$// R&O, Hawaii PUC, Petn CMRS Rate Reg'n, PR Dkt. 94-103, FCC 95-194 //$
$/ 300.332 Mobile services /$
$/ 20.13 State petitions for authority to regulate rates /$
                                                                 FCC 95-194
Before the
                        FEDERAL COMMUNICATIONS COMMISSION
Washington, D.C.
In the Matter of                        )
                                   )
Petition on Behalf of the State of Hawaii,        )         PR Docket No. 94-103
Public Utility Commission, for Authority     )
To Extend Its Rate Regulation of Commercial  )
Mobile Radio Services in the State of Hawaii )
Report and Order
                             Adopted: May 4, 1995;  Released: May 19, 1995
By the Commission:
                              I. INTRODUCTION
     1. On August 8, 1994, the Public Utilities Commission of Hawaii (hereinafter
``Hawaii'' or ``HPUC''), on behalf of that state, petitioned us to retain state regulatory
authority over the rates for intrastate commercial mobile radio services (``CMRS'').
Thirteen parties filed pleadings opposing the petition, and one party filed a pleading
supporting it. By this action, we deny the petition because it fails to satisfy the statutory
standard Congress established for extending state regulatory authority over CMRS rates.
                              II. BACKGROUND
          2. In 1993, Congress amended the Communications Act (``Act'') to revise
fundamentally the statutory system of licensing and regulating wireless (i.e., radio)
telecommunications services. Among other things, Congress: (1) established new
classifications of ``commercial'' and ``private'' mobile radio services (``CMRS'' and
``PMRS,'' respectively) in order to enable similar wireless services to be regulated
symmetrically in ways that promote marketplace competition; (2) reallocated up to 200
megahertz of spectrum from government to private use so as to expand opportunities for
innovative utilization of spectrum by the private sector; and (3) authorized competitive
bidding as a means of improving licensing efficiency within the context of the Act's public
interest goals, which include promoting investment in new and innovative wireless
telecommunications technologies.
          3. Congress also provided that, as of August 10, 1994, no state or local
government shall have authority to regulate ``the entry of or the rates charged'' for CMRS
and PMRS services, although states are permitted to regulate the ``other terms and
conditions'' of CMRS. As an exception to this general rule, Congress also provided that, if
a State had ``any regulation'' concerning the rates for any commercial mobile radio service
in effect as of June 1, 1993, it could retain its rate regulation authority by petitioning the
Commission no later than August 9, 1994, and demonstrating that either: (1) ``market
conditions with respect to such services fail to protect subscribers adequately from unjust
and unreasonable rates or rates that are unjustly or unreasonably discriminatory;'' or (2)
``such market conditions exist and such service is a replacement for land line telephone
exchange service for a substantial portion of the telephone land line exchange service
within such State.''
          4. In our proceeding to implement OBRA, we concluded that, since Congress
intended generally to preempt state and local rate and entry regulation of CMRS, a state
seeking to retain regulatory authority must ``clear substantial hurdles'' in demonstrating
that continued regulation is warranted. We also determined that the nature of a state's
burden of proof is delineated generally by the statute itself. Specifically, we found that:
     [I]n implementing the preemption provisions of the new statute, we have
     provided that states must, consistent with the statute, clear substantial hurdles
     if they seek to continue or initiate rate regulation of CMRS providers. While
     we recognize that states have a legitimate interest in protecting the interests
     of telecommunications users in their jurisdictions, we also believe that
     competition is a strong protector of these interests and that state regulation
     in this context could inadvertently become as [sic] a burden to the
     development of this competition. Our preemption rules will help promote
     investment in the wireless infrastructure by preventing burdensome and
     unnecessary state regulatory practices that impede our Federal mandate for
     regulatory parity.
          5. We also concluded that, while a state should have discretion to submit
whatever evidence it believes is persuasive, a petition to retain regulatory authority must be
grounded on demonstrable evidence. In that regard, we adopted Section 20.13 of our
Rules as a guide to the kinds of evidence and information that we would consider to be
pertinent and helpful to our consideration of a state petition. Moreover, in addition to the
evidence, information, and analysis that a state must submit, we determined that a
petitioning state also is required to identify and provide a detailed description of the
specific existing or proposed rules that it would continue or establish if we were to grant
its petition. We noted that the standards for preemption established in Louisiana PSC do
not apply to petitions submitted under Section 332 of the Act, nor to Section 20.13 of our
Rules. In Louisiana PSC the Supreme Court found that Section 2(b) of the
Communications Act prohibits the Commission from exercising Federal jurisdiction with
respect to ``charges, classifications, practices, services, facilities, or regulations for or in
connection with intrastate communications services.'' Here, Congress has explicitly
amended the Communications Act to preempt state and local rate and entry regulation of
commercial mobile radio services without regard to Section 2(b).
                         III. DECISIONAL FRAMEWORK
          6. In order to prevail on the merits, the HPUC must sustain its statutory
burden of demonstrating that ``market conditions with respect to [commercial mobile
radio] services fail to protect subscribers adequately from unjust and unreasonable rates or
rates that are unjustly or unreasonably discriminatory.'' A question arises as to what
showing is necessary to sustain this burden. Although we addressed this issue in the CMRS
Second Report and Order, we revisit it in view of the parties' debate in this record. As
explained more fully below, we do not agree that our decision to forbear from regulating
interstate CMRS under certain provisions of Title II makes it impossible to grant a state's
petition. At the same time, we conclude that a state must do more than merely show that
market conditions for cellular service have been less than fully competitive in the past. In
order to retain regulatory authority, a state must show that, given the rapidly evolving
market structure in which mobile services are provided, the conduct and performance of
CMRS providers ill-serve consumer interests by producing rates that are not just and
reasonable, or are unreasonably discriminatory.
