FILED

October 1, 1997

Cecil W. Crowson

Appellate Court Clerk

IN THE COURT OF APPEALS OF TENNESSEE

MIDDLE SECTION AT NASHVILLE

BELLSOUTH TELECOMMUNICATIONS, INC. )

d/b/a SOUTH CENTRAL BELL TELEPHONE )

COMPANY, )

)

Petitioner/Appellant, ) Public Service

) Commission 

VS. ) No. 95-03383

)

H. LYNN GREER, Chairman, SARA KYLE, ) Appeal No.

Director, and MELVIN J. MALONE, Director, ) 01A01-9601-BC-00008

Constituting the Tennessee Regulatory Authority, )

)

Respondents/Appellees. )

BELLSOUTH TELECOMMUNICATIONS, INC., )

) Public Service

Petitioner, ) Commission 

) No. 95-02614

VS. )

) Appeal No.

TENNESSEE PUBLIC SERVICE COMMISSION, ) 01A01-9602-BC-00066

)

Respondent. )

STATE OF TENNESSEE, on relations of )

BELLSOUTH TELECOMMUNICATIONS, INC., )

)

Petitioner/Appellant, ) Davidson Chancery

) No. 95-2965-II

VS. )

)

KEITH BISSELL, STEVE HEWLETT, and ) Appeal No.

SARA KYLE, in their capacity as Commissioners ) 01A01-9601-CH-00016

of the Tennessee Public Service Commission, )

)

Respondents/Appellees. )
APPEAL FROM

THE TENNESSEE PUBLIC SERVICE COMMISSION

NASHVILLE, TENNESSEE

For BellSouth Telecommunications,

Inc.:

Guy M. Hicks, III

Bennett L. Ross

Nashville, Tennessee

James G. Harralson

Atlanta, Georgia

For AT&T Communications of the

South Central States, Inc.:

Val Sanford

John Knox Walkup

Gullett, Sanford, Robinson & Martin

Nashville, Tennessee

For Tennessee Public Service Comm.:

Charles W. Burson

Attorney General & Reporter

Michael E. Moore

Solicitor General

Michael W. Catalano

Associate Solicitor General

Nashville, Tennessee

For Tennessee Consumers:

Charles W. Burson

Attorney General & Reporter

Michael E. Moore

Solicitor General

L. Vincent Williams

Consumer Advocate

Nashville, Tennessee

VACATED AND REMANDED

WILLIAM C. KOCH, JR., JUDGE
1The details of these early efforts are recounted in Tennessee Cable Television Assoc. v.

Tennessee Pub. Serv. Comm’n, 844 S.W.2d 151, 155-58 (Tenn. Ct. App. 1992).

2Tenn. Comp. R. & Regs. r. 1220-4-2-.55 (1993). This rule was revised again in June 1995.

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O P I N I O N

This consolidated appeal of three separate proceedings involves the efforts of

BellSouth Telecommunications, Inc. to take advantage of the 1995 legislation easing

the traditional regulatory burdens on telecommunications service providers. After

making significant adjustments in BellSouth’s reported operating results, the

Tennessee Public Service Commission determined that BellSouth’s current earned

rate of return exceeded its authorized rate of return and that BellSouth was receiving

$56.285 million in excess revenues. The Commission directed BellSouth to reduce

its rates by $56.285 million and set the initial rates in the company’s price regulation

plan accordingly. On this appeal, BellSouth and another intervening party take issue

with the procedures employed by the Commission to consider and act upon

BellSouth’s application for a price regulation plan. We have determined that these

proceedings were not preempted by the federal Telecommunications Act of 1996.

We have also determined that the General Assembly did not give the Commission

authority to adjust BellSouth’s reported operating results and that the Commission

should have convened a contested case hearing when BellSouth took issue with the

Commission’s decision to adjust its reported operating results. Accordingly, we

vacate the Commission’s January 23, 1996 order and all earlier related orders.

I.

Almost ten years ago, the Tennessee Public Service Commission began its

efforts to modernize Tennessee’s telecommunications network and to explore less

cumbersome ways to regulate the telephone companies under its jurisdiction.1

 The

Commission’s work culminated in its first regulatory reform rule that took effect on

January 10, 1993.2 One day later, BellSouth Telecommunications, Inc. filed its

conditional election to operate under this rule. 

