Amicus Curiae Brief — Public Utilities Commission v. Hawaiian Telephone Co.

Supreme Zour, US )

~ FILED

y } JUN 6 1988

No. 87-1152 i

In the Supreme Court of the United States

OCTOBER TERM, 1987

PUBLIC UTILITIES COMMISSION OF

THE STATE OF HAWAII, ET AL., PETITIONERS

v.

HAWAIIAN TELEPHONE COMPANY

ON PETITION FOR A WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

BRIEF FOR THE UNITED STATES AS AMICUS CURIAE

CHARLES FRIED

Solicitor General

LAWRENCE G. WALLACE

Deputy Solicitor General

CHRISTOPHER J. WRIGHT

Assistant to the Solicitor General

Department of Justice

Washington, D.C. 20530

(202) 633-2217

DIANE S. KILLORY

General Counsel

JOHN E. INGLE

Deputy Associate General Counsel

Federal Communications Commission

Washington, D.C. 20554

QUESTION PRESENTED

Whether, in a suit brought pursuant to Section 401(b) of the

Communications Act of 1934, 47 U.S.C. 401(b), the district

court correctly concluded that the Hawaii Public Utilities Com-

mission had not followed an order of the Federal Communica-

tions Commission separating the costs of the Hawaiian

Telephone Company between interstate and intrastate uses and

properly ordered an adjustment of the company’s intrastate

rates to correct that failure.

(I)

TABLE OF CONTENTS

Page

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TABLE OF AUTHORITIES

Cases:

Commissioner v. Sunnen, 333 U.S. 591 (1948) .......... 9

Domestic Communications-Satellite Facilities, 35 F.C.C.2d

844, reconsideration denied, 38 F.C.C.2d 665 (1972) ... 3

Integration of Rates and Services, 61 F.C.C.2d 380

(1976), reconsideration denied in part, 65 F.C.C.2d

ARS Se 3

Louisiana Pub. Serv. Comm. v. FCC, 476 U.S. 355

a es yan bx ag Kaw canes ances 1, 9, 14, 15

National Ass’n of Regulatory Util. Comm’rs v. FCC,

737 F.2d 1095 (D.C. Cir. 1984), cert. denied, 469 U.S.

Se a 2

New England Tel. & Tel. Co. v. Public Util. Comm’n of

Maine, 742 F.2d 1 (Ist Cir. 1984), cert. denied, 476 U.S.

EE a 8, 11

Public Serv. Comm’n of Maryland v. Chesapeake &

Potomac Tel. Co., 416 U.S. 445 (1966) .............. 10

Separation Procedures, 26 F.C.C.2d 247 (1970) ......... 2

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

ee oc a heen s bd bade baesedeses 2

Statutes:

Communication Act of 1934, 47 Stat. (& Supp. III)

151 ef seq.:

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(II!)

Miscellaneous:

S. Rep. 92-362, 92d Cong., Ist Sess. (1971)

Jn the Supreme Court of the Anited States

OCTOBER TERM, 1987

No. 87-1152

PUBLIC UTILITIES COMMISSION OF

THE STATE OF HAWAII, ET AL., PETITIONERS

v.

HAWAIIAN TELEPHONE COMPANY

ON PETITION FOR A WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

BRIEF FOR THE UNITED STATES AS AMICUS CURIAE

This brief is filed in response to the Court’s invitation to the

Solicitor General to express the views of the United States.

STATEMENT

1. a. The Communications Act of 1934 establishes a system

of dual federal and state regulation over telephone service. The

Act authorizes the Federal Communications Commission (FCC)

to regulate interstate and foreign service, but it reserves to the

states the authority to set rates for intrastate service. 47 U.S.C.

(& Supp. III) 151, 152(b); see Louisiana Pub. Serv. Comm'n v.

FCC, 476 U.S. 355, 360 (1986). This seemingly “clean parceling

of responsibility” is complicated by that fact that “virtually all

telephone plant that is used to provide intrastate service is also

used to provide interstate service” (ibid.). For that reason, and

because rates are designed to provide a telephone company’s

“revenue requirement,” which is the sum of a carrier’s

reasonable expenses plus a return on its investment in the

(1)

property used in providing telephone service, it is necessary to

separate and allocate to the appropriate jurisdiction (intrastate

or interstate) the costs of telephone equipment before rates for

each jurisdiction are set. Smith v. Illinois Bell Tel. Co., 282 U.S.

133 (1930). The Communications Act authorizes the FCC to

separate and allocate the costs of telephone equipment to the

appropriate jurisdiction. 47 U.S.C. 221(c), 410(c).' Since 1970,

separations for carriers in the 48 contiguous states have been

governed by the FCC’s “Ozark Plan.” See Separation Pro-

cedures, 26 F.C.C. 2d 247 (1970).

Until recently, most carriers who jointly provided interstate

service negotiated settlements to divide the interstate revenues in

an equitable manner.? Settlements generally were based on the

costs of the participating carriers as determined pursuant to the

Commission’s jurisdictional separations procedures. Thus, in

settling with an independent local exchange carrier for interstate

service, the American Telephone and Telegraph Company

(AT&T) typically would pay that carrier’s interstate expenses (as

determined by separations procedures) plus a return on that car-

rier’s interstate investment (similarly determined).