          7. Since the Budget Act does not explicitly construe or elaborate on the
phrase ``market conditions ... fail to protect subscribers adequately from unjust and
unreasonable rates or rates that are unjustly or unreasonably discriminatory,'' we look to
the ``design of the statute as a whole and its object and policy'' to give that phrase
meaning. We begin that task by reference to other Sections of the Communications Act,
such as Section 201, which also speak of just and reasonable rates. We have generally
described the measure of reasonableness under these Sections in terms of rates that reflect
or emulate competitive market operations. The more formal description, however, is
whether rates fall within a ``zone of reasonableness'' that is bounded at one end by the
``investor interest in maintaining financial integrity and access to capital markets'' and at
the other by the ``consumer interest in being charged non-exploitative rates.'' Regardless
of how the test is characterized, it is well established that determinations whether rates fall
within this zone are not dictated by reference to carriers' costs and earnings, but may take
account of non-cost considerations such as whether rates further the public interest by
tending to increase the supply of the item being produced and sold. These principles
define basic components of a state's demonstration under Section 332. Specifically, a state
must show that market conditions fail to produce rates that fall within a ``zone of
reasonableness,'' which is defined by reference to investor and consumer interests viewed in
the context of relevant public policy considerations.
          8. We also consider the meaning of the relevant language in the statute in the
context of the overarching command of Section 332(c)(3), which is: ``no State ... shall have
any authority to regulate'' CMRS rates. As we concluded in the CMRS Second Report and
Order, that provision, as well as the title of Section 332(c)(3) (``State Preemption''), express
an unambiguous congressional intent to foreclose state regulation in the first instance.
Moreover, OBRA reflects a general preference in favor of reliance on market forces rather
than regulation. Section 332(c), for example, empowers the Commission to reduce CMRS
regulation, and it places on us the burden of demonstrating that continued regulation will
promote competitive market conditions.
          9. Unlike some of the opponents of the HPUC Petition, we do not view the
statutory preference for market forces rather than regulation in absolute terms. If Congress
had desired to foreclose state and Federal regulation of CMRS entirely, it could have done
so easily. It chose instead to delineate the circumstances in which such regulation might be
applied. Tellingly, it did so in the context of a broad statutory framework with several
other principal components. Under the OBRA: (1) substantial amounts of spectrum
reserved for Federal government use are to be identified and transferred to commercial and
public safety uses; (2) this and other available spectrum, if allocated to commercial
telecommunications uses, are to be licensed ``rapidly'' through the use of competitive
bidding systems to promote the development and deployment of new technologies,
products, and services, with the goal of stimulating economic opportunity and
competition; and (3) in contemplation of the deployment of spectrum to commercial
wireless services, and to promote regulatory parity, Congress also articulated definitional
criteria for determining common carrier status consistently so success in the marketplace
will not be determined by regulatory strategies but by technological innovation, service
quality, competition-based pricing decisions, and responsiveness to consumer needs.
          10. Viewing all three components together, the statutory plan is clear.
Congress envisioned an economically vibrant and competitive market for CMRS services. It
understood that such a market was still evolving, and it provided the resources (e.g.,
additional spectrum) and administrative authority (e.g., licensing through competitive
bidding) to accelerate that process. Finally, Congress delineated its preference for allowing
this emerging market to develop subject to only as much regulation for which the
Commission and the states could demonstrate a clear-cut need. The public interest goal of
this Congressional plan is readily discernable. Congress intended to promote rapid
deployment of a wireless telecommunications infrastructure. Robust investment is a
prerequisite to achieving that goal. Thus, in implementing the statute, we have attempted
to facilitate the achievement of this goal by ensuring that regulation creates positive
incentives for efficient investment -- rather than burdening entrepreneurial activities -- and
by establishing a stable, predictable regulatory environment that facilitates prudent business
planning.
          11. We emphasize the important impact on our decisionmaking of these
fundamental elements of the OBRA statutory framework, which have no counterparts in
other sections of the Communications Act. They are devoted exclusively to wireless
telecommunications services, and to CMRS in particular. Our analysis of ``market
conditions'' in the context of Section 332(c)(3) necessarily is governed by that framework.
          12. Section 332(c)(3) must be interpreted in this context; it is an exception to
the general prohibition against state regulation. We conclude that Hawaii, or any other
state, should not be allowed to continue regulating CMRS overall, or cellular service in
particular, merely by demonstrating that the market for cellular service has been less than
fully competitive. Such a standard would effectively allow an exception permitting
regulation to nullify a general prohibition against it, because it is commonly understood
that such conditions have in the past adhered in the cellular marketplace. On numerous
occasions since the Commission established the two-carrier cellular market structure in
1982, we have acknowledged that such a structure provided less than optimal competitive
opportunities. Other Federal agencies have taken similar positions. One year prior to
adoption of the Budget Act, the General Accounting Office (GAO) -- the investigatory arm
of Congress -- examined the industry and reported that ``[w]hile GAO found no evidence
of anticompetitive or collusive behavior in the course of its work, the two-carrier (duopoly)
market system that the FCC created may provide only limited competition in cellular
telephone markets.'' It strains credulity to assert that Congress was blind to these
conditions in 1993 when it broadly prohibited state regulation of CMRS. Thus, we reject
a reading of the statute that allows continued rate regulation merely on a showing of
duopoly conditions, because it is not plausible to conclude that Congress adopted a self-
defeating statutory scheme.
          13. It also is worth noting that this Agency's recognition of imperfect cellular
market conditions has been matched by our commitment to rectify those conditions as
quickly as possible by strengthening and expanding cellular competition rather than by
resorting to heavy-handed regulation. For example, we have attempted to heighten cellular
competition at the retail level by prohibiting restrictions on the resale of cellular services,
except in narrow circumstances where we determined that restrictions intensify competition
between the two licensees in each local market. We also have retooled policies initially
tailored to promote competition in the wireline market upon determining that they were
unlikely to have that effect in the unique setting of wireless telecommunications. Most
especially, we have chosen to address the structural infirmity of the cellular market by
vastly expanding the amount of spectrum available for two-way wireless voice
communications and other innovative wireless services and technologies.
