Appendix — Public Utilities Commission v. Federal Communications Commission
Supreme Court brief1985
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84-1054
CASE NO.
Inu The
Supreme Court of the Hnited
OCTOBER TERM, 1984 -
. PUBLIC UTILITIES COMMISSION OF OHIO, ET AL..,
] Petitioners,
v.
FEDERAL COMMUNICATIONS COMMISSION AND
UNITED STATES OF AMERICA,
Respondents.
APPENDIX TO
PETITION FOR A WRIT OF CERTIORARI
ANTHONY J. CELEBREZZE, JR.
Attorney General of Ohio
ROBERT S. TONGREN
Assistant Attorney General
Counsel of Record
MARTIN J. MARZ
MARY R. BRANDT
Assistant Attorneys General
Office of the Ohio Attorney General
Public Utilities Section
180 East Broad Street
Columbus, Ohio 43215
Telephone (614) 466-4396
Attorneys for Petitioner
The Public Utilities Commission of Ohio
WILLIAM A. SPRATLEY
Consumers’ Counsel
RICHARD P. ROSENBERRY
JANINE L. MIGDEN
LAWRENCE E. BARTH
ASSOCIATE CONSUMERS’ COUNSEL
137 East State Street
Columbus, Ohio 43215
Telephone: (614) 466-9539
Attorneys for Ohio Office of
Consumers’ Counsel
i
TABLE OF CONTENTS
Virginia State Corporation Comm'n v. Federal
Communications Comm'n, 737 F.2d 388 (4th Cir. 1984) ..... A-l
Amend. of Part 31, 92 F.C.C.2d 864 (1983) .............. A-24
Amend. of Part 31, 89 F.C.C. 2d 1094 (1982) ............. A-61
Order Denying Rehearing, Case No. 83-1136,
NUE ccccccccewcececcccccsceccces A-90
A-l
VIRGINIA STATE CORPORATION COMMISSION,
Petitioner,
Vv.
FEDERAL COMMUNICATIONS COMMISSION AND
United States of America,
Respondents,
North American Telephone Association, et al.,
Intervenors.
No. 83-1136.
United States Court of Appeals,
Fourth Circuit.
Argued Oct. 7, 1983.
Decided June 18, 1984.
Before WIDENER, MURNAGHAN and SPROUSE,
Circuit Judges.
MURNAGHAN, Circuit Judge:
The controversy here presented involves an order of
the Federal Communications Commission (FCC) entitled
“Uniform 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
A-2
depreciation rates and methods for classes of property used
by telephone companies, state regulation of the same mat-
ter is thereby preempted.
Petitioner, Virginia State Corporation Commission,
along with multiple Petitioner-Intervenors representing
regulatory agencies of other states, argues that the states’
fixing of depreciation rates and accounting methods for in-
trastate ratemaking purposes is preempted neither by the
express language of the Federal Communications Act of
1934, 47 U.S.C. § 151 et seg. (1976) (the Act), nor by FCC
rules explicitly governing depreciation of telephone equip-
ment and facilities that are used interchangeably to pro-
vide both interstate and intrastate service. We agree with
the FCC that its order released January 6, 1983 preempts
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, 98 S.Ct. 222, 54 L.Ed.2d 154 (1977), that “FCC reguia-
tions must preempt any contrary state regulations where
the efficiency...of the national communications network is
at stake....’” Jd. at 1046.
I. Background
Under the current state of the telecommunications
art, local telephone companies provide ‘‘telephone plant”
(facilities and equipment) that serve both interstate and in-
trastate communications needs. Section 152 of the Act pro-
vides in subsection (a) that the statute ‘‘shall apply to all
interstate and foreign communication by wire,’’ but in
subsection (b) that ‘“‘nothing in this chapter shall be con-
strued to apply or to give the Commission jurisdiction with
respect to (1) charges, classifications, practices, services,
A-3
facilities, or regulations for or in connection with intrastate
communication 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, Nation-wide, and world-
wide wire...communication service with adequate facilities
at reasonable charges....'" 47 U.S.C. § 151.
In order to achieve the mandated goal, the FCC is
specifically empowered under 47 U.S.C. § 220 to prescribe
depreciation practices to be followed by interstate
carriers.! At the same time, the Act recognizes the con-
tinued vitality of state regulation of intrastate service. Sec-
tion 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...
T 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 Com-
mission may, when it deems necessary, modify the classes
and percentages 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....
(g) After the Commission has prescribed the forms and man-
ner of keeping of accounts...it shall be unlawful for [the car-
rier] to keep any other accounts...than those so prescribed
..0r to keep accounts in any manner other than that
prescribed or approved by the Commission....
A-4
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
commission or by local governmental authority.’’ Because
most of the nation’s telephone plant is used inter-
changeably to serve both interstate and intrastate telecom-
munications needs, the potential for conflict between
federal and state regulatory 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
depreciation practices that more truly reflected actual
depreciation 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 deprecia-
tion purposes 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 precision in allocating costs of service to current
consumers, and allowed more rapid capital recovery for
plant having a short useful life.*
2 This Court has already recognized that tandem use of telephone
plant to serve both interstate and intrastate needs is quite common. 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, 97 S.Ct. 651, 50
L.Ed.2d 631 (1976) (quoting Katz v. A. T. & T., 43 F.C.C. 1328, 1332
(1953)), to the effect that, ‘‘[wjere the Commission to exercise its jurisdic-
tion only where the telephone facilities in question were exclusively in-
terstate in character, it would result in virtually complete abdication
from the field of telephone regulation...."’
3 For example, under the ‘‘vintage year’’ method, all types of
telephone cable installed during one year (regardless of variations in
useful lives of the cables) would be classed together and depreciated 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 separately, more in keeping
with the plant's actual useful life.
A-5
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 replaced the ‘‘whole life’’ method of depreciation
with the “‘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 288-90.4
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 cogt 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
depreciation 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
Commissioners (“‘NARUC’"’) filed a Petition for Clarifica-
tion of the 1981 wiring order. Specifically, NARUC re-
quested 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 concerned. The FCC responded to the petition in a
4 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-6
Memorandum Opinion and Order of April 27, 1982, in
which it concluded that in light of the relevant legislative
history of the Act, ‘‘where state [accounting and deprecia-
tion] 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.’’
89 F.C.C.2d 1094, 1108 (1982).
In response to the FCC’s opinion and order, the
American Telephone and Telegraph Company filed a Peti-
tion for Reconsideration on June 7, 1982. General
Telephone Company of Ohio likewise petitioned for a
Declaratory Ruling 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.
e
° Writing for a 4-3 majority of the Commissioners, Secretary
William J. Tricarico found that portions of the Act were geared ‘‘to
achieve as much uniformity as possible without coercing any state com-
mission to use ratemaking methods it found unacceptable.”’ Tricarico
also emphasized that the Commission had always given “special con-
sideration to the needs and views of state commissions in developing ac-
counting and depreciation rules and most State commissions 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 Dissen-
ting 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 com-
petitiveness of our Nation's telephone industry in providing increasing-
ly essential interstate, as well as intrastate, facilities and services.’ /d.
at 1111.
6 In its petition, General Telephone noted that the Ohio state
regulatory 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 important interests of national
communications policy.
A-7
Docket No. 79-105, F.C.C. No. 82-581, slip op. (Jan. 6,
1983). After it carefully resurveyed 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 interpretation of the Act ‘‘is that where the
Commission prescribes depreciation rates for classes of
property [and the depreciation methods to be used], state
commissions are precluded from departing’ from those
rates and methods. /d. at 17, € 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 con-
nection with depreciation expense determinations and the
related accounting.’ Jd. at 6, € 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 rul-
ings would preempt inconsistent state regulatory action as
a matter of federal supremacy. /d. at 17, € 45.
Supported by numerous state and local regulatory
commissions, 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 result 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
Circuits,’ we hold that inconsistent state regulation of
T See Computer and Communications Industry Ass'n v. F-CC.,
693 F.2d 198 (D.C.Cir.1982). cert. denied. U.S. _. 103 S.Ct. 2109, 77
L.Ed.2d 313 (1983); New York Telephone Co. v. F.C.C., 631 F.2d 10459
(2nd Cir.1980); and Puerto Rico Telephone Co. v. F.C.C., 553 F.2d 694
(1st Cir. 1977), discussed in text infra. Contra Southwestern Bell
Telephone Co. v. Arkansas Public Service Comm‘n, 584 F.Supp. 1087
(D.C.Ark.1984) (Court holds that FCC lacked jurisdiction to issue the
January 6, 1983 Order and refuses to enforce it as u/tra vires).
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A-22
need not even be specified, as it was not here. The logical
result of this decision is to permit the FCC to abrogate
completely the state regulation of intrastate ratemaking
for the carriers’ intrastate operations in violation of the
Communications Act.
Ironically, the FCC recognized established law and
practice in holding, before it reversed itself only a little
more than eight months later, that
‘“[w]here 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) [47 U.S.C. § 152(b)] makes clear that Con-
gress did not intend this Cgmmission to foreclose
state ratemaking actions unless those actions im-
periled ‘important interests of national com-
munications policy... NCUC II, 552 F.2d at
1047. We have found in this instance that federal
regulation will not be frustrated if carriers main-
tain additional records for intrastate ratemaking
purposes.’’ Jn 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 chang-
ing its course...supply a reasoned analysis,’’ Motor Vehicle
Manufacturers Association v. State Farm Mutual
Automobile Insurance Co., __ U.S. __, 103 S.Ct. 2856, 2873,
77 L.Ed.2d 443 (1983), which must include a ‘‘rational con-
nection between the facts found and the choice made.’ At
2866, citing Burlington Truck Lines v. United States, 371
U.S. 156, 168, 83 S.Ct. 239, 245, 9 L.Ed.2d 207 (1962). The
FCC's post-hoc reinterpretation of legislative history, on
which the majority here quite properly does not depend,
A-23
combined with the unsupported and _ unsupportable
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 in-
terfere in state ratemaking after several decades of affir-
matively espousing the opposite conclusion.