' To illustrate how ratemaking works, suppose a telephone company

bought a telephone booth for $20,000 and the FCC allocated 80% of its cost

to the intrastate jurisdiction. If the state commission agreed that the telephone

booth was a reasonable expense and that $20,000 was a reasonable price (see

Pet. App. 27a n.30), there would be a $16,000 increase in the carrier’s invest-

ment in property providing intrastate service in the first year the booth was

used. If the carrier’s rate of return is 10%, it would be entitled to increase its

intrastate rates by $1,600 to provide a return on its investment in the telephone

booth. It would also be entitled to a depreciation expense. If the state commis-

sion decided that the telephone booth should last 20 years and used straight-

line methods, the annual depreciation expense would be $1,000 and $800

would be added to the carrier’s annual intrastate revenue requirement as an ex-

pense.

> Although settlements still take place in some communications contexts,

the FCC recently replaced them with a system of “access charges” for purposes

of most telephone services. Under the access charge procedure, long-distance

carriers (and some other users) pay local exchange carriers an access charge for

the use of the local exchanges, rather than sharing revenues through a set-

tlements process. See National Ass'n of Regulatory Util. Comm'rs v. FCC,

737 F.2d 1095 (D.C. Cir. 1984), cert. denied, 469 U.S. 1227 (1985).

a o

b. Interstate rates in the 48 contiguous states have tradi-

tionally been set so that rates are uniform for given distances

and durations of long distance calls. Until the advent of satellite

communications, the cost of calls to and from Hawaii and

Alaska was about three times higher than the cost for calls of

similar distance and duration on the mainland (Pet. App. Sa,

97a). With the advent of satellite communications, which

generally do not increase in cost as the distance of the call in-

creases, the FCC in the early 1970s saw an opportunity to in-

tegrate Hawaii and Alaska into the nationwide rate structure.’

Until that time, the Commission had not established separations

procedures that were applicable to Hawaii and Alaska. Instead,

petitioner, the Hawaii Public Utility Commission (PUC), had

used its own “Hawaiian Plan II” to determine the intrastate

costs of respondent, the Hawaiian Telephone Company. AT&T

had made interstate settlement payments to the Hawaiian

Telephone Company based on the Hawaii PUC’s separations

decisions.

In 1981, in conjunction with transitional procedures for in-

tegrating Hawaii into the nationwide rate structure, the FCC ap-

proved the recommendation of a joint board (on which the

Chairman of the Hawaii PUC served (Pet. App. 130a n.*)) that

the separations procedure set forth in the Ozark Plan be applied

in Hawaii without modification (id. at 249a-250a). Because in-

terstate rates for calls to and from Hawaii had been three times

higher than rates for comparable calls on the mainland, integra-

tion was expected “to yield significantly lower interstate phone

rates” (id. at 6a). However, because application of the Ozark

Plan separations procedures would allocate more costs to the in-

>See Domestic Communications-Satellite Facilities, 35 F.C.C. 2d 844,

856-859, reconsideration denied, 38 F.C.C. 2d 665, 692-697 (1972). The FCC

in that proceeding adopted a policy of conditioning any grants of domestic

satellite authorizations on the carriers’ undertaking to reduce rates to and from

remote areas promptly so as “to integrate these * * * points into the uniform

mileage rate pattern that now obtains for the contiguous states.” 35 F.C.C. 2d

at 857. See also Integration of Rates and Services, 61 F.C.C. 2d 380 (1976),

reconsideration denied in part, 65 F.C.C. 2d 324 (1977).

4

trastate side, there was also expected to be “upward pressure on

intrastate rates” (ibid.).* “To avoid a dramatic impact on local

rates” (ibid.), the Hawaiian Telephone Company and AT&T

proposed that the third and final step of rate integration be

deferred to January 1, 1985, and the FCC approved the pro-

posal (id. at 6a-7a, 264a). Between 1981 and 1984, while integra-

tion remained incomplete and separations were made according

to the Ozark Plan, AT&T agreed to make “transitional supple-

ment” payments to the Hawaiian Telephone Company in addi-

tion to regular settlement payments (id. at 7a).°

2. a. About one month after the FCC approved the agree-

ment between the Hawaiian Telephone Company and AT&T,

the Hawaiian Telephone Company filed an application with the

Hawaii PUC to increase its intrastate rates by about $48 million

annually (Pet. App. 123a). This application, which is the first of

two applications relevant here, was decided using 1982 as the

test year (id. at 124a). During 1982, AT&T’s transitional supple-

ment payment to the Hawaiian Telephone Company was about

$38 million (id. at 13la). The Hawaii Consumer Advocate (a

petitioner along with the Hawaii PUC) contended that the tran-

sitional supplement should be treated as intrastate revenue

(ibid.), which would reduce considerably the amount of any in-

‘trastate rate increase. The Consumer Advocate particularly

noted that the Hawaiian Telephone Company had stated, in

* For example, using the figures in note |, supra, if 80% of the cost of a

$20,000 telephone booth that is expected to last 20 years is allocated to the

intrastate jurisdiction and the intrastate rate of return is 10%, the telephone

company is entitled to intrastate rates providing a $1,600 return on this part of

its investment (10% x 80% x $20,000) and a depreciation expense of $800

(80% x $1,000) for the first year of its use, for a total of $2,400. If 90% of the

cost of the booth is allocated to the intrastate jurisdiction and the rate of

return is held at 10%, the company would be entitled to a return of $1,800

(10% x 90% x $20,000) and an expense of $900 (90% x $1,000), for a total

of $2,700. Thus, allocating 10% more of the cost of the booth to intrastate

service would lead to a $300 increase (122%) in intrastate rates.