          14. The framework of our CMRS regulatory policy -- moderate regulation,
symmetrical regulation of all services as appropriate, and a preference for curing market
imperfections by lowering entry barriers in order to encourage competition rather than by
regulating existing licensees -- aligns closely with the principal building blocks of OBRA.
Indeed, that statute is in a very real sense a validation of our approach. As the legislative
history of OBRA makes plain, Congress intended those building blocks to establish a
national regulatory policy for CMRS, not a policy that is balkanized state-by-state.
          15. That intention informs our review of petitions filed by states under
Section 332(c)(3). Put simply, Congress intended such petitions to be evaluated in light of a
general preference for allowing the policies embodied in OBRA to have an opportunity to
work. With regard to the statutory prohibition on state regulation in Section 332(c)(3) in
particular, the legislative history leaves no room for doubt on this point by providing
that:
     [i]n reviewing [state] petitions . . . the Commission also should be mindful of
     the Committee's desire to give the policies embodie[d] in section 332(c) an
     adequate opportunity to yield the benefits of increased competition and
     subscriber choice anticipated by the Committee.
          16. In deference to the states, with whom we have and will continue to share
telecommunications jurisdiction under the dual regulatory system of the Communications
Act, we have not presumed to establish a rigid blueprint for the demonstration required
under Section 332(c)(3). Moreover, unlike many opponents of the petition before us, we do
not agree that a state's burden is so great that it is impossible to carry. For example, our
decision to forbear from most CMRS regulation is not dispositive of the question whether
states may initiate or continue rate regulation of such services. We think it unlikely that
Congress would have established two separate statutory procedures -- one to govern our
forbearance, and another to govern states' petitions -- if it intended our decisions under
the former procedure to control automatically the outcomes under both of them. Instead,
we conclude that the exemption in Section 332(c)(3) is designed to permit a state to
demonstrate that market conditions in that state warrant a departure from national OBRA
policies.
          17. Such a demonstration begins but does not end with a showing of less
than fully competitive market conditions. Almost all markets are imperfectly competitive,
and such conditions can produce good results for consumers. In particular, as noted
previously, Congress was aware of the duopoly cellular structure when it generally
proscribed state regulation of CMRS. If a showing of less than perfect competition in the
past could justify granting a state petition, regulation might be imposed in a great many
circumstances. Nothing on this record convinces us that Congress intended that result.
          18. Instead, we believe that a state must establish the existence of an
environment of unjust and unreasonable, or unreasonably discriminatory, rates, given the
dynamic and evolving structure in which CMRS is provided. When we implemented the
Section 332(c)(3) state petition process in the CMRS Second Report and Order, we adopted a
rule designed to elicit the information needed to make such a showing. Such information
permits us to perform a Structure-Conduct-Performance (``SCP'') analysis, which is a
standard paradigm of modern industrial organization analysis. This paradigm, as applied to
the mobile telecommunications industry, holds that market structure is impacted by basic
conditions such as the number of licenses issued by the Commission and the state of
technology. Conduct, in turn, depends on the structure of the market, e.g., on the number
of competitors, the cost structure, and the degree of integration with other wireless
providers. Performance, in turn, depends on the conduct of providers and other industry
participants with regard to activities such as pricing, inter-firm coordination, and technical
standards. Such an analysis permits an evaluation of the degree of rivalry within a
particular industry structure and allows us to determine whether and how consumer
interests are being served by such activity.
          19. Nothing in our rule governing the state petition process suggests that
merely showing the existence of a cellular duopoly structure is enough to support a
petition. In the first instance, the rule signals our insistence that a petition must be based
on demonstrable evidence of anticompetitive activity, or unjust and unreasonable, or
unreasonably discriminatory, rates. For example, in order to determine whether an
anticompetitive environment presently exists within a state, we requested that a petitioning
state produce ``specific allegations of fact,'' to be supported by a sworn affidavit of an
individual with personal knowledge thereof, regarding ``anticompetitive or discriminatory
practices or behavior by commercial mobile radio service providers.'' We also requested
``[e]vidence, information and analysis demonstrating with particularity instances of
systematic unjust and unreasonable rates ... [or a] pattern of such rates, that demonstrates
the inability of the commercial mobile radio service marketplace in the state to produce
reasonable rates through competitive forces,'' and we indicated that we would consider
such evidence ``especially probative.''
          20. In order to assess present market conditions so as to predict the future
effectiveness of market forces within the state, we requested information on the number
and type of CMRS providers in the state as well as their respective customers, and ``an
assessment of the extent to which services offered by the commercial mobile radio service
providers the state proposes to regulate are substitutable for services offered by other
carriers in the state.'' We also requested information and complaint statistics revealing
customer satisfaction with CMRS providers within the state. In addition to this
information, and as a further aid in projecting CMRS growth rates and other trends within
the state, we also requested information on ``trends'' in each commercial radio provider's
rates and customer base and on ``opportunities for new providers to enter into the
provision of competing services'' as well as ``an analysis of any barriers to such entry.'' In
short, although states have the discretion to adduce such evidence in support of continued
rate regulation as they see fit, the comprehensive list of anticipated documentation in
Section 20.13 gives states guidance concerning the evidence of structure, conduct, and
performance that we would find persuasive in evaluating their petitions.
          21. The purposes to which such evidence must be put also are
straightforward. For example, with regard to industry structure, while a state seeking to
regulate two-way mobile voice services may draw attention to the cellular duopoly, it is
incumbent on that state to consider factors that have a direct and substantial impact on
that structure. In particular, in evaluating a cellular-oriented petition, we will look with
disfavor on any petition that fails to consider the immediate and near-term impact of PCS.
Given the general statutory purpose of facilitating PCS-type services, it would be difficult
to ignore or downplay the importance of fundamental structural changes when considering
Section 332(c) petitions.
