of Section

220(b) and indicates that Congress intended to preempt

state commission jurisdiction over depreciation rates for

subject carriers when it recodified the language from the

Interstate Commerce Act. Accordingly, we conclude that

the analysis of the legislative history contained in the

comments of AT&T and GTE accurately represents the

intent of Congress and that the more persuasive reading

of the legislative history supports the construction that

Section 220(b) preempts inconsistent state action where

the Commission has prescribed depreciation rates for a

carrier.

“Courts have given weight to interpretations of the Interstate

Commerce Act in interpreting the Communications Act. See, e.g.,

American Telephone and Telegraph Company v. FCC, 487 F.2d 865

(2d Cir. 1973).

A-70

C. Administrative and Court Decisions

27. The Preemption Order cited Accounting Rules for

Telephone Companies, 203 ICC 13 (1934), as evidence that

the FCC could not preempt state depreciation practices.

There the ICC recognized that states might have additional

accounting needs and indicated that it had permitted state-

prescribed sub-accounts within the federally-required books

of account. However, the adoption of a blanket subdivision

rule does not lead to the conclusion that federally adopted

accounting and depreciation rules are not preemptive.

Rather, it reflects an awareness that state commissions

may have special data requirements to properly administer

their regulatory policies which may require additional

detail beyond that prescribed by the federal agency. A

subdivision rule, however, does not permit what is

accounted for as an expense to be capitalized in the guise

of subdividing an expense account. While we may allow

subdivisions of accounts, we will not allow inconsistent

accounting or depreciation methods unless such practices

are otherwise consistent with the public interest. Any other

policy would obliterate the prescriptive effect of our adop-

tion of a uniform system of accounts.

98. In fact we have approved variations from the pre-

scribed uniform system of accounts. For example, our rules

give carriers blanket authority to subdivide certain pre-

scribed accounts “provided such subdivisions do not impair

the integrity of the accounts prescribed.” 47 C.F.R.

31.01-2(d) (1). C.F. 31.01-2(f), authorizing carriers to sub-

divide accounts “in the manner ordered by any state com-

mission having jurisdiction. . . .” We also have approved

state commission rate making treatment of plant under

construction different from that adopted by us. See 89 FCC

2d at 110%.

A-71

29. There may well have been some instances of incon-

sistent state treatment of depreciation in the past. How-

ever, we do not seek controversy unless it is necessary to

protect vital federal interests. Either such instances did not

come to our attention or they may not have appeared

threatening to federal interests.” In the past the communi-

cations marketplace was typified by monopoly conditions

and life and salvage factors underlying the state rates

were generally very similar, if not identical, to those used

by the Commission. In that environment, it was not essen-

tial that the Commission assert all the authority granted it.

See Computer and Communications Industry Association

v. FCC, No. 80-1471 (D.C. Cir. November 12, 1982). As

discussed, infra., in the more competitive conditions pre-

vailing today, the utilization of proper methods and rates

is more critical if the proper incentives are to be created

to insure that the marketplace will function efficiently to

bring the benefits of that competition to the ratepayers

of this country. Therefore, where it is necessary to protect

important federal policies against frustration by inconsis-

tent state actions, we will exercise the full breadth of our

depreciation powers. See para. 14 above.

30. Nor is there any merit to the argument that federal

preemption of depreciation practices constitutes intrastate

ratemaking which might run afoul of 47 U.S.C. 152(b).

Section 220(b) only prohibits the states from setting depre-

ciation rates for telephone property inconsistent from those

prescribed by the FCC. It does not require that any par-

ticular tariff for intrastate service be accepted by the state

commissions. The setting of depreciation rates and classes

"Pacific Telephone and Telegraph Company v. California, 401

P.2d 353 (1965), was cited in the Preemption Order to support non-

preemption. However, the California Supreme Court did not ana-

lyze Section 220(b) or its legislative history and its determination

is therefore unpersuasive.

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of depreciable property only resolves a single issne impact-

ing the ratemaking process. It does not restrict the state

commission’s broad discretion in setting charges for indi-

vidual services. In any event, Section 2(b) of the Act, 47

U.S.C. 152(b), has a well defined purpose which would not

be implicated here: “to restrain the Commission from

interfering with those essentiaily local incidents and prac-

tices of common carriage by wire that do not substantially

encroach upon the administration and development of the

interstate telephone network.” NCUC I, supra at 794 n.6.