* The transitional supplement payments were “based on a declining per-

centage of the cumulative total growth over 1979 in actual * * * interstate

revenues” (Pet. App. 253a).

an”

order to gain the support of the Governor for its agreement with

AT&T, that the agreement’s provision of transitional supple-

ment payments would reduce the need for intrastate rate in-

creases (id. at 132a). The Hawaiian Telephone Company, while

contending that the transitional supplement payments were in-

terstate rather than intrastate revenues (id. at 13la-132a), never-

theless stated that it had reduced its proposed intrastate rate in-

crease from $101 million to $48 million because of the transi-

tional supplement payments (id. at 155a (dissenting opinion)).

The Hawaii PUC first concluded, contrary to the Consumer

Advocate, that the transitional supplement payments were

plainly interstate revenues and that “(t]he use of interstate

revenues to satisfy intrastate revenue requirements would

violate the fundamental principles of jurisdictional separations”

(Pet. App. 132a). However, it also concluded that “the record is

clear that if the State of Hawaii, through its Governor, had not

supported the negotiated settlement, the Agreement between

AT&T and [the Hawaiian Telephone Company] would not have

been approved by the FCC” (id. at 133a). Had the settlement

not been approved, the PUC concluded, then separations would

have been made according to Hawaiian Plan II rather than the

Ozark Plan. The effect of using the Ozark Plan, it further

found, was that, on paper, “the intrastate rate of return under

present rates is reduced by 1.1%” (ibid.).° Finding that “it

would be totally unjust and unreasonable if [the Hawaiian

Telephone Company] after obtaining the benefit of the transi-

tional revenues were a/so to receive * * * the difference between

* An increase in the percentage of telephone equipment allocated to the in-

trastate jurisdiction leads to a decrease in a carrier’s rate of return in the

absence of an increase in the carrier’s revenues. For example, using the figures

in notes | and 4, supra, if 80% of the cost of a $20,000 telephone booth is

allocated to the intrastate jurisdiction, and the rate of return is 10%, the car-

rier is entitled to rates providing $1,600 in revenues. But if 90% of the cost of

the booth is allocated to the intrastate jurisdiction, and revenues are held con-

stant at $1,600, the rate of return would be 8.9% ($1,600 / $18,000). Thus, in

the absence of an increase in the carrier’s revenues, the rate of return would

decline by 1.1% as a result of shifting more of the cost of the telephone booth

to the intrastate jurisdiction.

6

Hawaiian Plan II and the Ozark Separation formulas” (id. at

138a (emphasis in original)), the PUC decided to reduce the

Hawaiian Telephone Company’s rate of return by 1.1%.’

The Hawaii Supreme Court affirmed (Pet. App. 66a-89a).

Noting that “[t]he rate award was obviously shaped to take ac-

count of uncommon circumstances” (/d. at 83a), the court saw

“no reason to disturb the pragmatic adjustment” made by the

Hawaii PUC (id. at 89a).

b. Before the Hawaii Supreme Court had ruled on its rate

request for test year 1982, the Hawaiian Telephone Company

filed a second rate increase request, using 1983 as the test year

(Pet. App. 90a). The PUC reaffirmed its “decision that the tran-

sitional supplement revenues cannot be treated as intrastate

revenues” (id. at 101a). It explained that in its previous decision

it “made no shift in expenses from intrastate to interstate,” but

instead “made an appropriate 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 [the Hawaiian Telephone Company] and AT&T” (ibid.

(emphasis in original)). It decided again to reduce the Hawaiian

Telephone Company’s rate of return by 1.1%, “emphasiz[ing]

the fact that by making such an adjustment, we are not

substituting the Hawaiian Plan II for the Ozark Plan for

ratemaking purposes” (id. at 10Sa). The PUC recognized that

transitional supplement payments would cease in 1984 and that

its decision would not be implemented until 1985 (id. at 102a),

but nevertheless took the transitional supplement into account

because “1983 is the test year” (id. at 103a). The result was a

decrease in intrastate revenues of $10.5 million (id. at 5Sa).°

’ One member of the Hawaii PUC dissented on the basis that its “backdoor

use Of interstate revenues” (Pet. App. 157a) was “not within [the PUC’s]

authority” (id. at 160a).

* The same commissioner who had dissented previously dissented again,

Stating that “[d]espite the protestations to the contrary, the majority continues

to undercut the Ozark Plan which it ostensibly adopts” (Pet. App. 120a). As

relevant here, the PUC affirmed its prior decision on motion for reconsidera-

tion (id. at 49a-6Sa).