          22. While PCS is not yet available to the public, it is an accepted antitrust
principle that a firm may be considered in competitive analysis if it could enter the market
in question. Under the caselaw potential entry must be reasonably prompt, a typical
period being two years from the present in order to expect a significant impact on existing
competitors, and there is little doubt that PCS licensees will enter the market for CMRS
in competition with cellular providers within this timeframe. We recently concluded an
auction designed to license rapidly two additional competitive providers of wireless two-
way voice and data communications in every local market in the country. As shown in the
table below, the winning bidders in the Hawaii market have committed to pay substantial
sums for the right to operate wireless systems in that state. Having done so, it is reasonable
to conclude they will deploy the facilities necessary to become operational as quickly as
possible so as to begin recouping their investment.
Broadband PCS Auction Results
Hawaii
MTA #
Freq.
Blk.
State
Market
Winning Bidder
Winning Bid
M047
A
Hawaii
Honolulu
Western PCS
Corporation
$22,361,030
M047
B
Hawaii
Honolulu
PCS PRIMECO, L.P.
$21,675,432
          23. The nature of this impending competitive entry bears emphasis. Unlike
the typical ``ease of entry'' case, where entry by new competitors is hypothetical or may
occur only at an industry's margin, PCS activity is undeniably real. It is not something that
``may'' occur, or that will occur only sporadically. It is happening, and it is happening on a
nationwide scale. As the recently-completed auction demonstrates, some of this entry is
being mounted by large, well-financed entities with long experience and success in the
telecommunications business. That field of competitors will be strengthened further upon
completion of additional spectrum auctions in the near future. Available evidence indicates
that cellular companies, faced with the near-term entry of PCS, have reacted by preparing
for impending competition, i.e., by lowering prices and adopting new technologies. For
example, there are reports that observable declines in cellular prices are attributable in part
to cellular carriers' knowledge that reasonably soon they will face new competition from
PCS licensees. The advent of PCS also appears unambiguously to be having an impact on
the present marketplace; it is repeatedly cited as a precipitating factor in major mergers and
joint ventures in the wireless industry. Thus, the available evidence indicates strongly that
such entry is not speculative. Instead, all evidence suggests that it is empirically real and in
the very near term will be substantial and pervasive. This warrants our consideration when
evaluating a state petition to regulate rates under Section 332(c)(3).
          24. Evidence of industry conduct and performance is also relevant. For
example, a state might demonstrate specific instances of collusive behavior on the part of
licensees. A state also might demonstrate that the statutory purposes of OBRA were not
coming to fruition in that state, or were not likely to do so. We would find highly relevant
any evidence that demand for CMRS services in general and cellular service in particular is
too low to promote market entry by the number of licensees needed to ensure that
facilities-based competition will occur at a level adequate to warrant reliance on market
forces, rather than rate regulation, as a means of protecting consumer interests.
          25. Moreover, a very strong indication that industry conduct and
performance are failing to serve consumer interests adequately would be evidence of a lack
of investment on the part of licensees in CMRS facilities, or a failure by licensees to deploy
adequately new facilities, technologies, and services. Such a showing might support a
conclusion that licensees were restricting the output of a service solely to increase its price,
and such activity might warrant an appropriate regulatory response. Of course, a successful
showing of this nature requires more than evidence that a licensee is earning economic
rents (i.e., pricing above cost). It is readily conceivable that economic rents earned in the
cellular industry also might advance important public policies, such as if they were applied
in furtherance of the statutory goal of promoting investment in the cellular infrastructure.
In that event, the rates underlying such profits would have been paid by those who
ultimately benefit from reinvestment in cellular facilities. Specifically, as a cellular carrier
adds large numbers of customers, it must expand capacity so that the quality of service to
existing and new customers is not degraded. Thus, an analysis of economic performance
must place great weight on reinvestment of profits in this high-growth industry, for,
without such reinvestment, consumers might receive less value for their money. In short,
the significance of economic rents under our Section 332(c)(3) analysis is found not simply
in their existence in the first instance but in their subsequent application.
          26. Finally, we note that SCP evidence typically may be segregated into two
categories: static factors and dynamic factors. For example, prices or rates of return in a
given year are static factors. Growth and investment are dynamic factors. In addition, a
dynamic analysis views price and other static factors at a given point in time in their
relationship to static factors such as price in the future. Thus, a rate of return that looks
high today may be fair and reasonable when looked at in terms of its impact on future
prices. Furthermore, static factors are, as the name implies, static, or even temporary,
whereas the long-term impact of dynamic factors is more important because their effects are
cumulative and more permanent. Thus, we believe that evidence concerning dynamic
factors is a more persuasive market indicator than evidence concerning static factors. Given
the rapidly changing nature of the market in which wireless services are provided and the
statutory purposes of OBRA, we conclude that evidence of where a market is going is
more relevant than evidence of where it has been.
          27. No single factor, standing alone, necessarily would tip the balance for or
against a particular state petition. The statute allows the states flexibility to make their
showings in the best manner they see fit, and it is conceivable that we might find a
showing based primarily on one factor to be persuasive. Those demonstrations that are tied
most closely to the statutory scheme are, of course, the most determinative. Our decisions
in this proceeding and similar proceedings are based on the totality of the evidence.
IV. CONFIDENTIALITY
          28. Hawaii states in its petition that it cannot provide data on the customers
served by CMRS carriers subject to regulation, due to the reluctance of CMRS utilities to
provide such data absent a guarantee that they will be protected from disclosure. Other
states, however, have submitted sensitive commercial data through procedures provided in
this Commission's Rules, and such data have been considered on a confidential basis. Any
uncertainty on Hawaii's part regarding the treatment of confidential data in this proceeding
was dispelled in the First Confidentiality Order, which explicitly invited Hawaii to submit
supplemental data with a request for confidential treatment, in accordance with Sections
0.457, 0.459, and 0.461 of our Rules. Hawaii has not submitted such data. Thus, any
decision not to use confidential data to support Hawaii's Petition is that State's alone.
          29. Mobile Telecommunications Technologies Corp. (MTel) on October 19,
1994, filed supplemental reply comments with a motion for their acceptance, asserting that
the replies filed timely on October 4, 1994, raised for the first time new arguments that
could adversely affect Mtel. Although our rules generally proscribe the filing of
supplemental pleadings in proceedings under Section 332(c)(3), MTel presents good cause
for waiving our rule in this instance. Moreover, nothing on this record suggests that any
party is harmed by accepting MTel's filing, and doing so will expand the record of relevant
record materials and thereby tend to improve it. For these reasons, we grant MTel's
motion and consider its supplemental reply.