Here the setting of depreciation rates is not an essentially

local incident or practice and it has substantial effects upon

the administration and development of the interstate tele-

phone network.”

D. Preemption Under Federal Supremacy

31. Even if one were to assume that Section 220(b) did

not automatically preempt the states whenever this Com-

mission has acted, federal preemption of inconsistent state

depreciation would be justified in this case to avoid frustra-

tion of validly adopted federal policies. The Fourth Circuit

has stated:

We have no doubt that the provisions of section 2(b)

deprive the Commission of regularly power over local

services, facilities and disputes that in their nature

and effect are separable from and do not substantially

affect the conduct or development of interstate com-

48Nor is federal preemption of depreciation practices inconsistent

with 47 U.S.C. 221(b). Section 221(b) was intended to reserve state

jurisdiction over exchange rates where exchange boundaries extend

over two states. That provision was not intended to create new res-

ervations to the states beyond that contained in Section 2(b) and

the narrow circumstances encompassed by interstate exchanges. See

Computer and Communications Industry Association v. FCC, supra,

and North Carolina Utilities Commission v. FCC, 552 F.2d 1036,

1046 (4th Cir. 1976), cert. denied, 434 U.S. 874 (1977) (hereinafter

cited as NCUC II).

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munications. But beyond that, we are not persuaded

that section 2(b) sanctions any state regulation, for-

mally restrictive only of intrastate communication,

that in effect encroaches substantially upon the Com-

mission’s authority under sections 201 through 205.

NCUC I, supra at 793. To the same effect, see Computer

and Communications Industry Association v. FCC, supra

at 35.

32. The D.C. Circuit recently addressed the preemption

question, observing:

We fail to see any distinction in this case between

preemption principles applicable to state ratemaking

authority and those applicable to other state powers.

The operative principle [is that] . . . preemption of

state tariffs on CPE is justified because state tariffs

would interfere with the consumer’s right to purchase

CPE separately from trancmission service and would

thus frustrate the validly adopted federal policy.

Id. at 38. The court went on to find that conflicting state

regulation may be preempted even though there is some

indirect effect on state ratemaking discretion, noting:

the Act itself does not dis:inguish between authority

over rates and authority over other aspects of com-

munications. Sections 2(a) and (b) of the Act allocate

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 equip-

ment rates are involved, as here, than when inter-

connection policies are involved, as in the NCUC cases.

Id. at 38-39.

33. The provision for adequate capital recovery is

important to “make available, so far as possible, to all

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the people of the United States a rapid, efficient, Nation-

wide, world-wide wire and radio communication service

with adequate facilities at reasonable charges .. . .” 47

U.S.C. 151. State depreciation rate prescriptions that do

not adequately provide for capital recovery in the competi-

tive environment, which constitutes this Commission’s

policy in those markets found capable of supporting

competition, would frustrate the accomplishment of that

policy and are preemptable by this Commission.

34. Over the past decade the Commission has embarked

in several areas of telecommunications to pursue a policy

of encouraging competition wherever the market conditions

will support such a policy and produce benefits to the

public interest. In MTS-WATS Market Structure Inquiry,

81 FCC 2d 177 (1980), the Commission opened the

domestic MTS-WATS market to competitive entry, reserv-

ing the question of entry to Alaska to a later phase since

concluded with the adoption of a similar open entry

policy, MTS-WATS Market Structure Inquiry, FCC 82-515

(released November 30, 1982). In Computer Inquiry II,

77 FCC 2d 384 (1980), recon., 84 FCC 2d 50 (1980), recon.,

88 FCC 2d 512, aff'd sub nom., Computer and Communica-

tions Industry Association v. FCC, supra, the Commission

opened the areas of enhanced services and customer prem-

ises equipment to competitive provision. These are just

two examples of the policies which the Commission has

pursued. However, they do point up the fact that if this

policy is to be successful, it will be necessary for the

marketplace to operate efficiently. Such efficient operation

requires proper price signals generating from supply and

demand conditions.

