Appendix — Public Utilities Commission v. Hawaiian Telephone Co.

2) | FILED

INTHE {(** cur

Supreme Court of the Gnited States

OCTOBER TERM, 1987

PUBLIC UTILITIES COMMISSION OF THE STATE OF HAWAII;

ALBERT TOM, Chairman; SUNAO KIDO, Commissioner; and

RuSSEL S. NAGATA, Director of the Department of Commerce

and Consumer Affairs, State of Hawaii, and Consumer

Advocate,

Petitioners,

v.

HAWAIIAN TELEPHONE COMPANY, a Hawaii Corporation,

Respondent.

On Petition for a Writ of Certiorari to the United

States Court of Appeals for the Ninth Circuit

APPENDIX TO THE PETITION FOR WRIT OF

CERTIORARI

WARREN Price, III

Attorney General

State of Hawaii

CoRINNE K.A. WATANABE*

First Deputy Attorney General

State of Hawaii

Harry S.Y. Kim, Esq.* STEVEN S. MICHAELS

Legal Counsel RONALD M. SHIGEKANE

Public Utilities Commission Deputy Attorneys General

State of Hawaii State of Hawaii

465 South King Street State Capitol

Honolulu, Hawaii 96813 Honolulu, Hawaii 96813

(808) 548-3990 (800) 548-4740

Counsel for Petitioners Counsel for Petitioner

Public Utilities Commission, Director of Commerce and

Albert Tom and Sunao Kido Consumer Affairs

*Counsel of Record

PRESS OF BYRON S. ADAMS, WASHINGTON, D.C. (202) 347-8203

EDITOR'S NOTE

THE FOLLOWING PAGES WERE POOR HARD copy

AT THE TIME OF FILMING. IF AND WIEN A

BETTER COPY CAN BE OBTAINED,

WILT, BE ISSUED,

A NEW FICHE

PETITIONERS’ APPENDIX

TABLE OF CONTENTS

OPINION OF THE (COURT WHOSE DECISION IS

SOUGHT TO BE REVIEWED

Appendix A—Opinion of the United States Court

of Appeals for the Ninth Circuit dated Sep-

tember 11, 1987, Hawaiian Telephone Com-

pany v. Public Utilities Comm’n, 827 F. 2d

p,m nr erITE

OTHER OPINIONS AND ORDERS IN THE CASE

Appendix B—Decision of the United States Dis-

eriet Court for the District of Hawaii Granting

Permanent Injunction dated March 13, 1985,

Hawaiian Telephone Company v. Public Utili-

ties Comm’n, Civ. No. 84-1306 (D. Haw. Mar.

Ty Se Sekbiinscacasnissocapilamnacaleaasivlaniarsdatennniae’

— C—Order of the United States District

for the District of Hawaii Granting Pre-

liminary Injunction dated January 8, 1985, Ha-

watian Telephone Company v. Public Uttlities

— Civ. No. 84-1306 (D. Haw. Jan. 8,

SINE iskacienaeheacaedidtanla nica taeatetinedtinncens

— D—Order of the United States District

for the District of Hawaii Granting Con-

sumer Advocate’s Motion to Intervene as

Defendant dated December 21, 1984, Ha-

watian Telephone Company v. Public Utilities

Comm’n, Civ. No. 84-1306 (D. Haw. Dec. 21,

BE Sancoans is naetincecedcdaaaianiers Ccahshadcatidiel ieihadene

Appendix E—Order No. 8168 of the Public Util-

ities Commission, State of Hawaii, dated No-

vember 15, 1984, In re Hawaiian Telephone

Company, Docket No. 4588 (Haw. P.U.C. Nov.

EL SEED * ‘Sencansdsasenncsais pachaudidepnisesiciatiencaelaaninns

la

37a

40a

47a

ll

Appendix F—Opinion of the Supreme Court of

Hawaii dated September 27, 1984, In re Ha-

wartian Telephone Company, 67 Haw. 370, 689

P. 2d 741 (1984) (on review of Decision and

Order 7412, Docket No. 4306, of the Public

Utilities Commission, State of Hawaii) ......... 66a

——— G—Decision and Order No. 8042 of the

ublic Utilities Commission, State of Hawaii,

dated August 14, 1984, In re Hawaiian Tele-

phone Company, Docket No. 4588 (Haw. P.U.C.

Sm I Ditiipideieiiaaiaie digeh tea. 90a

es H—Decision and Order No. 7412 of the

ublic Utilities Commission, State of Hawaii,

dated January 26, 1983, In re Hawaiian Tele-

phone Company, Docket No. 4306 (Haw. P.U.C.

Pe TR TE bitvntiice neti 123a

JUDGMENTS SOUGHT TO BE REVIEWED AND

ORDER EXTENDING THE TIME IN WHICH TO

PETITION FOR CERTIORARI

Appendix I—Judgment of the United States Dis-

trict Court for the District of Hawaii dated

March 18, 1985, Hawatian Telephone Company

v. Public Utilities Comm’n, No. 84-1306 (D.

maw. Tee. 3: We acu 169a

Appendix J—Judgment for Permanent Injunction

of the United States District Court for the Dis-

trict of Hawaii dated March 28, 1985, Ha-

warian Telephone Company v. Public Utilities

Comm’n, No. 84-1306 (D. Haw. Mar. 28,

TEED ssscsatencanaiindsisibnhebaeeed aah Ge ee ns 170a

Appendix K—Order of Associate Justice O’Con-

nor Extending the Time to File Petition for

Writ of Certiorari to and Including January 9,

TEND wsinswintaninheersannninniiamintaiiaaiebaaeee 178a

ili

OTHER MATERIAL

Record in the United States District Court

Appendix L—Complaint for —'s and In-

junctive Relief, filed in the District Court No-

sc adascnddatsatessanensosconsccocse

Appendix M—Intervenor’s Answer, filed in the

District Court November 21, 1984 (pursuant to

BE P.M GAT, Fe CLE) cnccssccccccccecess

—_— N—Defendants’ Answer, filed in the

istrict Court November 23, 1984 ................

Appendix O—Defendants’ Memorandum in Op-

position to Motion for Preliminary Injunction

(excerpts) and Appendix E Thereto, filed in the

District Court November 29, 1984 ................

Appendix P—Intervenor’s Memorandum in Op-

position to Plaintiff's Motion for Preliminary

Injunction (excerpts), filed in the District Court

i cinsecceuneeurtessinocsccceveres

Appendix Q—Plaintiff’s Reply Memorandum (ex-

cerpts), filed in the District Court December

SE ic ovessmapineoistasnneistssnoncsescencesevesoc sees

Statutes and Administrative Rulemakings:

Appendix R—Chapter 269, Hawaii Revised Stat-

utes (Public Utilities Commission) (1985) (ex-

i etekcasbiabetsnncsansanenstendncssonccenseessesessoosese

Appendix S—Chapter 91, Hawaii Revised Stat-

utes (Administrative Procedure Act) (1985) (ex-

IT ii citasetintiintewasecsexsessasceeisnsesconcsecssessssesees

Appendix T—The Federal Communications Act of

1934, as amended, 47 U. S. C. 151, et seq.

(1982 & Supp. IV 1986) (excerpts) ...............

Appendix U—In re Integration of Rates and Ser-

vices for the Provision of Communications by

Authorized Common Carriers between the

United States Mainland and Hawaii and

Alaska, Report and Order Nos. 81-312, -313

together with the Report and Order of the —

Federal-State Joint Board (Docket 21263), 87

I occ nsssecsunssseesssonsscccssssese

(197a

208a

2lla

216a

234a

242a

la

APPENDIX A

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

HAWAIIAN TELEPHONE COMPANY, a

Hawaii Corporation,

Plaintiff-Appellee,

iP

PuBLic UTILITIES COMMISSION OF

STATE OF HAWAII; ALBERT TOM,

Chairman; SUNAI KIDo,

Commissioner; and CLyDE S.

Dupont, Commissioner,

Defendants,

CONSUMER ApvocaTE, the Director

of the Department of Commerce

and Consumer Affairs, State of

Hawaii,

Intervenor-Defendant-Appellant.

Nos. 85-1907/1908

D.C. No.

C-84-1306-SPK

OPINION

Argued and Submitted

March 28, 1986—Honolulu, Hawaii

Submission Deferred April 29, 1986

Resubmitted October 28, 1986

Filed September 11, 1987

Before: Warren J. Ferguson, William C. Canby, Jr. and

Cynthia Holcomb Hall, Circuit Judges.

Opinion by Judge Canby; Dissent by Judge Ferguson

Appeal from the United States District Court

for the District of Hawaii

Stephen P. King, District Judge, Presiding

2a

SUMMARY

Communications

The Hawaiian Telephone Co. (HawTel), which provides

phone service for the state, is regulated by the defendant

Hawaii Public Utilities Commission (PUC). The Federal

Communications Commission (FCC) sets HawTel’s long-

distance rates and the PUC sets intrastate rates. Physical

plant used for both services is apportioned between the two

kinds of service through separations procedures. Although

Hawaii's interstate phone rates had been higher than rates in

other states, the FCC determined in 1972 that the rates

should be integrated into the mainland domestic rate pattern,

and adjustments were made so that they would be compara-

ble. The FCC later decided that integration would be accom-

plished in part by establishing new procedures for cost

apportionment. A special Federal-State Joint Board set up to

advise on separations procedures recommended use of the

Ozark Pian, instead of the Hawaiian Plan II used by the PUC.

The FCC and telephone companies agreed to phase in the

new procedures over four years to achieve full implementa-

tion by January |, 1985, with the interstate carrier making

transitional supplements to HawTel to reduce the need for

increased local rates. This was adopted in FCC Order 81-312.

Shortly afterward, HawTel filed for a local rate increase, but

the PUC cut the amount requested, in part due to a 1.1%

rate-of-return adjustment proposed by the PUC, which repre-

sented the differences between using the Ozark Plan and the

Hawaiian Plan II. The Hawaii Supreme Court affirmed, but

while the appeal was pending HawTel filed for another rate

increase. The PUC again granted a smaller increase, using the

same 1.1% rate-of-return adjustment, but this time not

expressly comparing rates under the two plans. HawTel filed

suit in federal district court challenging the decision. Appel-

lants PUC and Consumer Advocate (an intervenor) argued

that the court lacked jurisdiction to hear the case, and that the

3a

intrastate rate decision is consistent with Order 81-312, but

the court rejected these contentions and issued injunctions.

[1] The PUC itself is a person for purposes of section 401 (a)

of the Communications Act, and even if the PUC itself does

constitute a person subject to an enforcement action, the indi-

vidual Commissioners clearly are individuals, so the court

would not lack subject matter jurisdiction even if the PUC

were not a person. [2] In addressing the question of whether

FCC Order 81-312 constitutes an order of the commission

within the meaning of the Act, there is no authority to support

the proposition that the distinction drawn by the Administra-

tive Procedures Act (APA) between a rule or an order should

be applied to the Communications Act, which was modeled

after the Interstate Commerce Act. [3] Nor does the language

of other sections of the Communications Act show that Con-

gress did not intend to limit section 401(b) exclusively to

adjudicatory orders as the APA defines them. [4] This order

was appropriately interpreted as an order for enforcement by

injunction. [5] Finally, the challenge to jurisdiction based on

the requirement that the order be regularly made by the FCC

refers only to procedural regularity. The district court had

subject matt«.’ jurisdiction, [6] which is not barred by the

Johnson Act. [7] The appellants also assert that HawTel had

earlier argued to the Hawaii Supreme Court that the PUC

misapplied FCC Order 81-312. and that this issue is now

foreclosed. [8] But there were sufficient differences between

the two cases to militate against application of collateral

estoppel. >

[9] Appellant Consumer Advocate contends that FCC

Order 81-312 did not preempt state regulation of separations

procedures and that the use of state-developed procedures

was proper intrastate rate-making. [10] The Communications

Act empowers the FCC to prescribe uniform separations pro-

cedures. A nationwide telecommunications system with dual

intrastate and interstate rates can operate effectively only if

one set of separations procedures is employed. [11] The

4a

FCC's efforts to integrate Hawaii into the established rate

scheme for communications services applicable to the main-

land and the need for consistent apportionment between

interstate and intrastate Operations are sufficient to convince

that Order 81-312 preempted any independent separations

procedures of the Hawaii PUC. [12] This conclusion is sup-

ported by Louisiana PublicService Commission v. FCC, 106

S.Ct. 519 (1986), as that decision held that a state’s indepen-

dent depreciation rule for intrastate rate-making could be

protected from federal preemption only after a uniform sepa-

rations formula has been applied. [13] Finally, the district

court did not err in finding that the PUC’s rate adjustment

was an attempt to nullify the FCC’s Ozark separation plan.

[14] The court properly considered the effect of the PUC’s rul-

ing to determine whether it conflicted with federal law, and

made no clear error in finding that it did.

Judge Ferguson dissents, arguing that the Louisiana Public

Service Commission case constitutes a congressional denial of

power to the FCC to regulate intrastate rate-making.

COUNSEL

Thomas W. Williams, Jr.. Honolulu, Hawaii, for the plaintiff-

appellee.

Ronald Shigekane, Honolulu, Hawaii, for the Consumer

Advocate appellant.

Harry S.Y. Kim, Honolulu, Hawaii, for the appellants.

OPINION

CANBY, Circuit Judge:

The ultimate issue in this case is whether the Hawaii Public

Utilities Commission (PUC) violated an order of the Federal

5a

Communications Commission mandating use of a particular

set of “separations” procedures for allocating the respective

costs and investments between interstate and intrastate tele-

phone operations. A threshold question is whether the district

court had jurisdiction under § 401(b) of the Communications

Act to enforce the FCC order. In essence, the district court's

permanent injunction required the PUC to obey the FCC

order by raising Hawaiian Telephone Company’s (HawTel’s)

intrastate rates by $10,507,000 annually.

Hawaii's PUC and Consumer Advocate, as intervenor,

appealed. We deferred submission to await the Supreme

Court’s recent decision in Louisiana Public Service Commis-

sion v. FCC, 106 S. Ct. 1890 (1986), and to permit the parties

to comment upon it. We now affirm the district court's

injunction.

BACKGROUND

HawTel provides interstate, intrastate, and overseas tele-

phone service for residents of Hawaii. The FCC seis Haw-

Tel’s long-distance rates, and the PUC sets intrastate rates.

Because the same physical plant is used for both interstate

and intrastate services, some system for apportioning costs

and investments is necessary to set fair rates for the respective

services. See generally MCI Telecommunications Corp. v.

FCC. 750 F.2d 135 (D.C. Cir. 1984); McKenna, Preemption

Under the Communications Act, 37 Fed. Comm. L.J. |

(1985). This system of apportionment is referred to as

“separations procedures.”

Until recently, interstate rates for telecommunications to

and from Hawaii were considerably higher than interstate

rates in the 48 contiguous states. In 1972, the FCC deter-

mined that Hawaii's rates should be integrated into the Main-

land domestic rate pattern. Interstate rates in Hawaii

accordingly were to be adjusted so that they would be roughly

comparable to rates in other parts of the United States. /n re

Establishment of Domestic Communications-Satellite Facili-

ties by Non-Governmental Entities, Second Report & Order

(Docket No. 16495), 35 F.C.C.2d 844, 856-57, aff'd on recon-

sideration, 38 F.C.C.2d 665 (1972), aff'd sub nom. Network

Project v. FCC, 511 F.2d 786 (D.C. Cir. 1975). The FCC later

decided that integration would be accomplished in part by

establishing new procedures for interstate and intrastate cost

apportionment. The FCC, exercising its authority under 47

U.S.C. § 410, established a special Federal-State Joint Board,

to advise it on fair separations procedures for Hawaii.The

FCC had not previously prescribed any separations proce-

dures for Hawaii, and the PUC had apportioned costs accord-

ing to its own “Hawaiian Plan II.”

In 1981, the Joint Board recommended use of the so-called

“Ozark Plan,” see 47 C.F.R. §§ 67.1-67.701, for separations.

In re Integration of Rates & Services for the Provision of Com-

munications by Authorized Common Carriers between the

United States Mainland & Hawaii & Alaska, Memorandum

Opinion & Order (Docket 21263), 87 F.C.C.2d 20, 24 (1981).

The Ozark Plan, which was developed through cooperative

efforts of the FCC and utility regulators nationwide, had been

used in the 48 states for some time. The Joint Board suggested

extending the Plan for use in Hawaii without modification.

Id. The FCC ordered application of the Ozark separations

procedures to Hawaii. /ntegration of Rates & Services for the

Provision of Communications by Authorized Common Carri-

ers between the United States Mainland & Hawaii & Alaska,

Report & Order 81-312 (Docket 21263), 87 F.C.C.2d 18

(1981) {hereafter Order 81-312].'

The new procedures were expected to yield significantly

lower interstate phone rates, but only at the price of upward

pressure On intrastate rates. To avoid a dramatic impact on

local rates, the FCC, AT&T, and HawTel agreed to phase in

the new procedures over four years, with full implementation

'See infra note 21.

7a

by January |, 1985. During the transition period, AT&T was

to make certain payments or “transitional supplements” to

HawTel, thereby reducing the need for immediate intrastate

rate relief.

In August 1981, shortly after the integration plan was

adopted in FCC Order 81-312, HawTel filed for a local rate

increase of $47.6 million. PUC Docket 4306. This proceeding

was a predecessor to the one that is the subject of this appeal.

The PUC granted only $27.1 million of the requested

increase, in part due to a downward 1.1 percent rate-of-return

adjustment proposed by the PUC itself. The “Separation

Adjustment” represented the difference between intrastate

rates resulting from jurisdictional separations calculated

under the Ozark Plan and those calculated under Hawaiian

Plan Il. Jn re Application of Hawaiian Telephone Company,

PUC Decision & Order No. 7412, Docket No. 4306 (Jan.

1983); see In re Application of Hawaiian Telephone Coinpany,

67 Haw. 370, 689 P.2d 741, 751-52 (Haw. 1984). The PUC

agreed that the Ozark Plan should be used to establish the rate

base, and that an 11.46 percent rate of return was appropri-

ate. It also conceded that the transitional payments from

AT&T must be treated as interstate revenues. It considered

the special downward adjustment proper, however, in light of

the State’s previous support for the transitional rate-

integration agreement between AT&T, HawTel, and the

FCC. At HawTel’s request, the State had lobbied the FCC for

approval of the transition agreement, at least in part because

of HawTel’s representations that it would need local rate

relief of $30-35 million per year if the agreement were not

adopted.’