3. a. The Hawaiian Telephone Company then filed this ac-

tion in the United States District Court for the District of

Hawaii.® It brought suit pursuant to Section 401(b) of the Com-

munications Act, 47 U.S.C. 401(b), which provides that “[iJf

any persons fails or neglects to obey an order of the Commis-

sion,” the district courts “shall enforce obedience to such order

by a writ of injunction or other proper process.” The Hawaiian

Telephone Company argued that the Hawaiian PUC was failing

to comply with the FCC’s order that Ozark Plan separations

procedures be used in Hawaii, but was instead making intrastate

rate determinations based on Hawaiian Plan II separations.

As a preliminary matter, the district court determined that the

Hawaiian Telephone Company’s action was not barred by the

Johnson Act. 28 U.S.C. 1342, which provides in pertinent part

that “(t]he district courts shall not enjoin, suspend or restrain

the operation of, or compliance with, any order affecting rates

chargeable by a public utility and made by a State ad-

ministrative agency or rate-making body” where “[j]urisdiction

is based solely on diversity of citizenship or repugnance of the

order to the Federal Constitution.” The district court noted that

the Johnson Act “by its own terms applies only when jurisdic-

tion is founded solely on diversity of citizenship or repugnance

to the Federal constitution,” whereas “[h]ere, [the Hawaiian

Telephone Company’s] claim arises under 47 U.S.C. § 401(b)”

(Pet. App. 45a (emphasis in original)). The court also concluded

that the denial of its first rate increase request did not bar the

Hawaiian Telephone Company’s challenge to rates for a subse-

quent year (ibid.).

On the merits, the district court concluded that “[nJot-

withstanding the PUC’s disclaimer of any such action, the

PUC’s action had the effect of applying Hawaiian Plan II * * *

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

called ‘appropriate adjustment’ made by the PUC * * * was

calculated solely and precisely on the difference between

* The Hawaiian Telephone Company initially appealed the second Hawaii

PUC decision to the Hawaii Supreme Court, but dismissed that appeal after

obtaining relief from the PUC on reconsideration on several issues not rele-

vant here.

8

Hawaiian Plan Il and the Ozark Separations formulas. * * *

Because the PUC’s 1.1% ‘appropriate adjustment’ * * * was

directly the product of applying Hawaiian Plan II for purposes

of separations, the PUC thereby failed and negiected to obey

FCC Order 81-312, which required the application of the federal

Separations Manual.” Pet. App. 44a. The district court per-

manently enjoined the PUC from failing to follow the Ozark

Plan and ordered it to make effective intrastate rates sufficient

to generate additional revenues of $10.5 million annually (id. at

177a).

b. The court of appeals affirmed (Pet. App. la-36a). It first

concluded that FCC Order 81-312, which provides that the

Ozark Separations Manual “SHALL APPLY to Hawaii and

Alaska” (Pet. App. 250a), is an “order” within the meaning of

Section 401(b). It noted that the First Circuit had concluded in

New England Tel. & Tel. Co. v. Public Util. Comm’n of Maine,

742 F.2d 1 (1984), cert. denied, 476 U.S. 1174 (1986), that, in

general, rulemaking orders are not “order[s]” under Section

401(b), and that Order 81-312 resulted from a rulemaking pro-

ceeding (Pet. App. 14a). The court concluded that it “need not

decide today whether every rule, order, or regulation pro-

mulgated by the FCC is an enforceable order under § 401(b)”

because “[t]he language of the particular order in question, and

the proceedings leading up to it, demonstrate that the FCC in-

tended Order 81-312 to require particular actions be taken by

the PUC and private carriers providing service to Hawaii” (id. at

17a). Indeed, it noted that the *PUC conceded that it must

abide by those FCC-mandated separations procedures” (id. at

17a-18a). “Under the circumstances,” the court concluded,

“FCC Order 81-312 was appropriately interpreted as an ‘order’

for enforcement by injunction in the district court” (id. at 18a).

With respect to the claim that the Hawaiian Telephone Com-

pany was barred from arguing that the PUC had failed to follow

the FCC’s order applying the Ozark Plan to Hawaii because that

argument had been rejected in the first proceeding, the court of

appeals noted that when the Hawaii PUC’s first decision was

made the Hawaiian Telephone Company “was operating under

its transition agreement with AT&T * * * [which] provided for

9

payments to [the Hawaiian Telephone Company] to soften the

impact on its overall revenues of the mandated use of the Ozark

Plan” (Pet. App. 21la-22a). “In contrast,” the court noted, the

second order involved a “new setting” because it affected “rates

effective January 1, 1985, after the transition agreement had ex-

pired” (id. at 22a). Thus, while the PUC’s first decision affected

rates during the period in which the Hawaiian Telephone Com-

pany received transitional supplement payments from AT&T,

the second decision (although based on test year 1983, during

which the Company received transitional supplement payments)

would only affect the rates charged after the payments had

ceased. Relying on Commissioner v. Sunnen, 333 U.S. 591,

597-598 (1948), the court concluded that the Hawaiian

Telephone Company was not barred from raising the issue in

the second proceeding because the cessation of the transitional

supplement payments constituted a significant difference be-

tween the proceedings (Pet. App. 21a).'°

On the merits, petitioners “concede[d] the FCC’s plenary

authority over separations procedures” (Pet. App. 23a). They

instead argued that the FCC “had not exercised” its power to

control the Hawaii PUC’s ratemaking proceedings with respect

to separations matters (id. at 22a-23a). The court of appeals re-

jected that contention. It noted that Section 410(c) of the Com-

munications Act grants the FCC authority to decide separations

matters (id. at 24a). It then observed that “separations for in-

terstate ratemaking and separations for intrastate ratemaking

are two sides of the same coin” (id. at 23a), so that “FCC Order

81-312 necessarily preempted any independent separations pro-

cedures of the Hawaii PUC” (id. at 25a). The court noted that

this Court’s decision in Louisiana Pub. Serv. Comm’n, which

concerned intrastate ratemaking affer the FCC separates in-

terstate and intrastate expenses (476 U.S. at 375), “supports our

conclusion that the FCC separations procedures authorized by

§ 410(c) of the Act bind the states” (Pet. App. 27a).