On August 20, 1993, the Commission entered an order governing BellSouth’s

rates from 1993 through 1995. See In re Earnings Investigation of South Central Bell

Telephone Co., 1993-1995, Docket No. 92-13527. Based on the results of an
3The Commission specificallydeclined to follow its staff recommendation favoring forecasts

because the company’s actual earnings had been below the forecasted earnings. The Commission

noted that “[c]ontinuation of a policy similar to that which we started in 1990 could, if forecasts

continue to be missed, result in rate decreases for companies that need rate increases, and rate

increases for companies that are overearning.” In re Earnings Investigation of South Central Bell

Telephone Co., 1993-1995, Docket No. 92-13527, at 7. 

4The Consumer Advocate Division in the Office of the Attorney General and Reporter was

created in 1994 for the purpose of representing the interests of Tennessee’s consumers before the

Commission. Tenn. Code Ann. § 65-4-118(c) (Supp. 1996). 

5The Form PSC-3.01 report is a monthly report containing a telephone company’s intrastate

operating results in accordance with rules and forms established by the Commission. See Tenn.

Comp. R. & Regs. r. 1220-4-1-.10(2)(a)(1), - .10(3)(a) (1988).

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earnings investigation that had been commenced in 1992, the Commission concluded

that a range of return on BellSouth’s rate base of 10.65% to 11.85% would be just and

reasonable. The Commission adopted BellSouth’s recommendation that future rate

adjustments and deferred revenue account contributions should be based on the

company’s actualfirst-year results, as opposed to projections.3 It also determined that

there would be no rate adjustment for 1993 because BellSouth’s forecasted rate of

return for 1993 fell within the approved range. This court approved the

Commission’s order in all respects. American Assoc. of Retired Persons v. Tennessee

Pub. Serv. Comm’n, 896 S.W.2d 127 (Tenn. Ct. App. 1994).

In December 1994, the Consumer Advocate4 requested the Commission to

resolve what he considered to be inappropriate expense allocations in BellSouth’s

Form PSC-3.01 reports.5 When the Commission did not respond, the Consumer

Advocate filed a petition on January 23, 1995 requesting the Commission to

commence an investigation into BellSouth’s earnings. In March 1995, the

Commission announced that it was commencing another earnings investigation with

regard to BellSouth.

In the meantime, two competing telecommunications bills were introduced in

the first session of the Ninety-Ninth General Assembly that had convened in January

1995. The avowed purpose of both bills was to ease the traditional regulatory

constraints on local telephone companies and to permit greater competition for local

telecommunications services. Filed concurrently with these bills was a bill to replace

the Commission with a new regulatory entity. On May 26, 1995, the Governor

signed a bill replacing the Commission with the Tennessee Regulatory Authority
6Act of May 24, 1995, ch. 305, 1995 Tenn. Pub. Acts 450.

7Act of May 25, 1995, ch. 408, 1995 Tenn. Pub. Acts 703, codified at Tenn. Code Ann. §§

65-4-101, -123 & -124, 65-4-201, -203, -207, and 65-5-208 to -213 (Supp. 1996).

8Tenn. Code Ann. §§ 65-5-207, -208, -209(f), (h) (Supp. 1996).

9Tenn. Code Ann. § 65-4-124(a).

10Prior to 1995, the Commission could not permit new competitors to enter a market already

served by another provider unless it found that the current service was “inadequate to meet the

reasonable needs of the public.” Tenn. Code Ann. § 65-4-203(a) (Supp. 1996). The 1995 legislation

exempts telecommunications service providers from this requirement. Tenn. Code Ann. § 65-4-

203(c). The 1995 legislation also permits new competitors to enter a market if they demonstrate that

they will adhere to the applicable legal requirements and that they possess sufficient managerial,

financial, and technical abilities to provide the service. Tenn. Code Ann. § 65-4-201(c).

11Tenn. Code Ann. § 65-5-209.

12Tenn. Code Ann. § 65-5-212, -213. For the purposes of this program, a “small business”

is one with annual gross revenues of less than $4,000,000. Tenn. Code Ann. § 65-5-212.

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effective July 1, 1996.6

 Two weeks later, the Governor signed another bill

dramatically altering the regulation of local telephone companies and opening up the

local telecommunications market to unprecedented opportunities for competition.7

The expressed goal of the new regulatory structure was 

to foster the development of an efficient, technologically

advanced, statewide system of telecommunications

services by permitting competition in all

telecommunications services markets, and by permitting

alternative forms of regulation for telecommunications

services and telecommunications services providers. 