21t appears that the PUC considered the rate request somewhat disingen-

uous under the circumstances. In particular, the PUC found that HawTel

was already receiving rate relief through the transitional payments from

AT&T. The PUC also stated that it ordered the |.1 percent adjustment

because it found that the shift from Hawaiian Plan II to Ozark resulted in

a 1.1 percent reduction in the firm’s intrastate returns, even though Haw-

Tel’s overall revenues and expenses basically remained unchanged. The

PUC therefore found the rate-of-return adjustment necessary to avoid a

windfall for HawTel. PUC Decision & Order No. 7412 at 23-24.

8a

HawTel appealed the PUC’s decision in Docket 4306 to the

Hawaii Supreme Court, arguing that the order in fact nulli-

fied the FCC’s 1981 mandate to employ the Ozark Plan. On

September 27, 1984, the court upheld the PUC, finding that

the PUC had employed appropriate procedures and that it

merely had determined the appropriate rate of return on

intrastate business, which was within its authority.

Application of Hawaiian Telephone Company, 67 Haw. —_,

689 P.2d at 751. HawTel declined to seek United States

Supreme Court review.

While HawTel’s state-court appeal was pending, it filed for

another rate increase, with which this appeal is directly con-

cerned. PUC Docket 4588. In Docket 4588, after determin-

ing that HawTel would be entitled under the Ozark Plan to

some $30 million in new revenues, at a reasonable | 1.25 per-

cent rate of return, the PUC made an identical |.1 percent

rate-of-return adjustment. Jn re Application of Hawaiian

Telephone Company. Decision & Order No. 8042, Docket

No. 4588 (Aug. 1984). It granted HawTel about $20 million

in rate relief, $10,507,000 less than its calculations indicated

HawTel otherwise should receive. This time, however, the

PUC did not expressly compare rates under the Ozark Plan to

rates under Hawaiian Plan II, the way that it did to arrive at

the 1.1 percent figure in 1981.

HawTel filed suit in federal district court under 47 U.S.C.

§ 401(b),? challenging the PUC’s second rate decision in

Docket 4588. The downward rate adjustment, HawTel

argued, constituted a failure of the PUC to obey FCC Order

81-312. Appellants PUC and Consumer Advocate argued

that the district court lacked jurisdiction under § 401(b) and

3Section 401(b) is discussed at length infra Part |. HawTel also asserted

subject matter jurisdiction in the district court under 28 U.S.C. §§ 1331,

1337(a), 1343, 2201 & 2202. The court sustained jurisdiction under

§ 401(b) and did not rule on the other grounds. Because we uphold the dis-

trict court’s ruling, we do not consider the other jurisdictional claims.

9a

that the PUC’s intrastate rate decision was consistent with

FCC Order 81-312. Further, appellants contended that Haw-

Tel’s action was barred by the Johnson Act. 28 U.S.C.

§ 1342.* and by the doctrine of res judicata. The district court

rejected these contentions. Finding that the second 1.1 per-

cent adjustment had the effect of applying Hawaiian Plan II

as the basis for separations, the court issued preliminary and

permanent injunctions. Hawaiian Telephone C ompany vy.

Public Utilities Commission, Civ. No. 84-1306, slip op. (D.

Haw. Mar. 13, 1985). Both the PUC and the Consumer Advo-

cate appeal.®

DISCUSSION

I. JURISDICTION UNDER 47 U.S.C. § 401(b)

Questions of subject matter jurisdiction and Statutory

interpretation are reviewed in this court de novo. Carpenters

Southern California Admin. Corp. v. Majestic Housing, 743

F.2d 1341, 1343 (9th Cir. 1984); Southeast Alaska Conserva-

tion Council, Inc. v. Watson, 697 F.2d 1305, 1309 (9th Cir.

1983).

“ 28 U.S.C. § 1342 provides:

The district courts shail not enjoin. suspend or restrain the oper-

ation of, or compliance with, any order affecting rates chargeable

by a public utility and made by a State administrative agency or

a rate-making body of a State political subdivision, where:

(1) Jurisdiction is based solely on diversity of citizenship or

repugnance of the order to the Federal Constitution: and.

(2) The order does not interfere with interstate commerce: and.

(3) The order has been made after reasonable notice and hear-

ing: and,

(4) A plain, speedy and efficient remedy may be had in the

courts of such State.

*The appeals were consolidated by our order of Aug. 20, 1985, and appel-

lants filed a joint brief.

10a

47 U.S.C. § 401(b) states:

If any person fails or neglects to obey any order of

the [FCC] other than for the payment of money,

while the same is in effect, the [FCC] or any party

injured thereby . . . may apply to the appropriate dis-

trict court of the United States for the enforcement

of such order. If, after hearing, that court determines

that the order was regularly made and duly served,

and that the person is in disobedience of the same,

the court shall enforce obedience to such order by a

writ of injunction or other proper process, manda-

tory or otherwise, to restrain such person or the offi-

cers, agents, or representatives of such person, from

further disobedience of such order, or to enjoin

upon it or them obedience to the same.

The threshold questions in this case are whether a state utility

regulatory body is a “person” and whether, as a rulemaking or

nonadjudicatory order, FCC Order 81-312 is an “order”

“regularly made” within the meaning of Section 401(b).

A. Whether the PUC is a Person Within the Meaning of the

Statute

The definitional section of the Communications Act, 47

U.S.C. § 153, provides that: “[U]nless the context otherwise

requires .... “Person” includes an individual, partnership,

association, joint-stock company, trust, or corporation.” Jd.

§ 153(i). The Act defines “state commission” as “the commis-

sion, board, or official (by whatever name designated) which

under the laws of any State has regulatory jurisdiction with

respect to intrastate operations of carriers.” /d. § 153(t).

In support of their contention that the district court lacked

subject matter jurisdiction to grant injunctive relief because

the PUC is not a “person” for purposes of § 401(b), appellants

principally rely on the Vermont district court’s decision in

lla

New England Telephone & Telegraph Company v. Public Ser-

vice Board of Vermont, 576 F. Supp. 490 (D. Vt. 1983),

vacated as moot, 794 F.2d 677 (2d Cir. 1984). In that case,

the district court held that because the definition of “person”

in § 153(i) includes a series of specific categories that do not

encompass state utility commissions, the term “person”

should not be interpreted to include such commissions. New

England Tel. & Tel., 576 F. Supp. at 493-95.

We disagree with appellants’ argument and the district

court’s analysis in New England Tel. & Tel. The design of the

statute leads us to conclude that the PUC itself is a person for

purposes of § 401(b)’. Section 153(i) does not specify the

meaning of “person” in the Communications Act, but instead

lists several categories of entities that the term “includes.”®

Thus, the definition of “person” is open-ended and not

restricted to the examples enumerated in the statute.’ Fur-

*New England Tel. & Tel. is listed as “REVERSED AND REMANDED”

at 794 F.2d 677. The Second Circuit's memorandum decision makes clear,

however, that it was vacated and ordered dismissed as moot.

7Section 401(b) was derived in part from § 16 of the Interstate Commerce

Act of 1887, 24 Stat. 379, 384 (1887), providing for judicial enforcement

of ICC orders against “carriers.” While the statute contemplated judicial

orders addressed to carriers directing compliance with ICC orders, the stat-

ute also authorized injunctions addressed to any “other person” when nec-

essary to secure carrier compliance. 24 Stat. at 385 (1887). Section 401(a)

was derived from the 1906 amendment to § 20 of the 1887 Act, 34 Stat.

584, 593-95 (1906), which also applied to “carriers.” “Person” was substi-

tuted for “carrier” in the antecedents of both subsections, and the present

language essentially appeared in the clean bill, S. 3285 (73d Cong., 2d Sess.)

introduced by Senator Dil! on April 4, 1934. 78 Cong. Rec. 5952 (1934).

As part of the Procedural and Administrative Provisions, § 401 is appli-

cable to enforcement of all provisions of the chapter and orders thereunder.

*In defining most of the terms in § 153, Congress used the term “means.”

In defining “person,” however, Congress chose to use the term “includes,”

as it did for only four other definitions in § 153.

° See Highway & City Freight Drivers v. Gordon Transps., Inc., 576 F.2d

1285, 1289 (8th Cir.) (when statute describes what term “includes,” “the

fact that the statute does not specifically mention a particular entity ...

does not imply that the entity falls outside of the definition”) (citing Pfizer,

Inc. v. India, 434 U.S. 308, 312 n.9 (1978)), cert. denied, 439 U.S. 1002

(1978).

12a

thermore, § 153 expressly gives courts leeway to interpret

terms in the Act “{as] the context ... requires.” 47 U.S.C.

§ 153.

_ The purposes of § 401(b) and the structure of the Act

strongly suggest that the PUC can be enjoined under

§ 401(b).'° Section 401(b) is the sole mechanism Congress

provided for the FCC, the federal government, or private par-

ties to obtain enforcement of FCC orders against

noncarriers.'! Under appellants’ interpretation, state regula-

tory commissions would be exempt from this statutory

scheme. Rather than being required to challenge FCC orders

under § 402,’? state commissions would be free to violate

FCC orders with impunity. They would be equally immune to

private enforcement actions and to enforcement actions

brought by the FCC and 4he federal government.

State commissions have the same opportunity as others to

seek review of FCC orders under § 402. See, e.g., State Corpo-

10Several federal courts have held that state regulatory commissions are

persons under § 401(b). New England Tel. & Tel. Co v. Public Util.

Comm'n, 570 F. Supp. 1558, 1568-69 (D. Me. 1983), rev'd on other

grounds, 742 F.2d 1 (1st Cir. 1984), cert. denied, 106 S. Ct. 2902 (1986),

Mountain States Tel. & Tel. Co. v. Department of Pub. Serv. Reg., 588 F.

Supp. 5, 7 (D. Mont. 1983); see also Illinois Bell Tel. Co. v. Illinois Com-

merce Comm'n, 740 F.2d 566 (7th Cir. 1984); WUTC v. FCC, 513 F.2d

1142, 1145-46, 1152 (9th Cir.) (holding state commission had standing to

challenge validity of FCC order under § 402(a), implicitly concluding that

WUTC was a “person who is aggrieved or whose interests are adversely

affected” under § 402(b)(6)), cert. denied, 423 U.S. 836 (1975).

‘Civil actions for enforcement and review of the Communications Act

and orders made under the Act are governed by 47 U.S.C. §§ 401-415. Fol-

lowing promulgation of an order by the FCC, any aggrieved party can peti-

tion for rehearing. Jd. § 405. Sections 401(a) & (c) permit the FCC to

prosecute violations of the chapter.

'2Parties seeking to challenge the validity of FCC orders must do so

through actions in the circuit courts under 47 U.S.C. § 402 and 28 U.S.C.

§ 2342(1). FCC v. ITT World Communications, Inc., 466 U.S. 463, 468

(1984).

13a

ration Commission v. FCC, 787 F.2d 1421 (10th Cir. 1986):

New York State Commission on Cable TV v. FCC, 669 F.2d

58, 62 n.8 (2d Cir. 1982); North Carolina Utilities Conimis-

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

874 (1977). No logical ground supports excluding state com-

missions from the group of persons against whom enforce-

ment of orders may be sought. New England Telephone &

Telegraph Company v. Public Utilities Commission, 570 F.

Supp. 1558, 1569 (D. Me. 1983), rev'd on other grounds, 742

F.2d | (Ist Cir. 1984), cert. denied, 106 S.Ct. 2902 (1986).

Moreover, since § 401(a), which authorizes district courts to

enjoin violations of the Act itself, also contains the term

“person,” state commissions would be immune fram enforce-

ment of the Act in general.”* It is unlikely that Congress could

have intended this result.

[1] We hold that the PUC is a person for purposes of

§ 401(b)."* We also note that, even if the PUC does not itself

constitute a person subject to a § 401(b) enforcement action,

the individual Commissioners clearly are “individuals”

under § 153(i)."* Because the Commissioners qualify as per-

sons for purposes of § 401(b) injunctions, the district court

would not lack subject matter jurisdiction even if the PUC

were not a person.

"Section 401(a), 47 U.S.C. § 401(a), provides in part:

(a) The district courts of the United States shall have jurisdiction,

upon application of the Attorney General of the United States at

the request of the Commission, alleging a failure to comply with or

a violation of any of the provisions of this chapter by any person, to

issue a writ or writs of mandamus commanding such person to

comply with the provisions of this chapter.

/d. (emphasis supplicd).

‘Appellants also claim that holding the PUC to be a person under

§ 401(b) derogates the express provisions of § 152(b). The effect of § 152(b)

is addressed in connection with our preemption analysis, infra.

'SHawTel’s complaint named the individual Commissioners as defen-

dants, along with the PUC. The district court permanently enjoined both

the Commissioners individ ‘ly and the PUC.

l4a

B. Whether FCC Order 81-312 is an “Order” for Purposes of

§ 401(b)

The next question is whether FCC Order 81-312 consti-

tutes an “order of the Commission” within the meaning of

§ 401(b).’* Appellants maintain that it does not because the

Order resulted from a rulemaking as opposed to an adjudica-

tory proceeding. The gist of appellants’ argument has been

accepted by the First Circuit. New England Telephone & Tele-

graph Co. v. Public Utilities Commission of Maine, 742 F.2d

1 (Ist Cir. 1984), cert. denied, 106 S. Ct. 2902 (1986) [hereaf-

ter New England Telephone v. Maine]. In contrast, the Sev-

enth Circuit has affirmed the grant of an injunction under

§ 401(b) to enforce a nonadjudicatory order. Illinois Bell Tele-

phone Company v. Illinois Commerce Commission, 740 F.2d

566, 571 (7th Cir. 1984).

In New England Telephone v. Maine, the First Circuit

based its decision primarily on two grounds. First, the court

adopted the distinction between “rules” and “orders” that

appears in the Administrative Procedure Act’’. Second, it

concluded that the central role of the FCC in enforcing the

Communications Act, and its sole power to seek injunctions

under § 401(a), suggested that the scope-for private enforce-

ment under § 401(b) should be narrow.”* The court therefore

'6The phrase “order of the Commission” is not defined in the Communi-

cations Act.

17 The APA defines the term “order” as “a final disposition, whether affir-

mative, negative, injunctive, or declaratory in form, of an agency in a mat-

ter other than rule making.” 5 U.S.C. § 551(6).

The First Circuit also cited Congress’ use of the term “order” in several

other provisions of the Communications Act, which it interpreted to sig-

nify only FCC adjudicatory orders and not FCC rules. New England Tele-

phone v. Maine, 742 F.2d at 7. (citing 47 U.S.C. §§ 201, 204, 205, 209,

214(d) & 416(a)).

®The First Circuit further noted that treating FCC rules as orders under

§ 401(b) would require district judges with no special expertise regarding

ee

ea ae os

15a

concluded that an FCC directive that it considered to be the

product of a rulemaking proceeding, and that was not specifi-

cally directed at the parties against whom enforcement was

sought, was not enforceable under § 401(b).

Like several other circuit courts,’® we disagree with the

FCC rules to determine in the first instance the scope and meaning of those

ruies. Allowing 700 different judges to make such determinations would

lead to inconsistent interpretations of the FCC rules and threaten “the

sound development of a coherent nationwide communications policy,”

which was “a central objective of the 1934 Act.” New England Telephone

v. Maine, 742 F.2d at 5-6.

The First Circuit was also concerned about allowing injunctions against

parties who were not involved in the proceeding in which a rule was pro-

mulgated. See id. at 6-7.

'8For substantially the same reasons discussed infra, the Fourth, Fifth,

and Eighth Circuits, as well as the federal court for the District of Washing-

ton, have expressly or implicitly rejected the analysis of New England Tele-

phone v. Maine in a series of decisions that have been vacated and

remanded or reversed on other grounds. Chesapeake & Potomac Tel. Co. v.

Public Serv. Comm'n, 748 F.2d 879, 880-81 (4th Cir. 1984), vacated and

remanded for proceedings consistent with Louisiana Pub. Serv. Comm'n v.

FCC, infra, 106 S. Ct. 2239 (1986) (per curiam) (mem.); South Central Bell

Tel. Co. v. Louisiana Pub. Serv. Comm'n, 744 F.2d 1107, 1115 (Sth Cir.

1984), vacated and remanded for consideration in light of Chesapeake &

Potomac, supra, i06 S. Ct. 2884 (1986) (mem.); Southwestern Bell Tel. Co.

v. Arkansas Pub. Serv. Comm'n, 738 F.2d 901 (8th Cir. 1984), vacated and

remanded for consideration in light of Chesapeake & Potomac, supra, 106

S. Ct. 2885 (1986) (mem.); Virginia State Corp. Comm'n v. FCC, 737 F.2d

388 (4th Cir. 1984), rev'd on other grounds sub nom. Louisiana Pub. Serv.

Comm'n v. FCC, 106 S. Ct. 1890 (1986); Pacific Northwest Bell Tel. v.

Washington Util. & Transp. Comm'n, 565 F. Supp. 17, 21 (D. Wa. 1983),

vacated and remanded in light of Louisiana Pub. Serv. Comm'n, supra, No.

83-3746 (9th Cir. 1986).

The First Circuit's result also conflicts with the Seventh Circuit’s deci-

sion in //linois Bell Tel. Co., 740 F.2d 566 (ordering state commission com-

pliance with FCC order relating to Separations Procedures), and the

injunction granted by the federal court for the District of Kansas in

Southwestern Bell Tel. Co. v. State Corp. Comm'n, No. 83-4090 (D. Kan.

Apr. 8, 1983).

16a

First Circuit’s reasoning. So did the FCC. See New England

Telephone v. Maine, 742 F.2d at 10-11.

[2] To begin with, we find no authority supporting the prop-

osition thai the APA’s rule-order distinction should be

imported into the Communications Act. See 5 U.S.C. § 551

(use of APA’s definitions is mandatory only when APA itself

is applicable). In fact, the Communications Act’s legislative

history indicates that § 401(b) was modeled in part after § 16

(12) of the Interstate Commerce Act, 49 U.S.C. § 16 (12) (re-

pealed). The wording of the two provisions is virtually identi-

cal, see S. Rep. No. 781, 73d Cong., 2d Sess. 9 (1934). In

Pacific Fruit Express Company v. Akron, Canton & Youngs-

town Railroad, 524 F.2d 1025, 1028-31 (9th Cir. 1975), cert.

denied, 424 U.S. 911 (1976), we held that § 16 (12) authorizes

private in junctive actions to enforce ICC rules. The same

result would seem to follow for FCC rules under § 401(b).