The upshot of the case is that the FCC decided that
the carriers needed more revenue than the state regulatory
agencies were willing to provide, so it decided to impose dif-
ferent depreciation rates on intrastate equipment for the
very purpose of, and thus effectively, raising the intrastate
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 competition’ 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.
3 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 / (1976) 97% of the
telephone calls in the country were local. [he proportion could not be too
different today.
A-24
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 Ac-
counts for Class A and Class B Telephone Com-
panies, of the Commission’s Rules and Regula-
tions with respect to accounting for station con-
nections, optional payment plan revenues and
customer provided equipment and sale of ter-
minal 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 associated Bell System Operating Companies (AT&T).
AT&T seeks reconsideration of the Commission's decision
A-25
in Amendment of Part 31, 89 FCC 2d 1094 (1982)
(hereinafter cited as Preemption Order), in which the Com-
mission determined that Sections 220(a) and 220(b) of the
Communications Act of 1934, as amended, 47 U.S.C. 220(a)
and 220(b), did not preempt state commissions from apply-
ing different accounting and depreciation procedures for
purposes of intrastate ratemaking proceedings.! The
Preemption Order was a reconsideration of Amendment of
Part 31, 85 FCC 2d 818 (1981) (hereinafter cited as Expens-
ing Order).
2. The Commission also has before it a Petition for
Declaratory Ruling filed on June 7, 1982, by General
Telephone Company of Ohio (GTE of Ohio). This petition
requests 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 pur-
poses 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 company could utilize.
3. The Commission established a joint reply period
for the two petitions, utilizing the pleading cycle for com-
ments in response to the Petition for Reconsideration, and
allowed parties to cross-reference their pleadings where ap-
propriate. In addition to pleadings filed by the petitioners
and the GTE parties, comments or reply comments were
I On June 8, 1982, GTE Service Corporation, on behalf of itself.
United Telephone System. Inc., and Continental Telecom, Inc.
(hereinafter referred to as GTFE). filed a Petition for Clarification of the
Commission's Preemption Order. This petition was dismissed as untime-
lv. 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-26
filed by the Arkansas Public Service Commission (Arkan-
sas), Ohio, the People of the State of California and the
Public Utilities Commission of the State of California
(California), the Virginia State Corporation Commission
(Virginia), the National Association of Regulatory Utility
Commissioners (NARUC), the United States Independent
Telephone Association (USITA), the Office of Consumers’
Counsel, State of Ohio (Consumers’ Counsel), the United
Telephone System Inc. and the Idaho Public Utilities Com-
mission (Idaho). A summary of the comments is contained
in Appendix A. Below we consider the issues raised on
reconsideration, after which we shall consider the question
presented 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 connec-
tions should not be included in any accounting or regu-
latory revisions. 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 as- ©
sociated with the provision of inside wiring must be appor-
tioned between the federal and state jurisdictions as long
A-27
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. Ac-
cordingly, we initiated 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 ac-
counding and depreciation procedures that would begin ex-
pensing the inside wiring portion of the station connection
account would be in the public interest, and would facilitate
the deregulation of the provision of inside wiring if the
Commission should later decide to take that approach. The
principal changes required that future costs of installing in-
side wiring and similar costs be included as an expense in
Account 605, Repair of Station Equipment. Such costs
were previously capitalized in Account 232, Station Con-
nections. The expensing of these costs would be phased in
over a four year period unless a carrier obtained state com-
mission approval to expense one hundred percent im-
mediately. The Expensing Order also required that the pre-
sent net investment 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 depreciation procedures that had previously
applied to the inside wiring portion of the station connec-
tion account.
7. On reconsideration, we concluded that the Expens-
ing Order was not intended to preempt state commissions
from utilizing other depreciation or accounting procedures
for intrastate ratemaking proceedings, unless such preemp-
tion occurs as a matter of law. Our discussion was based in
part on an assumption that most or all of the state
A-28
commissions would follow our lead. We also indicated that
Section 220 does not preclude state commissions from
departing from accounting and depreciation rules prescrib-
ed by this Commission for purposes of regulating in-
trastate communications services. In reaching this conclu-
sion, we reviewed Section 20(5), the Interstate Commerce
Act predecessor of the accounting and depreciati« > provi-
sions contained in Section 220. We concluded that nothing
in the history of Section 20(5) provided any indication of
whether that provision had been intended to preempt state
commissions from prescribing divergent depreciation rates
when the Interstate Commerce Commission (ICC) had
prescribed a rate. We stated:
{ijmasmuch as Section 20 had never been con-
strued to restrict state commissions from requir-
ing carriers to keep additional records for pur-
poses of intrastate ratemaking and court deci-
sions in analagous contexts did not adopt an ex-
pansive interpretation of that provision, the
reenactment of that language should not be inter-
preted to restrict state commissions from keeping
such additional records in the absence of clear
evidence that the 1934 Congress intended to pro-
duce that result.
Preemption Order, supra at 1102.
8. We also reviewed the legislative history of the
Communications Act and concluded that Congress had
been uncertain 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 con-
cluded that Congress had been attempting to obtain as
much uniformity as possible without coercing any state
commission to use ratemaking methods which it might find
A-29
unacceptable. We found that we had proceeded in a manner
consistent with this purpose for nearly four decades, noting
that we had recognized divergent practices by state com-
missions from time-to-time. The language of Section 2(b)(1)
was found to support the interpretation that state commis-
sions are not precluded from applying different accounting
and depreciation procedures from this Commission. The
Preemption Order concluded by finding that nothing in the
Act precluded us from preempting state commission ac-
tions that might interfere with or tend to frustrate policies
or rules we have adopted to carry out statutory objectives
with respect to interstate or foreign communications, but
we also found that federal regulation would not be
frustrated if carriers maintain additional records for in-
trastate ratemaking purposes.
II. 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 pro-
perty 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 /). The Preemption
Order was the first time the Commission had squarely ad-
dressed the preemptive effect of a prescribed depreciation
rate, despite having prescribed rates for more than thirty
A-30
years. No federal court has addressed the question of the
preemptive effect of a Commission prescribed depreciation
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
provision dealing directly with depreciation. A careful
review of AT&T’s and GTE’s pleadings and a thorough
reevaluation 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 effect 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
provisions, it is necessary to understand the relationship
between 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 period through depreciation charges to
operating expense. Depreciation as used here is an accoun-
ting 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
* The United States Supreme Court has held that state commis-
sions may prescribe depreciation rates where the empowered federal
commission has not prescribed rates. Northwestern Bell Telephone 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-31
expense is a determination that there is no category of
asset for which depreciation expense will be allowed. It is
therefore clear that the decision 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 objec-
tives 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 criteria are
satisfied in this case. In reaching this conclusion we analyz-
ed the language of Section 220, the legislative history, rele-
vant 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 depreciation charges may be properly
included under operating expenses, and the
percentages of depreciation which shall be charg-
ed with respect to each of such classes of proper-
ty, classifying the carriers as it may deem proper
for this purpose. The Commission may, when it
deems necessary, modify the classes and percen-
tages so prescribed. Such carriers, shall not, after
the Commission has prescribed the classes of pro-
perty for which depreciation charges may be
A-32
included, charge to operating expenses any depre-
ciation charges on classes of property other than
those prescribed by the Commission, or, after the
Commission has prescribed percentages of de-
preciation, 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 in-
cluded 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 by
the Commission. That this preempts inconsistent state ac-
tion is further indicated in Section 220(h) which gives the
Commission discretion to ‘“‘except’’ carriers from the re-
quirements 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 preeempted when the Commission has acted in
the depreciation area. By providing that states be given
notice, Congress ensure that state needs for accounts,
records and memoranda brought to the Commission's at-
tention 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
A-33
spoke of depreciation in general terms without any attempt
to make distinctions between either ‘‘intrastate’’ or ‘‘in-
terstate’’ property. This is significant because when Con-
gress 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 indicates
that it intended no distinction.
17. Taken as a whole, the language of Section 220 ap-
pears 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 practies in form only, allowing the states to
treat substantive depreciation matters as they might
choose. While that might be a plausible construction of
Section 220, after full analysis we do not believe that Con-
gress intended such a feeble gesture. There would be little
purpose to require the carriers to keep all their books pur-
suant 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 com-
prehensive treatment given to this matter by the Congress
demonstrate that more was intended. Accordingly, we find
that the statutory language indicates that FCC deprecia-
tion prescriptions are to be followed in both the federal and
state jurisdictions unless the FCC provides otherwise. As
demonstrated below, this construction is also consistent
with the legislative history.
B. Legislative History
18. In the Preemption Order we found that the
A-34
legislative history of Section 220 was inconclusive and at
most indicated that Congress was ‘‘not sure’ about the
preemptive 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
prescribing 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.
20. The closest the ICC came to delineating its posi-
tion 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 interstate commerce and at any time
may be so used. Under such circumstances, no
doubt would seem to exist as to the power of Con-
gress to regulate the accounting practices of such
companies with respect to their property. in-
cluding the accounting for depreciation.
In the Preemption Order we focused on the fact that the
A-35
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 com-
missions wuuld have been precluded from prescribing 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 conclusion 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 pro-
ceeding did not actually prescribe depreciation rates, but
only began a proceeding looking toward the ultimate
prescription of depreciation rates, there were no deprecia-
tion rates prescribed that could have preempted 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 states. It did
not reach the question of whether Section 20(5) would
preempt the states if the ICC prescribed depreciation
rates.°
21. At the hearings pertaining to the Communica-
tions Act the then chairman of the ICC indicated his belief
that the ICC depreciation rulings would govern both
federal and state depreciation practices:
3 Similarly, [nterstate Commerce Commission v. Goodrich Transpor-
tation Co., 224 U.S. 194 (1912) and Kansas City Southern Ry. Co. v. LRS.
52 F.2d 372 (8th Cir. 1931) do not appear to have any pertinance to the
issue at hand. As noted in 89 FCC 2d at 1099, Goodrich did not raise any
question with respect to the effect of ICC accounting rules upon activities
not subject to ICC rate regulation. The Kansas holding simply reconciles
two federal statutes, the Internal Revenue Code and the Interstate Com-
merce Act. It did not purport to establish new law on state preemption.