The court of appeals next agreed with the district court that

“the ‘appropriate adjustment’ here was a fairly transparent and

improper attempt to circumvent the FCC mandate” (Pet. App.

‘© The court of appeals rejected the Hawaii PUC's contention that the

Johnson Act bars the injunction for essentially the same reasons given by the

district court (Pet. App. 19a-20a).

10

27a). It concluded: “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 ad-

mission, do directly.” Pet. App. 29a.!!

DISCUSSION

1. Petitioners first argue (Pet. 18-19) that review is war-

ranted because the decision below conflicts with the First Cir-

cuit’s decision in New England Tel. & Tel. Co., where the court

concluded that Section 401(b) generally authorizes suits to en-

force orders resulting from FCC adjudicatory proceedings, but

not orders resulting from rulemaking proceedings. As an initial

matter, for reasons stated more fully in our brief in Public Serv.

Comm’n of Maryland v. Chesapeake & Potomac Tel. Co., No.

84-1362, we, like the court below, are not persuaded by the First

Circuit’s conclusion that Section 401(b), which does not on its

face distinguish between different types of orders, may general-

ly be used only to enforce FCC orders resulting from ad-

judicatory proceedings.'?

'! Judge Ferguson dissented. He first stated that while “i]t is undisputed

that the Communications Act empowers the FCC to prescribe uniform separa-

tions procedures for apportioning the property and expenses of telephone

companies between the interstate jurisdiction, governed by the FCC, and the

intrastate jurisdiction, governed by state regulatory authorities” (Pet. App.

30a), “error arises if it is concluded that this grant of authority extends to

intrastate rate-making” (id. at 33a). However, he concluded that it was not

necessary to reach that issue because, in his view, the Hawaiian Telephone

Company was collaterally estopped by the prior Hawaii Supreme Court deci-

sion from arguing that the Hawaii PUC’s “appropriate adjustment” was

simply a device to avoid the FCC's separations order (id. at 35a-36a).

'2 We are serving a copy of our brief in Public Serv. Comm'n of Maryland

on the parties here. The Court heard oral argument in that case, which

presented the question whether an KCC rulemaking order that preempted the

states from using depreciation methods contrary to those prescribed by the

FCC could be enforced under Section 401(b). The Court did not decide that

question, but instead remanded in light of the decision in Louisiana Pub. Serv.

Comm’n, which held that the FCC lacks authority to prescribe preemptive

depreciation procedures and hence resolved the underlying dispute in Public

Serv. Comm'n of Maryland, 476 U.S. 445 (1986).

We do not believe that review is warranted here to resolve the

alleged conflict in the courts of appeals. While the court below

indicated its disagreement with the First Circuit’s approach (Pet.

App. 1Sa-17a), it is not at all clear that the two courts would

reach different results on the facts of this case. In New England

Tel. & Te!. Co., the First Circuit held that an order issued as

part of a rulemaking proceeding could not be enforced in an ac-

tion brought under Section 401(b) against the Public Utilities

Commission of Maine, which was not a party to the rulemaking

proceeding. The court read “order” in Section 401(b) “to apply

exclusively to those cases in which the [Federal Communica-

tions] Commission has previously considered and determined

the specific rights and duties in question and where the private

action seeks only to enforce the Commission’s specific mandate”

(742 F.2d at 5). Noting that “[{rJules are generai in form and they

can be highly general in content” (/d. at 6), the court thought it

unfair to enforce rules “against persons not parties to the

rulemaking proceeding” (id. at 7). It suggested (without

deciding) that suit might be brought pursuant io Section 401(b)

to enforce the rulemaking order in that case against the Ohio

Public Utilities Commission because the Ohio Commission had

participated in that proceeding in response to a complaint

directed against it and had been ordered explicitly to conform to

the FCC’s depreciation orders (id. at 9).

The concerns expressed by the First Circuit are not present

here. The relevant FCC proceeding involved only questions

relating to the integration of Hawaii and Alaska into the nation-

wide telephone rate structure and FCC Order 81-312 concisely

provided that the Ozark Separations manual “SHALL APPLY

to Hawaii and Alaska” (Pet. App. 250a). The Chairman of the

Hawaii PUC served on the joint board that recommended that

result and the Hawaii PUC participated in the FCC’s considera-

tion of the joint board’s recommendation. Moreover, the PUC

has consistently maintained that it agrees that the FCC’s order

requires it to apply Ozark Plan separations in state ratemaking

proceedings (see pages 13-14, infra). In these circumstances, it

does not seem unfair to require the Hawaii PUC to comply with

the order the Hawaiian Telephone Company seeks to enforce.