[3] Second, the language of other sections of the Communi-

cations Act shows that Congress did not intend to limit

§ 401(b) exclusively to adjudicatory orders as the APA

defines them. When Congress intended the APA’s definition

of a given term to be incorporated into the Communications

Act, it said so. E.g., 47 U.S.C. §§ 409(a)-(c) (incorporating

APA’s definition of “adjudication”). Congress never pro-

vided that the APA’s definition of “order” should extend to

§ 401(b).”

2°0T wo Supreme Court decisions also seem to support the conclusion that

Congress intended the term “order” in § 401(b) to encompass FCC rules. In

CBS. Inc. v. United States, 316 U.S. 407, 425 (1942), the Court held that

FCC rules constitute orders for purposes of § 402(a) of the Act. Because

Congress did not indicate any intention that “order” should have a differ-

ent meaning in § 401(b) from § 402, it appears that FCC rules can be con-

strued to constitute orders for purposes of § 401(b). But see New England

Telephone v. Maine, 742 F.2d at 8 (distinct functions of sections 401(b) and

402 dictate a far broader interpretation of “order” in § 402 than in

§ 401(b)).

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17a

We do not believe that our interpretation of § 401(b) dis-

places the FCC from its central role in the enforcement of the

Act. The FCC has broad discretion to act through either case-

by-case adjudication or the rulemaking process. See United

States v. Southwestern Cable Company, 392 U.S. 157, 180-81

(1968); see also SEC v. Chenery Corporation, 332 U.S. 194,

202-03 (1947) (citing CBS, Inc. v. United States, 316 U.S. 407,

421 (1942)). Thus, the FCC can tailor directives to the needs

of particular circumstances. Moreover, the FCC can inter-

vene or file amicus briefs in § 401(b) actions or even invoke

the doctrine of primary jurisdiction. See, e.g., United States v.

Yellow Freight System, Inc., 762 F.2d 737, 739 (9th Cir. 1985)

(primary jurisdiction doctrine authorizes suspension of dis-

trict court proceedings to allow agency to express views on

pending issues within agency's special competence); but see

New England Telephone v. Maine, 742 F.2d at 11 (noting that

primary jurisdiction doctrine lacks needed clarity and effi-

ciency). These mechanisms help to prevent substantially

inconsistent application of FCC rules and serious judicial

encroachment on FCC responsibilities.

[4] We need not decide today whether every rule, order, or

regulation promulgated by the FCC is an enforceable order

under § 401(b), however. The language of the particular order

in question, and the proceedings leading up to it, demonstrate

that the FCC intended Order 81-312 to require particular

actions be taken by the PUC and private carriers providing

service to Hawaii.”* Appellant PUC conceded that it must

In Ambassador, Inc. v. United States, 325 U.S. 317 (1945), the Supreme

Court upheld a §401 injunction granted to enforce tariff regulations

imposed by a telephone company in compliance with a FCC rulemaking

order. /d. at 325. To the extent that Ambassador involved a § 401(b) injunc-

tion, it also supports the injunction in this case.

*1See FCC Order 81-312, 87 F.C.C.2d 18, which in pertinent part pro-

vides:

18a

abide by those FCC-mandated separations procedures.

Under the circumstances, we conclude that FCC Order 81-

312 was appropriately interpreted as an “order” for enforce-

ment by injunction in the district court.

C. Whether FCC Order 81-312 was “Regularly Made”

Appeliants’ final challenge to jurisdiction under § 401(b)

seizes upon that section’s requirement that an order be

“regularly made” by the FCC. They contend that a substan-

tive determination must be made that the FCC had authority

to make Order 81-312. Appellants argue that the Commission

was without authority to mandate a specific separations

method for intrastate ratemaking.

[5] We think that “regularly made” in § 401(b) simply refers

to procedural regularity. The substantive validity of FCC

orders can be challenged only through actions under § 402(a).

ITT World Communications, Inc., 466 U.S. at 468 & n.5 (also

noting in dicta that challenges to validity of past agency con-

duct should be brought through actions for FCC declaratory

rulings under doctrine of primary jurisdiction, not in district

courts). It would defeat the purpose of § 402(a) to interpret

§ 401(b) to require a threshold finding of the FCC’s authority

to make particular rules. Appellants identify, and we have

found, no procedural problems with the promulgation of

3. IT IS FURTHER ORDERED That... the NARUC-FCC Sepa-

rations Manual [Ozark Plan]... SHALL APPLY to Hawaii and

Alaska.

4. IT IS FURTHER ORDERED That, Section 67.1 (e) of the

Commission's Rules and Regulations, 47 C.F.R. §67.1 (e), IS

AMENDED to read as follows: These Separations Procedures

apply to Puerto Rico, the United States Virgin Islands, Alaska and

Hawaii.

Thus, the order was not merely interpretive, but instead was a mandate to

apply the NARUC-FCC separations procedure.

19a

Order 81-312. Consequently, the district court had subject

matter jurisdiction under § 401(b) to issue the injunction.

Il. THE JOHNSON ACT

As their final jurisdictional challenge, appellants argue that

the Johnson Act, 28 U.S.C. § 1342, bars HawTel’s action. The

four conditions in the Johnson Act are conjunctive; therefore,

all four conditions must be present to deprive the district

court of jurisdiction.” DeKalb County v. Southern Bell Tele-

phone & Telegraph Company, 358 F. Supp. 498, 504 (N.D.

Ga. 1972), aff'd, 478 F.2d 700 (Sth Cir. 1973); United States

v. Public Utilities Commission, 141 F. Supp. 168, 188 (N.D.

Cal. 1956), aff'd, 355 U.S. 534 (1958).

HawTel does not dispute that the final three conditions are

met.*? Instead, HawTel argues, and the district court found,

that the Johnson Act is inapplicable because HawTel’s action

is not based “solely” on a claim of “repugnance of the order

to the Federal Constitution.” See 28 U.S.C. § 1342(1).

Although appellee's action is based expressly on 47 U.S.C.

§ 401(b) and FCC Order 81-312, appellants contend that it is

in essence a preemption claim under the Supremacy Clause.

|6] We have construed the term “solely” in § 1342(1) nar-

rowly. The Johnson Act applies “only when [a challenge to a

rate order] rests exc/usivel/y on ‘repugnance of the order to the

Federal Constitution.’ ” Jnternational Brotherhood of Electri-

cal Workers v. Public Service Commission, 614 F.2d 206, 210-

11 (9th Cir. 1980) (quoting 28 U.S.C. § 1342(1)) (emphasis

supplied) (upholding federal jurisdiction because the union's

action depended in part on an interpretation of National

22 See supra note 4.

23The PUC’s decision possibly may affect interstate commerce, see 28

U.S.C. § 1342(2). because it interferes with an FCC-mandated system for

apportioning costs between interstate and intrastate services. HawTel does

not advance this argument, and we need not consider it today.

20a

Labor Relations Act). A claim of preemption does not meet

this test. Jd. at 211. The district court was correct in holding

that the Johnson Act did not bar appellee’s action.

III. RES JUDICATA

[7] The district court also rejected appellants’ contention

that HawTel’s claim is barred by res judicata. Appellants

assert that HawTel argued that the PUC had misapplied FCC

Order 81-312 when it appealed the PUC’s 1981 rate order to

the Hawaii Supreme Court.* Appellants contend that this

issue is now foreclosed. Whether res judicata or collateral

estoppel bars claims is a mixed question of law and fact sub-

ject to de novo review. A&A Concrete, Inc. v. White Mountain

Apache Tribe, 781 F.2d 1411, 1414 (9th Cir.), cert. denied,

106 S.Ct. 2008 (1986). :

HawTel offers several responses. First, HawTel contends

that the Hawaii Supreme Court never squarely addressed its

federal claim,” at least in part because the court exercises

only limited review of rate cases. See In re Application of

Hawaii Electric Light Company, 60 Haw. 625, 628-29, 594

P.2d 612, 617 (Haw. 1979). Thus, without citing the case,

HawTel appears to invoke the principle of Robinson v. Ari-

yoshi, 753 F.2d 1468, 1472 (9th Cir. 1985), vacated and

remanded on other grounds, 106 S.Ct. 3269 (1986), that col-

lateral estoppel or res judicata effect will not be given to a

24To the extent HawTel did not assert that argument, appellants contend

it should have and is now precluded from doing so. Appellants appear to

argue al times that res judicata bars HawTel’s district court action. At other

times, they appear to argue that HawTel should be collaterally estopped

from raising certain issues. Our conclusion is the same whichever doctrine

appellants intend to argue.

*5Res judicata prevents federal litigation of a federal constitutional claim

that was or might have been raised in a prior state action. Board of Trustees

of Carpenters Pension Trust Fund v. Reyes, 688 F.2d 671, 673 (9th Cir.

1982) (noting appellant's failure to seek United States Supreme Court

review of the state court judgment), cert. denied, 462 U.S. 1120 (1983).

2la

State court decision when the complaining party did not have

a “full and fair opportunity to litigate a claim in state court or

where the state court demonstrated inability or unwillingness

to protect federal rights.” Jd. There is some support in the

record for HawTel’s characterization of the Hawaii Supreme

Court's decision, but we need not rule upon this contention

because we find Hawtel’s second argument dispositive.

HawTel’s second point is that there is such a disparity

between the contexts of the PUC decisions in Dockets 4306

and 4588 that neither res judicata nor collateral estoppel can

apply. We agree. The two dockets involve different rate peri-

ods, with different rate bases. The causes of action are clearly

not the same, and res judicata cannot apply. See Commis-

sioner v. Sunnen, 333 U.S. 591, 597-98 (1948) (income tax

claims for successive tax years not same cause of action for res

judicata purposes). It is true that collateral estoppel may

apply and foreclose the litigation of issues that were actually

litigated and decided in a previous action, even though the

causes of action differ. /d. at 598-99. But in successive rate

proceedings, as in successive tax cases, there are strong policy

reasons for denying the application of collateral estoppel

when variations in either facts or law occur. An issue once

decided may create inequities in the continuing administra-

tion of the law if applied by estoppel to later years. /d. at 599-

600.

[8] Here we conclude that there were sufficient differences

between the PUC actions in Dockets 4306 and 4588 to mili-

tate against the application of collateral estoppel to the !.1

percent rate downward rate adjustment. Although essentially

the same adjustment was applied, it was applied to different

rate periods, with different revenues, different expenses, and

different investments. See Papago Tribal Utility Authority v.

FERC, 776 F.2d 828, 833 n.5 (9th Cir. 1985), cert. denied,

106 S.Ct. 1515 (1986). When Docket 4306 was decided, Haw-

Tel was operating under its transition agreement with AT&T.

Among other things, that agreement provided for payments

22a

to HawTel to soften the impact on its overall revenues of the

mandated shift to the Ozark Plan. In contrast, Docket 4588

involved rates effective January |, 1985, after the transition

agreement had expired.” If, in this new setting, the 1.1 per-

cent adjustment did violate the FCC separations rule, Haw-

Tel should be free to raise the issue,. rather than to suffer a

continuing violation of a policy set by the FCC. HawTel is not

collaterally “appealing” the Hawaii Supreme Court’s deci-

sion, but is challenging the lawfulness of the PUC’s action in

Docket 4588. PUC Docket 4588 has not been ruled upon by

the Hawaii court, or ary other court. We conclude that the

district court properly rejected the application of res judicata

and collateral estoppel.”’

IV. PREEMPTION OF THE SEPARATIONS FIELD

{9} Reaching the merits, appellant Consumer Advocate

contends that FCC Order 81-312 did not preempt state regu-

?61n its Judgment for Permanent Injunction 1 15, the district court noted

this distinction:

The declared purpose behind the PUC adjustment is to have

Hawaii intrastate ratepayers share in the transitional supplement

received by HTC under the HTC-AT&T agreement approved by

the FCC in 1981. Yet presumably Hawaii intrastate ratepayers

have received some benefit from that agreement by a slowing

down of increases in intrastate rates. Furthermore, that agree-

ment, and supplements under the agreement, terminated on

December 31, 1984. The rates set in PUC Docket No. 4588, how-

ever, remain in place indefinitely until modified in another future

proceeding before the PUC.

Id.

27? HawTel also argued that because federal courts have exclusive juris-

diction under § 401(b) to enforce FCC Orders, the state court determina-

tion cannot preclude federal review even if the state court reached the

merits of its federal claim. See Southern Pacific Transp. Co. v. Public Utili-

ties Comm'n, 716 F.2d 1285, 1289-90 (9th Cir. 1983), cert. denied, 466 U.S.

936 (1984). We need not reach this issue, and express no view on the merits

of appellees’ contentions regarding exclusive jurisdiction, or on that possi-

ble ground for collateral attack on the state court's decision.

tree. Bink Se! ed out

| ee A Ce eal Stee Oe Fe

23a

lation of separations procedures and that the PUC’s use of

state-developed procedures was perfectly proper for intra-

state ratemaking. This argument raises a question of law

reviewed here de novo. United States v. McConney, 728 F.2d

1195, 1201 (9th Cir.) (en banc), cert. denied, 469 U.S. 824

(1984).

Appellants concede the FCC’s plenary authority over sepa-

rations procedures, but argue in their Joint Brief that the FCC

has not exercised this power. They point to the absence of an

express statement of intention to preempt the field of separa-

tions for intrastate ratemaking purposes in FCC Order 81-

312. They argue that the applicable test for preemption is

whether both the state and federal regulations “can be

enforced without impairing the federal superintendence of

the field.” Florida Lime & Avocado Growers, Inc. v. Paul, 373

U.S. 132, 142 (1963).

Appellants’ argument overlooks the extent to which separa-

tions for interstate ratemaking and separations for intrastate

ratemaking are two sides of the same coin.”? When the same

plant and equipment is used to provide both interstate and

intrastate services and different authorities set rates for these

respective services, cost and investment must be apportioned

uniformly in order to establish fair rates. See The Minnesota

Rate Cases, 230 U.S. 352, 435 (1913); Washington Utilities &

Transportation Commission v. FCC, 513 F.2d 1142, 1146

(9th Cir.), cert. denied, 423 U.S. 836 (1975). If the sum of the

28In this respect, appellants’ brief contradicts the PUC’s earlier conces-

sions in Docket 4588 and in the Hearing on Motion for Preliminary Injunc-

tion, that the PUC must apply the FCC-mandated separations procedures.

Counsel for the PUC stated that the PUC agreed with Hawtel and “the FCC

that the separations formula must remain intact for each governmental

authority to assert its own jurisdiction.”

°Thus the question is not whether federal separations procedures pre-

empt state ratemaking. It is whether federal separations procedures pre-

empt any inconsistent separations adopted, openly or otherwise, by the

state for the purposes of establishing the intrastate rate base.

24a

intrastate and interstate portions for rate-base allocation pur-

poses were not 100 percent,

some costs of plant and expenses would not be

included in the rate computations of either [the

PUC or the FCC]. In [that] situation. . ., the “carrier

may be deprived of a fair rate of return when inter-

state and intrastate jurisdictions are both taken into

account.”

Application of Hawaiian Tel. Co., 67 Haw. ___, 689 P.2d at

751-52 (quoting New England Tel. & Tel. Co. v. Public Utili-

ties Comm'n, 448 A.2d 272, 298 (Me. 1982)). See also Illinois

Bell, 740 F.2d at 567; Washington Utilities & Transportation

Commission, 513 F.2d at 1146-47 (recognizing complemen-

tary nature of the separations process).

[10] The Communications Act empowers the FCC to pre-

scribe uniform separations procedures. //linois Bell, 740 F.2d

at 567; see 47 U.S.C. § 221(c) (granting FCC authority to clas-

sify property for interstate or foreign telephone toll service);

id. § 410(c) (requiring use of Federal-State Joint Board for

separations rulemaking). These statutes evince a congression-

al intent that FCC separations orders control the state regula-

tory bodies, because a nationwide telecommunications sys-

tem with dual intrastate and interstate rates can operate

effectively only if one set of separations procedures is

employed. E.g., State Corporation Commission v. FCC, 787

F.2d 1421, 1426-27 (10th Cir. 1986) (citing cases); see Louisi-

ana Public Service, 106 S. Ct. at 1902 (citing Smith v. I/linois

Bell Telephone Co., 282 U.S. 133 (1930)); S. Rep. No. 92-362.

92d Cong.. Ist Sess., reprinted in 1971 U.S. Code Cong. &

Admin. News 1511, 1513, 1515 (noting need to preserve fed-

eral superintendence in the separations field, citing Sith v.

Illinois Bell, supra). see also NARUC v. FCC, 746 F.2d 1492,

1499-1501 (D.C. Cir. 1984); Jn re Establishment of Interstate

Toll Settlements & Jurisdictional Separations Requiring the

Use of Seven Calendar Day Studies by the Florida Pub. Serv.

Mt A co Rg ate aR ah

A sine AD

25a

~ Comm'n, Memorandum Opinion & Order on Reconsidera-

tion (Docket No. 84-268), 98 F.C.C.2d 777-84 (1984); Jn re

AT&T & the Associated Bell System Companies Charges for

Interstate & Foreign Communication Service, Interim Deci-

sion & Order (Docket Nos. 16258 & 15011), 9 F.C.C.2d 30,

90-91 (1967).

The FCC’s statements during the lengthy Ozark Plan pro-

ceedings indicate a desire to adopt a separations scheme

agreeable to as many states as possible because that scheme

will apply to the entire nation. E.g., Prescription of Procedures

for Separating and Allocating Plant Investment, Operating

Expenses, Taxes and Reserves Between the Intrastate and

Interstate Operations of Telephone Companies, Report &

Order 70-1151 (Docket 18866), 26 F.C.C.2d 247, 257 (1970).

In 1972, the FCC began efforts to integrate Hawaii “into the

established rate scheme for communications services applica-

ble to the Mainland.” Docket No. 16495, 35 F.C.C.2d at 856-

57. The FCC extended Ozark to Hawaii as a central part of

that rate scheme in Order 81-312, expressly citing its separa-

tions authority under § 221(c) and following the procedure set

forth by § 410(c).