V. HAWAII PETITION
     A. Summary of PUC Request
          30. Hawaii regulates five cellular companies and three radio common carriers
in the state under Chapter 269 of the Hawaii Revised Statutes, which confers ``broad
regulatory oversight and investigative authority over all public utility companies.''  The
subject cellular companies are GTE Mobilnet of Hawaii Incorporated (GTE Mobilnet), the
only wireline cellular company in the state; USCOC of Hawaii 3, Inc., d/b/a United States
Cellular (USCOC); Maui Cellular Telephone Company, Inc. (MCTC); Honolulu Cellular
Telephone Company (HCTC); and Cybertel Corporation, d/b/a Cybertel Cellular
(Cybertel). The three radio common carriers are Dr. Mark Goldman, d/b/a Island
Radio-Phone (Goldman); Ram Paging Hawaii (Ram Paging); and General Telcourier, Inc.,
d/b/a Pager One (General Telcourier).
          31. Hawaii asserts its primary objectives in carrying out regulatory functions
are to assure adequate and efficient services and reasonable rates, and to provide a fair
return to regulated CMRS utilities. Hawaii states that it seeks to continue its regulation of
CMRS utilities' rates and tariffs because it is uncertain whether the initial market driven
rates that Petitioner approved for the CMRS utilities when they were certificated are
currently just and reasonable. Hawaii says that financial reports filed in the past three
years indicate CMRS utilities are ``generally beginning to experience either an increase in
profits and a recovery of their prior accumulated losses or potential profits for the future.
From the outset, the CMRS utilities used market driven rates rather than cost and/or the
return on invested capital to structure their rates and tariffs.'' Based on data submitted by
Hawaii, the average after-tax rate of return for cellular carriers was approximately 14 and
19 percent during 1992 and 1993, respectively.
          32. Hawaii asserts that financial data show CMRS utilities generally
experienced heavy losses during the early years, and profitability after three or more years.
The data also show that as the customer base increased, revenues seem to have increased
proportionately more than the incremental increase in the associated operating costs and
the investment in plant and equipment. Hawaii states the increase in rate of return on the
invested plant and equipment has substantially increased over the years, indicating the
return will become greater as more customers subscribe. Hawaii asserts that it ``intends to
test'' the market driven rates against the cost of service and rate of return to determine
whether the current rates and tariffs are excessive:
     In order to conduct this review and monitor the operating costs, the rate of
     return on rate base, and the overall financial condition of each of the CMRS
     utilities, Petitioner must continue to regulate the utilities' rates and tariffs.
     Additionally, by regulating the rates, Petitioner will also be able to
     effectively monitor rate design and structure, as well as the availability and
     quality of service, since each of the CMRS utilities will be required to appear
     before Petitioner for all rate case filings.
          33. Hawaii also states it should continue to regulate CMRS rates and tariffs
to ensure true competition ``once other companies are licensed by the FCC and certificated
by Petitioner'' and contends that ``such regulatory oversight is necessary whether the tariffs
of the CMRS utilities are based on market driven rates or cost and return on invested
capital.'' Hawaii asserts it should at least continue to regulate CMRS rates and tariffs until
the conclusion of its communications infrastructure docket (Docket No. 7702), instituted in
May 1993, which it anticipates in mid-1995.
          34. Hawaii describes trends in the operators' customer base in Attachments 1
and 2 and Exhibits A-1 through A-8 of its Petition. Rate information is provided in
Attachment 3, but Hawaii asserts that it did not include trends because carriers have not
sought a rate increase. The regulatory regime to be applied if the Petition is granted is
described in Attachment 4 and summarized below.
     B. Rate Regulation for Which Continued Authority Is Sought
          35. Hawaii's proposed general order setting standards for CMRS in the state
requires that a tariff be on file and available for public inspection during business hours of
each CMRS business office. The tariff is required to include exchange areas, base rate
areas, and the ``conditions and circumstances'' under which service will be furnished, and
defining the classes and grades of service available to customers. Maps showing the CMRS
utility's service area and facilities are required to be accessible at CMRS business offices as
well.
          36. Hawaii also would require each CMRS utility to file an annual projection
of capital improvements for the ensuing five years, ``in considerable detail'' for the first
year. In addition, Hawaii would require that capital expenditures for single projects
exceeding the lesser of $500,000 or 10 percent of the utility's plant in service be submitted
for review at least 60 days prior to construction or commitment of funds. The
contemplated review process includes a hearing before a HPUC determination that any
portion of the proposal should be disallowed from the rate base.
          37. The proposed general order also addresses customer billing disputes and
related matters, the establishment of customer credit and deposits, and complaint
procedures, engineering standards, inspections and tests, service quality standards, and
safety requirements.
          38. The existing tariffs submitted by Hawaii as Attachment 3 to its Petition
indicate tariffing practice of several years' standing that generally comports with the
proposed general order. Thus, for example, the HCTC tariff includes three cellular service
plans apparently established in March 1986, and definitions of peak and off-peak rate
periods that have not been altered since January 1990. The rates and application of several
options under the basic cellular plan and two options for the bulk service plan each date
from August 1990. The general terms of the HCTC reseller service plan date from March,
1986, while rates under optional plans date from 1989 or 1990.
VI. CASE ON THE MERITS
                                    A. Pleadings of the Parties
          39. Several commenters oppose the petition. BellSouth, GTE, and McCaw
offer the specific perspective of cellular operators, while trade groups, including CTIA and
PCIA, assert more general contentions about the state of cellular competition and standards
for review of petitions. In addition, AMSC urges continued preemption of state authority
over space and ground segments of mobile satellite services (MSS), and AMTA opposes
state rate authority over reclassified private land mobile services.