12

Accordingly, it is not clear that the First Circuit would conclude

that the order in question cannot be enforced against the Hawaii

PUC pursuant to Section 401(b). It might conclude, with

respect to FCC Order 81-312, that the Hawaii PUC is more

comparable to the Ohio Public Utilities Commission than to the

Public Utilities Commission of Maine, so that the order is en-

forceable.

Conversely, the court below made clear that it was “not

decid[ing] today whether every rule, order, or regulation pro-

mulgated by the FCC is an enforceable order under § 401(b)”

(Pet. App. 17a). Accordingly, in a case involving a very general

rule where the defendant was not involved in the rulemaking

proceedings, that court might conclude that the rule could not

be enforced in a Section 401(b) proceeding. While the First Cir-

cuit and the Ninth Circuit might reach differing conclusions on

the facts of New England Tel. & Tel. Co., and while a number

of other courts of appeals have reached conclusions contrary to

those of the First Circuit (see cases cited at Pet. App. 15a n.19)

and no court of appeals has followed the First Circuit’s ap-

proach, this case is not an appropriate one for resolving the

disagreements that have arisen.'?

2. Petitioners next argue (Pet. 19-23) that 47 U.S.C. (&

Supp. III) 152(b), as construed in Louisiana Pub. Serv.

Comm'n, grants state regulatory commissions broad authority

over intrastate rates and that the courts below improperly in-

truded into that realm here. We think that whether the courts

below correctly concluded that the Hawaii PUC improperly

refused to apply the Ozark Plan and properly ordered the PUC

to increase the Hawaiian Telephone Company’s intrastate rates

by $10.5 million are close questions. However, the answers to

'S Petitioners suggest (Pet. 19 n.8) that the courts below erred in concluding

that the issuance of an injunction was not prohibited by the Johnson Act.

However, as we explained in our briet (at 17 n.14) in Public Uni. Comm'n of

Maryland, we agree with the courts below (Pet. App. 19a-20a, 45a) that where

jurisdiction is based on a federal statute such as Section 401(b), the Johnson

Act, which applies where “[)Jurisdiction is based solely on diversity of citizen-

ship or repugnance of the order to the Federal Constitution,” is not a bar to

the issuance of an injunction

13 :

those questions depend on how the complicated factual issues

presented by this unique case are resolved rather than on how

any legal issue is resolved. Accordingly, review by this Court is

not warranted.

a. There is very little dispute with respect to any legal issue.

On the one hand, it is undisputed that the states set rates for in-

trastate telephone service. On the other hand, it is clear that the

FCC separates and allocates telephone equipment to the in-

terstate and intrastate spheres, and that its decisions with

respect to separations matters control. Section 410(c), added to

the Communications Act in 1971, makes that plain. It provides

that the FCC “shall refer any proceeding regarding the jurisdic-

tional separation of common carrier property and expenses be-

tween interstate and intrastate operations * * * to a Federal-

State Joint Board.” It further provides that the FCC “shall also

afford the State members of the Joint Board an opportunity to

participate in its deliberations, but not vote, when it has under

consideration the recommended decision of the Joint Board”

(§ 410(c) (emphasis added)). Thus, under the scheme Congress

established, the states participate in separations proceedings,

but the FCC makes the final decision. Congress described the

joint board procedure established in Section 410(c) as achieving

“Joint participation without abandoning Federal superintend-

ence in the field.” S. Rep. 92-362, 92d Cong., Ist Sess. 6 (1971).

The Hawaii PUC has recognized throughout the proceedings

underlying this case that the FCC’s separations orders control

cost allocations in the state ratemaking proceedings. In its order

with respect to the Hawaiian Telephone Company’s first rate in-

crease request, the PUC stated that “the Ozark Plan was made

applicable to Hawaii by order of the Federal Communications

Commission” (Pet. App. 139a). In its second order, the PUC

stated that “this Commission did not adopt the Hawaiian Plan

Il in [the Hawaiian Telephone Company’s] last rate case and the

Commission recognized the Ozark Separation Plan as being

appropriate in allocating expenses and capital expenditures be-

tween [the Hawaiian Telephone Company’s] intrastate and in-

terstate operations” (id. at 106a-107a). It reiterated on recon-

sideration that it was “not substituting the Hawaiian Plan II for

14

the Ozark Plan for ratemaking purposes” (/d. at 52a-53a (em-

phasis omitted)). Thus, the Hawaii PUC agrees that the FCC’s

1981 separations order is binding in its ratemaking proceedings.

In the court of appeals, it “concede[d] the FCC’s plenary

authority over separations procedures” (id. at 23a).

Nothing in Louisiana Pub. Serv. Comm’n calls into question

the Hawaii PUC’s concession that the FCC’s separations deci-

sion controls jurisdictional cost allocation in intrastate ratemak-

ing proceedings. In that case, the “principal argument” that the

FCC had authority to require state commissions to follow its

depreciation rules was based on 47 U.S.C. 220, which deals

specifically with depreciation (476 U.S. at 366). The Court con-

cluded that Section 220 either merely “spell[s] out the authority

of the FCC in the context of interstate regulation” (476 U.S. at

377) or “dictate[s] how the carriers’ books would be kept for the

purposes of financial reporting” (/d. at 378), but does not give

the FCC authority over depreciation practices used in intrastate

ratemaking. The Court also concluded that 47 U.S.C. (& Supp.