[11] This history, the statutory framework underlying it,

and the need for consistent apportionment between interstate

and intrastate operations, are sufficient to convince us that

FCC Order 81-312 necessarily preempted any independent

separations procedures of the Hawaii PUC.

V. LOUISIANA PUBLIC SERVICE AND § 152(b)

In its recent decision in Louisiana Public Service, the

Supreme Court held that § 152(b) of the Act bars “federal pre-

emption of state regulation over depreciation of dual jurisdic-

tion property for intrastate ratemaking purposes.” 106 S.Ct.

at 1904. Section 152(b) provides:

{ NJothing in this chapter shall be construed to apply

or to give the [FCC] jurisdiction with respect to (1)

26a

charges, classifications, practices, services, facilities,

or regulations for or in connection with intrastate

communication service by wire or radio of any car-

rer... ...

47 U.S.C. § 152(b). Appellants argue that this provision, and

the Louisiana Public Service decision, support their view that

the FCC cannot dictate separations practices to the states for

use in their intrastate ratemaking. We disagree.

The Supreme Court made it quite clear in Louisiana Public

Service that federal separations procedures were an essential

prerequisite to the creation of independent spheres of federal

and state power over communications:

~The Communications Act not only establishes dual

state and federal regulation of telephone service; it

also recognizes that jurisdictional tensions may arise

as a result of the fact that interstate and intrastate

service are provided by a single integrated system.

Thus, the Act itself establishes a process designed to

resolve what is [sic] known as “jurisdictional

separations” matters, by which process it may be

determined what portion of an asset is employed to

produce or deliver interstate as opposed to intrastate

service. 47 U.S.C. § 410(c). Because the separations

process literally separates costs such as taxes and

operating expenses between interstate and intrastate

service, it facilitates the creation or recognition of

distinct spheres of regulation.

Louisiana Public Service, 106 S. Ct. at 1902. See also id. at

1899 (“the jurisdictional limitations placed on the FCC by

§ 152(b), coupled with the fact that the Act provides for a

‘separations’ proceeding to determine the portions of a single

asset that are used for interstate and intrastate service. 47

U.S.C. § 410(c), answer” arguments for preemption of depre-

ciation).

SAA NA Ache taal bia nah. SENS eas a hale

is ntti cl

27a

{12] Thus, it is only affer a uniform separations formula has

been applied that a state’s independent depreciation rule for

intrastate ratemaking can be protected from federal preemp-

tion. See Smith v. Illinois Bell, 282 U.S. at 148. The Supreme

Court’s decision in Louisiana Public Service accordingly sup-

ports our conclusion that the FCC separations procedures

authorized by § 410(c) of the Act bind the states, and that

§ 152(b) does not stand in the way.”

VI. PUC DISOBEDIENCE OF THE FCC ORDER

Finally, appellants contend that the PUC did not disobey

the FCC order. The district court found that it did. We review

factual findings for clear error. E.g., United States v. McCon-

ney, 728 F.2d at 1201.

We have already determined that the FCC properly pre-

empted the separations field, employing the authority granted

by the Communications Act. No one disputes the authority of

a state PUC to establish a reasonable rate of return for utili-

ties within its jurisdiction. But, as the district court found, the

“appropriate adjustment” here was a fairly transparent and

improper attempt to circumvent the FCC mandate. Cf. Aloha

Airlines, Inc. v. Director of Taxation, 464 U.S. 7, 12-13 (1983)

(state could not circumvent preemptive federal Act prohibit-

ing gross receipts tax on airlines by calling its tax a “property

3° ppellants contend that, even after imposition of a federal separations

formula, PUC remains free to impose variations. If, for example, the FCC

decides that interstate rates should be based on 25% of an employee’s $20

per hour wage, the PUC need not accept a base of the remaining $15. The

PUC remains free to determine that a $20 wage is unreasonable for state

ratemaking purposes, while a $16 wage is reasonable. The PUC could then

base its rates on 75% of that figure, or $12.

We accept this argument, but it does not apply directly to this case. What

the PUC cannot do is concede that a $20 wage is reasonable for intrastate

ratemaking purposes, but nevertheless base its rate on $12 of the wage

because it thought that the interstate proportion of the wage, set by the FCC

at 25%, was too low. That example is more nearly analogous to this case.

28a

tax measured by gross receipts”). The Supremacy Clause does

not countenance state policies—in this case, a state ratemak-

ing ruling—that may produce results inconsistent with the

objective of a federal statute. E.g.. Maryland v. Louisiana,

451 U.S. 725, 747 (1981).

[13] The undisputed evidence is that, while the PUC ini-

tially used the Ozark Plan to calculate rates, it then adjusted

rates downward by 1.1 percent. The PUC arrived at its 1.1

percent “Adjustment for Change in Separation Plan” by com-

paring 1981 rates under the Ozark Plan and under Hawaiian

Plan II. It also took into account the transitional payments

from AT&T even though it acknowledged that these had to be

considered as interstate revenues. The district court did not

clearly err in finding that this adjustment was an attempt to

nullify the FCC’s Ozark separations plan. Although no new

comparison was performed in 1984 in Docket 4588, the PUC

expressly carried over the 1.1 percent adjustment even after

it found that 11.25 percent was a reasonable rate of return

and that a rate increase of $30 million was necessary to

achieve the 11.25 percent return.” Appellants offered only

the explanation that the 1.1 percent adjustment resulted from

the PUC’s determination, within its proper authority, that

the adjustment was “necessary, fair and reasonable.” PUC

Decision & Order No. 8042, Docket No. 4588 at 15 (noting

that adjustment would be treated as an adjustment to

expenses). No support for such a finding appears in the PUC

order or in evidence, however.

[14] Rather than simply accept the PUC’s statements that

it was applying the Ozark Plan, the district court properly

considered the effect of the PUC’s ruling to determine

whether it conflicted with federal law. See Perez v. Campbell,

31The PUC made it quite clear that its adjustment in Docket No. 4588

was not independent of its original adjustment in Docket No. 4306. “We

find no reason to deviate from our previous decision.” Decision & Order

No. 8042. Docket No. 4588, at 14.

thd cic 8 an i

whew

Th Sali Se oan Yodel namie lt aaa te dh em Le,

TV ie pina Mica ind wed eee Sa

Fee on

ita eemre

402 U.S. 637, 652 (1971); New York State Commission on

Cahle TV v. FCC, 669 F.2d 58, 62 (2d Cir. 1982). Reviewing

the record, we conclude that the district court committed no

clear error in finding that “[t]he so-called ‘appropriate adjust-

ment’... in Docket No. 4588 was calculated solely and pre-

cisely on the difference between the Hawaiian Plan II and

Ozark Separations formulas.” Judgment for Permanent

Injunction { 13. That finding supports a conclusion that PUC

violated the FCC-impeosed Ozark Plan.

CONCLUSION

The district court’s injunction is authorized under § 401(b)

and its decision to accord preemptive weight to FCC Order

81-312 does not violate the dual regulatory system prescribed

under the Communications Act. The court did not clearly err

in finding that the PUC’s rate-of-return adjustment was in

effect a thinly veiled attempt to depart from the required sep-

aration of plant and expenses between interstate and intra-

state use. The PUC clearly has supreme authority with regard

to intrastate ratemaking; but the PUC is not entitled to define

boundaries of its intrastate sphere that are different from

those established by the valid FCC order. Nor can the PUC

accomplish by subterfuge what it could not, by its own admis-

sion, do directly.

The order of the district court enjoining the PUC and its

Commissioners is therefore AFFIRMED.

FERGUSON, Circuit Judge, dissenting:

I dissent. The majority opinion misconstrues and misap-

plies the Supreme Court's recent decision in Louisiana Public

Service Commission v. FCC, 106 S. Ct. 519 (1986), and in so

doing pays scant heed to the important federalism concerns

that lie at the heart of this case. As the Supreme Court has

30a

pointed out in a different context, “the essence of federalism

is that States must be free to develop a variety of solutions to

problems and not be forced into a common uniform mold.”

Addington v. Texas, 441 U.S. 418 (1979). The Supremacy

Clause of Art. VI of the Constitution does, of course, give

Congress the power to preempt state law. See Louisiana, 106

S. Ct. at 1898. Absent a congressional mandate, however, it is

not appropriate for either the FCC or this court to abridge the

authority of the Hawaii Public Utilities Commission

(“PUC”) to set intrastate rates for telephone services. The

Court’s decision in Louisiana makes clear that 47 U.S.C.

§ 152(b) constitutes a congressional denial of power to the

FCC to regulate intrastate rate-making. For this reason, |

would reverse the decision of the district court.

The threshold issue is, as the majority points out, the ques-

tion of whether the district court had jurisdiction to require

the PUC to obey an FCC order raising the intrastate rates for

Hawaii Telephone (“HawTel”). Whether the district court

had jurisdiction depends on whether there was an enforceable

FCC order under 47 U.S.C. § 401(b). Whether there was an

enforceable order under section 401(b) depends, in turn, on

whether intrastate rate-making is preempted by the uniform

separations process.

It is undisputed that the Communications Act empowers

the FCC to prescribe uniform separations procedures for

apportioning the property and expenses of telephone compa-

nies between the interstate jurisdiction, governed by the

FCC, and the intrastate jurisdiction, governed by state regu-

latory authorities. See 47 U.S.C. §§ 221(c), 410(c). The issue,

however, is whether, once that apportionment is made

according to FCC procedures, the FCC can require the state

to follow the uniform procedures when establishing intrastate

rates. Simply stated, the question is whether state regulatory

authorities are preempted by 47 U.S.C. §§ 221(c) and 410(c)

from making adjustments in setting intrastate rates. The

Supreme Court’s decision in Louisiana leaves no doubt that

Mina Ea all Oe ate a MIN a

ee Te eee ee

3la

there is no federal preemption in the area of intrastate regula-

tion, even where intrastate regulation has an impact on inter-

state communications. Under Louisiana, therefore, this court

should find that the district court had no jurisdiction to

enforce the FCC's order.

The issue in Louisiana was whether state regulation of

depreciation methods and rates for telephone companies was

preempted by rulings of the FCC. The Court held that 47

U.S.C. § 152(b) bars federal preemption of state regulation of

depreciation of “dual jurisdiction” property for intrastate

rate-making purposes, notwithstanding 47 U.S.C. § 220,

which expressly directs the FCC to prescribe depreciation

practices. The FCC argued in Louisiana that section 220

operates to preempt inconsistent state depreciation regula-

tions even for intrastate rate-making purposes, and that such

federal displacement of state regulation was justified as neces-

sary to avoid frustration of valid federal policies. The

Supreme Court rejected this argument, noting the “express

jurisdictional limitations” of section 152(b) and stating that

“by its terms this provision fences off from FCC reach or reg-

ulation intrastate matters—indeed including matters ‘in con-

nection with’ intrastate service.” 106 S.Ct. at 1899. The

Court noted that the Act itself establishes a process for resolv-

ing jurisdictional separations issues, 47 U.S.C. § 410(c), and

stated that “it is possible to apply different rates and methods

of depreciation to plant once the correct allocation between

the interstate and intrastate use has been made.” /d. at 19@2.

Applying the reasoning of Louisiana, it is clear that once

jurisdictional separations were made, the PUC was not pre-

empted from making an adjustment to intrastate rates alone.

Section 152(b) expressly denies the FCC jurisdiction over

“charges, classifications, practices, services, facilities, or regu-

lations for or in connection with intrastate communication

service.” 106 S. Ct. at 1899. The Supreme Court noted that

this section contains not only a substantive jurisdictional lim-

itation on the FCC’s power, but also a rule of statutor, con-

32a

struction (“... nothing in this chapter shall be construed to

apply or to give the Commission jurisdiction with respect to

... intrastate communication service”). Thus, in Louisiana,

the FCC could not rely on the specific grant of authority to

prescribe depreciation procedures contained in section 220 to

defeat the express limitations of section 152(b). Similarly,

here, once apportionment between State and Federal jurisdic-

tions is made under section 410(c), the FCC may not further

rely on that section to invade the authority specifically denied

the agency under section | 52(b). As the Court points out, the

separations process itself “facilitates the creation or recogni-

tion of distinct spheres of regulation.” Jd. at 1902.

Nor, under Louisiana, may the FCC compel a different

result by arguing that the PUC’s adjustment of intrastate

rates was preempted as an evasion of the separations proce-

dure. The Supreme Court makes clear in the Louisiana

decision that arguments about the effect or impact of state

regulation will not confer preemptive authority on the FCC if

the agency is acting outside the scope of its congressionally

delegated authority. In Louisiana, the FCC argued that the

express limitations on federal authority contained in section

152(b) should not bar the FCC from requiring state commis-

sions to follow FCC depreciation practices for intrastate rate-

making purposes, because the plant involved was used inter-

changeably to provide both intrastate and interstate service:

and that any authority reserved to the states under section

152(b) should be confined to intrastate matters which are sep-

arable from and do not substantially affect interstate com-

merce.

The Supreme Court rejected this argument, noting:

While it is certainly true, and a basic underpinning

of our federal system, that state regulation will be

displaced to the extent that it stands as an obstacle

to the accomplishment and execution of the full pur-

poses and objectives of Congress, it is also true that

ee Le ee

oe Ne ee Rn a ck _

33a

a federal agency may preempt state law only when

and if it is acting within the scope of its congressio-

nally delegated authority.

Id. at 1901 (citation omitted).

The Court went on to explain that an agency literally has no

power to act, let alone preempt state law, until Congress con-

fers authority on it; and that the best way of determining

whether Congress intended the agency's regulations to dis-

place state law is to examine the scope of the authority

granted to the agency by the legislature. /d. Applying these

principles, the Court reiterated that section 152(b) consti-

tutes a congressional denial of power to the FCC, and con-

cluded therefore that “we simply cannot accept an argument

that the FCC may nevertheless take action which it thinks

will best effectuate a federal policy.” Jd.

The argument that HawTel made, and the district court

accepted, that the Hawaii PUC’s actions constituted an eva-

sion of the federal separations procedures, is essentially the

same kind of argument that the Court rejected in Louisiana.

Louisiana stands for the proposition that an agency may not

expand its jurisdiction beyond that granted by Congress,

regardless of the policy arguments that the agency may make

in support of greater preemptive power. Thus, under the prin-

ciples of Louisiana the first question to ask is whether there

is a congressional grant of authority to the agency. It is clear

from the statute that Congress has authorized the FCC to

establish separation procedures. However, error arises if it is

concluded that this grant of authority extends to intrastate

rate-making, as the authority of the FCC in this area is clearly

limited by the express provisions of section 152(b). Accord-

ing to Louisiana, HawTel cannot bypass that express limita-

tion hy reference to the impact or effect of the state’s exercise

of authority on interstate communications. The Court explic-

itly holds that the authority reserved to the state regulatory

authorities under section |52(b) is not limited to those areas

34a

where the matter to be regulated is “purely local” and where

interstate communications are not affected by the state regu-

lation. Dismissing this approach, the Court states “the short

answer to this argument is that it misrepresents the statutory

scheme and the basis and test for preemption. 106 S. Ct. at

1901.

I conclude therefore that the FCC order was not enforce-

able under 47 U.S.C. § 401(b), as the federal agency had no

authority to intervene in the purely intrastate rate-making of

the PUC. The PUC accepted the FCC order in the initial sep-

arations process and allocated property and expenses

between the intrastate and interstate jurisdictions accord-

ingly. Once that process was complete, the authority of the

FCC terminated, as, under section 152(b), the FCC may not

require compliance with federal standards in intrastate rate-

making, arguments about the effect of such rate-making on

interstate communications notwithstanding. Thus, the dis-

trict court was without jurisdiction to issue the injunction.

To hold otherwise subverts the operation of the federalism

that Congress has mandated. The FCC regulates interstate

rates. The state PUCs regulate intrastate rates. That rule may

not work as the telephone companies would like,but that is a

problem that Congress must solve.’ Only Congress can extend

the jurisdiction of a federal agency, not the courts. Were pro-

posals before Congress to confer jurisdiction on the FCC over

intrastate rates, they would doubtless engender a consider-

able political controversy. However, Congress has not acted,

and the Supreme Court has said in no uncertain terms that

the FCC may not assume jurisdiction merely because it

thinks to do so would make for a more efficient system.’

‘It is hard to escape the conclusion that, as in Louisiana, “what is really

troubling [the appellees] is their sense that state regulations will not allow

them sufficient revenues.” 106 S. Ct. at 1902. While recognizing that con-

cern, as the Court pointed out, “only Congress can rewrite the statute.” /d.

It should be emphasized that a decision by this panel that there was no

enforceable order under 47 U.S.C. § 401(b) would not leave the telephone

ee

35a

I have set forth in detail my reasons for dissenting from the

majority’s analysis of the impact of Louisiana because the

majority ignores the important federalism concerns which

must be addressed when federal regulatory agencies attempt

to assert authority over intrastate decision-making absent a

clear mandate from Congress. I believe, however, that this

court does not need to reach the preemption issue as Haw-

Tel’s suit here is collaterally estopped by the decision of the

Hawaii Supreme Court in /n re Hawaii Telephone Co., 689

P.2d 741 (Haw. 1984).

The majority concludes that collateral estoppel does not

apply because of the factual differences between the two

actions. The majority concedes that both actions concerned

HawtTel’s appeal of essentially the same downward adjust-

ment in intrastate rates, but argues that because the adjust-

ment was applied in different rate periods, with different

revenues, different expenses, and different investments, the

second suit is not a collateral appeal of the first.

The principle of collateral estoppel “is designed to prevent

repetitious lawsuits over matters which have once been

decided and which have remained substantially static, factu-

ally and legally.” Commissioner v. Sunnen, 333 U.S. 591, 599

(1948). In the context of claims involving tax liability in dif-

ferent tax years, the Supreme Court noted that “the prior

judgment acts as collateral estoppel only as to those matters

in the second proceeding which were actually presented and

determined in the first suit,” id. at 598, cautioning that “a

subsequent modification of the significant facts or a change in

the controlling legal principles may make that determination

obsolete or erroneous, at least for future purposes,” id. at 599.

companies without any means of challenging the rate-setting of state rate-

setting commissions. Apart from any federal constitutional claims, there

are also a number of state grounds on which decisions or orders of state reg-

ulatory agencies may be challenged in state courts. See, e.g., Haw. Rev. Stat.