A-36
Paragraph (j)...should be most carefully consid-
ered. It unquestionably directly conflicts with,
and destroys the uniformity of systems of ac-
counts and depreciation accounting required by
the preceding provisions of the section. That is
not true under the present law.4
22. Other witnesses who appeared at the hearing
repeated the same view. See statements of Mrs. Gifford,”
Mr. Benton,® and Dr. Irvin Stewart.’
23. The Preemption Order relied heavily on the
‘silence contained in the Congressional Reports,”’ 89 FCC
2d 1105, in concluding that the legislative history did not
support a finding that Section 220 was intended to preempt
state commissions from prescribing their own depreciation
rates for intrastate purposes. However, a reexamination of
the legislative history in light of the comments on recon-
sideration indicates that the committee reports accompa-
nying the bills did contain language indicating that the
committees believed that the predecessor provision had
preempted the states. The House Report, in discussing the
Section 220(j) provision (which was not adopted) that
would have reserved jurisdiction over depreciation rates to
the states for purposes of intrastate ratemaking, stated
that the provision was “responsive to the requests of the
4 Ltr. of F. McManamy. Hearings on S. 2910. p. 208.
5 Hearings on H.R. 8301. pp. 191-192 (See 89 FCC 2d at 1105.
fn.17). The Preemption Order had indicated that Mr. Gifford’s preemp-
tion views were tentative. However. careful review of that testimony
reveals that Mr. Gifford’s uncertainty may have concerned the date Sec-
tion 20(5) was enacted, not preemption.
6 Hearings on S. 2910. 73rd Cong.. 2d Sess.. p. 181 (1943).
U Hearings on H.R. 8301. 73rd Cong.. 2d Sess.. p. 17 (1934).
A-37
State commissions that the present law be changed so as
to permit those bodies to exercise, for State purposes, cer-
tain jurisdiction over...depreciation accounting. "8
24. In remarks on the House floor, Representative
Rayburn, Chairman, House Committee on Interstate and
Foreign Commerce explained Section 220 of the proposed
bill as follows:
[plaragraphs (a) to (g), relating to accounts
records, memoranda, and depreciation, is based
upon sections 20(5) to (8) of the Interstate Com-
merce Act with changes necessary to permit
State commissions to prescribe the systems of ac-
counts for the intrastate operation of carriers.
Paragraphs (h) to (j) are new...paragraph (j)
removes any limitation upon the power of a State
commission to prescribe, for the purposes of the
exercise of its jurisdiction, rates of depreciation.
The last three paragraphs named were placed in
the bill at the request of the State commissions
which feel that their task of regulating intrastate
communications will be greatly facilitated by the
adoption of these paragraphs.”
25. The Senate version of Subsection (j) took a totally
8 H.R. Rep. No. 1850, 73rd Cong.. 2d Sess. 7 (1934) (emphasis add-
ed). The section (j) proposed by the House 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 prac-
tices; (2) relieve any carrier from keeping any accounts. records, or
memoranda which may be required to be kept by any State commission
in pursuance of authority granted under State Law.” H.R. 8301. 73
Cong.. 2d Sess. Section 2201i) (February 27, 1934).
\
9 74 Cong. Rec. 10314 (1934) (emphasis added).
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different approach than the House version. It called ‘‘for in-
vestigation and report to Congres instead of immediately
turning over these matters to the State."’ S. Rep. No. 781,
73rd Cong., 2d Sess. 5 (1934).!° The version of Section
220(j) finally enacted was the result of agreement in the
conference committee. The conferees agreed to adopt the ’
House provisions as to Sections 220(h) and (i), but decided
against the House Section 220(j) proposal to remove any
limitation upon the power of states to prescribe rates of
depreciation. Instead, Section 220(j) was modified along
the lines of the Senate proposal to require the Commission
to “investigate and report to Congress as to the need for
legislation to define or further harmonize the powers of the
Commission and of State commissions with respect to
other matters to which this section relates."’ Conf. Comm.
Rep. No. 1918, 73rd Cong., 2d Sess. 17 (1934). The obvious
inference to be drawn is that the conferees were not
prepared at that time to allow the states to prescribe
depreciation rates different than those established at the
federal level, but that matter might be considered later if
the report required by Section 220(j) indicated it to be
appropriate.
26. The hearing testimony and Committee reports
therefore indicate that the language being recodified from
Section 20(5) of the Interstate Commerce Act preempted
10 The Senate version of Section 2201 j) provided: “The Commis-
sion shall investigate and report to the Congress whether in its opinion
legislation is desirable (1) authorizing the Commission to except the car-
riers of any particular class or classes in any State from any of the re-
quirements under this section in cases where such carriers are subject
to State commission regulation with respect to matters to which this
section relates; and (2) permitting the State commissions. in pursuance
of authority granted under State Law, to prescribe their own percentage
rates of depreciation or systems of accounts records. or memoranda to
be kept by carriers.’ S. 3285. 73rd Cong.. 2d Sess. Section 220(j) (March
28, 1934).
SE
A-39
the state commissions’ jurisdiction over depreciation. The
rules of statutory construction provide that where Con-
gress enacts a provision from an existing statute, it intends
that the construction applicable to the existing provision
apply as well to the new provision.'!! The legislative
history thus supports the actual language of Section 220(b)
and indicates that Congress intended to preempt state
commission jurisdiction over depreciation rates for subject
carriers when it recodified the language from the Interstate
Commerce Act. Accordingly, we conclude that the analysis
of the legislative history contained in the comments of
AT&T and GTE accurately represents the intent of Con-
gress and that the more persuasive reading of the
legislative history supports the construction that Section
220(b) preempts inconsistent state action where the Com-
mission has prescribed depreciation rates for a carrier.
C. Administrative and Court Decisions
27. The Preemption Order cited Accounting Rules for
Telephone Companies, 203 ICC 13 (1934), as evidence that
the FCC could not preempt state depreciation practices.
There the ICC recognized that states might have additional
accounting needs and indicated that it had permitted state-
prescribed sub-accounts within the federally-required
books of account. However, the adoption of a blanket sub-
division rule does not lead to the conclusion that federally
adopted accounting and depreciation rules are not preemp-
tive. Rather, it reflects an awareness that state commis-
sions may have special data requirements to properly
i Courts have given weight to interpretations of the Interstate
Commerce Act in interpreting the Communications Act. See, e.g.,
American Telephone and Tel graph Company v. FCC, 487 F.2d 865 (2d
Cir. 1973).
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administer their regulatory policies which may require ad-
ditional detail beyond that prescribed by the federal agen-
cy. A subdivision rule, however, does not permit what is ac-
counted for as an expense to be capitalized in the guise of
subdividing an expense account. While we may allow sub-
divisions of accounts, we will not allow inconsistent ac-
counting or depreciation methods unless such practices are
otherwise consistent with the public interest. Any other
policy would obliterate the prescriptive effect of our adop-
tion of a uniform system of accounts.
28. In fact we have approved variations from the
prescribed uniform system of accounts. For example, our
rules give carriers blanket authority to subdivide certain
prescribed accounts “provided such subdivisions do not
impair the integrity of the accounts prescribed.” 47 C.F.R.
31.01-2(d\(1). C.F. 31.01-2(f), authorizing carriers to sub-
divide accounts ‘‘in the manner ordered by any state com-
mission having jurisdiction...."" We also have approved
state commission rate making treatment of plant under
construction different from that adopted by us. See 89 FCC
2d at 1107.
29. There may well have been some instances of in-
consistent state treatment of depreciation in the past.
However, we do not seek controversy unless it is necessary
to protect vital federal interests. Either such instances did
not come to our attention or they may not have appeared
threatening to federal interests.!? In the past the commun-
ications marketplace was typified by monopoly conditions
Te Pacific Telephone and Telegraph Company v. California. 40} P.
2d 353 (1965), was cited in the Preemption Order to support nonpreemp-
tion. However, the California Supreme Court did not analyze Section
220(b) or its legislative history and its determination is therefore
unpersuasive.
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and life and salvage factors underlying the state rates were
generally very similar, if not identical, to those used by the
Commission. In that environment it was not essential that
the Commission assert all the authority granted it. See
Computer and Communications Industry Association v.
FCC, No. 80-1471 (D.C. Cir. November 12, 1982). As
discussed, infra., in the more competitive conditions
prevailing today, the utilization of proper methods and
rates is more critical if the proper incentives are to be
created to insure that the marketplace will function effi-
ciently to bring the benefits of the competition to the
ratepayers of this country. Therefore, where it is necessary
to protect important federal policies against frustration by
inconsistent state actions, we will exercise the full breadth
of our depreciation powers. See para. 14 above.
30. Nor is there any merit to the argument that
federal preemption of depreciation practices constitutes in-
trastate ratemaking, which might run afoul of 47 U.S.C.
152(b). Section 220(b) only prohibits the states from setting
depreciation rates for telephone property inconsistent from
those prescribed by the FCC. It does not require that any
particular tariff for intrastate service be accepted by the
state commissions. The setting of depreciation rates and
classes of depreciable property only resolves a single issue
impacting the ratemaking process. It does not restrict the
state commission's broad discretion in setting charges for
individual services. In any event, Section 2(b) of the Act, 47
U.S.C. 152(b), has a well defined purpose which would not
be implicated here: ‘‘to restrain the Commission from in-
terfering with those essentially local incidents and prac-
tices of common carriage by wire that do not substantially
encroach upon the administration and development of the
interstate telephone network.’ NCUC IJ, supra at 794 n.6.