III) 152(b), which provides that the states have authority over

“charges, classifications, practices, services, facilities, [and]

regulations [used] for or in connection with intrastate com-

munication service,” expressly grants the states authority over

depreciation practices, since “ ‘[c]harges, ‘classifications,’ and

‘practices,’ are terms often used by accountants, regulators,

courts, and commentators to denote depreciation treatment”

(476 U.S 371). Here, in contrast, it is clear under Section 410(c)

that the FCC has authority to determine separations for in-

trastate ratemaking purposes and Section 152(b) does not give

the states authority to separate and allocate the costs of

telephone equipment to the intrastate and interstate jurisdic-

tions.'4

'4 Petitioners thus err (Pet. 22-23) in relying on the dissenting judge’s view

(Pet. App. 33a) that the Hawaiian Telephone Company’s argument “is essen-

tially the same kind of argument that the Court rejected in Louisiana.” Had

the Court concluded in that case that Section 220 gives the FCC authority to

prescribe depreciation methods for use in intrastate as well as interstate

ratemaking proceedings and that Section 152(b) does not give the states

authority to determine depreciation matters, it would have ruled differently.

Here, in contrast to Louisiana Pub. Serv. Comm'n, it is undisputed that the

authority granted the FCC over separations in Section 410(c), unlike its power

15

The Court noted in Louisiana Pub. Serv. Comm’n that

federal and state regulators exercise their authority over rates in

their respective jurisdictions “once the correct allocation be-

tween interstate and intrastate use has been made” (476 U.S. at

375). That is perfectly consistent with the conclusion that state

regulators must respect the separations decisions made by the

FCC in setting intrastate rates. In any event, in light of the posi-

tion taken by the Hawaii PUC throughout the course of this

litigation, this case presents no occasion to consider whether

state regulators must follow the FCC’s separations decisions.

b. The dispute here is primarily a factual dispute. The

Hawaii PUC made what it termed an “appropriate adjustment”

of the Hawaiian Telephone Company's rate of return on ac-

count of the company’s receipt of transitional supplement

payments from AT&T (Pet. App. 10la). However, while con-

sistently maintaining that it was applying Ozark Plan separa-

tions procedures, the PUC calculated the adjustment by

substituting the result that would obtain from application of the

Hawaiian Plan II separations formula for the result under the

Ozark Plan. In light of the PUC’s choice of that method to im-

plement the adjustment, the district court concluded that the

PUC had not made an appropriate adjustment, but was simply

refusing to apply Ozark Plan separations (id. at 44a). The court

of appeals agreed, adding that the PUC cannot “accomplish by

subterfuge what it could not, by its own admission, do directly”

(id. at 29a).

It is not indisputably clear whether, in fact, the Hawaii PUC

made an “appropriate adjustment” (Pet. App. 101a) or “a thinly

veiled attempt to depart from the required separation of plant

and expenses between interstate and intrastate use” (id. at 29a).

On the one hand, an adjustment of the intrastate rate of return

over depreciation under Section 220, extends to intrastate ratemaking. And,

~ while it is clear that Section 152(b) grants the states authority over intrastate

ratemaking (see 476 U.S. at 372-373), it has not been contended that it

authorizes the states to establish their own separations procedures.

16

in light of the Hawaiian Telephone Company’s receipt of transi-

tional supplement payments would appear to be appropriate in

light of its representations that the payments would limit its

need to raise intrastate rates, even though the transitional sup-

plement payments were interstate revenues.'* On the other

hand, the adjustment the PUC made, as the district court

stressed, was not calculated with respect to the transitional sup-

plement payments, but was instead “the product of applying

Hawaiian Plan II for purposes of separations” (id. at 44a).

It is not appropriate for this Court to grant the petition to

resolve this factual dispute. This is especially so since the proper

resolution of this case depends on the treatment of the transi-

tional supplement payments, which were paid from 1981

through 1984 and have ceasec Moreover, arrangements similar

to AT&T’s agreement to make transitional supplement

payments are unlikely to be made in the future because in-

terstate settlements have largely been replaced by access charges

(see note 2, supra). Thus, the dispute here appears to be largely

of historical interest.

c. Petitioners advance one argument with respect to the

merits of the district court’s order that may be of future

relevance. They contend (Pet. 29-30) that the district court erred

in ordering the Hawaii PUC to set rates sufficient to generate

additional revenues of $10.5 million annually (Pet. App. 177a).

In petitioners’ view, once the court found that the PUC had

failed to comply with the FCC’s order, it should have enjoined

the PUC without mandating a specific increase in the amount of

the Hawaiian Telephone Company’s intrastate revenues.