§ 91-14(g) (1976).

36a

The central issue in the instant case is whether the PUC

may independently adjust its intrastate rate basis or is pre-

empted from so doing by FCC orders governing the separa-

tions process. In Hawaiian Telephone Co., the Hawaii

Supreme Court squarely confronted and decided this issue.

The court stated: “We have examined the claim that the State

agencies invaded a federally preempted area by varying a

jurisdictional separation approved by the FCC, but find the

claim to be without merit.” 689 P.2d at 741. Thus, the two

rate increase requests, one pursued in state court and one sub-

sequently raised in federal court, raise the same legal issue:

Did the PUC invade a federally preempted area in setting its

intrastate rates? The state court found that it did not, because

it neither “varied a formula, method of procedure decreed by

the federal agency nor tampered with interstate rates in any

way.” Id. at 751.

In this suit, HawTel seeks to relitigate the propriety of that

conclusion as to PUC’s intrastate rate-making procedures. In

the period between the first and second suit, there has been no

“subsequent modification of the significant facts,” Sunnen,

333 U.S. at 591 (emphasis added). That the transition period

had expired and that the two suits involved different rate

periods are not significant changes for the determination of

whether or not the state’s authority to set intrastate rates,

after following the prescribed separations procedures, is pre-

empted under the federal statute. Collateral estoppel should

therefore bar HawTel’s attempt to relitigate in federal court

the very issue decided against it by the Supreme Court of

Hawaii. To decide otherwise is not only to commit the

resources of this court to redundant litigation; it is also a con-

travention of those principles of comity which underlie the

federal system.

37a

APPENDIX B

IN THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF HAWAII

CIVIL NO. 84-1306

HAWAIIAN TELEPHONE COMPANY, A Hawaii Corporation,

Plaintiff,

VS.

PUBLIC UTILITIES COMMISSION OF THE STATE OF HAwaAII;

ALBERT Tom, Chairman; SuNAo KIDO, Commissioner;

and CLYDE S. DuPoNT, Commissioner,

Defendants.

Filed March 13, 1985

DECISION GRANTING PERMANENT INJUNCTION

This matter came on for trial on March 12, 1985, on

the plaintiff's complaint for a permanent injunction. An

earlier hearing on December 17, 1984, on a preliminary

injunction resulted in an Order Granting Preliminary In-

junction filed herein on January 8, 1985, following a De-

cision rendered on December 26, 1984.

The evidence adduced at the hearing on a permanent

injunction was essentially the same as at the hearing on

a preliminary injunction. Some cross-examination of Carl

D. Zaretki and some testimony by Leroy Yuen were added

to the earlier record. An order by the Public Utilities

Commission following this court’s Order of January 8,

1985, was received.

I re-adopt the statements, findings of fact, and conclu-

sions of law set forth in my Decision of December 26,

1984, and Order of January 8, 1985.

38a

Some further reaction to the Public Utilities Commis-

sion’s argument that the Commission did not violate the

FCC Report and Order in Docket No. 21263 is required.

Leroy Yuen testified that separations calculations in

PUC Docket No. 4588 were made according to the fed-

erally-mandated Ozark Plan and that calculations according

to Hawaiian Plan II were never made (and have not yet

been made) in that docket. Therefore, the PUC argues,

the 1.1% ‘“‘adjustment’’ that was made in PUC Docket No.

4588 cannot be said to have been derived soiely from a

comparison between the Ozark Plan and Hawaiian Plan

II, as held by this court in connection with the hearing

on a preliminary injunction herein. Thus any complaint as

to PUC Decision and Order No. 8042 in PUC Docket No.

4588 cannot be said to involve a violation of FCC Report

and Order in Docket No. 21268.

It is true that no new separations calculations based on

Hawaiian Plan II were made in connection with PUC

Docket No. 4588. However, the 1.1% ‘‘adjustment’’ made

in PUC Docket No. 4588 was carried over from PUC

Docket No. 4306 in which such a comparison was made.

In Exhibit No. 1 to PUC Docket No. 4306, the 1.1% dif-

ference in Return on Rate Base between the results ob-

tained under the Ozark Plan (4.0%) and the results obtained

under Hawaiian Plan II (5.1%) is developed explicitly. Ex-

hibit No. 8 to PUC Docket No. 4306 then shows an ‘‘Ad-

justment for Change in Separation Plan” calculated as

111.1% of Interstate Rate Base = .011 x 454,129 =

$4,995”’ by which amount the ‘‘Increase In Net Operating

Income Required”’ is additionally reduced.

This 1.1% from PUC Docket NO. 4306 was carried over

to PUC Docket No. 4588, although without identifying the

item as an ‘Adjustment for Change in Separation Plan’’.

Instead the PUC stated, at page 14 of its Decision and

Order No. 8042, that at 1.1% adjustment having already

39a

been found to be fair and reasonable in PUC Docket No.

4306, would be applied again in PUC Docket NO. 4588.

PUC Docket NO. 4588 immediately succeeded PUC

Docket NO. 4306. No separate basis for reaching an ‘‘ad-

justment” of 1.1% in PUC Docket No. 4588 is given other

than the calculations set forth in Exhibit No. 1 to PUC

Docket No. 4306.

I adhere to my conclusions on the preliminary injunction.

The preliminary injunction heretofore granted will be

made permanent.

The foregoing constitute the court’s Findings of Fact

and Conclusions of Law.

DATED: Honolulu, Hawaii, March 13, 1985.

/s/SAMUEL P. KING

United States District

Judge

40a

APPENDIX C

IN THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF HAWAII

CIVIL NO. 84-1306

HAWAIIAN TELEPHONE COMPANY, A Hawaii Corporation,

Plaintiff,

“VS.

PuBLIC UTILITIES COMMISSION OF THE STATE OF HAWAII;

ALBERT ToM, Chairman; SUNAO KIDO, Commissioner;

and CLYDE S. DUPONT, Commissioner,

Defendants.

Filed January 8, 1985

ORDER GRANTING PRELIMINARY INJUNCTION

This matter has come before the Court on Plaintiff’s

Motion for Preliminary Injunction. Pursuant to notice, a

hearing on the Motion was held on December 17, 1984.

The Court has considered the affidavits of the parties,

evidence submitted at hearing, and the pleadings and ar-

guments of counsel. In accordance with its Decision herein,

rendered on December 26, 1984, the Court finds as follows:

1. By Report and Order adopted June 29, 1981 and

released July 8, 1981 in Docket No. 21263 (Report and

Order 81-312), the Federal Communications Commission

(““FCC’’) ordered that the federal Separations Manual

(based on what is referred to as the ‘Ozark Plan’’) “shall

apply to Hawaii.”’

2. Plaintiff HAWAIIAN TELEPHONE COMPANY

(‘““HTC”’) has moved for a Preliminary Injunction against

defendants PUBLIC UTILITIES COMMISSION and the

4la

PUBLIC UTILITIES COMMISSIONERS (collectively

“PUC” herein) under 47 U.S.C. §401(b), which reads in

part:

If any person fails or neglects to obey any

order of the [Federal Communications] Commis-

sion ... any party injured thereby ... may apply

to the appropriate district court of the United

States for the enforcement of such order. If, after

hearing, that court determines that the order was

regularly made and duly served, and that the

person is in disobedience of the same, the court

shall enforce obedience to such order by a writ

of injunction or other proper process, mandatory

or otherwise ....

3. The above-referenced FCC Report and Order in

Docket No. 21263 is an “order’’ which was “regularly

made”’ and the PUC is a “‘person,”’ all within the meaning

of those words as used in 47 U.S.C. §401(b).

4. The June 29, 1981 FCC Report and Order in Docket

No. 21263 referenced above is applicable to and binding

upon the PUC for purposes of jurisdictional separations

procedures in setting intrastate rates.

5. In its August 14, 1984 Decision and Order No. 8042

in Docket No. 4588, the PUC established intrastate tele-

phone rates for HTC’s regulated services.

6. The PUC in Decision and Order No. 8042 made an

adjustment to HTC’s revenue requirement, based on a 1.1%

computational factor, which resulted in a reduction of

$10,507,000 in the rate increase granted to Plaintiff. Said

adjustment is shown on Exhibit 4 to the Decision and

Order.

7. The PUC denies that, in making its adjustment, it

failed to apply the Ozark Plan as required by FCC Report

and Order 81-312. The PUC states in Decision and Order

No. 8042:

42a

.... The Commission ... did not shift intrastate

expenses to interstate and the Commission did

not adopt Hawaiian Plan II as the basis for sep-

arations. ... The Commission made an appro-

priate adjustment to provide reciprocal benefits

to the ratepayers as a result of the State of

Hawaii’s, and in turn the ratepayers’ support of

the transitional agreement between HTC and

AT&T. In making the appropriate adjustment the

Commission merely took the difference in rates

of return between Hawaiian Plan II and the

Ozark Plan as a basis of measurement and applied

the percentage difference to HTC’s intrastate rate

base. In so doing the annual cost or dollar return

became a reduction in a cost or expense item in

the determination of revenue requirements. We

must emphasize again that the Commission made

an “appropriate adjustment’’ and made no shift

in expenses from intrastate to interstate ....

8. The transitional agreement referred to above was be-

tween HTC and AT&T and was supported by the State

of Hawaii through its Governor. The agreement resulted

in a transitional supplement payable to HTC by AT&T, as

described in Decision and Order No. 8042:

The origin of the transitional supplement issue

begins with the FCC decision in [FCC] Docket

No. 21263, the purpose of which was to deter-

mine whether, and how Hawaii-Mainland tele-

phone rates could be integrated into the

nationwide toll rate structure without unduly bur-

dening Hawaii intrastate ratepayers. Previous to

the FCC decisions, the Hawaii-Mainland calls

were approximately three times the rates for calls

of corresponding distances on the mainland. Rev-

enues from Hawaii-Mainland calls were split in

approximate correspondence to the costs incurred

43a

by HTC and AT&T. With the proposed integra-

tion, the reduction of two-thirds in rates and an

immediate imposition of the mainland separa-

tions/settlements procedure would result in a se-

vere contraction of revenues to HTC and a

consequent increase in revenue burden for HTC

intrastate subscribers.

In view of the potential impact, both HTC and

the State Government sought some modification

of the separations formula so that the rate in-

tegration would not burden HTC’s intrastate ra-

tepayers. Both parties stressed the unique

characteristics of Hawaiian service and argued

for modification to the nationwide separations

plan which would shift somewhat more revenue

responsibility from the intrastate to the interstate

jurisdiction.

As a result, a joint agreement between HTC

and AT&T proposed that the 1971 NARUC-FCC

Separations Manual would be applied, unad-

justed, to HTC’s operations for purposes of ju-

risdictional separations. Revenue settlements,

however, would be based on the conventional sep-

arations/settlements procedure plus a transitional

supplement payment reflecting differing splits

each year in the growth in revenue since the base

year 1979. Finally, the agreement deferred the

final step of rate integration until January 1,

1985.

In In Re Hawauvian Telephone Company, De-

cision and Order No. 74312, Docket No. 4306

(January 1983) we stated that:

Though the Commission has conceded ...

that it cannot utilize the transitional sup-

plement revenues as intrastate revenues, we

44a

find that it would be totally unjust and un-

reasonable if HTC after obtaining the benefit

of the transitional revenues were also to re-

ceive the benefit of the lowered intrastate

return—the difference between Hawaiian

Plan II and the Ozark Separation formulas.

To award HTC another 1.1% increase in

their return would deprive the ratepayers of

any reciprocal benefits resulting from their

support of the transitional Agreement. We

conclude, as shown in the subject entitled

‘Revenue Increase Authorized” herein that

an appropriate adjustment in the expenses

and rate base must be made to insure that

rates to be set are ‘“‘just and reasonable.”’

(Emphasis added.)

9. Notwithstanding the PUC’s disclaimer of any such

action, the PUC’s action had the effect of applying Ha-

waiian Plan II (a different separations method) instead of

the Ozark Plan as a basis for separations. The so-called

“appropriate adjustment”’ made by the PUC in Docket No.

4588 was calculated solely and precisely on the difference

between Hawaiian Plan II and the Ozark Separations for-

mulas.

10. Because the PUC’s 1.1% “appropriate adjustment”’

in Docket NO. 4588 was directly the product of applying

Hawaiian Plan II for purposes of separations, the PUC

thereby failed and neglected to obey FCC Order 81-312,

which required the application of the federal Separations

Manual.

11. The declared purpose behind the PUC adjustment

is to have Hawaii intrastate ratepayers share in the tran-

sitional supplement received by HTC under the HTC-AT&T

agreement approved by the FCC in 1981. Yet presumably

Hawaii intrastate ratepayers have received some benefit

from that agreement by a slowing down of increases in

45a

intrastate rates. Furthermore, that agreement, and sup-

plements under the agreement, terminate on December 31,

1984. The rates set in PUC Docket No. 4588, however,

remain in place indefinitely until modified in another future

proceeding before the PUC.

12. There may well be other matters besides the results

obtained through the application of separations formulas

which a public utilities commission may consider in rate

determinations. Here, however, the PUC has not articu-

lated any reason for its action other than the existence

of the transitional supplement, which the PUC specifically

held in its Docket No. 4588 decision could not be consid-

ered to be intrastate revenue.

13. Res judicata does not bar the present action; PUC

Docket No. 4588 is a different application from the earlier

PUC Docket No. 4306, which was appealed to and affirmed

by the Supreme Court of Hawaii on September 10, 1984.

14. The Johnson Act, 28 U.S.C. §1342, by its own terms

applies only when jurisdiction is founded solely on diversity

of citizenship or repugnance to the Federal Constitution.

Here, HTC’s claim arises under 47 U.S.C. § 401(b).

15. The Eleventh Amendment does not bar injunctive

relief against actions by State officials that contravene

federal statutes or the Federal Constitution.

16. The federal statutory remedy provided by 47 U.S.C.

§401(b), if available in other respects, is not defeated by

the existence of an adequate state judicial remedy.

17. The present Motion for Preliminary Injunction does

not involve the Civil Rights Act, 42 U.S.C. §1983.

NOW, THEREFORE, IT IS HEREBY ORDERED

THAT:

1. Plaintiff's Motion for Preliminary Injunction is

granted;

46a

2. Defendants are hereby enjoined from failing and ne-

glecting to obey FCC Order 81-312, adopted in Docket No.

21263 on June 290, 1981, released July 8, 1981;

3. Within 10 days of the date of this Order, the PUC

shall place in effect schedules of intrastate rates for HTC

sufficient to generate additional revenues of $101,507,000

based on the test year employed by the PUC in Docket

No. 4588;

4. All additional revenues collected by HTC as a result

of this Order shall be subject to refund with interest cal-

culated pursuant to Hawaii Revised Statutes §269-16(c) if

HTC does not prevail on the merits of this case;

5. The Preliminary Injunction here ordered shall remain

in full force and effect pending final determination of this

case and until further Order of this Court.

6. This Order shall be served upon each of the

Defendants and the Intervenor, the CONSUMER ADVO-

CATE.

DATED: Honolulu, Hawaii, January 8, 1985.

/s/SAMUEL P. KING

United States District Judge

47a

APPENDIX D

IN THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF HAWAII

CIVIL NO. 84-1306

HAWAIIAN TELEPHONE COMPANY, a Hawaii corporation,

Plaintiff,

v.

PUBLIC UTILITIES COMMISSION OF THE STATE OF

HAwaAll; et al.

Defendants,

and

CONSUMER ADVOCATE, the Director of the Department of

Commerce and Consumer Affairs, State of Hawaii,

Applicant for Intervention.

Filed December 21, 1984

ORDER GRANTING CONSUMER ADVOCATE’S

MOTION TO INTERVENE AS DEFENDANT

Applicant for Intervention the Consumer Advocate’s Mo-

tion to Intervene as Defendant was heard before Magis-

trate Bert S. Tokairin on Monday, November 26, at 3:00

o’clock p.m., 1984. Having considered the affidavits, plead-

ings and argument of counsel, this Court finds:

1. The Consumer Advocate has the responsibility to rep-

resent, protect and advance the interests of consumers of

utility services in the State of Hawaii.

2. The Consumer Advocate’s duties and interests are

separate and distinct from those of the Hawaii Public Util-

ities Commission.

48a

3. Unless the Consumer Advocate is ailowed to inter-

vene in this action, the disposition of the action may impair

and impede his ability to protect those interests, which

may not be adequately represented by existing parties.

4. The Consumer Advocate was a party to the Public

Utilities Commission’s Docket Nos. 4306 (and the subse-

quent appellate proceedings in Hawaii Supreme Court

Docket No. 9343) and 4588.

5. The Consumer Advocate agreed that it will cooperate

with Plaintiff so that this matter may be resolved as ex-

peditiously as possible.

6. The Consumer Advocate has met the criteria for in-

tervention in accordance with Rule 24 of the Federal Rules

of Civil Procedure.

NOW, THEREFORE, IT IS HEREBY ORDERED

THAT:

1. Applicant the Consumer Advocate’s Motion to Inter-

vene as Defendant is granted;

2. This Order shall be served upon the parties.

DATED: Honolulu, Hawaii, DEC 21, 1984.

/s/BERT S. TOKAIRIN

MAGISTRATE BERT S.

TOKAIRIN

APPROVED AS TO FORM:

/s/THoMAS W. WILLIAMS

THOMAS W. WILLIAMS, JR.

Attorney for Plaintiff

ORDER GRANTING CONSUMER ADVOCATE’S MO-

TION TO INTERVENE AS DEFENDANT, Hawazian

Telephone Company vs. Public Utilities Commission, et al.,

Civil No. 84-1306 (U.S.D.C.-Haw.)

49a

APPENDIX E

BEFORE THE PUBLIC UTILITIES COMMISSION

OF THE STATE OF HAWAII

DOCKET NO. 4588

In the Matter of the Application of

HAWAIIAN TELEPHONE COMPANY

For Approval of Rate Increases and Revised Rate

Schedules.

ORDER NO. 8168

Filed November 15, 1984

At 1:15 o’clock P.M.