Here the setting of depreciation rates is not an essentially
A-42
local incident or practice and it has substantial effects upon
the administration and development of the interstate
telephone network.!3
D. Preemption Under Federal Supremacy
31. Even if one were to assume that Section 220(b)
did not automatically preempt the states whenever this
Commission has acted, federal preemption of inconsistent
state depreciation would be justified in this case to avoid
frustration of validly adopted federal policies. The Fourth
Circuit has stated:
We have no doubt that the provisions of section
2(b) deprive the Commission of regulatory power
over local services, facilities and disputes that in
their nature and effect are separable from and do
not substantially affect the conduct or develop-
ment of interstate communications. But beyond
that, we are not persuaded that section 2(b) sanc-
tions any state regulation, formally restrictive
only of intrastate communication, that in effect
encroaches substantially upon the Commission's
authority under sections 201 through 205.
NCUCI, supra at 793. to the same effect, see Computer and
Communications Industry Association v. FCC, supra at 35.
Nor is federal preemption of depreciation practices inconsistent
with 47 U.S.C. 221(b). Section 221(b) was intended to reserve state
jurisdiction over exchange rates where exchange boundaries extend
over two states. That provision was not intended to create new reserva
tions to the states beyond that contained in Section 2(b) and the narrow
circumstance encompassed by interstate exchanges. See Computer and
Communications Industry Association v. FCC, supra, and North
Carolina Utilities Commission v. FCC, 552 F.2d 1036, 1046 (4th
Cir.1976). cert. denied, 434 U.S. 874 (1977) (hereinafter cited as NCUC
II).
A-43
32. The D.C. Circuit recently addressed the preemp-
tion question, observing:
We fail to see any distinction in this case between
preemption principles applicable to state ratemak-
ing authority and those applicable to other state
powers. The operative principle [is that]...preemp-
tion of state tariffs on CPE is justified because
state tariffs would interfere with the consumer's
right to purchase CPE separately from transmis-
sion service and would thus frustrate the validly
adopted federal policy.
Id. at 38. The court went on to find that conflicting state
regulation may be preempted even though there is some in-
direct effect on state ratemaking discretion, noting:
the Act itself does not distinguish between authori-
ty over rates and authority over other aspects of
communications. Sections 2(a) and (b) of the Act
allocated federal and state authority with regard
to both ‘charges [and]...facilities.'’ Therefore, con-
flicting federal and state regulations regarding dual
use CPE are no more acceptable under the Act
when equipment rates are involved, as here, than
when interconnection policies are involved, as in
the NCUC cases.
Id. at 38-39.
33. The provision for adequate capital recovery is im-
portant to ‘‘make available, so far as possible, to all the peo-
ple of the United States a rapid, efficient, Nation-wide, world-
wide wire and radio communication service with adequate
facilities at reasonable charges...... 47 U.S.C. 151. State
depreciation rate prescriptions that do not adequately pro-
vide for capital recovery in the competitive environment,
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which constitutes this Commission's policy in those
markets found capable of supporting competition, would
frustrate the accomplishment of that policy and are
preemptable by this Commission.
34. Over the past decade the Commission has em-
barked in several areas of telecommunications to pursue a
policy of encouraging competition wherever the market
conditions will support such a policy and produce benefits
to the public interest. In MTS-WATS Market Structure In-
quiry, 81 FCC 2d 177 (1980), the Commission opened the
domestic MTS-WATS market to competitive entry, reserv-
ing the question of entry to Alaska to a later phase since
concluded with the adoption of a similar open entry policy,
MTS-WATS Market Structure Inquiry, FCC 82-515 (releas-
ed November 30, 1982). In Computer Inquiry II, 77 FCC 2d
384 (1980), recon., 84 FCC 2d 50 (1980), recon., 88 FCC 2d
512, aff'd subnom., Computer and Communications In-
dustry Association v. FCC, supra, the Commission opened
the areas of enhanced services and customer premises
equipment to competitive provision. These are just two ex-
amples of the policies which the Commission has pursued.
However, they do point up the fact that if this policy is to
be successful, it will be necessary for the marketplace to
operate efficiently. Such efficient operation requires proper
price signals generating from supply and demand
conditions.
35. Capital recovery is an important determinant of
the price at which services can be offered and significantly
affects the amount of facilities provided to supply the
needs of the communications industry. In Amendment to
Part 31, 83 FCC 2d 267 (1980), recon., 87 FCC 2d 916 (1981),
the Commission adopted remaining life and straight line
equal life group depreciation methods that recover capital
A-45
on a basis that approximates straight line unit depreciation
more closely than did the previously used methods. More
timely capital recovery was anticipated to result in faster
technological innovation with its accompanying benefits of
more efficient service provision and lower costs resulting
from more productive use of facilities.
36. Capital recovery issues are important in the im-
plementation of Computer Inquiry II due to the part
depreciation plays in the determination of net book value
and the resultant gain or loss that may occur on the
transfer of assets to the new subsidiary. It will also be
significant in any later transfer of assets from the provi-
sion of regulated service to unregulated service or vice-
versa. Thus, appropriate capital recovery will ease the
regulatory burdens associated with supervising the transi-
tion to the new structure.
37. Depreciation is a significant portion of the
revenue requirement of the regulated telephone companies.
As such, it plays an important role in determining the price
at which they offer their services. If competition is to be
viable, it is necessary for prices to reflect depreciation ex-
penses that are realistic for a competitive market. Absent
such depreciation levels, improper signals will be given to
the market. Since most plant is used interchangeably to
provide interstate and intrastate communications service,
supply and demand is determined by the combination of in-
puts from service demand in both regulatory jurisdictions.
Approximately 75 percent of exchange plant is allocated to
the intrastate jurisdiction. It is clear that unless telephone
plant, including that portion subject to allocation to the in-
trastate jurisdiction, is depreciated at a reasonable rate,
improperly time capital recovery will occur. Indeed, in a in-
creasingly competitive environment, it is possible that
A-46
improper capital recovery could delay or prevent moder-
nization which would add to the costs borne by ratepayers
and could, ultimately, threaten carriers’ ability to fully
recover their invested capital. Moreover, the extent of state
action attempting to prevent carriers from utilizing our
depreciation prescriptions places substantial burdens on
carriers and could well impair their ability to raise the in-
vestment capital they will need to fully compete in the con-
tinually evolving competitive telecommunications
marketplace.!4 Such a result could undermine the achieve-
ment of the Commission's objective to develop policies that
will engender a dynamic, efficient telecommunications
marketplace with services being provided at reasonable
prices.
38. NARUC contends that preemption with respect
to station connections is unnecessary and will not produce
competitive benefits because expensing is not the same as
unbundling. While NARUC is correct in a strict sense, it
avoids the critical issue, which is the proper timing of cost
recovery. If the Commission preempts with respect to sta-
tion connections and all states must expense these costs,
current ratepayers will be paying these costs instead of
future ratepayers as would be the case with capitalization.
Thus, future prices will reflect the appropriate costs for
providing those services. Moreover, if these costs are
14 ATAaT and GTE indicate several state commission have refus-
ed to follow. have indicated an intent not to follow. or are being urged
not to follow Commission determinations with respect to the expensing
of inside wiring and/or the adoption of straight-line equal life group or
remaining life depreciation methods. A staff review of state action in
conjunction with AT&T intrastate tariff proceedings reveals that all but
two states have approved expensing of station connections, that 13
states have rejected and 12 have approved equal life group depreciation.
and that 9 states have rejected and 22 have approved remaining life
group depreciation. Prior to issuing our Order in this docket we did not
expect that such significant variance would be required by states.
A-47
expensed and state commissions must allow rates to cover
these costs, it is likely that the cost causative ratepayer
will in many cases be charged for the costs being expensed
in connection with the provision of inside wiring. Thus, the
Commission's objective may be substantially achieved by
preempting state commissions from departing from our ex-
pensing rules.
39. In 1971 Congress amended the Communications
Act to change the procedures for allocating costs between
federal and state jurisdictions by adding Section 410(c).
The Commission was given the ultimate authority with
respect to such allocations, further solidifying its
superintendency over common carrier communications.
See NCUC I, supra at 795. Section 410(c) procedures pro-
vide for uniformity in the separations process, thereby in-
suring that plant, expenses and revenues will be rationally
accounted for in the dual jurisdictional environment. The
utilization of one depreciation rate is the most effective
method for insuring that this uniformity will be maintained
and to insure that no jurisdiction bears a greater burden
than another in the transition to a fully competitive
marketplace. Several parties suggest that under or over
recovery will result from one jurisdiction or another
because of the shifting usage patterns for telephone plant
over time and argue that if such a result were to occur,
significant inequities would result to both ratepayers and
carriers. A uniform depreciation rate for each class of pro-
perty applicable to all property whether allocated to the
federal or state jurisdiction clearly eliminates these poten-
tial problems.
40. For all of these reasons, it is apparent to us that
a substantial impact on federal policies could result if state
commissions were allowed to diverge from Commission
A-48
prescribed depreciation rates and practices. Accordingly, it
is essential to preempt inconsistent state depreciation
practices to avoid frustration of these vital national
policies.
III. Declaratory Ruling Petition.
41. GTE of Ohio seeks to have the Commission
preempt an order of the Ohio Public Utilities Commission
that did not approve remaining life and equal life group
rates for intrastate ratemaking purposes. As alleged by
GTE of Ohio, the differential in rates amounts to seven
million dollars per year. GTE of Ohio states that failure of
this Commission to preempt the state will frustrate the
achievement of federal policies adopted by this Commis-
sion. Its argument is similar to those cited in connection
with the reconsideration petition.
42. Essentially the same arguments are made
against the GTE of Ohio petition as were urged on recon-
sideration with regard to the substance of the issue.
However, Ohio cites an Ohio statute that precludes the
state commission from adopting remaining life deprecia-
tion for intrastate purposes.