See Tenn. Code Ann. § 65-4-123 (Supp. 1996). In broad terms, the 1995 legislation

set out to accomplish this goal in five ways. First, it mandated the universal

availability of basic telephone service at affordable rates and froze basic and nonbasic telephone rates for four years.8

 Second, it required incumbent local telephone

companies to make available non-discriminatory interconnection to their public

networks to other providers.9 Third, it eased the traditional limitations on the ability

of new providers to enter the market.10 Fourth, it provided a transition procedure to

enable existing local telephone companies to take advantage of the newly relaxed

regulatory environment.11 Fifth, it established a five-year, $10 million loan guarantee

program to induce small and minority businesses to enter the telecommunications

market.12
13Tenn. Comp. R. & Regs. r. 1220-4-2-.55 (1995).

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The transition procedure for existing local telephone companies was designed

to be simple and expeditious. It requires an existing local telephone company

desiring to take advantage of the new regulatory environment to file an application

for a price regulation plan and envisions that the Commission will act on the

application within ninety days. See Tenn. Code Ann. § 65-5-209(c). It requires the

Commission to base its decision whether to grant the application on an audit of the

applicant’s most recent Form PSC-3.01 report. See Tenn. Code Ann. § 65-5-209(c),

-209(j).

Tenn. Code Ann. § 65-5-209(c) states that the company’s rates existing on June

6, 1995 will be the initial rates under its price regulation plan if the company’s earned

rate of return on its most recent Form PSC-3.01 report is less than its current

authorized fair rate of return existing when the application was filed. The statute also

empowers the Commission or Authority to initiate a contested rate-making

proceeding if the audit of the Form PSC-3.01 report reveals that the company’s

earned rate of return is greater than its current authorized fair rate of return.

Conversely, the statute permits the company to request a contested rate-making

hearing if the audit reveals that its earned rate of return is less than its current

authorized fair rate of return. 

The Commission’s revised regulatory reform rules took effect one week after

the Governor signed the telecommunications reform legislation.13 On June 20, 1995,

BellSouth filed its application for a price regulation plan. On July 24, 1995, the

Commission permitted AT&T Communications of the South Central States, Inc. to

intervene in the proceeding. Approximately two weeks later, the Commission

directed its staff to conduct the audit of BellSouth’s most recent Form PSC-3.01

report in accordance with Tenn. Code Ann. § 65-5-209(c), (j). 

 On August 17, 1995, the Commission’s staff issued the results of its audit of

BellSouth’s Form PSC-3.01 report for the twelve-month period ending on December

31, 1994. At the outset, the staff determined that, except for four minor

discrepancies, BellSouth’s December 1994 report accurately reflected the company’s

books and records, that it reflected the Commission’s previously ordered rate-making

adjustments, and that it complied with the generally accepted accounting principles
14Tenn. Code Ann. § 65-5-209(c) required an audit of the existing telephone company’s most

recent Form PSC-3.01 report available when the company filed its application for a price regulation

plan. When BellSouth filed its application for a price regulation plan, it had already filed a Form

PSC-3.01 report for the twelve months ending on March 31, 1995. This report, as opposed to the

report for the twelve months ending on December 31, 1994, was BellSouth’s most recent report.

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as adopted in Part 32 of the Uniform System of Accounts. Accordingly, the staff

concluded that BellSouth’s corrected rate of return for 1994, as taken from its books,

was 10.21%.

Even though BellSouth’s corrected rate of return for 1994 was less than its

authorized rate of return in the Commission’s August 20, 1993 order, the

Commission’s staff decided that BellSouth’s audited rate of return should be adjusted

to reflect “out-of-period and non-recurring items” and “known charges” occurring

during the audit period. Accordingly, the staff concluded that BellSouth’s adjusted

rate of return for 1994 was 12.29% and that this adjusted rate of return “more

accurately reflects the earnings potential of the rates in effect at the end of the audit

period.” Since this adjusted rate of return exceeded BellSouth’s currently authorized

rate of return, the staff recommended that the Commission initiate a contested ratemaking proceeding under Tenn. Code Ann. § 65-5-209(c) to establish the initial rates

for Bell South’s price regulation plan. 

The staff’s August 17, 1995 report and recommendations provoked a swift and

strong reaction from BellSouth. On September 12, 1995, the company filed a petition

for a declaratory order pursuant to Tenn. Code Ann. § 4-5-223(a) (1991) questioning

the staff’s authority to recommend adjustments to its corrected Form PSC-3.01report.

In the meantime, the Commission rejected the August 17, 1995 report because it was

based on an incorrect Form PSC-3.01 report14 and directed its staff to audit the proper

Form PSC-3.01 report. 