/s/BERTHA F. KUROSAWA

Chief Clerk of the Commission

ORDER GRANTING MOTION FOR

RECONSIDERATION

IN PART AND DENYING MOTION

FOR RECONSIDERATION IN PART

A Motion for Reconsideration was filed by Hawaiian

Telephone Company on August 24, 1984, requesting the

Commission to reconsider Decision and Order No. 8042

filed in the above entitled proceeding on August 14, 1984,

concerning the following matters:

1. The adjustment made by the Commission to

provide reciprocal benefits to the ratepayers.

2. Implementation of a phased increase effective

January 1, 1985 to permit restoration of

50a

$10,507,000 adjustment which provides recip-

rocal benefits.

3. The restoration of $36,410 for foreign trans-

lation expenses.

4. The treatment of the General Services and

Licenses Expenses.

5. The capital carrying costs of $1,036,000 used

in the reduction of HTC’s total revenue re-

quirements.

6. The disallowance of $1,901,200 in manage-

ment salaries for HTC’s total company oper-

ations.

7. The disallowance of premium increases for em-

ployee insurance.

8. The 14% equity cost in arriving at a 11.25%

rate of return.

The Commission upon careful consideration of the

grounds stated in the Motion for Reconsideration and being

fully advised in the premises, finds that two items pre-

sented in its Motion have merit and our Decision and

Order No. 8042 should be amended accordingly. On the

remaining matters presented in the Motion, we find no

new grounds that were not already considered in the is-

suance of Decision and Order No. 8042.

Upon due consideration of the Motion and the record

in this docket, the Commission finds, in seriatim, as fol-

lows:

1. We find no new grounds, points or authorities in the

request to restore to the $10,507,000 adjustment made in

our decision not already considered in Decision and Order

No. 8042.

In its Motion, HTC erroneously alleged that Hawaiian

Plan II was used in place of the Ozark Plan, the separation

5la

plan approved by the Federal Communications Commission

(FCC herein), and that the intrastate costs were arbitrarily

adjusted.

On the issue of the transitional supplement we stated

on pages 11-12 of Decision and Order No. 8042 the fol-

lowing:

“In In Re Hawaiian Telephone Company, De-

cision and Order No. 7412, Docket No. 4306 (Jan-

uary, 1983) we stated that:

‘Though The Commission has conceded above

that it cannot utilize the transitional supplement

revenues as intrastate revenues, we find that it

would be totally unjust and unreasonable, if HTC

after obtaining the benefit of the transitional rev-

enues were also to receive the benefit of the

lowered intrastate return—the difference be-

tween Hawaiian Plan II and the Ozark Separation

formulas. To award HTC another 1.1% increase

in their return would deprive the ratepayers of

any reciprocal benefits resulting from their sup-

port of the transitional Agreement. We conclude,

as shown in the subject entitled ‘Revenue In-

crease Authorized’ herein that an appropriate ad-

gustment in the expenses and rate base must be

made to insure that rates to be set are ‘just and

reasonable.’

We hereby reaffirm our decision that the tran-

sitional supplement revenues cannot be treated as

intrastate revenues. Consequently, the CA’s rec-

ommendation to treat the transitional supplement

as intrastate revenues must be denied.

In this proceeding, we believe that some of the

parties harbor a misunderstanding of the intent

of the Commission’s decision in Docket No. 4306

on the issue of transitional supplement. The Com-

52a

mission, in that decision, did not shift intrastate

expenses to interstate and the Commission did not

adopt Hawaiian Plan II as the basis for sepa-

ration. As stated in our Decision and Order No.

7412, the Commission made an appropriate ad-

justment to provide reciprocal benefits to the

ratepayers as a result of the State of Hawaii’s,

and in turn the ratepayers’ support of the tran-

sitional agreement between HTC and AT&T. In

making the appropriate adjustment the Commis-

sion merely took the difference in rates of return

between Hawaiian Plan II and the Ozark Plan

as a basis of measurement and applied the per-

centage difference to HTC’s intrastate rate base.

In so doing the annual cost or dollar return be-

came a reduction in a cost or expense item in

the determination of revenue requirements. We

must emphasize again that the Commission made

an ‘appropriate adjustment’ and made no shift in

expenses from intrastate to interstate. The Com-

mission in Decision and Order No. 7412 adhered

to jurisdictional separations when we stated that:

For purposes of this proceeding, the Commis-

sion finds that jurisdictional separations are re-

quired by law and that the procedures specified

by the Ozark Plan as proposed by the Company

are reasonable.”” (Emphasis added.)

We further stated on pages 14-15 that:.

“In Docket No. 4306 this Commission made an

adjustment by reducing the amount of the rev-

enue increase by 1.1% on the intrastate rate base

so that the intrastate rates would be just and

reasonable. We find no reason to deviate from

our previous decision.

We again emphasize the fact that by making

such an adjustment, we are not substituting the

Pee Re ee Te

53a

Hawaiian Plan II for the Ozark Plan for rate-

making purposes. As we have indicated herein,

the method of separating interstate and intras-

tate operations is based upon the Oazark Plan.

Further, though we have utilized the Ozark

Plan and recognize that the FCC has jurisdiction

over HTC’s interstate operations this Commis-

ston 1s not precluded from making any present

and future adjustments to HTC’s intrastate re-

sults of operations in order to balance the interest

of the ratepayers and HTC to fulfill our respon-

sibility to fix ‘just and reasonable’ rates.’”’ (Em-

phasis added.)

Our decision in the past HTC rate case on this issue

and in this decision clearly indicates that the Ozark Plan

was used to allocate interstate and intrastate costs. The

Commission recognized that the costs would be incurred

during the test year and arrived at an intrastate revenue

requirement necessary to produce a fair rate of return

found reasonable. After the total intrastate revenue re-

quirement was determined the Commission then made an

appropriate intrastate adjustment based upon the prece-

dent and principle first enunciated in Docket No. 4306.

HTC appealed the transitional supplement issue in

Docket No. 4306 to the Hawaii Supreme Court and the

Court issued its opinion on this issue in September, 1984.

See In Re Hawaiian Telephone Company, Sup. Ct. No.

93438, filed September 27, 1984. The Hawaii Supreme Court

held on the issue of transitional supplement, the following

(pp. 18-20):

“The foregoing conclusion that the rate order

was just and reasonable in total effect would nor-

mally end our inquiry. Hawaiian Telephone, how-

ever, avers the decision under review is flawed

in yet another respect; it alleges the Commission

erred ‘by making an unsupported and unlawful

54a

‘Separation Adjustment.’ We have examined the

claim that the State agency invaded a federally

preempted area by varying a jurisdictional sep-

aration approved by the FCC, but find the claim

to be without merit.”

“The Commission, of course, may not interfere

with federal regulation of interstate telecommun-

ications services; the Supremacy Clause does not

countenance rulings by a state ratemaking agency

that ‘may produce a result inconsistent with the

objective of the federal [regulatory] statute.’

Maryland v. Louisiana, 451 U.S. 1725, 747 (1981)

quoting Rice v. Santa Fe Elevator Corp., 331 U.S.

218, 230 (1947)). Thus for example, a state agency

may not adopt for its ratemaking purposes a de-

preciation formula incompatible with the depre-

ciation method decreased for such purposes by

the FCC though a preemption order. See New

England Telephone & Telegraph Co. v. Public

Utilities Commission of Maine, 570 F. Supp. 1558

(1988).

Here, the Commission neither varied a formula,

method, or procedure decreed by the federal agency

nor tampered with interstate rates in any way.

It expressly rejected the Consumer Advocate’s

thesis that the circumstances surrounding the ap-

proval of ‘transitional supplements’ by the FCC

rendered it appropriate for those receipts to be

considered as intrastate revenue, recognizing that

‘(t]he use of interstate revenues to satisfy in-

trastate revenue requirements would violate the

fundamental principles of jurisdictional separa-

tions.’ P.U.C. Order and Decision No. 7412, at

22.”” (Emphasis added.)

55a

The Commission submits that the Hawaii Supreme Court

holding on the subject of transitional supplement is

dispositive of this issue in this reconsideration proceeding.

2. We find no new grounds, points or authorities to

approve the implementation of a phased rate -increase to

permit the restoration of the $10,507,000 effective January

1, 1985.

On this issue, we stated in Decision and Order No. 8042,

page 13, that:

“Although HTC claimed that the rates to be

approved in this docket will be sometime in 1984

and 1985 [and] will be the first full year it pur-

portedly will have an opportunity to earn an au-

thorized return, HTC provided no evidence on

what its results of operations would be for 1984

and 1985. HTC assumed that the revenues, ex-

penses, expenditures and conditions with the ex-

ception of the transitional supplement would

remain status quo.

We also note that HTC makes no distinction

between an actual and normalized year used in

the ratemaking process. Further, 1983 is the test

year and all revenues, expenses and similar items

based upon a representative year are used in set-

ting rates for the future. Accordingly, we reject

HTC’s position with respect to the mootness of

the benefits resulting from the agreement be-

tween HTC and AT&T.” (Emphasis added.)

3. We find no new grounds to restore the $36,410

($55,000 x 66.2%) of intrastate foreign currency translation

expenses which were disallowed in Decision and Order No.

8042.

The NARUC-FCC Separations Manual’ specifically states

that:

1 Section 1, General, Part 1, Subsection 11.18.

56a

“11.18 The separations procedures described

in this manual are not to be interpreted as in-

dicating what property, revenues, expenses and

taxes, or what items carried on the income, re-

serve and retained earnings accounts, should or

should not be considered in any investigation or

rate proceeding.”

Since our decision disallowed any foreign currency trans-

lation expenses for intrastate operations, we find that there

will be no difference in the intrastate results of operations

by excluding the total company expenses of $55,000 before

the separation of $55,000 or the intrastate reduction of

$36,410 after the separation of these translation expenses.

The inclusion of the $55,000 in total company expenses

and the separation of 33.8% (100% - 66.2%) to interstate

yields a residual of $36,410 of foreign currency translation

expenses to the intrastate operations. The disallowance of

the expenses by either method would reduce intrastate

expenses by $36,410. The end result remains the same.

Intrastate expenses are $45,410 lower.

4. We also find no new grounds, points or authorities,

not already considered in arriving at the test year General

Services and License expenses of $2,722,000.

We find that the General Services and License expenses

are reasonable and that no further amplification of our

decision is necessary.

5. With respect to the capital carrying costs of

$1,036,000 as a credit to reduce HTC’s intrastate ex-

penses, we find that in our calculations on this matter, a

corresponding adjustment of $612,000 was not made to

the revenues under present rates. By not making an off-

setting adjustment to revenue under present rates, the

amount of the increase awarded in Decision and Order No.

57a

8042 was understated by $612,000 excluding revenue taxes.

We conclude that the error in calculation was inadvertent

and the amount should be restored.

We note also in review of the capital carrying costs,

that the intrastate depreciation expenses for the test year

was overstated by $99,000.

6. After careful review of HTC’s request that we re-

consider the disallowance of $1,901,200 in total company

management salaries, we find from a review of the record

that the disallowance should have been $950,000 for total

company rather than the $1,901,200 that was used. With

the allocation to HTC’s non-regulated operation and after

separation, the intrastate disallowance amount is $608,000

instead of the $1,217,000 disallowed amount stated in De-

cision and Order No. 8042.

With respect to HTC’s request that the Commission re-

consider its ‘‘punitive action’’ of disallowing the requested

management increase in salaries, we find no new grounds,

points or authorities not already considered in our decision.

Accordingly, we find that HTC’s request to reconsider

the disallowance of the management salary increases must

be denied.

7. We find no new grounds, points or authorities to

amend our decision on premium increases for employee

insurance.

We stated in Decision and Order No. 8042 that:

“The Commission in accepting the CA’s esti-

mate as being more reasonable is not implying

that it is mandating the CA’s approach. We point

out only that cost containment 1s required and it

is in management’s discretion and prerogative as

to how this should be accomplished.”’ (Emphasis

added.)

58a

8. We also find no new grounds, points or authorities,

not already considered in our decision on the cost of eq-

uity.

With respect to HTC’s reference to Maui Electric Com-

pany, Ltd. the record is void of any comparison between

the operations and financial conditions of Maui Electric

and HTC.

9. We find that HTC’s request to phrase the last sen-

tence of the ordering paragraph in Decision and Order

NO. 8042 to: “The first report shall be filed on January

31, 1985, and successive reports filed thereafter within 30

days of the end of each quarter in 1985” as being rea-

sonable.

REVISED RESULTS OF OPERATIONS

We have concluded under Items 5 and 6 above, that

certain adjustments to HTC’s results of operations after

allocation to HTV’s non-regulated operations and after sep-

aration are in order and these adjustments are shown in

Exhibit 3, as amended, attached hereto and made a part

hereof.

As a result of the adjustments to be made, the uncol-

lectibles, gross revenue and income taxes were also re-

computed.

The end result is that the gross revenue increase, should

have been $32,009,000 instead of $30,840,000.

Exhibit 4, as amended, also shows that the intrastate

adjustment to provide reciprocal benefits should have been

$10,507,000 shown in Exhibit 4, Decision and Order No.

8042.

FURTHER INCREASE

Finally, Exhibit 5 attached hereto and made a part her-

eof shows that a further increase of $1,169,000 over and

id ae = -

én oe

59a

above $90,543,000 is necessary to provide for an 11.25%

intrastate return on rate base.

Accordingly, we find that said $1,169,000 increase is

necessary, just and reasonable.

NEW RATES

In Decision and Order No. 8042 we found that an in-

crease of $9,543,000 to the service connection or non-re-

curring activities reasonable. We also ordered HTC to file

new permanent rates to reflect the additional $9,543,000.

The Commission after reconsidering its Decision and Or-

der No. 8042 finds that a further increase of $1,169,000

is justified for the reasons discussed herein above. As

stated in Decision and Order No. 8042 “.. .fairness dic-—

tates that the non-recurring activities charges or station

connection charges* should be borne by those who cause

such non-recurring costs by HTC each year. .. .’’ We then

concluded that $7,598,900 of the $9,543,000' increase

should be imposed on station connection activities.

By Decision and Order No. 8052 dated August 23, 1984,

we approved revised rates to reflect the increases au-

thorized in Decision and Order No. 8042. Upon review of

the rates previously authorized and the record in this pro-

ceeding, we find that the added increase herein granted

should be imposed upon non-recurring station connection

activities.

The record indicates that HTC originally requested an

increase of $17,633,000 in the non-recurring station con-

nection activities. This increase was based upon the re-

covery of HTC’s costs from the cost causer. In our Interim

* Used in the same context as HTC’s non-recurring activities charges

which include such activities as moves and changes.

‘The balance of the $1,944,000 increase are revenues from new in-

trastate charges.

60a

Decision and Order No. 7855, we granted an increase of

$653,000 for station connection activities. Another increase

of $7,958,900 for the same activities was granted in De-

cision and Order No. 8042. Together the total increase

authorized amounted to $8,611,900 which is far less than

the $17,633,000 requested by HTC to cover the costs of

non-recurring activities. Thus, we find that the further

increase granted herein should be imposed upon the non-

recurring station connection activities.

In reviewing the rates we approved for the non-recur-

ring activities, we note that the majority of the increases

were imposed upon Tiers I through III of the station con-

nection tariffs. The charge for Tier IV received relatively

insignificant increases while the charges in Tier V in many

cases received no increase.

The record indicates that a comparison between HTC’s

cost of service for Tiers IV and V station connection ac-

tivities and the rates for the same activities show a wide

discrepancy between rates and costs. For Tier I, Tier II

and Tier III, the rates and the cost-to-serve are signifi-

cantly closer than Tiers IV and V.

Accordingly, we find that the further increase of

$1,169,000 should be imposed upon Tier IV, Premise Wir-

ing Charges, and Tier V, Station Handling Charges in the

Station Connection Move and Change Charges. We find

these changes to be reasonable.

IT IS THEREFORE ORDERED THAT:

1. HTC shall submit to the Commission within seven

days, for our approval, revised rate schedules reflecting a

further increase of $1,169,000 in accordance with the find-

ings made herein and as shown in Exhibit 5 attached

hereto.

2. Exhibits 3 and 4 attached to Decision and Order No.

8042 be deleted and Amended Exhibits 3 and 4 attached

hereto be substituted therefore.

6la

3. The last sentence in the ordering paragraph be

phrased as follows: “The first report shall be filed on

January 31, 1985, and successive reports filed thereafter

within 30 days of the end of each quarter in 1985”.

4. All other matters, in Decision and Order No. 8042

except the foregoing, shall remain in full force and effect.

DONE at Honolulu, Hawaii, this 15th day of November,

1984.

PUBLIC UTILITIES COMMISSION

OF THE STATE OF HAWAII

By /s/ALBERT TOM

Albert Tom, Chairman

By /s/SuNAO KIDO

Sunlao Kido, Commissioner

APPROVED AS TO FORM:

/s/HarrRY S.Y. Kim

HARRY S. Y. KIM

Commission Counsel

62a

HAWAIIAN TELEPHONE COMPANY

REVISED

RESULTS OF OPERATIONS UNDER EXISTING RATES

AND AT 11.25% RETURN

($000’s)

Results Increase

Under Without Results

Existing Appropriate At 11.25%

Rates Adjustment Return

Revenues:

Gross Revenues $215,968 $332,009 $247,977

Uncollectibles (1,014) (304) 1,318

Net Revenues $214,954 $31,705 $246,658

Expenses: .

Maintenance $ 53,933 $ 51,271

Traffic 5,675 5,503

Commercial 14,021 14,021

Marketing 2,624 2,624

Advertising 701 701

General Office Salaries

& Expenses 13,665 13,665

Insurance & Damages 252 252

Operating Rents 2,578 2,578

Relief & Pensions 11,338 11,338

General Services &

Licenses 1,512 1,512

Expenses Charged

Constr. (2,689) (2,689)

Wage Normalization 1,066 1,066

Other Expenses 400 400

Depreciation &

Amortization Expense 51,835 51,835

{Exhibit 3 As Amended continued on next page]

63a

Results Increase

Under Without Results At

Existing Appropriate 11.25%

Rates Adjustment Return

Business Information

Systems (200) (200)

Supply &

Transportation (1,641) (1,641)

Management Wage

Adjustment ( 609) (1,217)

Relocation Expenses (131) (131)

Customer Deposits (79) (79)

Accrued Vacation ,

Expenses (577) (577)

Depreciation To

Clearing 39 39

Capital Carrying Costs (727) (727)

Operating Taxes 17,444 22,376

Total Operating

Expenses $170,430 $172,019

Operating Income Before

Income Taxes $ 44,524 $ 74,088

Income Taxes $9,594 $ 24,159

Net Operating Income $ 34,930 $ 49,929

Rate Base $443,813 $443,813

Return On Rate Base 7.87% 11.25%

EXHIBIT 3 AS AMENDED

64a

HAWAIIAN TELEPHONE COMPANY

; REVISED

INTRASTATE REVENUE INCREASE WITH

APPROPRIATE ADJUSTMENT BASED

ON 1983 TEST YEAR

$000’s

Increase Necessary To Produce An 11.25% Return On

Rate Base $32,009

Less: Appropriate Adjustment As Discussed, Supra,

Under Transitional Supplement $10,507!