          40. Support for partial grant of the petition, limiting state rate authority to
cellular providers, comes from resellers, i.e., the NCRA. While Nextel, a competitor of
incumbent cellular operators in its provision of Specialized Mobile Radio (SMR) and wide
area SMR service, only asserts that such a selective grant is warranted in California, other
parties contend the prospect of disparate rate regulation in Hawaii is raised by Nextel's
suggestion. Similarly, E. F. Johnson asserts that if formerly private carriers are subject to
rate regulation, local SMR service should be excepted, and only wide area SMR should be
subject to continued rate authority as applied to cellular service. PCIA, Paging Network,
and Mtel argue Hawaii has provided no basis for asserting rate authority over paging and
other non-cellular CMRS, and these parties, joined by GTE, McCaw, and RCA, also
address whether rate authority limited to cellular service would impair regulatory parity.
          41. Opponents of any continued rate authority state that Hawaii does not
even allege that market conditions fail to protect subscribers, or that the existing state
regulatory regime better protects consumers than the Federal forbearance approach.
Indeed, GTE contends Hawaii's existing regulatory practice has substantially delayed new
service offerings and alternative rate plans. McCaw and BellSouth assert that state
petitions must demonstrate market conditions that are substantially deficient when
compared to national duopoly circumstances, and that Hawaii's limited factual submission
does not identify the state as distinctively problematic. McCaw also asserts that Hawaii
should be required to demonstrate that market conditions cannot be remedied by exercise
of retained Federal authority under Sections 201, 202, and 208 of the Communications Act,
and that the benefits of Hawaii's proposed regulation will exceed costs.
          42. Nextel similarly asserts that, with respect to ``non-dominant'' CMRS
providers such as its SMR and wide area SMR operations, Hawaii has not satisfied the
statutory standard. Nextel contends, however, that state regulation of ``dominant'' CMRS
providers, i.e., cellular operators, is justified.  McCaw responds that both Congress and the
Commission have rejected a regulatory distinction based on ``dominance'' of cellular
service, and notes the Congress considered and rejected a proposal to authorize disparate
regulatory requirements on existing and new service providers. CTIA adds that the
statutory preemption test is not premised on a dominance standard, but on review of
market conditions with an eye toward similar regulatory treatment of similar services.
McCaw also notes that Nextel's support of continued regulation of cellular is unsupported
by economic or other evidence.
          43. As to Hawaii's concern whether existing CMRS rates are reasonable in
light of recently improved CMRS carrier earnings, opponents state that Hawaii's return
data, even if accepted as valid, do not establish the unreasonableness of rates in an
industry facing quite different circumstances than a traditional public utility. Indeed, GTE
and BellSouth assert real cellular rates have declined over the last several years, such that
Hawaii's rates are some of the lowest in the country. Commenters stress that Hawaii has
not otherwise sought to demonstrate or substantiate problematic market conditions, and
iterate the Commission's past determination that cellular industry characteristics in general,
notwithstanding its duopolistic structure, warrant forbearance from selected elements of
Federal regulatory authority.
          44. Opponents also assert that Hawaii's initiation of an inquiry into rate base
regulation is not a continuation of current regulation, and much of its proposed future
regulatory mechanism does not pertain to rates. McCaw states that granting continued
rate authority to enable review of market driven rates by reference to costs and returns is
to invert Section 332 of the Act, which requires an initial demonstration of unreasonable
rates as a basis for grant of rate authority. McCaw notes that Hawaii can file a subsequent
petition if findings in its infrastructure docket enable such a demonstration.
          45. The NCRA supports the Hawaii petition, asserting that until ``effective
competition'' arrives, continued state rate regulation is necessary to restrain the dominating
market power of cellular duopolists. NCRA references reports issued by several Federal
agencies describing the competitive deficiencies of cellular market structure, including the
Department of Justice review undertaken with respect to generic wireless waivers sought by
Bell Operating Companies. For the Commission to reject the several states' petitions,
which are the only form of regulatory oversight absent Federal monitoring of cellular,
NCRA argues, it must reject its own views as well as those of the Department of Justice.
CTIA replies that the Commission's forbearance standard in the CMRS Second Report and
Order was based on a finding of sufficient competition, and that proponents of state rate
authority generally have failed to support their assertions with empirical evidence of
market power. McCaw adds that NCRA's documents in most instances predate spectrum
auction legislation, and all but one predate the CMRS Second Report and Order; none,
asserts McCaw, adduce state-specific findings respecting market conditions.
     B. Discussion
     1. Qualification of Petition
          46. Hawaii has not submitted its currently effective tariffing and rate
regulations, and the absence of requests for rate increases since CMRS carriers initiated
service suggests limited occasion to exercise or develop various aspects of HPUC rate
regulatory practice. Examination of tariffs submitted with the Petition, however, as well as
comments submitted by carriers operating in the state, indicate that while Hawaii has not
yet undertaken detailed rate-based regulation as a routine procedure, its present review of
rates requires tariffing and its review of such tariffs apparently may entail significant and
protracted delay of those tariffs' effectiveness. Nor do cellular carriers operating in
Hawaii dispute the presence of existing rate regulation; although BellSouth characterizes it
as minimal. GTE characterizes the state's review of new service offerings as ``burdensome
and time-consuming,'' asserting that all rates must be filed with and approved by the
HPUC, and that ``most rate or service offerings'' are delayed 30 days before becoming
effective. Even recognizing that each instance of pre-effectiveness review of tariffed service
offerings may not turn directly on the reasonableness of proposed rates, we consider such
review a recognized element in the common understanding of ``rate regulation.'' Hawaii's
existing regime is sufficiently portrayed in the record to demonstrate that ``regulation
concerning the rates for any commercial mobile service'' was being exercised by that state
on June 1, 1993. Therefore, we conclude that Hawaii's Petition is properly before us.
     2. Showing on the Merits
          47. Section 332(c)(3) provides that a state petition shall be granted if it
``demonstrate[s]'' that market conditions for the service at issue fail to protect subscribers
adequately from unjust, unreasonable, or unreasonably discriminatory rates.  On this record
we conclude that Hawaii has not made such a demonstration and, accordingly, we deny its
Petition.