On September 15, 1995, the Commission’s staff issued its second audit report -

this time covering BellSouth’s Form PSC-3.01 report for the twelve months ending

on March 31, 1995. This report employed the same audit methodology used in the

August 17, 1995 report. The staff made three corrections to BellSouth’s Form PSC3.01 report and then concluded that the corrected report accurately reflected the

company’s books and records and the Commission’s previously ordered rate-making

adjustments and that it complied with the generally accepted accounting principles
15BellSouth had reported a 10.20% earned rate of return on its Form PSC-3.01 report and

contested the corrections made by the Commission’s staff. We need not resolve this dispute here.

16The Commission entered an order on November 9, 1995 formally denying BellSouth’s

petition for a declaratory order. BellSouth filed a Tenn. R. App. P. 12 petition in this court on

January 5, 1996, seeking appellate review of this order. BellSouth Telecommunications, Inc. v.

Greer, App. No. 01A01-9601-BC-00008.

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as adopted in Part 32 of the Uniform System of Accounts. As a result of its

corrections, the staff concluded that BellSouth’s corrected rate of return for the

twelve months ending on March 31, 1995 was 10.30%.15

The staff again recommended making “adjustments” to the results in

BellSouth’s Form PSC-3.01 report. It recommended fifteen “out-of-period”

adjustments to remove items recorded on BellSouth’s books during the twelve

months ending on March 31, 1995 that applied to months prior to April 1994 and for

items recorded outside the audit period that applied to the audit period. It

recommended nine additional adjustments for abnormal or unusual expenses that

were not expected to occur. Finally, it recommended twelve adjustments for “known

changes” reflecting the annualized cost of rate changes or volume changes occurring

during the period covered by the Form PSC-3.01 report. As a result of these

adjustments, the Commission’s staff concluded that BellSouth’s adjusted rate of

return was 12.74%. Since this adjusted rate of return exceeded BellSouth’s currently

authorized rate of return, the staff again recommended that the Commission initiate

a contested rate-making proceeding to establish BellSouth’s initial rates.

On September 20, 1995, the Commission accepted its staff’s September 15,

1995 report and convened a contested case proceeding to set BellSouth’s initial rates.

Approximately one month later, it also convened a contested case proceeding to

consider BellSouth’s petition for a declaratory order concerning the staff’s audit

methodology and directed that the proceeding be consolidated with the pending

contested rate-making proceeding. The consolidated proceeding commenced on

November 1, 1995. After denying BellSouth’s request for a declaratory order without

permitting BellSouth to introduce proof substantiating its challenge to the staff’s

audit methodology and conclusions,16 the Commission proceeded with the proof

establishing a fair rate of return for BellSouth. On November 7, 1995, the

Commission determined that BellSouth’s rate of return should be 10.35% and, based
17The Commission allocated $21.5 million to reduce IntraLATA long distance message toll

rates, $27.4 million to eliminate the $1.50 residential touchtone rates, and $7.4 million to eliminate

the $1.00 zone charge. The Commission also directed BellSouth to waive the service connection

charges for computer lines at schools and libraries and to provide a flat-rate option to customers who

have expressed a desire to be included in Metro Area Calling.

18BellSouth had already appealed from an October 16, 1995 order entered by the Chancery

Court of Davidson County dismissing its petition for a writ of mandamus to compel the Commission

to implement its price regulation plan. State ex rel. BellSouth Telecommunications, Inc. v. Bissell,

App. No. 01A01-9601-CH-00016. This appeal and the appeal from the Commission’s denial of

BellSouth’s petition for a declaratory order, BellSouth Telecommunications, Inc. v. Greer, App. No.

01A01-9601-BC-00008, were consolidated with the appealfromtheCommission’sJanuary 23, 1996

order. Later, on BellSouth’s motion, we dismissed the appeal in the mandamus case on the grounds

of mootness but reserved taxing costs pending the resolution of this appeal. State ex rel. BellSouth

Telecommunications, Inc. v. Bissell, App. No. 01A01-9601-CH-00016 (Tenn. Ct. App. May 3,

1996).

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on the adjustments in its staff’s September 15, 1995 report, directed BellSouth to

reduce its rates by $56.285 million. 

On November 20, 1995, the Commission resumed its hearing to consider

recommendations from BellSouth, the Consumer Advocate, and AT&T concerning

the most appropriate way to reduce BellSouth’s rates by $56.285 million. On January

23, 1996, the Commission entered an order formally determining that BellSouth’s

rate of return should be 10.35% and, therefore, that BellSouth was earning $56.285

million in excess revenues. The Commission prescribed changes in BellSouth’s rate

design to eliminate these excess revenues17 and determined that BellSouth’s rates

would be affordable for the purpose of Tenn. Code Ann. § 65-5-209(c) once these

reductions were in place. 