Total Revenue Increase Authorized $21,502

Less: Interim Increase Granted Per Decision and

Order No. 7855 10,790

Additional Increase $10,712

EXHIBIT 4 AS AMENDED

' Rate Base x % Appropriate Adjustment Factor + Interstate Gross

Revenue Factor = $443,813 x .011 + .46463 = $10,507

65a

HAWAIIAN TELEPHONE COMPANY

FURTHER INCREASE AFTER CONSIDERATION

OF HTC’s MOTION FOR RECONSIDERATION

000’s

Revised Additional Increase Per Exhibit No. 4

as amended $10,712

Additional Increase Granted Per Decision

and Order No. 8042 9,543

Further Increase necessary to produce 11.25% return 1,169

EXHIBIT 5

66a

APPENDIX F

In the Mater of the Application of HAWAIIAN

TELEPHONE COMPANY For Approval of Intrastate Rate

Increases and Revised Rate Schedules

NO. 9343

APPEAL FROM PUBLIC UTILITIES COMMISSION

STATE OF HAWAII

(DOCKET NO. 4306)

SEPTEMBER 27, 1984

LUM, CJ., NAKAMURA, PADGETT,

HAYASHI AND WAKATSUKI, JJ.

PUBLIC UTILITIES—public service commissions or

boards—judicial review or intervention—appeal from or-

ders of commission—review and determination in gen-

eral.

The enforcement of text-book orthodoxy in the rate-

making process is not a function of this court under

Hawaii Revised Statutes (HRS) Chapters 269 and 91.

APPEAL AND ERROR—review—scope and extent in gen-

eral—matters or evidence considered in determining

question—consideration of other cases and matters

therein.

It is not the practice of this court to decide important

questions of law by dicta from unrelated cases.

PUBLIC UTILITIES—public service commissions or

boards—in general—powers and functions in general.

SAME—same—yjudicial review or intervention—appeal from

orders of commission—review and determination in gen-

eral.

The general supervision over all public utilities has

been delegated to the Public Utilities Commission. It is

PE ee ee ee ee ee ee eee

67a

the Commission that is authorized to fix “just and rea-

sonable’ rates to be charged by public utilities, and a

reviewing court is not empowered to examine a rate

case de novo.

PUBLIC UTILITIES—public service commissions or

boards—judicial review or intervention—appeal from or-

ders of commission—review and determinations in gen-

eral.

This court’s function in rate making is a limited one

circumscribed by the provisions of HRS § 91-14(g).

SAME—regulations—regulation of charges—reasonableness

of charges in general.

Whether utility rates set by the Public Utilities Com-

mission are “just and reasonable” is by no means de-

pendent on the procedure followed by the Commission

in deciding what rate would be fa.r in the circumstances.

Under the statutory standard of ‘‘just and reasonable”

it is the result reached not the method employed which

is controlling.

SAME —same—same—same.

SAME—public service commissions or boards—ysudicial re-

view or intervention—appeal from orders of commis-

ston—review and determination in general.

It is not theory but the impact of the rate orders

which counts. If the total effect of the rate order cannot

be said to be unjust and unreasonable, judicial inquiry

is at an end. The fact that the method employed to

reach that result may contain infirmities is not then

important.

PUBLIC UTILITIES—regulation—regulation of charges—

reasonableness of charges in general. ;

The reasonableness of utility rates is not determined

by a fixed formula but is a fact question requiring the

exercise of sound discretion by the Public Utilities Com-

mission.

68a

SAME—same—same—nature and extent in general.

The rate-making function involves the making of prag-

matic adjustments, and there is a “zone of reasonable-

ness’’ within which the Public Utilities Commission may

exercise its judgment.

ADMINISTRATIVE LAW—powers and proceedings of ad-

ministrative agencies, officers, and agents—in general—

discretion.

When invoked as a guide, sound discretion is that

exercised not arbitrarily or wilfully, but with regard to

what is right and equitable under the circumstances and

the law.

PUBLIC UTILITIES—regulation—regulation of charges—

reasonableness of charges in general.

To insure that rates are “just and reasonable” in-

cludes the power to take into consideration the interest

of the ratepayers as well as that of the utility owners.

SAME—public service commissions or boards—in general—

exclusive and concurrently powers.

STATES—political status and relations—state action in-

vading power of the United States—exclusive or concur-

rent federal powers.

Since the property of a telephone company is used in

providing both intrastate and interstate telecommuni-

cations services and expenses are incurred in the joint

rendition of such services, a separation of telephone

property, revenues, and expenses between the intrastate

and interstate operations of the company is essential to

the appropriate recognition of the competent govern-

mental authority in each field of regulation.

PUBLIC UTILITIES—in general—constitutional and sta-

tutory provisions.

SAME —public service commissions or boards—in general—

exclusive and concurrent powers.

69a

STATES—political status and relations—invading power

of the United States—exclusive or concurrent federal pow-

ers.

The Public Utilities Commission may not interfere with

federal regulation of interstate telecommunications ser-

vices. The Supremacy Clause does not countenance rul-

ings by a state rate-making agency that may produce

a result inconsistent with the objective of the federal

: regulatory statute.

PUBLIC UTILITIES—public service commissions or

boards—in general—exclusive and concurrent powers.

STATES —political status and relations—state action in-

vading power of the United States—exclusive or concur-

} rent federal powers.

: Where the Public Utilities Commission neither varied

a formula, method, or procedure decreed by a federal

agency nor tampered with interstate rates in any way,

it did not invade an area reserved for federal regulation.

PUBLIC UTILITIES—regulation—regulation of charges—

value of property; rate base.

“Rate base” represents the total investment in, or

fair value of, the facilities of a utility employed in pro-

viding service. While the difficulty in making an exact

apportionment of the property used in providing service

is apparent and only. reasonable measures are essential,

it is quite another matter to ignore altogether the actual

uses to which the property is put in providing interstate

or intrastate services.

a violent) ae hic. tibia tea

OPINION OF THE COURT BY NAKAMURA, J.

We are asked to review a decision and order of the

Public Utilities Commission allowing a rate increase for

telephone and related services provided by the Hawaiian

Telephone Company. The Company sought specific ap-

proval of revised intrastate rate schedules it claimed were

|

j

- sa ecreamnentinte tiniest aarti eel

70a

projected to increase intrastate revenues by approximately

$47,600,000 and “‘produce [an] 8.5% rate of return on the

average intrastate rate base for the test year 1982.” After

lengthy contested proceedings, the Commission approved

instead rate schedules it found would increase revenues

by $27,121,000 and produce a 9.18% rate of return. The

Company appeals, charging the Commission erred: (1) “in

failing to find a fair rate of return,” (2) “in failing to

provide the Company an opportunity to earn a fair return

on its intrastate rate base,” (3) “by making an unsupported

and unlawful Separation Adjustment,’ ” and (4) “in award-

ing a rate increase sufficient only to produce an annual

revenue increase of $27,121,000.” Finding no merit in the

claims of error, we affirm the decision and order.

I.

A.

After filing the required notice of an intent to seek rate

increases in early June of 1981, Hawaiian Telephone sub-

mitted an application for approval and revised rate sched-

ules in August of 1981. The revised schedules, it claimed,

were structured to general increased intrastate revenues

of $47,600,000, which in its estimation “represent{ed] a

25% increase.”

The application came on the heels of the approval in

June of 1981 by the Federal Communications Commission

(FCC) of a 1980 agreement between American Telephone

and Telegraph Company (AT&T) and Hawaiian Telephone

purporting to represent a “resolution among the various

interests involved of questions of jurisdictional separations,

settlements, and rate integration for Hawaii.’! The agree-

‘The foregoing language is from the joint motion submitted to the

FCC by AT&T and Hawaiian Telephone. The agreement itself stated

it was “for revenue division (settlement) arrangements for interstate

MTS [message telecommunications services] and WATS [wide area te-

lecommunications services] to and from Hawaii.”

Tla

ment was spurred by the federal agency’s determination

in 1972 that rates for interstate telecommunications ser-

vices to and from Hawaii, which then were substantially

higher than interstate rates on the mainland, should be

integrated into the “U.S. Mainland domestic rate pattern’’

and the agency’s 1976 decisions that this was to be

achieved in three phases and accompanied by “cost-based

settlements based on prescribed jurisdictional separations

procedures.”

2 The first of the agreement’s recital clauses reads as follows:

WHEREAS, the Federal Communications Commission (FCC) has

determined the public interest requires that interstate MTS and

WATS rates for service to and from Hawaii be integrated into the

U.S. Mainland domestic rate pattern, Establishment of Domestic

Communications-Satellite Facilities, 35 F.C.C.2d 844 (1972); that such

rate integration should be accomplished by phased reductions in three

steps, Integration of Rates and Services, 61 F.C.C.2d 380 (1976);

and that such rate integration should be accompanied by cost-based

settlements based on prescribed jurisdictional separations procedures,

Integration of Rates and Services, 61 F.C.C.2d 380 (1976), Recon-

sideration, 65 F.C.C.2d 324 (1977), Memorandum Opinion and Or-

der, FCC 78-693, released September 29, 1978{.]

‘Jurisdictional separations procedures” are methods by which the costs

of providing services, expenses, and revenues are allocated between

the federal and state jurisdictions. As a publication of the National

Association of Regulatory Utility Commissioners (NARUC) explains:

Telephone Companies are engaged in furnishing both intrastate

and interstate communications services, including exchange, message

toll telephone, wide area telephone, private line, and data services.

The intrastate services are subject to the jurisdiction of the several

state regulatory bodies, and interstate services are subject to the

jurisdiction of the Federal Communications Commission. The major

portion of telephone property of the companies is used in common

for both intrastate and interstate services. Similarly, the major por-

tion of the expense is incurred in the joint rendition of these services.

Therefore, a uniform method of separations, acceptable to the state

and federal regulatory bodies, is essential so that the property costs,

revenues, expenses, taxes and reserves of each company subject to

72a

The ordered integration was partially implemented by

rate reductions in 1976, 1977, and 1979. Full integration,

however, was to come after the prescription of procedures

to be applied in determining ‘‘jurisdictional separations and

cost-based settlements” with respect to Hawaii. Thus, a

Federal-State Joint Board was convened by the FCC to

examine existing procedures for possible modification to

suit the situation. But before the Board submitted its rec-

ommendation, AT&T and Hawaiian Telephone agreed they

would request the Board to recommend and the FCC to

decree that the method of separations described in the

NARUC-FCC Separations Manual (Feb. 1971 ed.), which

has been incorporated in the FCC’s rules, would apply.

The compact between the interstate and the intrastate

carriers stipulated they would jointly seek sanction to delay

full implementation of these procedures and full rate in-

tegration until 1985. The agreement also provided that

cost-based settlements were to be effective from 1981

through 1984, but the local carrier was to receive “‘tran-

sitional supplements” during this period.* The agreement

the respective jurisdictions may be determined.

NARUC-FCC Cooperative Committee on Communications, Separations

Manual 5 (1971).

* The agreement provided in relevant part:

(2) For 1981 through 1984, the interim MTS and WATS settlement

will consist of a uniform cost-based settlement, plus a transitional sup-

plement.

(A) The uniform cost-based MTS and WATS settlement will be

based on Hawaiian interstate MTS and WATS costs determined in

accordance with the existing Separations Manual or any revisions

thereto prescribed by the FCC or other authorized body, and will

include the uniform interstate settlement ratio. Such settlement, in-

cluding underlying separations studies, and procedures for subse-

quent review and true-up, will be administered in accordance with

procedures employed by telephone companies on the Mainland.

(B) The transitional supplement will be based on a decreasing

percentage of the cumulative total revenue growth from January 1,

eee tee lt St Aare Oe Lie ante mar ah eS Mil ime

to celebrate

73a

called for parity thereafter in rates for telecommunications

services to and from Hawaii and interstate rates on the

mainland United States.

In accord therewith AT&T and Hawaiian Telephone

moved in July of 1980 to have the Joint Board recommend

the prescription of the NARUC-FCC Separations Manual

for Hawaii and to have the FCC approve the agreement,

asserting such actions would “avoid the need for further

proceedings ... and ... result in implementation of full

rate integration in a manner that will serve the overall

public interest.” Hawaiian Telephone sought the support

of Hawaii’s Congressional delegation and the Governor in

seeking such approval. But before endorsing the carriers’

pact, the Governor requested an explanation on how it

would be of direct benefit to customers.‘ In-responding to

the pointed query, Hawaiian Telephone professed that the

agreement provided a means to accomplish rate integration

with minimum impact to Hawaii customers and “the ac-

cumulated cost to Hawaii and Mainland customers of de-

laying integration [would] be approximately $36 million

compared to the $130 million in transition payments which

lessen the need for local rate increases.’’ (Emphasis sup-

1980 (over 1979) in actual two-way Hawaii interstate MTS and WATS

revenues, as follows:

Year Percent

1981 100

1982 60

1983 35

1984 20

‘ Since Hawaiian Telephone’s position before the State PUC has been

that “the Company’s interstate services are separate and distinct from

its intrastate services, at least for rate-making purposes,”’ the Governor

sought clarification on “precisely how the users of the Company’s in-

trastate services will directly benefit from the operation of the ...

Agreement,” See letter from the Hon. George R. Arlyoshi to Donald

M. Kuyper, President, Hawaiian Telephone Company (July 31, 1980).

74a

plied).* Similar representations were made in a subsequent

letter from a company vice-president to the Attorney Gen-

eral.* A formal expression of State support was transmit-

ted thereafter to the chairman of the FCC.’ The federal

regulatory agency “accepted and approved” the agreement

in July of 1981.

Hawaiian Telephone submitted its application for in-

trastate rate increases to the Public Utilities Commission

on August 25, 1981. In accord with the mandate of rule

* See letter from Donald M. Kuyper to the Hon. George R. Ariyoshi

(Aug. 13, 1980).

* The letter from L. K. Toole to Attorney General Tany Hong dated

October 13, 1980 stated in part:

As indicated in recent correspondence between Mr. Don Kuyper

and Governor George Ariyoshi, ‘(w]e are obliged as a business

matter to maintain an adequate overall rate of return for the

Company as a whole.’ The Agreement between Hawaiian and AT&T

significantly lessens the need to increase local rates to fully al-

lowable levels in order to maintain that comparable overall rate

of return.

It is our intent to certainly give consideration to the level of

comparable overall earnings in determining the amount and timing

of any application for local rate relief.

"The Governor’s letter to the chairman of the FCC stated in part:

In a filing to the FCC in September, the State of Hawaii expressed

its support of this agreement with certain qualifications. I am pleased

to be able to inform you that those concerns have now been resolved

in a manner that is satisfactory to all parties,.and that local users

of telephone services in Hawaii will benefit from the agreement.

Therefore, I urge the Joint Board and the Commission to approve

the agreement between Hawaiian and AT&T as expeditiously as

possible. I am confident that such action is in the best interest of

the citizens of the State of Hawaii.

Letter from the Hon. George R. Ariyoshi to the Hon. Charles D. Farris

(October 16, 1980).

75a

8-3 of the Commission’s Rules of Practice and Procedure,

the petition was accompanied by “written direct testi-

mony” and exhibits purportedly sustaining the requested

rate increase.

The Consumer Advocate of the State of Hawaii, whose

duty it is to “represent, protect, and advance the interests

of consumers of utility services,”* however, considered the

submission wanting in essential respects and quickly moved

for summary disposition of the application. He argued the

testimony and exhibits neither established ‘‘cost justifica-

tions” nor reflected the Company’s “earnings results’ on

a county or divisional basis as mandated by the Commis-

sion’s rules. After overruling the Advocate’s motion for a

finding of “insufficiency” and disposing of other prelimi-

nary matters, the Commission commenced a series of pub-

lic hearings on Hawaiian Telephone’s plea for rate

increases.

The utility proposed across-the-board price increases

amounting to approximately thirty-five percent for most

of the services it rendered the public and limited changes

in rates and charges for other services. The Consumer

Advocate maintained throughout the contested-case hear-

*HRS § 269-51 provides:

Consumer advocate: director of commerce and consumer affairs.

The director of commerce and consumer affairs shall be the consumer

advocate in hearings before the public utilities commission. The con-

sumer advocate shall represent, protect, and advance the interest of

consumers of utility services. The consumer advocate shall not re-

ceive any salary in addition to the salary received as director of

commerce and consumer affairs.

The responsibility for advocating the interests of the consumer

of utility services shall be separate and distinct from the responsi-

bilities of the public utilities commission and those assistants em-

ployed by the commission. As consumer advocate, the director of

commerce and consumer affairs shall have full rights to participate

as a party in interest in all proceedings before the public utilities

commission.

76a

ings, as he had earlier, that a need for rate increases had

not been demonstrated. The large sums Hawaiian Tele-

phone became entitled to in the form of “transitional sup-

plements” under the recently approved agreement with

AT&T were among the reasons urged for disallowing rate

hikes.

At one point in the protracted proceedings, the Com-

pany summarized its case through the testimony of an

officer and the exhibits presented in conjunction therewith.

It averred therein that “the rate relief requested [was]

$47.6 million which will produce a rate of return on the

intrastate rate base [of $485 million] of only 8.6%.” (H.T.C.

Exh. No. T-19, at 3-4). This estimate of necessary revenue,

it explained, followed a determination “that a net oper-

ating income of $41.7 million would be required for in-

trastate operations in test year 1982.” (H.T.C. Exh. No.

T-19, at 4). “The Commission, based on the foregoing,

[deemed] it [unnecessary] to make a finding on ... a spe-

cific fair rate of return for the test year 1982.” P.U.C.