35. Capital recovery is an important determinant of

the price at which services can be offered and significantly

affects the amount of facilities provided to supply the

A-75

needs of the communications industry. In Amendment to

Part 31, 83 FCC 2d 267 (1980), recon., 87 FCO 2d 916

(1981), the Commission adopted remaining life and

straight line equal life group depreciation methods that

recover capital on a basis that approximates straight line

unit depreciation more closely than did the previously

used methods. More timely capital recovery was anticipated

to result in faster technological innovation with its accom-

panying benefits of more efficient service provision and

lower costs resulting from more productive use of facilities.

36. Capital recovery issues are important in the im-

plementation of Computer Inquiry II due to the part

depreciation plays in the determination of net book value

and the resultant gain or loss that may occur on the

transfer of assets to the new subsidiary. It will also be

significant in any later transfer of assets from the provi-

sion of regulated service to unregulated service or vice-

versa. Thus, appropriate capital recovery will ease the

regulatory burdens associated with supervising the transi-

tion to the new structure.

37. Depreciation is a significant portion of the revenue

requirement of the regulated telephone companies. As

such, it plays an important role in determining the price

at which they offer their services. If competition is to

be viable, it is necessary for prices to reflect depreciation

expenses that are realistic for a competitive market.

Absent such depreciation levels, improper signals will be

given to the market. Since most plant is used inter-

changeably to provide interstate and intrastate communica-

tions service, supply and demand is determined by the

combination of inputs from service demand in both

regulatory jurisdictions. Approximately 75 percent of

exchange plant is allocated to the intrastate jurisdiction.

It is clear that unless telephone plant, including that por-

tion subject to allocation to the intrastate jurisdiction, is

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depreciated at a reasonable rate, improperly timed capital

recovery will occur. Indeed, in an increasingly competitive

environment, it is possible that improper ce »ital recovery

could delay or prevent modernization which would add

to the costs borne by ratepayers and could, ultimately,

threaten carriers’ ability to fully recover their invested

capital. Moreover, the extent of state action attempting

to prevent carriers from utilizing our depreciation pre-

scriptions places substantial burdens on carriers and

could well impair their ability to raise the investment

capital they will need to fully compete in the continually

evolving competitive telecommunications marketplace.”

Such a result could undermine the achievement of the

Commission’s objective to develop policies that will en-

gender a dynamic, efficient telecommunications marketplace

with services being provided at reasonable prices.

38. NARUC contends that preemption with respect to

station connections is unnecessary and will not produce

competitive benefits because expensing is not the same as

unbundling. While NARUC is correct in a strict sense, it

avoids the critical issue, which is the proper timing of

cost recovery. If the Commission preempts with respect

to station connections and all states must expense these

costs, current ratepayers will be paying these costs instead

of future ratepayers as would be the case with capitaliza-

“AT&T and GTE indicate several state commissions have refused

to follow, have indicated an intent not to follow, or are being urged

not to follow Commission determinations with respect to the ex-

pensing of inside wiring and/or the adoption of straight-line equal

life group or remaining life depreciation methods. A staff review

of state action in conjunction with AT&T intrastate tariff proceed-

ings reveals that all but two states have approved expensing of sta-

tion connections, that 13 states have rejected and 12 have approved

equal life group depreciation, and that 9 states have rejected and

22 have approved remaining life group depreciation. Prior to issuing

our Order in this docket we did not expect that such significant vari-

ance would be required by states.

A-77

tion. Thus, future prices will reflect the appropriate costs

for providing those services. Moreover, if these costs are

expensed and state commissions must allow rates to cover

these costs, it is likely that the cost causative ratepayer

will in many cases be charged for the costs being expensed

in connection with the provision of inside wiring. Thus,

the Commission’s objective may be substantially achieved

by preempting state commissions from departing from our

expensing rules.

39. In 1971 Congress amended the Communications

Act to change the procedures for allocating costs between

federal and state jurisdictions by adding Section 410(c).

The Commission was given the ultimate authority with

respect to such allocations, further solidifying its super-

intendency over common carrier communications. See

NCUC I, supra at 795. Section 410(c) procedures provide

for uniformity in the separations process, thereby insuring

that plant, expenses and revenues will be rationally

accounted for in the dual jurisdictional environment. The

utilization of one depreciation rate is the most effective

method for insuring that this uniformity will be maintained

and to insure that no jurisdiction bears a greater burden

than another in the transition to a fully competitive mar-

ketplace. Several parties suggest that under or over

recovery will result from one jurisdiction or another

because of the shifting usage patterns for telephone plant

over time and argue that if such a result were to occur,

significant inequities would result to both ratepayers and

carriers. A uniform depreciation rate for each class of

property applicable to all property whether allocated to

the federal or state jurisdiction clearly eliminates these

potential problems.