On February 14, 1996, BellSouth filed a Tenn. R. App. P. 12 petition to review

the Commission’s January 23, 1996 order. BellSouth Telecommunications, Inc. v.

Tennessee Pub. Serv. Comm’n, App. No. 01A01-9602-BC-00066. On February 27,

1996, this court stayed the Commission’s January 23, 1996 order and, in orders filed

on February 27, 1996 and March 30, 1996, consolidated this appeal with two other

related appeals by BellSouth.18 On April 3, 1996, we clarified our earlier stay order

by stating that it applied to both the rate reductions ordered by the Commission as

well as the implementation of BellSouth’s price regulation plan. On this appeal, both

BellSouth and AT&T take issue with numerous aspects of the procedure and

reasoning employed by the Commission to dispose of BellSouth’s application for a

price regulation plan under Tenn. Code Ann. § 65-5-209.
19The Commission ceased to exist on June 30, 1996. While the General Assembly provided

transition provisions with regard to the Commission’s rules, employees and property,seeTenn. Code

Ann. § 65-1-301 to -306 (Supp. 1996), it did not address the status of regulatory proceedings

pending before the Commission or of pending judicial proceedings involving actions of the

Commission. The members of the Authority did not succeed to the offices of the members of the

Commission. However, the Authority has assumed the regulatory power formerly possessed by the

Commission with regard to the matters at issue on this appeal. Accordingly, on July 16, 1996, we

substituted the members of the Authority in place of the members of the Commission.

20Preemption may result from action by Congress itself or by action of a federal agency

acting within the scope of its authority. City of New York v. F.C.C., 486 U.S. 57, 63-64, 108 S. Ct.

1637, 1642 (1988); Louisiana Pub. Serv. Comm’n v. F.C.C., 476 U.S. 355, 369, 106 S. Ct. 1890,

1898-99 (1986). Federal agencies must declare their intent to preempt state law with some

specificity. Schneidewind v. ANR Pipeline Co., 485 U.S. 293, 309 n.12, 108 S. Ct. 1145, 1155 n.12

(1988).

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II.

PREEMPTION BY THE TELECOMMUNICATIONS ACT OF 1996

As a threshold matter, we take up AT&T’s assertion that this appeal should be

remanded to enable the Authority to determine whether the federal

Telecommunications Act of 1996 preempts state law authorizing BellSouth to begin

operating under a price regulation plan.19 AT&T claims that the preemption issue

should be addressed before the approval of BellSouth’s price regulation plan because

the interconnection provisions in state law differ from those in the

Telecommunications Act of 1996 and because state law contains no provision for

modifying a price regulation plan once it has been approved. We have determined

that the possibility of preemption is not so pressing that it requires a remand to the

Authority for further proceedings.

A.

Our federal system of government recognizes the dual sovereignty of the

federal government and the various state governments. Printz v. United States, ___

U.S. ___, ___, 117 S. Ct. 2365, 2376 (1997); Gregory v. Ashcroft, 501 U.S. 452, 457,

111 S. Ct. 2395, 2399 (1991). The states possess sovereignty within their particular

spheres concurrent with the federal government subject only to the limitations

imposed by the Supremacy Clause, U.S. Const. art. VI, cl. 2. Tafflin v. Levitt, 493

U.S. 455, 458, 110 S. Ct. 792, 795 (1990). 

The Supremacy Clause provides Congress with the power to preempt state

law.20 The courts are, however, reluctant to presume that preemption of state law has
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occurred. Building & Constr. Trades Council v. Associated Builders & Contractors

of Massachusetts/Rhode Island, Inc., 507 U.S. 218, 224, 113 S. Ct. 1190, 1194

(1993); Exxon Corp. v. Governor of Maryland, 437 U.S. 117, 132, 98 S. Ct. 2207,

2217 (1978). Thus, the courts work from the assumption that the historic powers of

the states are not displaced by a federal statute unless that was the clear and manifest

intent of Congress. California Div. of Labor Standards Enforcement v. Dillingham

Contr., N.A., ___ U.S. ___, ___, 117 S. Ct. 832, 838 (1997); BFP v. Resolution Trust

Corp., 511 U.S. 531, 544, 114 S. Ct. 1757, 1765 (1994); Louisiana Pub. Serv.

Comm’n v. F.C.C., 476 U.S. at 368, 106 S. Ct. at 1898.

Preemption occurs when there is an outright or actual conflict between federal

and state law. Freightliner Corp. v. Myrick, 514 U.S. 280, 287, 115 S. Ct. 1483, 1487

(1995); Louisiana Pub. Serv. Comm’n v. F.C.C., 476 U.S. at 368, 106 S. Ct. at 1898.