Decision and Order No. 7412, at 96. And it approved new

rate schedules designed to “‘produce an annual revenue

increase of $27,121,000” and yield the “‘net operating in-

come of $41,700,000 ... requested by HTC.” Jd. at 113.

The disparity in estimates of additional revenue likely to

generate the desired net income resulted in part from a

finding that “(t]he intrastate rate base for test year 1982

[was] $454,129,000” rather than $485,000,000 as claimed

by Hawaiian Telephone. Jd.

Il.

Hawaiian Telephone argues the Commission committed

reversible error when it approved rate increases calculated

to “produce an annual revenue increase of $27,121,000”

and yield a “net operating income of $41,700,000.” The

Commission, the Company claims, “adopted an unprece-

dented and unlawful method of determining the rate in-

crease and then reduced the already inadequate award by

77a

the unsupported and unlawful use of a so-called ‘Separa-

tion Adjustment.’ ”’ The initial specification of error is that

“(t]he Commission erred in failing to find a fair rate of

return.’’ But we are not convinced this was error.

A.

We are mindful, of course, that orthodoxy in public util-

ity rate making suggests four sequential determinations

should precede the ultimate rate decision; they are:

(1) what are the enterprise’s gross utility revenues

under the rate structure examined; (2) what are its

operating expenses, including maintenance, deprecia-

tion and all taxes, appropriately incurred to produce

those gross revenues; (3) what utility property pro-

vides the service for which rates are charged and thus

represents the base (rate base) on which a return

should be earned and (4) what percentage figure (rate

of return) should be applied to the rate base in order

to establish the return (wages of capital) to which

investors in the utility enterprise are reasonably en-

titled.[*]

1 A. Priest, Principles of Public Utility Regulation 45

(1969) (emphasis in original).

The regulatory agency in this case acknowledged it did

not determine ‘‘what percentage figure (rate of return)

should be applied to the rate base in order to establish

the return.’’ Id. The public utility asserts the neglect was

fatal. It maintains our decisions in Honolulu Gas Co. v.

Public Utilities Commission, 33 Haw. 487 (1935), and In

*] A. Priest, supra, note 1, at 45, reads as follows:

See Missouri ez rel, Southwestern Bell Tel. Co. v. Public Serv.

Comm'n, 262 U.S 276, 290-92 (1923) (Brandeis, J., dissenting). See

also City of Cleveland v. Public Util. Comm’n, 164 Ohio St. 442,

132 N.E.2d 216, 217 (1956).

78a

re Hawaii Electric Light Co., 60 Haw. 625, 594 P.2d 612

(1979), ‘‘mafk]Je it abundantly clear that a fair rate of re-

turn finding is essential to the regulatory process,”’ di-

recting us to statements therein that seemingly support

the thesis. Still, the enforcement of text-book orthodoxy

in the rate-making process is not our function under Ha-

waii Revised Statutes (HRS) Chapters 269 and 91; nor is

it our practice to decide important questions of law by

dicta from unrelated cases. Cf. Permian Basin Area Rate

Cases, 390 U.S. 747, 775 (1968) (the Supreme “Court does

not decide important questions of law by cursory dicta

inserted in unrelated cases.’’), reh’g denied, 392 U.S. 917

(1968).

Our function in rate making is a limited one. “{T]he

general supervision ... over all public utilities” has been

delegated to the Public Utilities Commission. HRS § 269-

6 (Supp. 1983). “It is the Commission that is authorized

to fix ‘just and reasonable’ rates to be charged by public

utilities, HRS § 269-16 (1976), and a reviewing court is

not empowered to examine the case de novo.”’ In re Ha-

watt Electric Light Co., 60 Haw. at 629, 594 P.2d at 617

(citations omitted). Our role is circumscribed by the pro-

visions of HRS § 91-14(g).'° Section 91-14(g\3), however,

HRS § 91-14(g) (1976) reads:

(g) Upon review of the record the court may affirm the decision

of the agency or remand the case with instructions for further pro-

ceedings; or it may reverse or modify the decision and order if the

substantial rights of the petitioners may have been prejudiced be-

cause the administrative findings, conclusions, decisions, or orders

are:

(1) In violation of constitutional or statutory provisions; or

(2) In excess of the statutory authority or jurisdiction of the

agency; or

(3) Made upon unlawful procedure; or

(4) Affected by other error of law; or

(5) Clearly erroneous in view of the reliable, probative, and sub-

79a

expressly provides that an administrative decision and or-

der is subject to reversal or modification if ‘[mJade upon

unlawful procedure.” Since the claim of error here con-

cerns the procedure employed in approving revised rate

schedules for utility services, our task is to consider the

challenged action in the light of pertinent procedural man-

dates.

The procedural requirements relating to rate determi-

nations are delineated in HRS § 269-16(b). The subsection

requires that changes in rate schedules be preceded by

notice and commission approval.' And a rate increase can

stantial evidence on the whole record; or

(6) Arbitrary, or capricious, or characterized by abuse of discre-

tion or clearly unwarranted exercise of discretion.

“In 1981 HRS § 269-16(b) read

(b) No rate, fare, charge, classification, schedule, rule, or practice,

other than one established pursuant to an automatic rate adjustment

clause previously approved by the commission, shall be established,

abandoned, modified, or departed from by any public utility, except

‘after thirty days’ notice to the commission and prior approval by

the commission for any increases in rates, fares, or charges. The

notice herein provided for shall plainly state the rate, fare, charge,

classification, schedule, rule, or practice proposed to be established,

abandoned, modified, or departed from and the proposed effective

date thereof and shall be given by filing the notice with the com-

mission and keeping it open for public inspection. The commission

may, in its discretion and for good cause shown, allow any rate,

fare, charge, classification, schedule, rule, or practice to be estab-

lished, abandoned, modified, or departed from upon notice less than

that provided for herein. A contested case hearing shall be held in

connection with any increase in rates and such hearing shall be

preceded by a public hearing at which the consumers or patrons of

the public utility may present testimony to the commission concern-

ing the increase. The public hearing shall be an advertised public

hearing or hearings on the island on which the utility is situated.

Notice of the advertised hearing, with the purpose thereof and the

date, time, and place at which it will open, shall be advertised not

80a

only be approved after “public hearing” at which con-

sumers or patrons of the utility are allowed to present

their views regarding the increase and ‘‘a contested case

hearing.” See supra note 11. Hawaiian Telephone does not

dispute that the necessary “‘public hearing” and ‘‘contested

case hearing’’ were conducted; nor does it contend the

subsection expressly calls for a fair rate of return finding.

This aspect of the challenge of the rate order is pur-

portedly grounded on the final portion of § 269-16(b), which

less than once in each of three weeks in a newspaper published in

and of general circulation in the State, the first publication being

not less than twenty-one days before the public hearing and the last

publication being not more than two days before the scheduled hear-

ing. The applicant or applicants will notify their consumers or pa-

trons of the proposed change in rates and of the time and place of

the public hearing not less than one week before the date set, the

manner and the fact of notification to be reported to the commission

before the date of hearing. The commission is authorized to use such

additional media as radio or television to advise the public if it finds —

it necessary to do so. The commission, upon notice to the public

utility, may suspend the operation of all or any part of the proposed

rate, fare, charge, classification, schedule, rule, or practice or any

proposed abandonment or modification thereof or departure there-

from and after a hearing by order regulate, fix, and change all such

rates, fares, charges, classifications, schedules, rules, and practices,

so that the same shall be just and reasonable, and prohibit rebates

and unreasonable discrimination between localities, or between users

or consumers, under substantially similar conditions, regulate the

manner in which the property of every public utility is operated with

reference to the safety and accommodation of the public, prescribe

its form and method of keeping accounts, books, and records, and

its accounting system, regulate the return upon its public utility

property, the incurring of indebtedness relating to its public utility

business, and its financial transactions, and do all things in addition

which are necessary and in the exercise of such power and juris-

diction, all of which as so ordered, regulated, fixed, and changed

shall be just and reasonable, and such as shall provide a fair return

on the property of the utility actually used or useful for public utility

purposes.

Amendments to this subsection enacted in 1983 are not relevant to the

instant case.

8la

“sums up the requirements of the entire ratemaking proc-

ess” and dictates ‘‘just and reasonable” rates, ‘‘such as

shall provide a fair return on the property ... used or

useful for public utility purposes,” See supra note 11. Cit-

ing general principles of rate making, the Company argues

a fair return determination can only follow a finding on

a fair rate of return. And since no such finding preceded

the decision on what the amount of the return would be,

it would have us declare the rate order failed to meet the

statutory standard enunciated in § 269-16(b).

Whether the rates set by the Commission are ‘“‘just and

reasonable,”’ however, is by no means dependent on the

procedure followed by the rate-making body in deciding

what return would be fair in the circumstances. ‘‘Under

the statutory standard of ‘just and reasonable’ it is the

result reached not the method employed which is con-

trolling.” Federal Power Commission v. Hope Natural Gas

Co., 320 U.S. 591, 602 (1944) (citations omitted); In re

Hawaii Electric Light Co., 60 Haw. at 637, 594 P.2d at

621. As the Supreme Court explains:

It is not theory but the impact of the rate order which

counts. If the total effect of the rate order cannot be

said to be unjust and unreasonable, judicial inquiry

_ is at an end. The fact that the metiiod employed

to reach that result may contain infirmities is not then

important.

Federal Power Commission v., Hope Natural Gas Co., 320

U.S. at 602. Discerning no statutory basis for faulting the

method employed by the Commission in determining the

return the utility was entitled to, we proceed to the ques-

tion of whether the rate order, in total effect, can be said

to be unjust and unreasonable.

III.

In Hawaiian Telephone’s opinion the Commission failed

“to provide ... an opportunity [for the utility] to earn a

82a

fair return ... by arbitrarily limiting the rate award to a

certain amount of net operating income’”’ and also erred

“in awarding a rate increase sufficient only to produce an

annual revenue increase of $27,121,000 instead of the

$47,600,000 requested.’”’ Essentially, the claim is that the

rate increases were not “such as shall provide a fair re-

turn.’”’ See supra note 11.

A.

The Commission acknowledgedly tailored rate increases

to produce less revenue than sought and to yield “a certain

amount of net operating income.”’ The resulting rate of

return was 9.18% on the intrastate rate base rather than

the 14.27% sought or the 11.5% and 12+% urged re-

spectively by the Consumer Advocate and the Department

of Defense, an intervenor in the proceeding.

“Rates which produce a return ... more than 2% lower

than the lowest rate of return [supported by an expert

witness] in the case,’ Hawaiian Telephone contends,

“clearly are unjust, unreasonable and confiscatory.” Still,

“the reasonableness of [utility] rates is not determined by

a fixed formula but is a fact question requiring the exc.cise

of sound discretion by the Commission.” In re Hawai

Electric Light Co., 60 Haw. at 636, 594 P.2d at 620 (ci-

tations omitted); see also Federal Power Commission v.

Natural Gas Pipeline Co., 315 U.S. 575, 586 (1942).'? Fur-

2 The Supreme Court’s opinion in pertinent part reads:

The Constitution does not bind rate-making bodies to the service

of any single formula or combination of formulas. Agencies to whom

this legislative power has been delegated are free, within the ambit

of their statutory authority, to make the pragmatic adjustments which

may be called for by particular circumstances. Once a fair hearing

has been given, proper findings made and other statutory require-

ments satisfied, the courts cannot intervene in the absence of a clear

showing that the limits of due process have been overstepped. If

the Commission’s order, as applied to the facts before it and viewed

83a

thermore, ‘‘{i]t is ... recognized that the ratemaking func-

tion involves the making of ‘pragmatic’ adjustments and

... there is a ‘zone of reasonableness’ within which the

[C]lommission may exercise its judgment.”’ 60 Haw. at 636,

594 P.2d at 620 (citations omitted). Viewing the decision

and order in context with these precepts in mind, we can-

not say the Commission arbitrarily limited the rate award

or clearly erred in any other respect.

B.

The rate award was obviously shaped to take account

of uncommon circumstances. Admittedly it was influenced

by significant events that antecede the application for ap-

proval of rate increases, including assertions that ‘‘$130

million in transition payments [would] lessen the need for

local rate increases.” And revised rate schedules designed

to provide the $41,700,000 in net operating income Ha-

waiian Telephone said would be required in test year 1982,

rather than those submitted earlier by the utility, were

approved. To be sure, the Commission deviated from nor-

mal practice in several respects as alleged. Yet as we

observed earlier, “[a]gencies to whom [the rate-making]

power has been delegated are free, within the ambit of

their statutory authority, to make the pragmatic adjust-

ments which may be called for by particular circumstan-

ces.”” Federal Power Commission v. Natural Gas Pipeline

Co., 315 U.S. at 586; see also In re Hawaii Electric Light

Co., 60 Haw. at 636, 594 P.2d at 620.

The particular circumstances in the considered judgment

of the rate-making agency called for practical adjustments

to protect the public interest, and we perceive no grounds

for a countermand of the ruling. Where approval by the

FCC of a plan devised by AT&T and Hawaiian Telephone

in its entirety, produces no arbitrary result, our inquiry is at an

end.

315 U.S. at 586.

84a

to postpone ordered rate deductions for interstate services

and to provide $130,000,000 in “transitional supplements”

for the latter over a four-year period was procured with

the support of the State of Hawaii and such support was

secured on a representation that telephone users in Hawaii

would otherwise be subjected to ‘‘a local rate case gen-

erating $30-35 million per year,” * it would have been

surprising if the Commission had not looked askance at a

plea for approval of intrastate rate schedules calculated to

produce $47,600,000 in additional revenue.

We detect no basis for deeming the rate order confis-

_catory. Though witnesses testifying at the contested case

hearing thought a fair rate of return would be several

percentage points above the 9.18% return the approved

rates were likely to provide, we think 9.18% was within

the ‘zone of reasonableness.’ In re Hawaii Electric Light

Co., 60 Haw. at 636, 594 P.2d at 620 (citations omitted).

‘“TRjeasonableness ... is not determined by a fixed formula

but is a fact question requiring the exercise of sound dis-

cretion ...’’ Jd. When invoked as a guide, sound discretion

'8 See supra notes 4, 5, and 6. That State support for the AT&T-

Hawaiian Telephone agreement was secured on representations that it

lessened the need for local rate increases is clear from the correspond-

ence between officers of Hawaiian Telephone and the State of Hawaii.

For example, the letter from L. K. Toole to the Attorney General | was

prefaced by this statement:

In the interest of reaching agreement between the State of Hawaii

and Hawaiian Telephone for the State’s support to the FCC of the

ATT/HTC negotiated Agreement in FCC Docket 21263, Hawaiian

Telephone offers the following explanation of relevant factors.

See Letter from L. K. Toole to Tany Hong (October 15, 1980).

And the following statement appears in an earlier letter:

It is estimated that in the absence of the Agreement, a local rate

case generating approximately $30-35 million per year or a 25-26%

increase in rates to all local customers would be required to offset

the effects of reduced toll revenues alone.

See letter from Donald M. Kuyper to the Hon. George R. Ariyoshi

(August 13, 1980).

&

:

3

85a

is that “exercised not arbitrarily or wilfully, but with re-

gard to what is right and equitable under the circumstan-

ces and the law.” Langnes v. Green, 282 U.S. 531, 541

(1931) (quoted in Cooke Trust Co. v. Edwards, 43 Haw.

226, 231 (1959)).

Here, the Commission allowed rate increases calculated

to yield the net operating income Hawaiian Telephone de-

cided it needed. The resulting rate of return for the utility

was higher than the 8.5% it said would be yielded by the

revised rate schedules submitted for approval. And we

have recounted some of the other factors considered by

the Commission in approving rate schedules structured to

produce a net operating income of $41,700,000. Under the

circumstances, we could not say the Commission was ar-

bitrary; we would have to agree the rate order was fash-

ioned with regard to what appeared right and equitable

under the circumstances and the law. In the words of the

Commission, “[t]o insure that rates are ‘just and reason-

able’ includes the power to take into consideration the

interest of the ratepayers as well as that of the utility

owners.” P.U.C. Decision and Order No. 7412, at 27.

IV.

The foregoing conclusion that the rate order was just

and reasonable in total effect would normally end our in-

quiry. Hawaiian Telephone, however, avers the decision

under review is flawed in yet another respect; it alleges

the Commission erred “by making an unsupported and

unlawful ‘Separation Adjustment.’ ’’ We have examined the

claim that the State agency invaded a federally preempted.

area by varying a jurisdictional separation approved by the

FCC, but find the claim to be without merit.

A.

Since the property of a telephone company is used in

providing both intrastate and interstate telecommunica-

86a

tions services and expenses are incurred in the joint ren-

dition of such services, ‘‘a separation of telephone prop-

erty, revenues, and expenses between the intrastate and

interstate operations of the company ... ‘is essential to

the appropriate recognition of the competent governmental

authority in each field of regulation.’’’ NARUC-FCC Sep-

arations Manual, supra, at 5 (quoting Smith v. Illinois Bell

Telephone Co., 282 U.S. 133, 148 (1930)). Hawaiian Tele-

phone would have us rule the Commission intruded in an

area reserved for federal regulation by adjusting the Com-

pany’s intrastate rate base for the test year to reflect the

consequences of its agreement with AT&T which deferred

rate reductions on interstate telecommunications services

and stipulated that its share of the revenue generated by

furnishing such services during the test year would consist

of a cost-based portion and a “transitional supplement.”

The Commission, of course, may not interfere with fed-

eral regulation of interstate telecommunications services;

the Supremacy Clause does not countenance rulings by a

state rate-making agency that ‘may produce a result in-

consistent with the objective of the federal [regulatory]

statute.”’ Maryland v. Louisiana, 451 U.S. 725, 747 (1981)

(quoting Rice v. Santa Fe Elevator Corp., 331 U.S. 218,

230 (1947)). Thus for example, a state agency may not

adopt for its rate-making purposes a depreciation formula

incompatible with the depreciation method decreed for such

purposes by the FCC through a preemption order. See New

England Telephone & Telegraph Co. v. Public Utilities

Commission of Maine, 570 F. Supp. 1558 (D.Me. 1983).

Here, the Commission neither varied a formula, method,

or procedure decreed by the federal agency nor tampered

with interstate rates in any way. It expressly rejected the

Consumer Advocate’s thesis that the circumstances sur-

rounding the approval of “transitional supplements” by the

FCC rendered it appropriate for

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