43. One procedural argument is raised by Ohio with
respect to the petition. It contends that the question
presented is premature since the order is subject to further
reconsideration before the Ohio Commission pursuant to a
request filed by GTE of Ohio. We do not agree since the
purpose of declaratory rulings is to give guidance to af-
fected persons in areas where uncertainty or confusion ex-
ists. A case or controversy in the judicial sense is not re-
quired, NCUC I, supra at 790-1. In this case, it appears
necessary to issue such a ruling to clarify for the state
A-49
commissions and the carriers the effect of our depreciation
prescriptions. The fact that reconsideration proceedings
are under way in Ohio does not mitigate against such a
course in light of the divergencies from this Commission's
depreciation methods and rates that are occurring to the
detriment of federal policies. Thus, we find it imperative to
declare today that inconsistent state prescribed deprecia-
tion rates are preempted by the Communications Act and
are accordingly void. The existence of a state statute
preventing a state commission from adopting a particular
method does not affect this determination. When federal
preemption is involved, there is no difference between a
statute or a regulation of a state commission. Both must
fall in the face of overriding federal concerns and policies.
IV. Conclusion
44. We have carefully reviewed the record upon
reconsideration. The issues raised concerning the Preemp-
tion Order caused us to reevaluate the statutory language
of Section 220(b), the legislative history of the provision,
and the relevant judicial and administrative proceedings
relating to the subject. Our considered judgment after this
review is that the Preemption Order must be reconsidered.
We find that the most logical and reasonable interpretation
of Section 220(b) of the Act is that where the Commission
prescribes depreciation rates for classes of property, state
commissions are precluded from departing from those
rates. Since the depreciation method utilized is a material
part in determining the rate to be applied, state commis-
sions are also precluded from departing from the deprecia-
tion methods prescribed by the Commission. Thus, the Ex-
pensing Order is binding upon state commissions and they
must expense additions to inside wiring in accordance with
the plan established therein. Moreover, they must follow
A-50
the amortization procedures adopted in that decision for
the embedded inside wiring and any additions to the
capitalized amount as a result of the phase-in of the expens-
ing of inside wiring.
45. Even if Section 220(b) does not preempt state
commissions, we would act under our authority to preempt
state actions that interfere with the accomplishment of
federal policies and objectives. Computer and Communica-
tions Industry Associaton v. FCC, supra, and NCUC I].
We note that petitioner and the parties supporting the peti-
tion cite several states that have indicated they do not in-
tend to follow the Commission's depreciation prescriptions
or expensing of inside wiring, or have refused to follow
either. In light of the concerns expressed about an efficient-
ly functioning market, we must find that inconsistent
depreciation rates prescribed by state commissions will in-
terfere with the efficient operation of the communications
marketplace and thereby frustrate the achievement of the
Commission's policies. Accordingly, we find that this Com-
mission's depreciation policies and rates, including the ex-
pensing of inside wiring, preempt inconsistent state
depreciation policies and rates.
46. Accordingly, IT IS ORDERED, pursuant to Sec-
tion 1, 4(i), and 220(b) of the Communications Act of 1934,
as amended, 47 U.S.C. 151, 154(i), and 220(b), That the
Petition for Reconsideration filed by the American
Telephone and Telegraph Company IS GRANTED.
47. IT IS FURTHER ORDERED, That the Petition
for Declaratory Ruling filed by General Telephone Com-
pany of Ohio IS GRANTED to the extent reflected herein.
48. IT IS FURTHER ORDERED, That the
A-51
Secretary shall cause this order to be published in the Federal
Register.
49. IT IS FURTHER ORDERED, That the Secretary
shall cause a copy of this order to be served on each state
commission.
FEDERAL COMMUNICATIONS COMMISSION
William J. Tricarico Secretary
Appendix A. Summary of Comments
1. AT&T argues that the Commission on reconsidera-
tion should find that state commissions are precluded from
departing from the depreciation methods and rates establish-
ed by this Commission in order to allow the carriers to achieve
timely capital recovery. It views the Preemption Order as a
retreat from the Commission's competitive policies.
2. AT&T asserts that realistic depreciation rates are
essential to attain accurate cost-based pricing decisions to
prevent artificial barriers to competition, to foster
technological innovation which will enhance network efficien-
cy and the availability of competitive alternatives, to facilitate
the timely implementation of the detariffing of customer
premises equipment! and to insure the financial viability of
the carriers. It contends that competitive conditions result
in faster obsolescence and shorter asset lives, requiring that
depreciation methods and rates be inseparable from ratemak-
ing to insure capital recovery.
1 It contends that different depreciation rates between jurisdictions
will result in disagreements about net book value in deregulating CPE
and that the application of the Separations Manual will create uncertain-
ty as to which plant a particular book value relates.
A-52
3. AT&T proposes two legal theories for preempting
state commission action. First, it asserts that the Commis-
sion may preempt under Sections | and 2 of the Act, citing
California v. FCC, 567 F.2d 84, 86 (D.C. Cir. 1977), cert.
denied, 434 U.S. 1010 (1978), NCUC II, NCUC I, and
NARUC v. FCC, 533 F.2d 601 (D.C. Cir. 1976). It states
that because of the central role depreciation, including the
depreciation aspects of station connections, plays in the
achievement of the Commission's policies, preemption is
necessary to avoid interference with or frustration of these
policies.
4. AT&T's second theory is that Section 220(b)
preempts states on its face, asserting that in its earlier
pleadings it did not rely on Section 220(g) as suggested by
the Commission's decision. It argues that Section 220
gives the Commission discretion with respect to accoun-
ting rules, but does not give it such discretion with regard
to depreciation prescriptions. AT&T states that the Com-
mission's rule allowing carriers to subdivide an account to
comply with a state commission order does not mean that
a state can require capitalization when this Commission re-
quires expensing. Finally, it submits that the Commission
misread the legislative history of the Communications Act
by failing to consider statements in the committee reports
and remarks of members at committee hearings that in-
dicate Congress believed the Interstate Commerce Act pro-
visions from which Section 220(b) was taken did in fact
preempt the states. See also Depreciation Charges of
Telephone Companies, 118 1.C.C. 295 (1926).
5. GTE asserts that the Commission's policies in the
areas of competition and faster capital recovery will be
frusstrated if the state commissions are allowed to depart
from the depreciation rates and methods prescribed by the
A-53
Commission. It contends that Section 220(b) preempts the
states and distinguishes Section 220(a) as being discre-
tionary on the Commission and argues that the Commis-
sion focused only on the provisions of Section 220(a) in its
earlier decision. It submits that there is no doubt that a
state can require a carrier to keep additional records and
memoranda. However, GTE argues that the Commission's
decision is overly broad. It is clear, GTE contends, that the
Commission can preempt inconsistent state action when it
conflicts with national telecommunications policies, and it
should do so in this case. GTE also argues that the
legislative history and the rules of statutory construction
indicate that Congress intended to preempt the states in
the area of depreciation, submitting that property cannot
be successfully depreciated at two different rates prescrib-
ed by different regulatory bodies because under or over
recovery from one or the other jurisdiction will occur from
the use of shifting usage factors.
6. The oppositions generally argue that the states
have the jurisdiction to determine the extent to which in-
trastate rates reflect depreciation and expensing ad-
justments promulgated by the Commission. Sections 2(b)
and 221(b) are cited as reserving jurisdiction over local and
intrastate telephone rates to the states as intended by Con-
gress when it distinguished between “‘‘interstate’’ and ‘‘in-
trastate’’ in Sections 1 and 2. Ohio argues that the preemp-
tion argument was rejected in the only case of which it is
aware, Pacific Telephone and Telegraph Company uv.
California, 401 P. 2d 353 (1965).
7. Ohio asserts that the courts have distinguished
between ratemaking and interconnection policies, NCUC I]
and NCUC I, and submits that it is the ratemaking
jurisdiction reserved to the states that is in questicn in this
A-54
proceeding. To permit the Commission to prescribe
depreciation rates applicable to all property whether used
for interstate or intrastate services would, in Ohio's view,
be equivalent to giving the FCC a hand in setting state
rates.
8. Ohio is concerned that under some methods, such
as remaining life, costs will not be charged to consumers
who receive the benefits of the property being depreciated.
Finally, it contends that Sections 220(i) and (j) are consis-
tent with concurrent jurisdiction.
9. Ohio argues that GTE is attempting to have the
Commission read Section 2(b) out of the Act, and asserts
that it is inappropriate to ignore language in a statute, to
extend a statute beyond its clear import, or to embrace sub-
jects not specifically enumerated. Section 2(b)(1) is stated
by Ohio to have been intended to reverse the Supreme
Court decision in Houston East and West Texas Ry. v.
U.S., 234 U.S. 342 (1914), wherein the ICC was given the
power to suspend intrastate rates enabling carriers to raise
intrastate rates to federal levels for similar distances.
NARUC and Ohio argue that section 2(b) was intended to
ensure that state jurisdiction was not limited by the 1934
legislation.
10. Several parties assert that there is considerable
Commission precedent recognizing the states’ independent
reatemaking authority, including departures from Commis-
sion prescribed accounting, for intrastate rates. They note
that the Commission has encouraged state commissions to
devote more resources to depreciation matters. Amend-
ment of Part 31, 83 FCC 2d 267 (1980) recon., 87 FCC 2d
916 (1981), has recognized in this proceeding the state
jurisdiction over expensing of station connections for state
A-55
ratemaking purposes, has recognized divergent treatment
of interest during construction and has not contested
California’s use of remaining life for approximately thirty
years. Ohio argues that there is nothing to suggest that
there needs to be national uniformity in depreciation pro-
cedures and that local diversity is desirable, noting that
even a GTE of Ohio witness in an Ohio rate case has in-
dicated that local diversity in setting depreciation rates is
pr-ferable.
11. Ohio contends that McDonnell Douglas Corp. v.
General Telephone Company of California, 594 F.2d 720
(9th Cir. 1979), recognized the validity of intrastate
regulatory jurisdiction under the Act by finding that Con-
gress in enacting Section 2(b) had intended to give states
considerable power with respect to wire communications
that are wholly intrastate in nature.