It can also occur by implication when compliance with both federal and state law is

impossible or when state law obstructs the accomplishment of Congress’s objectives.

Boggs v. Boggs, ___ U.S. ___, ___, 117 S. Ct. 1754, 1760-61 (1997); CSX Transp.,

Inc. v. Easterwood, 507 U.S. 658, 663, 113 S. Ct. 1732, 1737 (1993); California Fed.

Sav. & Loan Ass’n v. Guerra, 479 U.S. 272, 281, 107 S. Ct. 683, 689 (1987).

Preemption may also arise when Congress’s legislation is so pervasive that it leaves

no room for state legislative action. Cipollone v. Liggett Group, Inc., 505 U.S. 504,

516, 112 S. Ct. 2608, 2617 (1992); Louisiana Pub. Serv. Comm’n v. F.C.C., 476 U.S.

at 368, 106 S. Ct. at 1898. 

Preemption is basically a question of Congressional intent. Barnett Bank of

Marion County, N.A. v. Nelson, ___ U.S. ___, ___, 116 S. Ct. 1103, 1107 (1996);

Hawaiian Airlines, Inc. v. Norris, 512 U.S. 246, 252, 114 S. Ct. 2239, 2243 (1994);

R.J. Reynolds Tobacco Co. v. Durham County, 479 U.S. 130, 140, 107 S. Ct. 499, 506

(1986). This intent must be reflected in the text and structure of the federal statute.

Ingersoll-Rand Co. v. McClendon, 498 U.S. 133, 138, 111 S. Ct. 478, 482 (1990);

Shaw v. Delta Air Lines, Inc., 463 U.S. 85, 95, 103 S. Ct. 2890, 2899 (1983). The

best evidence of preemptive intent is an express preemption clause. CSX Transp.,

Inc. v. Easterwood, 507 U.S. at 664, 113 S. Ct. at 1737. However, in the absence of

explicit preemption language, the courts must also examine the structure and purpose

of the federal statute for implicit preemptory intent. De Buono v. NYSA-ILA Medical

& Clinical Servs. Fund, ___ U.S. ___, ___, 117 S. Ct. 1747, 1751 (1997); Barnett
21The Telecommunications Act of 1996 “promotes competition and reduces regulation in

order to secure lower prices and higher qualityservices for American telecommunications consumers

and to encourage the rapid development of new telecommunications technologies.” House Rpt. No.

104-204, 104th Cong., 2d Sess. 47, reprinted in 1996 U.S.C.C.A.N. 10, 11. One of the principal

ways it accomplishes its goal is to impose a general duty of interconnection on all

telecommunications carriersthereby requiring local telephone companies to offer competitors access

to part of their networks. 47 U.S.C.A. § 251 (West Supp. 1997); House Rpt. No. 104-204, 104th

Cong., 2d Sess. 48, reprinted in 1996 U.S.C.C.A.N. 10, 11. Tenn. Code Ann. § 65-4-123 states a

similar purpose, and Tenn. Code Ann. § 65-4-124(a) (Supp. 1996) imposes a similar duty of

interconnection on local telephone companies.

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Bank of Marion County, N.A. v. Nelson, ___ U.S. at ___, 116 S. Ct. at 1108; FMC

Corp. v. Holliday, 498 U.S. 52, 56-57, 111 S. Ct. 403, 407 (1990).

The courts begin their inquiry with the presumption that Congress did not

intend to preempt state law. Building & Constr. Trades Council v. Associated

Builders & Contractors of Massachusetts/Rhode Island, Inc., 507 U.S. at 224, 113

S. Ct. at 1194. The proper approach is to reconcile the federal and state laws, Merrill

Lynch, Pierce, Fenner & Smith, Inc. v. Ware, 414 U.S. 117, 127, 94 S. Ct. 383, 389-

90 (1973), rather than to seek out conflict where none clearly exists. Exxon Corp. v.

Governor of Maryland, 437 U.S. at 130, 98 S. Ct. at 2216. State law should be

displaced by federal law only to the extent there is a conflict. Dalton v. Little Rock

Family Planning Servs., ___ U.S. ___, ___, 116 S. Ct. 1063, 1064 (1996).

B.

AT&T asserts that the case should be remanded to the Authority to consider

whether the Telecommunications Act of 1996 preempts state law because the federal

Act’s interconnection provisions differ from their state law counterparts. However,

the mere existence of a federal regulatory program does not imply preemption of

similar state laws. English v. General Electric Co., 496 U.S. 72, 87, 110 S. Ct. 2270,

2279 (1990). Thus, AT&T must demonstrate something more if its preemption

argument is to succeed.

