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

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## Record

- **Collection:** Supreme Court brief
- **Document type:** Amicus Curiae Brief
- **Published:** January 1, 1988
- **Citation:** 485 U.S. 956

## Text

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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SS Sa Se ae 10
I eg iw gb abl wie Ata u et ws 19

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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oe ar eee ee. FEE) TS2ED) sss. 1, 12, 14, 16
ee oak tuk gta vesa sian e's 14
ee cdc a nese icsnsvsccaeesces 2
oe ee 7, 40, 14, 12, 3
ey glk gsc k es av bees es davees 2, 13, 14
SS > a hy oe

(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

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385019_1197%3A5. Public record. Not legal advice.