40. For all of these reasons, it is apparent to us that

a substantial impact on federal policies could result if state

commissions were allowed to diverge from Commission

prescribed depreciation rates and practices. Accordingly,

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it is essential to preempt inconsistent state deprecia-

tion practices to avoid frustration of these vital national

policies.

Ill. Declaratory Ruling Petition.

41. GTE of Ohio seeks to have the Commission preempt

an order of the Ohio Public Utilities Commission that did

not approve remaining life and equal life group rates for

intrastate ratemaking purposes. As alleged by GTE of

Ohio, the differential in rates amounts to seven million

dollars per year. GTE of Ohio states that failure of

this Commission to preempt the state will frustrate the

achievement of federal policies adopted by this Commis-

sion. Its argument is similar to those cited in connection

with the reconsideration petition.

42. Essentially the same arguments are made against

the GTE of Ohio petition as were urged on reconsideration

with regard to the substance of the issue. However, Ohio

cites an Ohio statute that precludes the state commission

from adopting remaining life depreciation for intrastate

purposes.

43. One , procedural argument is raised by Ohio with

respect to the petition. It contends that the question pre-

sented is premature since the order is subject to further

reconsideration before the Ohio Commission pursuant to a

request filed by GTE of Ohio. We do not agree since the

purpose of declaratory rulings is to give guidance to af-

fected persons in areas where uncertainty or confusion

exists. A case or controversy in the judicial sense is not re-

quired, NCUC I, supra at 790-1. In this case, it appears

necessary to issue such a ruling to clarify for the state

commissions and the carriers the effect of our depreciation

prescriptions. The fact that reconsideration proceedings

are under way in Ohio does not mitigate against such a

course in light of the divergencies from this Commission’s

depreciation methods and rates that are occurring to the

detriment of federal policies. Thus, we find it imperative

A-79

to declare today that inconsistent state prescribed deprecia-

tion rates are preempted by the Communications Act and

are accordingly void. The existence of a state statute pre-

venting a state commission from adopting a particular

method does not affect this determination. When federal

preemption is involved, there is no difference between a

statute or a regulation of a state commission. Both must

fall in the face of overriding federal concerns and policies.

IV. Conclusion

44. We have carefully reviewed the record upon recon-

sideration. The issues raised concerning the Preemption

Order caused us to reevaluate the statutory language of

Section 220(b), the legislative history of the provision, and

the relevant judicial and administrative proceedings relat-

ing to the subject. Our considered judgment after this re-

view is that the Preemption Order must be reconsidered.

We find that the most logical and reasonable interpretation

of Section 220(b) of the Act is that where the Commission

prescribes depreciation rates for classes of property, state

commissions are precluded from departing from those

rates. Since the depreciation method utilized is a material

part in determining the rate to be applied, state commis-

sions are also precluded from departing from the deprecia

tion methods prescribed by the Commission. Thus, the Fz-

pensing Order is binding upon state commissions and they

must expense additions to inside wiring in accordance with

the plan established therein. Moreover, they must follow

the amortization procedures adopted in that decision for

the embedded inside wiring and any additions to the capi-

talized amount as a result of the phase-in of the expensing

of inside wiring.

45. Even if Section 220(b) does not preempt state com-

missions, we would act under our authority to preempt

state actions that interfere with the accomplishment of

federal policies and objectives. Computer and Communica-

tions Industry Association v. FCC, supra, and NCUC II.

A-80

We note that petitioner and the parties supporting the

petition cite several states that have indicated they do not

intend to follow the Commission’s depreciation prescrip-

tions or expensing of inside wiring, or have refused to

follow either. In light of the concerns expressed about an

efficiently functioning market, we must find that inconsis-

tent depreciation rates prescribed by state commissions will

interfere with the efficient operation of the communications

marketplace and thereby frustrate the achievement of the

Commission’s policies. Accordingly, we find that this Com-

mission’s depreciation policies and rates, including the

expensing of inside wiring, preempt inconsistent state

depreciation policies and rates.