The goals of the federal Telecommunications Act of 1996 and Tennessee’s

1995 telecommunications legislation are similar.21 Neither the federal Act nor the

regulations promulgated by the Federal Communications Commission pursuant to the

Act contain explicit preemption provisions. In fact, the Act specifically states that

“[t]his Act and the amendments made by this Act shall not be construed to modify,
22See also 47 U.S.C.A. § 251(d)(3) (West Supp. 1997) which directs the Federal

Communications Commission not to promulgate regulations that prevent state commissions from

enforcing local regulations, orders, or policies (1) that establish local telephone companies’ access

and interconnection obligations, (2) that are “consistent” with the 47 U.S.C.A. § 251, and (3) that

do not substantially prevent the implementation of the requirements of 47 U.S.C.A. § 251 or the

Telecommunications Act of 1996.

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impair, or supersede Federal, State, or local law unless expressly provided in such Act

or amendments.” Telecommunications Act of 1996, § 601(c)(1), 47 U.S.C.A. § 152

note (West Supp. 1997). Congress included this provision to prevent “affected

parties from asserting that the bill impliedly pre-empts other laws.” House

Conference Report No. 104-458, 104th Cong., 2d Sess., 201, reprinted in 1996

U.S.C.C.A.N. 124, 215. With specific reference to the interconnection issue, the Act

also states that it should not be construed to prohibit state commissions from

enforcing or promulgating regulations or from imposing additional requirements that

“are necessary to further competition in the provision of telephone exchange service

or exchange access” as long as they are “not inconsistent” with the Act. See 47

U.S.C.A. § 261(b), (c) (West Supp. 1997).22

The Telecommunications Act of 1996 contains no explicit preemption

language and does not contain provisions that are in outright or actual conflict with

state law. Accordingly, AT&T’s preemption argument can succeed only if it can

demonstrate that Congress’s regulatory statutes have completely occupied the field,

that it is impossible to comply with the requirements of both the federal and state law,

or that the state law somehow obstructs the accomplishment of the objectives of the

Telecommunications Act of 1996. AT&T has failed on all counts. Nothing in the

text or structure of the Act supports its unfocused preemption claims.

Congressplainlydid not desire to displace local telecommunicationsregulation

when it enacted the Telecommunications Act of 1996. The Act itself makes it clear

that state commissions play a pivotal role in implementing telecommunications

policy. They provide a forum for resolving disputes between existing local telephone

companies and their competitors seeking access to an existing telephone network.

See 47 U.S.C.A. § 252. By the same token, the text of the Act and Tennessee’s

telecommunications statutes do not suggest that telephone companies will be unable

to comply with the requirements of both or that compliance with the state statutes will

somehow obstruct the objectives of the Telecommunications Act of 1996.
-14-

AT&T has already invoked the remedies before the Authority made available

by 47 U.S.C.A. § 252. In March 1996, it initiated interconnection negotiations with

BellSouth. One month later, it requested BellSouth to provide information

concerning BellSouth’s costs for providing certain telecommunications services.

After BellSouth declined to provide the information on the ground that it was not

relevant to the interconnection negotiations, AT&T filed a petition in May 1996

requesting the Authority to resolve the dispute over the issue of access to the

requested information. As far as this record shows, this proceeding remains before

the Authority. This type of proceeding, and others like it, provide the parties with an

appropriate forum to air out and resolve more clearly defined issues concerning the

possible preemptive effect of specific provisions of the Telecommunications Act of

1996 or of the Federal Communications Commission’s regulations.

III.

PRICE REGULATION PLANS UNDER TENN. CODE ANN. § 65-5-209

The determinative issues on this appeal involve the Commission’s process for

considering BellSouth’s application for a price regulation plan. BellSouth essentially

asserts that the Commission and its staff exceeded the plain mandate of Tenn. Code

Ann. § 65-5-209. For its part, AT&T argues that the Commission did not go far

enough in fashioning the details of BellSouth’s price regulation plan. The resolution

of these issues requires us to construe Tenn. Code Ann. § 65-5-209 and other related

statutes enacted by the General Assembly in 1995 to foster the development of an

efficient, technologically advanced, statewide system of telecommunications in

Tennessee.

A.

The search for the meaning of statutory language is a judicial function.

Roseman v. Roseman, 890 S.W.2d 27, 29 (Tenn. 1994); State ex rel. Weldon v.