12. California argues that the Commission's refusal
to preempt state power to prescribe depreciation rates for
intrastate ratemaking purposes will not undermine the
Commission's procompetitive policies or signal a retreat
since many states have adopted policies that foster com-
petition. AT&T's assertion that preemption must be exer-
cised to promote procompetitive policies is rejected by
NARUC as unsupported. It states that expensing of sta-
tion connection costs can have no competitive effect
because expensing is not the same as unbundling. More-
over, it contends that the Commission did not adopt re-
maining life and equal life group depreciation procedures to
promote competition but, rather, to more properly time
capital recovery and insure that any deficiency in past
depreciation was adjusted. Finally, NARUC states that
the speculative statements about the numbers of states
that are not following the Commission's policies are
A-56
inadequate to justify preempting state commission jurisdic-
tion on the theory that federal policies are being frustrated.
13. NARUC argues that the attempted distinction of
Section 220(a) from Section 220(b) on the basis that Section
220(b) is mandatory while Section 220(a) is discretionary does
not address the question of the preemptive effect of either
section. It contends that neither reason nor case law provides
support for asserting that preemption of state regulation of
intrastate communications is automatic with respect to sub-
ject areas which the FCC must regulate on the interstate
level. It further notes that the language of Section 220(g)
with respect to the effect of prescribed depreciation rates,
accounts or records other than as prescribed by the Com-
mission. NARUC states that the relationship between ac-
counting and ratemaking is self evident and argues that state
control over intrastate rates would have little vitality if state
commissions were deprived of the power to disallow expenses
and depreciation claimed by carriers. NARUC asserts that
the fact that a proposed Section 220(j) that would have ex-
pressly reserved depreciation prescription powers to the
states was not adopted does not mean that states must be
bound by Commission depreciation prescriptions, stating
that the final provision adopted was a compromise.
14. Consumers’ Counsel supports the Commission's
Preemption Order and generally cites from that Order in sup-
port of its position. Idaho also agrees with the conclusion
of the Order and states that it believes that administrative
costs of separate record keeping to meet state requirements
will be small. Arkansas filed to indicate that its opinions had
not rejected the new depreciation methods outright but had
left the decision to individual cases for resolution.
15. AT&T's reply submits that the setting of
A-57
depreciation rates does not constitute the exercise of
jurisdiction with respect to charges for intrastate services.
It argues that Section 2)b) does not deprive this Commis-
sion of jurisdiction over jointly used property where its
regulation affects the conduct or development of interstate
communications. AT&T states that if a state utilized the
depreciation rate prescribed by the Commission, it may
make adjustments to the test period data to reflect con-
cepts of used and useful property or other pro forma ad-
justment to reflect conditions during the period during
which the tariff will be in effect.
16. AT&T distinguishes Houston East and West
Texas Ry. Co. v. U.S., supra, by asserting that that case in-
volved actual preemption of service rates. It notes that
while Congress may have sought to reverse that decision in
the communications field, the issue here is only the
jurisdiction to prescribe depreciation rates. Thus, it con-
tends that the case actually suggests that Section 2(b)
should be narrowly interpreted. Moreover, while use of
federally prescribed depreciation rates may significantly
affect intrastate rates, the states remain free to price in-
dividual service rates. See e.g., NCUC I.
17. USITA submits that federal preemption of
jurisdiction over depreciation rate prescriptions for car-
riers for which the Commission has prescribed depreciation
rates would not interfere with state commission ability to
set intrastate service rates in accordance with any
ratemaking method desired. It contends that the setting of
depreciation rates is not a ratemaking function pursuant to
Sections 201-205, but is the exercise of a specific power
granted to the Commission by Congress. USITA argues
that divergent depreciation rates create confusion and
raise problems of capital recovery.
A-58
18. GTE contends that state action whether in the
nature of ratemaking or otherwise which ‘‘stands as an
obstacle to the accomplishment and execution of the full
purposes and objectives of Congress’”’ will be preempted.
Fidelity Federal Savings and Loan Association v. de la
Cuesta, 50 LW 4916, 4919 (1982). GTE concludes that the
states do not have the power through the guise of ratemak-
ing to negate FCC action designed to give effect to federal
statutory objectives. GTE does not challenge state rights
pursuant to state statutes to regulate rates for intrastate
services. It asserts that no preclusion of state ratemaking
jurisdiction would result from FCC preemption under Sec-
‘tion 220(b), although failure to preempt will endanger im-
portant national policies.
19. GTE submits that Section 220(b) charges the
Commission with the responsibility of prescribing
depreciation rates for carriers subject to the Act and
recognizes only two exceptions. First, the Commission
should act as soon as possible. Second, Section 220(h)
recognizes that certain classes of carriers may be exemp-
ted. The Commission, according to GTE, has not exercised
its authority pursuant to this provision in this proceeding.
Finally, GTE argues that reliance on NCUC I and NCUC
II as supporting a finding that the Commission cannot
preempt state commission depreciation prescriptions for
carriers subject to the Act is inconsistent with the holdings
and analysis of those cases. AT&T and GTE submit that
Section 221(b) is inapplicable because that provision was
intended only to give states the jurisdiction to regulate
local exchange service extending over a state boundary.
A-59
SEPARATE STATEMENT OF COMMISSIONER
JOSEPH R. FOGARTY
IN RE: RECONSIDERATION OF DOCKET NO. CC
79-105.
Having dissented from the Commission's original deci-
sion declining to preempt State accounting and depreciation
rules inconsistent with those prescribed by the FCC,' I am
pleased that the Commission has reconsidered this issue and
acted to preempt such inconsistent State regulation.
As this Order establishes in detail, a true reading of
the statutory language and legislative history of Section
220(b) of the Communications Act clearly demonstrates that
Congress intended FCC depreciation rules and policies to con-
trol the field. ‘
Even if preemption were not explicity mandated by
Section 220(b), the effective implementation of our pro-
competitive federal telecommunications policies dictates that
inconsistent State depreciation regulation be preempted by
this Commission. We cannot ‘‘defer to the States’’ on capital
recovery issues. Telephone companies must be able to recover
their cost of capital in a timely and effective manner if they
are to price their services efficiently and to improve and ex-
pand their facilities to meet the challenges of competition
and technologic innovation.
This preemption imperative is not merely theoretical.
Too many States (e.g., Alabama, Louisiana, Nebraska, Ohio,
New Jersey, Michigan, Arkansas) have already refused to
! Amendment of Part 31, Joint Dissenting Statement of Commis-
sioners Joseph R. Fogarty and Anne P. Jones, 89 FCC 2d 1109-1111 (1981).
A-60
recognize the critical necessity of the FCC's cost recovery
principles. The resulting depreciation rate differentials are
alarming: GTE of Ohio has indicated that it will be denied
$7 million in capital recovery this year if the State of Ohio's
disparate depreciation treatment is allowed to prevail.
The FCC cannot ignore the detrimental impacts of in-
consistent State treatment of depreciation if our pro-
competitive policies are to have any integrity and viability.
This Commission now recognizes that preemption is both
mandated as a matter of law and essential as a matter of
policy, and our action today has my full endorsement and
support.
2 eae
A-61
BEFORE THE
FEDERAL COMMUNICATIONS COMMISSION
WASHINGTON, D.C. 20554
CC Docket 79-105
In the Matter of
Amendment of Part 31, Uniform System of Ac-
counts for Class A and Class B Telephone Com-
panies, of the Commission's Rules and Regula-
tions with respect to accounting for station con-
nections, optional payment plan revenues and
related capital costs, customer provided equip-
ment and sale of terminal equipment.
MEMORANDUM OPINION AND ORDER
Adopted: April 1, 1982; Released: April 27, 1982
BY THE COMMISSION: COMMISSIONERS FOGAR-
TY AND JONES DISSENTING AND ISSUING A
JOINT STATEMENT; COMMISSIONER RIVERA
DISSENTING.
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
Utility Commissioners (NARUC) and a petition for recon-
sideration 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
Commission's Rules (Uniform System of Accounts for
Class A and Class B Telephone Companies). The principal
A-62
changes 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 previous-
ly been capitalized in Account 232 (Station Connections). The
First Report and Order also required that the present net in-
vestment in inside wiring and investment that will be add-
ed during a transition period be amortized over a period of
10 years. That requirement superseded existing depreciation
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 different accoun-
ting and depreciation procedures for purposes of computing
revenue requirements for intrastate telecommunications ser-
vices. 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 purports to restrict the discre-
tion of state commissions. GTE Service Corporation (GTE)
and American Telephone and Telegraph Company (AT&T)
have filed oppositions to the petitions. Those companies con-
tend 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 accoun-
ting or depreciation procedures for intrastate ratemaking pro-
ceedings. 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 procedures for intrastate
ratemaking purpose, it is unnecessary to consider further the
California petition and it will be dismissed as moot.
Hf ain uh
2 he er et ON ay ticioe aO R O Mm Aiy o Hm
—m
a eRe TRUER ot
A-63
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 connections on the causative ratepayer. We accor-
dingly ordered AT&T to submit a plan for changing the ac-
counting treatment of station connection costs that would
be consistent with that objective. Jd. at 110. AT&T
responded by filling a petition for rulemaking (RM-3017)
that proposed amendments to Part 31 of our Rules. After
reviewing that petition, we instituted this proceeding by in-
viting comments upon a somewhat different proposal to
modify accounting for station connections. !
5. After reviewing the comments, we concluded that
any changes in the accounting or other regulatory treat-
ment of station connections should not include drop or
block lines and protectors. We also concluded that changes
in accounting procedures would not be sufficient in and of
themselves to place other station connection costs on the
causative ratepayer. This is the case because costs
associated with the provision of inside wiring necessarily
must be apportioned between the federal and state jurisdic-
tions as long as inside wiring is provided as a tariffed ser-
vice subject to dual regulation. Complete unbundling can-
not be achieved by expensing rather than capitalizing such
costs because both the telephone operations investment
and telephone operations expenses are apportioned for pur-
poses of computing an interstate and an intrastate tele-
communication service revenue requirement. Complete
! Notice of Proposed Rulemaking (CC Docket 79-105), 44 F.R.
48988 (August 14, 1979). We also invited comment upon some other pro-
posed accounting changes that are closely related to station
connections.