          48. Our decision is based in part on the fact that Hawaii's Petition in
principal part does not argue that market conditions fail to protect subscribers adequately
from unjust, unreasonable, or unreasonably discriminatory rates. Rather, Hawaii principally
requests continued rate authority in order to determine market conditions. The statute is
not satisfied by a showing of uncertainty about the need for rate regulation, however.
Section 332(c)(3) requires a demonstration that market conditions fail to protect subscribers,
not that they may be failing to protect them.
          49. Our decision also is based on other factors.  First, Hawaii does not
address the direct and fundamental changes to the duopoly cellular market structure that
are being realized by PCS and other services, such as wide area SMR.  Second, Hawaii
presents no systematic or authenticated evidence of collusive or otherwise anticompetitive
practices concerning the provision of any CMRS.  Third, Hawaii does not present evidence
showing widespread consumer dissatisfaction with CMRS providers in that state, or discuss
what specific rate regulations are needed to address whatever level of dissatisfaction may
exist.  Fourth, Hawaii fails to advance any persuasive analysis regarding the critical issue of
investment by cellular licensees (or by any other CMRS providers).
          50. Another shortcoming of Hawaii's Petition is that it views any evidence of
market imperfection as proof of a need for continued rate regulation, while all
countervailing evidence is attributed to its regulatory oversight. Even assuming such an
argument is reasonable in theory, the HPUC has not established its factual predicate. The
HPUC does not appear to have prescribed any particular pricing or rate development
formula, and with minor exceptions, all currently effective and previously effective cellular
rates in Hawaii appear to have been carrier-initiated. On this record, we are not persuaded
by the HPUC's implicit argument that, absent continuation of its rate regulation authority,
even for a limited period of time, cellular or other CMRS rates will quickly fall outside the
zone of reasonableness.
          51. Finally, by default, rate of return information becomes the principal
remaining girder upon which Hawaii might rest its case. In general, we are not persuaded
that rate of return evidence alone constitutes sufficient ground to support a petition, even
assuming, arguendo, that Hawaii's pre-tax return data accurately portray carriers' financial
performance. In this regard, the relevant observation is not how such returns compare
with those earned by traditionally regulated public utilities in mature, stable environments.
Rather, any such observation must account for the fact that CMRS is a dynamic and
relatively infant industry that is still developing. A key element of the study of markets is
the recognition that not all industries and markets are at the same stage of development.
Thus, the comparision necessary for determining whether prices are just and reasonable is
not with mature industry, but with high growth industries. It has been shown that the rate
of growth of output is one of the most important determinates of profitability, that is, all
other things being equal, high growth firms (such as the cellular industry) tend to earn high
profits. Furthermore, even if profits are high now, the entry of PCS should contain those
profits increasingly forcefully.  Thus, evidence that cellular industry profits are higher than
that we might allow, for example, for local exchange carriers, is not dispositive.
          52. Hawaii's specific rate of return evidence does not disuade us from this
view. During 1992 and 1993, the weighted average after-tax returns are 14.2 percent and
19.6 percent, respectively. We do not consider this to be high in the context of a high
growth industry. These levels likely will be reduced as the presence of PCS carriers grows
in Hawaii -- an event we think it reasonable to measure in months, not years. That
additional competition should drive prices and rates of return of cellular carriers down even
further. Even now, the data Hawaii provided show negative or very low returns for many
CMRS carriers. For example, during 1993, GTE Mobilenet, Inc.'s operations on the Islands
of Hilo, Maui, Oahu and Kauai show returns of -12.2 percent, 3.39 percent, 8.55 percent,
and -4.79 percent, respectively. Even where profits seem high in a given year, we recognize
that short term profits must be earned to recover losses or lean returns in previous years,
otherwise investment capital may turn to other more profitable investments. In sum, while
we would be concerned if average rates of return were high in the long term, particularly
after accounting for the high growth rate, Hawaii has not demonstrated that such
conditions exist. For that and the foregoing reasons, we deny Hawaii's petition.
VII. REGULATION OF OTHER TERMS AND CONDITIONS
                                    53. Prior to OBRA, Section 332 prohibited the states from imposing ``rate ...
regulation'' upon certain wireless telecommunications carriers. This prohibition was
construed broadly to preclude almost all state regulatory activity. As revised by OBRA,
Section 332(c)(3) now prohibits states from regulating ``the rates charged'' for CMRS, but it
expressly reserves to them the authority to regulate the ``other terms and conditions of
commercial mobile services.'' Although there is no definition of the term ``the rates
charged'' in the statute or its legislative history, there is legislative history regarding the
``other terms and conditions'' language. We believe it is sufficient to allow us to comment
in a preliminary manner on what regulatory activities the HPUC is entitled to continue,
despite our denial of its Petition.
          54. The House of Representatives Committee on Energy and Commerce,
reporting on the House bill that was incorporated into the amended Section 332, noted
that even where state rate regulation is preempted, states nonetheless may regulate other
terms and conditions of commercial mobile radio services. The Committee stated:
     By ``terms and conditions,'' the Committee intends to include such matters
     as customer billing information and practices and billing disputes and other
     consumer protection matters; facilities siting issues (e.g., zoning); transfers of
     control; the bundling of services and equipment; and the requirement that
     carriers make capacity available on a wholesale basis or such other matters as
     fall within a state's lawful authority. This list is intended to be illustrative
     only and not meant to preclude other matters generally understood to fall
     under ``terms and conditions.''
          55. Establishing with particularity a demarcation between preempted rate
regulation and retained state authority over terms and conditions requires a more fully
developed record than is presented by the HPUC Petition and related comments. Thus, we
will not expound at any length on this matter. The legislative history largely speaks for
itself. It is possible to extrapolate certain findings from the legislative history, however, and
we do so here in the interest of minimizing future proceedings directed at this issue.