46. Accordingly, IT IS ORDERED, pursuant to Sec-

tions 1, 4(i), and 220(b) of the Communications Act of 1934,

as amended, 47 U.S.C. 151, 154(i), and 220(b), That the

Petition for Reconsideration filed by the American Tele-

phone and Telegraph Company IS GRANTED.

47. IT IS FURTHER ORDERED, That the Petition

for Declaratory Ruling filed by General Telephone Com-

pany of Ohio IS GRANTED to the extent reflected herein.

48. IT IS FURTHER ORDERED, That the Secretary

shall cause this order to be published in the Federal Regis-

ter.

49. IT IS FURTHER ORDERED, That the Secretary

shall cause a copy of this order to be served on each state

commission.

FEDERAL

COMMUNICATIONS

COMMISSION®*

William J. Tricarico

Secretary

°See attached separate statement of Commissioner Joseph R.

Fogarty.

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Appendix A. Summary of Comments

1. AT&T argues that the Commission on reconsidera-

tion should find that state commissions are precluded from

departing from the depreciation methods and rates estab-

lished by this Commission in order to allow the carriers to

achieve timely capital recovery. It views the Preemption

Order as a retreat from the Commission’s competitive pol-

icies.

2. AT&T asserts that realistic depreciation rates are es-

sential to attain accurate cost-based pricing decisions to

prevent artificial barriers to competition, to foster techno-

logical innovation which will enhance network efficiency and

the availability of competitive alternatives, to facilitate the

timely implementation of the detariffing of customer prem-

ises equipment’ and to insure the financial viability of the

carriers. It contends that competitive conditions result in

faster obsolescence and shorter asset lives, requiring that

depreciation methods and rates be inseparable from rate-

making to insure capital recovery.

3. AT&T proposed two legal theories for preempting

state commission action. First, it asserts that the Commis-

sion may preempt under Sections 1 and 2 of the Act, citing

California v. FCC, 567 F.2d 84, 86 (D.C. Cir. 1977), cert.

denied, 434 U.S. 1010 (1978), NCUC II, NCUC I, and

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

that because of the central role depreciation, including the

depreciation aspects of station connections, plays in the

achievement of the Commission’s policies, preemption is

necessary to avoid interference with or frustration of these

policies.

‘It contends that different depreciation rates between jurisdictions

will result in disagreements about net book value in deregulating

CPE and that the application of the Separations Manval will create

uncertainty as to which plant a particular book value relates.

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4. AT&T’s second theory is that Section 220(b) pre-

empts states on its face, asserting that in its earlier plead-

ings it did not rely on Section 220(g) as suggested by the

Commission’s decision. It argues that Section 220 gives the

Commission discretion with respect to accounting rules, but

does not give it much discretion with regard to depreciation

prescriptions. AT&T states that the Commission’s rule

allowing carriers to subdivide an account to comply with a

state commission order does not mean that a state can re-

quire capitalization when this Commission requires expens-

ing. Finally, it submits that the Commission misread the

legislative history of the Communications Act by failing to

consider statements in the committee reports and remarks

of members at committee hearings that indicate Congress

believed the Interstate Commerce Act provisions from

which Section 220(b) was taken did in fact preempt the

states. See also Depreciation Charges of Telephone Com-

panies, 118 1.C.C. 295 (1926).

5. GTE asserts that the Commission’s policies in the

areas of competition and faster capital recovery will be

frustrated if the state commissions are allowed to depart

from the depreciation rates and methods prescribed by the

Commission. It contends that Section 220(b) preempts the

states and distinguishes Section 220(a) as being discre-

tionary on the Commission and argues that the Commis-

sion focused only on the provisions of Section 220(a) in its

earlier decision. It submits that there is no doubt that a

state can require a carrier to keep additional records and

memoranda. However, GTE argues that the Commission’s

decision is overly broad. It is clear, GTE contends, that the

Commission can preempt inconsistent state action when it

conflicts with national telecommunications policies, and it

should do so in this case. GTE also argues that the legis-

lative history and the rules of statutory construction indi-

cate that Congress intended to preempt the states in the

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area of depreciation, submitting that property cannot be

successfully depreciated at two different rates prescribed

by different regulatory bodies because under or over re-

covery from one or the other jurisdiction will oceur from

the use of shifting usage factors.