In our view, the specificity of the district court’s order is

troublesome. Section 152(b) clearly gives the states authority

over the setting of intrastate rates. Thus, on the assumption that

the district court was right in enjoining the Hawaii PUC from

'S Indeed, the Hawaiian Telephone Company stated in the first rate increase

proceeding that it had reduced its request in light of the transitional supple-

ment payments, thus apparently agreeing that an adjustment was appropriate

(Pet. App. 155a (dissenting opinion)). Whether the Company in tact reduced

its request as it claimed was never directly addressed by the Hawaii PUC.

n°

17

failing to follow the Ozark Plan, the proper remedy would seem

to be to instruct the PUC to calculate the Hawaiian Telephone

Company's revenue requirement without regard to the dif-

ference between application of Ozark Separations and

Hawaiian Plan I1.'* However, since the PUC found that the

effect of using the Ozark Plan rather than Hawaiian Plan II

would be to increase the Hawaiian Telephone Company’s

revenues by $10.5 million, and that its “appropriate adjustment”

would reduce the company’s revenues by that amount (Pet.

App. 55a), it appears that there is no dispute that the result of

the application of the Ozark Plan formula would be a $10.5

million increase in the Hawaiian Telephone Company’s in-

trastate rates. Petitioners do not suggest that application of the

Ozark Plan would lead to any other result. In that circumstance

(in which the alleged error in the form of the order may be whol-

ly immaterial), and since petitioners did not focus on the argu-

ment that the district court’s remedy is improper in the courts

below (which, accordingly, did not address the issue), there is

no reason for this Court to consider whether the district court

erred in specifying a $10.5 million increase in intrastate rates.

3. Petitioners also contend (Pet. 23-25) that, because of the

Hawaii Supreme Court’s decision affirming the Hawaii PUC’s

first rate order, the courts below were barred by res judicata or

collateral estoppel from determining whether the PUC’s similar

adjustment in the second rate order was appropriate. It seems

plainly correct that the change in circumstances cited by the

'® We see no reason, under the peculiar facts of this case, why the Hawaii

PUC, after applying the Ozark Plan formula, could not then take into account

the amount of the transitional supplement payment the Hawaiian Telephone

Company would receive in setting its intrastate revenue requirement, which is

what the Hawaii Consumer Advocate asked it to do and it declined to do (Pet.

App. 132a). Indeed, as noted (see page S & note 15, supra), the Hawaiian

Telephone Company has acknowledged that such an adjustment would be ap-

propriate here, although it contends that it decreased its requested revenue re-

quirement so that no further adjustment would be appropriate. Since the tran-

sitional supplement payments have ceased, however, whether the Hawaii PUC

could adjust the Hawaiian Telephone Company's revenue requirement in light

of those payments is not an issue of prospective importance.

18

court of appeals —the cessation of the transitional supplement

nayments — warranted a new consideration of the matter. In its

second decision, the Hawaii PUC did not suggest that the cessa-

tion of transitional supplement payments was not a reason to

reconsider the appropriateness of its adjustment. It instead

stated that since the second rate request was based on test year

1983, and transitional supplement payments were made in that

year, it would consider the effect of the payments even though it

knew the payments would cease by the time its order took effect

(Pet. App. 102a-103a). It seems clear that the Hawaii PUC

would have reconsidered the appropriateness of the adjustment

had the test year been 1985.'’ In any event, whether the change

in circumstances here was sufficient so that the Hawaiian

Telephone Company was not precluded from challenging the

appropriateness of the adjustment of its rate of return is a fact-

bound question not warranting review by this Court.'*

'? Indeed, petitioners appear to acknowledge that the PUC’s only basis for

the adjustment was the receipt of the transitional supplement payments, but

they suggest that the Hawaiian Telephone Company’s proper recourse is to

apply for another rate increase based on test year 1985 (Pet. 28-29).

'® Petitioners also contend (Pet. 24) that the Hawaiian Telephone Com-

pany’s appeal of the second rate decision to the Hawaii Supreme Court, which

the Company dismissed following the PUC’s decision on reconsideration,

barred its subsequent Section 401(b) action. The court of appeals did not con-

sider whether the filing of an appeal trom a state ratemaking order precludes a

Section 401(b) action, an argument that petitioners did not press below.

Moreover, the basis for petitioner's argument is ity unsupported contention

that under the Hawaii Rules of Civil Procedure a voluntary dismissal of an ap-

peal is a dismissal with prejudice. In those circumstances, review by this Court

is not warranted

Similarly, petitioners raise Various arguments relating to abstention (Pet.

25-28) that were not raised below until atter the court of appeals had issued its

decision (and hence were not addressed by the court of appeals). These belated

contentions appear to depend on petitioners’ assertion that the Hawaiian

Telephone Company's Section 401(b) suit ts barred by res judicata. Further-

more, there ts little basis tor contending that abstention is appropriate where a

federal statute (§ 401(b)) specitically provides jurisdiction to determine

whether a state agency ts following federal law and there are no ongoing state

proceedings. Accordingly, review of the abstention issues is not warranted

19

CONCLUSION

The petition for a writ of certiorari should be denied.

Respectfully submitted.

CHARLES FRIED

Solicitor General

LAWRENCE Gi. WALLACE

Deputy Solicitor General

CHRISTOPHER J. WRIGHT

Issistant to the Solicitor General

DIANE S. KILLORY

General Counsel

JOHN E. INGLE

Deputy Associate General Counsel

Federal Communications Commission

JUNE 1988

US GOVERNMENT PRINTING OFFICE 1988—202-037/60491