          56. First, although the HPUC may not prescribe, set, or fix rates in the
future because it has lost authority to regulate ``the rates charged'' for CMRS, it does not
follow that its complaint authority under state law is entirely circumscribed. Complaint
proceedings may concern carrier practices, separate and apart from their rates. In
consequence, it is conceivable that matters might arise under state complaint procedures
that relate to ``customer billing information and practices and billing disputes and other
consumer matters.'' We view the statutory ``other terms and conditions'' language as
sufficiently flexible to permit Hawaii to continue to conduct proceedings on complaints
concerning such matters, to the extent that state law provides for such proceedings.
          57. Second, under the same logic, we also conclude generally that several
other aspects of a state's existing regulatory system may fall outside the statutory
prohibition on rate regulation. For example, a requirement that licensees identify
themselves to the public utility commission, or whatever other agency the state decides to
designate, does not strike us as rate regulation, so long as nothing more than standard
informational filings is involved. Moreover, nothing in OBRA indicates that Congress
intended to circumscribe a state's traditional authority to monitor commercial activities
within its borders. Put another way, we believe Hawaii retains whatever authority it
possesses under state law to monitor the structure, conduct, and performance of CMRS
providers in that state.  We expect that, to the extent any interested party seeks
reconsideration on this issue, it will specify with particularity the provisions of the Hawaii
regulatory practice at issue.
VIII. ORDERING CLAUSES
                                         58. Accordingly, pursuant to Section 332(c)(3)(B) of the Communications
Act, 47 U.S.C.  332(c)(3)(B), IT IS ORDERED that the Petition for Authority To Extend
Rate Regulation of Commercial Mobile Radio Services, filed by the Public Utilities
Commission, State of Hawaii, IS DENIED for the reasons set forth above.
          59. IT IS FURTHER ORDERED that the motion for acceptance of
supplemental reply comments, filed October 19, 1994 by Mobile Telecommunications
Technologies Corp., IS GRANTED.
          60. IT IS FURTHER ORDERED, pursuant to Sections 1.4(b), 1.4(b)(2), and
1.106(f) of the Commission's Rules, that any petition for reconsideration of this order
SHALL BE FILED within thirty days of the day after the day on which public notice of
this action is given.
                         FEDERAL COMMUNICATIONS COMMISSION
                         William F. Caton
                         Acting Secretary
Appendix A
PR Docket No. 94-103 (Hawaii)
Parties Filing Comments or Oppositions to Hawaii Petition
AMSC Subsidiary Corporation in Response to Various State Petitions to Regulate Rates of
CMRS Providers
American Mobile Telecommunications Association, Inc.
BellSouth Corp.
Cellular Telecommunications Industry Assoc.
E.F. Johnson Co.
GTE Service Corp. on behalf of GTE Mobilnet of Hawaii Inc. and GTE Hawaiian
Telephone Company Inc.
McCaw Cellular Communications, Inc.
Mobile Telecommunications Technologies Corp.
National Cellular Resellers Assoc.
Paging Network, Inc. on Petitions by State Authorities to Continue Regulation of CMRS
Rates
Nextel Communications, Inc.
Personal Communications Industry Assoc.
Parties Filing Replies
Cellular Telecommunications Industry Association
GTE Service Corporation
McCaw Cellular Communications, Inc.
PageMart, Inc.
Rural Cellular Association
Supplemental Reply Comments of Mobile Telecommunication Technologies Corp.
Appendix B
                 After-Tax Rates of Return in Hawaii
Company-Market
1989
1990
1991
1992
1993
GTE Mobilnet, Inc. - Hilo
NA
NA
5.10%
-10.06%
-12.20%
GTE Mobilnet, Inc. - Maui
NA
NA
22.82%
1.01%
3.93%
GTE Mobilnet, Inc. - Oahu
NA
NA
-18.40%
-2.25%
8.55%
GTE Mobilnet, Inc. - Kauai
NA
NA
6.87%
-8.78%
-4.79%
USCOC of Hawaii 3, Inc - Island
of Hawaii
NA
NA
-22.76%
-4.20%
2.59%
Maui Cellular Telephone Co. -
Maui
NA
NA
NA
NA
-10.11%
Honolulu Cellular Company -
Oahu
8.95%
12.53%
24.14%
43.12%
43.73%
Cybertel Cellular - Kauai
NA
NA
-28.66%
5.45%
36.97%
Average After-Tax (Weighted By
Average Net Plant and
Equipment)
14.15%
19.64%
Sources: PR Docket No. 94-103, Petition of Public Utilities Commission, State of Hawaii,
For Authority to Extend Its Rate Regulation of Commercial Mobile Radio Services in the
State of Hawaii, filed Aug. 8, 1994, EXHIBIT A-1. Hawaii provided pre-tex rates of return.
The effective tax-rate used for this table is 38.22% (34% Federal, 6.4% State).
                             Appendix C
                    Increase Net Plant in Hawaii
Company-Market
1989
1990
1991
1992
1993
GTE Mobilnet, Inc. - Hilo
NA
NA
1345
2468
2714
GTE Mobilnet, Inc. - Maui
NA
NA
1497
3165
3113
GTE Mobilnet, Inc. - Oahu
NA
NA
10,796
14,148
18,790
GTE Mobilnet, Inc. - Kauai
NA
NA
845
2821
3753
USCOC of Hawaii 3, Inc - Island
of Hawaii
NA
NA
2173
2283
3315
Maui Cellular Telephone Co. -
Maui
NA
NA
NA
NA
214
Honolulu Cellular Company -
Oahu
11,599
15,155
20,067
18,505
18,719
Cybertel Cellular - Kauai
NA
NA
2449
2808
2659
Total Plant and Equipment
NA
NA
39,172
46,198
53,277
Annual Growth
18%
15%
Source: PR Docket No. 94-103, Petition of Public Utilities Commission, State of Hawaii,
For Authority to Extend Its Rate Regulation of Commercial Mobile Radio Services in the
State of Hawaii, filed Aug. 8, 1994, EXHIBITS A-1, A-2, A-3, A-4 and A-5.