6. The oppositions generally argue that the states have

the jurisdiction to determine the extent to which intrastate

rates reflect depreciation and expensing adjustments piw

mulgated by the Commission. Sections 2(b) and 221(b) are

cited as reserving jurisdiction over local and intrastate

telephone rates to the states as intended by Congress when

it distinguished between “interstate” and “intrastate” in

Sections 1 and 2. Ohio argues that the preemption argument

was rejected in the only case of which it is aware, Pacific

Telephone and Telegraph Company v. California, 401 P.

2d 353 (1965).

7. Ohio asserts that the courts have distinguished

between ratemaking and interconnection policies, NCUC II

and NCUC I, and submits that it is the ratemaking juris-

diction reserved to the states that is in question in this

proceeding. To permit the Commission to prescribe depre-

ciation rates applicable to all property whether used for

interstate or intrastate services would, in Ohio’s view, be

equivalent to giving the FCC a hand in setting state rates.

8. Ohio is concerned that under some methods, such as

remaining life, costs will not be charged to consumers who

receive the benefits of the property being depreciated.

Finally, it contends that Sections 220(i) and (j) are con-

sistent with concurrent jurisdiction.

9. Ohio argues that GTE is attempting to have the Com-

mission read Section 2(b) out of the act, and asserts that

it is inappropriate to ignore language in a statute, to ex-

tend a statute beyond its clear import, or to embrace sub-

jects not specifically enumerated. Section 2(b)(1) is stated

A-84

by Ohio to have been intended to reverse the Supreme Court

decision in Houston East and West Texas Ry. v. U.S., 234

U.S. 342 (1914), wherein the ICC was given the power to

suspend intrastate rates enabling carriers to raise intra-

state rates to federal levels for similar distances. NARUC

and Ohio argue that Section 2(b) was intended to ensure

that state jurisdiction was not limited by the 1934 leg-

islation.

10. Several parties assert that there is considerable

Commission precedent recognizing the states’ independent

ratemaking authority, including departures from Commis-

sion prescribed accounting, for intrastate rates. They

note that the Commission has encouraged state commis-

sions to devote more resources to depreciation matters,

Amendment of Part 31, 83 FCC 2d 267 (1980) recon.,

87 FCC 2d 916 (1981), has recognized in this proceeding

the state jurisdiction over expensing of station connections

for state ratemaking purposes, has recognized divergent

treatment of interest during construction and has not

contested California’s use of remaining life for approxi-

mately thirty years. Ohio argues that there is nothing to

suggest that there needs to be national uniformity in

depreciation procedures and that local diversity is desir-

able, noting that even a GTE of Ohio witness in an Chio

rate case has indicated that local diversity in setting

depreciation rates is preferable.

11. Ohio contends that McDonnell Douglas Corp. v.

General Telephone Company of California, 594 F.2d 720

(9th Cir. 1979), recognized the validity of intrastate

regulatory jurisdiction under the Act by finding that

Congress in enacting Section 2(b) had intended to give

states considerable power with respect to wire communica-

tions that are wholly intrastate in nature.

12. California argues that the Commission’s refusal to

preempt state power to prescribe depreciation rates for

A-85

intrastate ratemaking purposes will not undermine the

Commission’s procompetitive policies or signal a retreat

since many states have adopted policies that foster

competition. AT&T’s assertion that preemption must be

exercised to promote procompetitive policies is rejected

by NARUC as unsupported. It states that expensing of

station connection costs can have no competitive effect

because expensing is not the same as unbundling. More-

over, it contends that the Commission did not adopt

remaining life and equal life group depreciation procedures

to promote competition but, rather, to more properly time

capital recovery and insure that any deficiency in past

depreciation was adjusted. Finally, NARUC states that

the speculative statements about the numbers of states

that are not following the Commission’s policies are

inadequate to justify preempting state commission juris-

diction on the theory that federal policies are being

frustrated.

13. NARUC argues that the attempted distinction of

Section 220(a) from Section 220(b) on the basis that

Section 220(b) is mandatory while Section 220(a) is

discretionary does not address the question of the pre-

emptive effect of either section. It contends that neither

reason nor case law provides support for asserting that

preemption of state regulation of intrastate communica-

tions is automatic with respect to subject areas which the

FCC must regulate on the interstate level. It further notes

that the language of Section 220(b) does not differ signif-

icantly from that in Section 220(g) with respect to the

effect of prescribed depreciation rates, accounts or records

other than as prescribed

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