# Appendix — California v. Federal Communications Commission > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385012_0153%3A03 ## Record - **Collection:** Supreme Court brief - **Document type:** Appendix - **Published:** January 1, 1985 - **Citation:** 474 U.S. 809 ## 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 —_ wv a 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, A-2 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./P, Intervenor./ P, Intervenor./P, Intervenor./P, Intervenor./R, Intervenor./R, Intervenor./R, Intervenor./R, Intervenor./R, Intervenor./R, Intervenor./ Ki, Intervenor./ RK, Intervenor./ KR, Intervenor./R, Intervenor./ KR, Intervenor./R, Intervenor./R, Intervenor./R, Intervenor./R, Intervenor./R, Intervenor./R, Intervenor./R, Intervenor./R, Intervenor./R, Intervenor./R, Intervenor./R, Intervenor./R, 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 A-4 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. A-13 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 of 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- A-58 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 A-63 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. I [Text truncated at 120,000 characters. The full text is on the page linked above.] --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385012_0153%3A03. Public record. Not legal advice.