A-64
unbundling could be achieved by determining that the pro-
vision of inside wiring should be provided on a detariffed
basis. We have, of course, made such a determination with
respect to customer premises equipment and have adopted
rules to separate that business from the telephone opera
tions that are subject to tariff regulation.2 We concluded
that it would be premature to adopt such a fundamental
change in the regulatory status of inside wiring without
conducting further inquiry.
6. Nevertheless, we concluded that changes in ac-
counting 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 wiring.
The First Report and Order does not produce any change
in regulatory status. The interstate portion of the embedd-
ed net investment will be reflected in the return component
of the interstate telecommunication service revenue re-
quirement and the interstate portion of the annual amor-
tization 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 ac-
counting rules will not have a greater or different effect
than any other accounting rules we have prescribed for the
“ 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).
“tee
© een ed) Wrenn
A-65
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-
clude that the First Report and Order was not intended to
have any preemptive effect that does not arise by operation
of law. The discussion of the effects of expensing upon in-
trastate rates and revenue requirements in thet Order was
based upon the assumption that all or most state commis-
sions would choose to follow those rules for purposes of
computing intrastate telecommunications service rates.
Our decision to permit carriers to accelerate the transition
to expensing with the approval of state regulatory commis-
sions 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 ap-
peared reasonable because most state commissions have
followed most accounting and depreciation procedures
prescribed by this Commission in the past and the con-
siderations that led us to conclude that expensing 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 to 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
A-66
for ‘intrastate ratemaking purposes and AT&T and GTE
apparently contend that Section 220 of the Communica-
tions 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
characterized as a request for a declaratory ruling with
respect 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 pro-
perly labeled. We have concluded, for reasons explained in
Part II, that Section 220 does not 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
precludes the states from departing from our accounting
and depreciation rules for purposes of computing in-
trastate telecommunication service revenue requirements.
Subsection (g) provides:
(g) After the Commission has prescribed the
forms and manner of keeping of accounts,
records, and memoranda 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 prescribed or such as
may be approved by the Commission or to keep
the accounts in any other manner than that
prescribed or approved by the Commission.
Notice of alterations by the Commission in the re-
quired manner or form of keeping accounts shall
oe ial ts ee Oi at 8 ci a Re Meee al.
en ee ee
A-67
be given to such persons by the Commission at
least six months before the same are to take ef-
fect. (Emphasis added)
10. Subsection (g) does not literally impose any
restriction upon the power of the states to regulate in-
trastate 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 con-
flict with obligations that Subsection (g) imposes upon car-
riers. 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 compile 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) im-
plicitly precludes the use of other accounting methods or
systems for other regulatory purposes when this Commis-
sion has prescribed methods that must be used for in-
terstate ratemaking purposes.
11. Subsections (a)-(g) of Section 220 were in the main
a reprint of provisions contained in Section 20 of the In-
terstate 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 Commis-
sion was in the process of developing accounting and
3 At the time of adoption of Section 220(g) of the 1934 Com-
munications 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 Commission... 41
Stat. 493 (1920). See 49 U.S.C. § 2065).
A-68
depreciation rules for telephone companies at the time the
Communications 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.4 Unless the context in-
dicates 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.°
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 pro-
hibiting railroads from maintaining accounts, records or
memoranda other than those prescribed by the ICC. Con-
gress may have wished to inhibit the railroads from
defrauding investors through fraudulent or sloppy accoun-
ting 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. The Act was apparent-
ly motivated solely by a desire to make railroad regulation
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.,
4 Courts have attached great weight to interpretations of In-
terstate 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-69
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 Supreme Court sus-
tained 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 regula-
tion. The Court said (id. at 211):
If the Commission is to successfully perform its
duties in respect to reasonable rates, undue
discriminations and favoritism, it must be in-
formed as to the business of the carriers by a
system of accounting which will not permit the
possible concealment of forbidden practices in ac-
counts which it is not permitted to see and concer-
ning which it can require no information. It is a
mistake to suppose that the requiring of informa-
tion concerning the business methods of such cor-
porations, as shown in their accounts, is a regula-
tion of business not within the jurisdiction of the
Commission, as seems to be argued for the com-
plainants. 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 mat-
ters as are really within its jursidiction.
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 con-
struction of Section 20 that would have limited the states’
discretion to regulate intrastate rail rates would have been
A-70
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 ac-
counting records or information that differ from data
generated by the rules prescribed for interstate ratemak-
ing. Indeed such an interpretation would appear to
preclude carriers from using accelerated depreciation
methods 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 re-
quirements 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 operating
expense for accounting purposes. The railroad contended in
Kansas City Southern Ry. Co. v. Commissioner of Int.
Rev., 52 F.2d 372 (8th Cir. 1931) that the Commissioner
was required to accept the amortized expenses as a deduc-
tion from income because failure to do so would violate Sec-
tion 20 of the Interstate Commerce Act. The Court sum-
marily 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
A-71
authorities to follow. This would be beyond its
province....Systems of accounting for railroads
under the control of the Commission cannot in-
terfere with the government's system of taxation.
The Commission has not power to direct how the
Revenue Laws of the United States shall be inter-
preted or by its orders provide standards to
govern the taxing authorities.
17. AT&T apparently contends that providing stan-
dards for state-regulators to follow was within the In-
terstate Commerce Commission's province and that the
ICC had specifically rejected contentions that Section 20 of
the Interstate Commerce Act did not give it that power.
AT&T's reliance on Depreciaton Charges of Telephone
Companies, 118 I.C.C. 295 (1926), is misplaced. In the
Depreciation 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 requirements for the local telephone com-
panies engaged only to an insignificant extent in interstate
commerce. In rejecting NA RUC'’s position, the ICC merely
held that its obligation under Section 20(5) to prescribe
depreciation rates for telephone companies was mandatory,
not discretionary.® In dicta, the Commission additionally
appeared to suggest that its authority under Section 20(5)
extended to all property ‘“‘open for use in interstate com-
merce."’ Petitioners in CC Docket No. 79-105, however, do
not appear to dispute the authority of the FCC, under sec-
tion 220 of the Communications Act, to extend its accoun-
ting and depreciation prescriptions to cover assets used for
primarily intrastate purposes. The ICC’s 1926 telephone
depreciation charge proceeding is silent on the issue of
whether federal prescription of depreciation rates preempts
8 118 LCC. at 332-33.
A-72
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
Telephone Companies, 203 ICC 13 (1934), in support of its
contention that state commissions lack jurisdiction over
telephone 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;
In the measures adopted with respect to the
uniform system, we are acting in pursuance of the
direction of Congress. Uniformity is the desired
and important object. The nature of the undertak-
ing necessarily precludes the incorporation of
special provisions covering the requirements of
the several State commissions.
Indeed, the Supreme Court has placed this same construction on
the ICC's order in the Depreciation Charge proceeding. Smith v. Illinuis
Bell Tel. Co., 282 U.S. 133. 159 (1930).
8 See also, Kansas City So. Ry. v. United States, 231 U.S. 423
(1913); and Int. Com. Comm. v. Goodrich Trans Co.. supra.
——
A-73
We have, however, recognized the needs of the
several State commissions in the intrastate regula-
tion which is their duty and have, endeavored to
help them in the securing of all necessary informa-
tion by leaving it open to them to require subdivi-
sion 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 con-
strued as recognition of the power of the states to require
accounts for this own regulatory purposes independent of the
scope of the Commission's authority to prescribe 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 depar-
ting from a federally prescribed accounting system by adop-
ting accounting methods that are inconsistent with the
federal system. That ICC opinion does contain language that
indicates that the ICC believed such departures from unifor-
mity would be undesirable, but the ICC did not conclude that
such departures are precluded by statute.
9 See. 49 U.SC.A. Section 17(2); and Davis, Administrative Law
Treatise. Ch. 3 (1978).
10 Significantly, the FCC also has permittted state-prescribed sub-
accounts in the USOA books, 47 C.F.R. Section 31.10-2(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 sub-
dividing 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 prescrib-
ed reports to such commission. (Emphasis added.)
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20. Supreme Court decisions relating to Section 20 of
the Interstate Commerce Act never squarely :ddressed 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 requirements
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 enforcing depreciation
rules prior to the adoption of the ICC depreciation rules. The
Court expressly declined to determine what effect the adop-
tion of ICC depreciation rules would have upon the state com-
mission'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 ex-
pansive interpretation of that provision, the reenactment of
that language should not be interpreted to restrict state com-
missions 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 subsection 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;
(2) relieve any carrier from keeping any accounts,
records, or memoranda which may be required to
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be kept by any State commission in yureuance of
authority granted 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
desirable (1) authorizing the Commission to ex-
cept the carriers of any particular class or classes
in any State from any of the requirements under
this section in cases where such carriers are sub-
ject to State commission regulation with respect
to matters to which this section relates; and (2)
permitting the State commissions, in pursuance
of authority granted under State Law, to
prescribe their own percentage rates of deprecia-
tion or systems of accounts, records, or memoran-
da to be kept by carriers.!?
23. The Conference Committee drafted a com-
opromise 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
modification, 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
Als 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 ¢ 3985. 73d Cong.. 2d Sess. Section 220(j) (March 28, 1934).
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the public interest, 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 commis-
sion regulation with respect to matters to which
this section relates. (Emphasis added)
(i) The Commission, before prescribing any re-
quirements as to accounts, records, or memoran-
da, shall notify each State commission having
jurisdiction with respect to any carrier involved,
and shall give reasonable 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 Commis-
sion 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
opposition of the original version of Section 220(j) support
the position that Congress intended in dropping this provi-
sion to preempt the states for all purposes. They contend
that statements by witnesses from both sides were premis-
ed on the belief that absent a provision similar to original
section 220(j) the states would be bound by federal accoun-
ting and depreciation prescriptions in their local regula-
tion. We disagree.
25. The record of the Congressional hearings in-
dicates little more than that the supporters of original sec-
tion 220(j) believed that the provision was desirable to
resolve a previous unsettled point of law under the
predecessor provision of the Interstate Commerce Act.
ed
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This desire on the part of the state commissions to have
Congress explicitly recognize the authority of the states to
prescribe accounts and depreciation rates for local
regulatory purposes is reflected in the following
statements of J. E. Benton, NARUC’s general solicitor
(emphasis added).
Section 220, which is the section giving the Com-
mission jurisdiction to prescribe accounts and
reports, also takes account of local conditions and
safeguards the powers of State commissions in
the matters of depreciation and of accounting
regulations. The State commissions are very
solicitous that the act shall be so phrased that it
cannot be construed as imposing any depreciation
regulation promulgated by the Federal Commis-
sion 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 apprehen-
sive 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 deprecia-
tion 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 commis-
sions shall have the power in rate cases to deter-
mine what allowances shall be made for deprecia-
tion 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
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mandate to the Federal commission to fix rates of
depreciaton unles it shall be made entirely clear in
the act that such determination is for the use of
the Federal commission only and is not to affect
the State commissions in their regulatory work.
* * * * * * *
That section merely proposes to provide, in plain
terms, that the control of intrastate telephone
business as now exercised by the States, shal!
continue to be exercised by them without in-
terference by the Federal Commission. !°
26. Several witnesses opposed original section 220(j)
on the grounds that it would create the possibility of
unreasonably burdening the carriers with the cost of multi-
ple 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
opposing witness, however, specifically expressed che view
that the then-current law prohibited the states from
prescribing accounts and depreciation rates for their own
IS Hearings 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.
14 See e.g., Hearirgs on S. 2910. p. 96; and Hearings on H.R. 8301.
p. 191. (Statements of W.S. Gifford, President. AT&T.)
15 See. e.g.. Hearings on S. 2910, p. 208; and Hearings on H.R.
8301, p. 96. (Letters of F. McManamy, Commissioner, ICC.)
16 See, e.g. Hearings on H.R. 8301, p. 243 (Statement of F.B
MacKinnon, President. United States Independent Telephone Associa-
tion). 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.
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purposes, and this statement was tentative.!’
27. Even if all the witnesses who testified concerning
original section 220(j) had consistently and clearly express-
ed the view that the states lacked authority to prescribe ad-
ditional accounts and depreciation rates absent this provi-
sion, we could accord little weight to the statements given
the silence contained in the Congressional reports.'* In
IT MR. GIFFORD. [Section 220(j)] throws the whole uniform ac-
counting 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 Com-
mission and one for the State commission, because each State may pro-
vide for a different system of accounting. The States will require one
system of accounting, and we will also have 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 Siate 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 serious con-
sideration before we go into that.
Hearings on H.R. 8301. pp. 191-92. (Emphasis added).
18 Generally, statements made by interested parties as to the nature
and effect of a bill are accorded to little or no weight if not incorporated
into a committee report. These statements are very weak evidence that
the legislature adopted the assumed interpretation, in view of the possibili-
ty that the committee believed the changes were unnecessary because the
assumed interpretation was erroneous. See, Sutherland Statutory Construc-
tion, Section 48.10, and cases cited therein.
Similarly, contrary to the contention of AT&T, the mere existence
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 additional 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-80
striking the compromise which became the law, Congress
was completely silent as to its intent in eliminating the
House version of Section 220(j).
28. H. REP. No. 1918 describes the Conference provi-
sions as follows (p. 47):
Section 220(j) of the Senate bill (accounts and
depreciation charges) authorizes the Commission
to investigate and report to Congress upon the
desirability of legislation authorizing the Com-
mission to except the carriers of any particular
class or classes in any State from the re-
quirements of the section and permitting State
commissions to prescribe their own percentage
rates of depreciation and systems of accounts for
carriers. The House amendment (sec. 220(h))
specifically 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 percentage 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 In-
terstate 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 preempt
inconsistent state commission accounting and depreciation
practices. If Subsection (g) produced that effect, any fur-
ther legislation to ‘‘harmonize’’ the powers of the
regulatory commissions might be superfluous.
30. The carriers’ contention that Subsection (i)
demonstrates that the 1934 Congress believed it had
A-81
preempted State commission accounting and depreciation
rules is not persuasive. Congress undoubtedly correctly an-
ticipated that most State commissions would not choose to
create a complete system of accounts and would be vitally
interested in any rules developed by this Commission. The
adoption of special notice and consultation requirements
does not demonstrate that Congress assumed all states
would be required to adhere to all federal accounting or
depreciation rules.
31. Subsections (h)-(j) indicate that the 1934 Con-
gress wished to achieve as much uniformity as possible
without coercing any state commission to use ratemaking
methods it found unacceptable. This Commission has pro-
ceeded in a manner that is consistent with that purpose for
nearly four decades. We have always given special con-
sideration to the needs and views of state commissions in
developing accounting and depreciation ryles and most
S* ate commissions have chosen to follow most accounting
and depreciation rules prescribed by this Commission.
Departures have nonetheless occurred from time to time. 19
For example. our Order on reconsideration (FCC 79-678. releas-
ed November 6, 1979) with respect to our Docket 21230 decision adop-
ting revised accounting rules for plant under construction noted that
many states have adopted different accounting procedures for plant
under construction. We expressly acknowledged in paragraph 9 of that
order that our decision would not inhibit the discretion of the state com
missions. 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
commission. The states remain free to establish intrastate
rates on whatever lawful basis they choose. The fact that
separate accounting information will have to be retained to
accomplish this and the fact that the gathering and reten-
tion of this information may involve additional cost does
not. in our view. involve any significant interference with
state control over intrastate rates
A-82
This Commission has never attempted to prevent any
State commission from departing from our accounting and
depreciation rules. Indeed we have expressly recognized
that State commissions have a right to do so.
32. NARUC correctly notes that this Commission
previously 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 commis-
siv..3 may make in this area. Of course, they are
free to adopt the same ratemaking treatment for
plant under construction and interest during con-
struction 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 impinge upon
the ratemaking prerogatives of any state commis-
sion. 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 in-
trastate ratemaking.
(Footnote 19 continued) ”
States have also departed from accounting practices we have
prescribed in other situations. Florida requires full normalization of
taxes, this Commission does not. Many states have authorized or re-
quired a deferral of expenses when we do not.
A-83
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
prescribed by this Commission. The California Supreme
Court rejected that contention in Pacific Tel. and Tel. Co.
v. California, 401 P.2d 353, 372-73 (1965).7°
34. Thus, AT&T and GTE are asking us to repudiate
nearly forty years of administrative practice and applicable
state court precedents by adopting an interpretation of
Section 220 that would require an unwilling state commis-
sion 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 depreciation
prescriptions. Past departures have not produced such an
effect. If carriers maintain the records we require for pur-
poses 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
pes 20 The Florida Public Service Commission concluded that it is not
required to use depreciation methods prescribed by this Commission.
Southern Bell Telephone and Telegraph Co., 66 PUR 3d 1, 57-58 (1966).
A-84
state accounting and depreciation departures from the
prescriptions contained in the First Report and Order would
permit the states to burden the carriers with the costs of
maintaining multiple sets of records. We, of course, are not
free to preempt the states on the theory that they otherwise
may impose administrative costs on the carriers in the course
of engaging in intrastate ratemaking.
37. Our analysis of Section 220 is supported also by
Section 2(b) of the Act, 47 U.S.C. § 152(b), which provides
in pertinent part that ‘‘nothing in this Act shall be construed
to apply or to give the Commission jurisdiction with respect
to (1) charges...for or in connection with intrastate com-
munication service by wire or radio of any carrier...'’ Sec-
tion 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 objec-
tives. Section 2(b) makes clear that Congress did not intend
this Commission to foreclose state ratemaking actions unless
those actions imperiled ‘important interests of national com-
munications 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 in-
trastate ratemaking purposes.
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Ordering Clauses
38. Accordingly, IT IS HEREBY ORDERED THAT
the petition for clarification of the National Association of
Regulatory Utility Commissioners, filed April 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 Califor-
nia, filed April 30, 1981, IS DISMISSED as moot.
40. IT IS FURTHER ORDERED THAT the Secretary
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 Secretary
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
William J. Tricarico Secretary
April 1, 1982
JOINT DISSENTING STATEMENT
OF
COMMISSIONERS JOSEPH R. FOGARTY AND
ANNE P. JONES
A-86
IN RE: EXPENSING OF STATION CONNECTIONS
(CC DOCKET NO. 79-105)—PETITIONS FOR
CLARIFICATION AND RECONSIDERATION.
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 re-
quired that account 232 of the Uniform System of Ac-
counts be separated into two subclasses, ‘Station
Connections-inside wiring’’ and ‘Station Connections-
Other.’ We further required that the existing investment
in Station Connections—inside wiring be amortized over a
period of ten years, which represents an accelerated
depreciation in contrast to past practices, and that all new
investment for inside wiring be expensed rather than
capitalized.
Because we wished to ameliorate the effect such an
expensing plan could have upon local rates, the Commis-
sion required that expensing take place over a four-year
period. In discussing this phase-in approach, the Commis-
sion stated that ‘*...we want to allow all carriers and state
regulatory agencies as much flexibility as possible in shif-
ting from capitalization to expensing. Hence, for those car-
riers 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 Com-
mission intended its decision to be binding upon the States.
T First Report and Order. 85 FCC 2d 818, 829 (Emphasis added).
A-87
Since only approximately one-quarter of inside wiring costs
are apportioned to the interstate jurisdiction, a phase-in
which embraced only these costs would result in about 6",
12%, 18% and 25 percent of all new inside wiring costs be-
ing expenses instead of capitalized in each of the four years
respectively. Surely this is not what the Commission in-
tended. 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 competition 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 reguiatory scheme to introduce
competition whenever’ technological and
economic circumstances are conducive to such a
change.”
As the Commission has seen in the deregulation of
customer premises equipment, asset valuation is a very
-) aie
“ Ibid. 827
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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 accoun-
ting books required (one Federal and one State), any even-
tual detariffing of the inside wiring account will be made all
the more difficult, since inside wiring must be deregulated
in toto or not deregulated at all (unless the Commission con-
templates deregulating only the first one-fourth of the length
of the 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 Sta-
tion Connections-inside wiring account.
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