Thomason, 142 Tenn. 527, 540, 221 S.W. 491, 495 (1920). Courts must ascertain and

give the fullest possible effect to the statute without unduly restricting it or expanding

it beyond its intended scope. Perry v. Sentry Ins. Co., 938 S.W.2d 404, 406 (Tenn.

1996); Kultura, Inc. v. Southern Leasing Corp., 923 S.W.2d 536, 539 (Tenn. 1996).

At the same time, courts must avoid inquiring into the reasonableness of the statute
-15-

or substituting their own policy judgments for those of the legislature. State v.

Grosvenor, 149 Tenn. 158, 167, 258 S.W. 140, 142 (1924); State v. Henley, 98 Tenn.

665, 679-81, 41 S.W. 352, 354-55 (1897); Hamblen County Educ. Ass’n v. Hamblen

County Bd. of Educ., 892 S.W.2d 428, 432 (Tenn. Ct. App. 1994).

When approaching statutory text, courts must also presume that the legislature

says in a statute what it means and means in a statute what it says there. Connecticut

Nat’l Bank v. Germain, 503 U.S. 249, 253-54, 112 S. Ct. 1146, 1149 (1992); Worley

v. Weigel’s, Inc., 919 S.W.2d 589, 593 (Tenn. 1996). Accordingly, we must construe

statutes as they are written, Jackson v. Jackson, 186 Tenn. 337, 342, 210 S.W.2d 332,

334 (1948), and our search for the meaning of statutory language must always begin

with the statute itself. Neff v. Cherokee Ins. Co., 704 S.W.2d 1, 3 (Tenn. 1986); Pless

v. Franks, 202 Tenn. 630, 635, 308 S.W.2d 402, 404 (1957); City of Nashville v.

Kizer, 194 Tenn. 357, 364, 250 S.W.2d 562, 564-65 (1952).

Statutory terms draw their meaning from the context of the entire statute, Lyons

v. Rasar, 872 S.W.2d 895, 897 (Tenn. 1994); Knox County ex rel. Kessel v. Lenoir

City, 837 S.W.2d 382, 387 (Tenn. 1992), and from the statute’s general purpose. City

of Lenoir City v. State ex rel. City of Loudon, 571 S.W.2d 297, 299 (Tenn. 1978);

Loftin v. Langsdon, 813 S.W.2d 475, 478 (Tenn. Ct. App. 1991). We give these

words their natural and ordinary meaning, State ex rel. Metropolitan Gov’t v.

Spicewood Creek Watershed Dist., 848 S.W.2d 60, 62 (Tenn. 1993), unless the

legislature used them in a specialized, technical sense. Cordis Corp. v. Taylor, 762

S.W.2d 138, 139-40 (Tenn. 1988).

The legislative process does not always produce precisely drawn laws. When

the words of a statute are ambiguous or when it is just not clear what the legislature

had in mind, courts may look beyond a statute’s text for reliable guides to the

statute’s meaning. We consider the statute’s historical background, the conditions

giving rise to the statute, and the circumstances contemporaneous with the statute’s

enactment. Still v. First Tenn. Bank, N.A., 900 S.W.2d 282, 284 (Tenn. 1995);

Mascari v. Raines, 220 Tenn. 234, 239, 415 S.W.2d 874, 876 (1967); Davis v.

Aluminum Co. of Am., 204 Tenn. 135, 143, 316 S.W.2d 24, 27 (1958). We also resort

to legislative history. Storey v. Bradford Furniture Co. (In re Storey), 910 S.W.2d
23Some courts have even cited a statute’s legislative history to buttress their interpretation

when a statute is not ambiguous. See, e.g., Worley v. Weigel’s, Inc., 919 S.W.2d at 593; VanArsdall

v. State, 919 S.W.2d 626, 632 (Tenn. Crim. App. 1995). 

-16-

857, 859 (Tenn. 1995); University Computing Co. v. Olsen, 677 S.W.2d 445, 447

(Tenn. 1984); Chapman v. Sullivan County, 608 S.W.2d 580, 582 (Tenn. 1980).23

Courts consult legislative history not to delve into the personal, subjective

motives of individual legislators, but rather to ascertain the meaning of the words in

the statute. The subjective beliefs of legislators can never substitute for what was, in

fact, enacted. There is a distinction between what the legislature intended to say in

the law and what various legislators, as individuals, expected or hoped the

consequences of the law would be. The answer to the former question is what courts

pursue when they consult legislative history; the latter question is not within the

courts’ domain.

Relying on legislative history is a step to be taken cautiously. Piper v. ChrisCraft Indus., Inc., 430 U.S. 1, 26, 97 S. Ct. 926, 941 (1977); North & South Rivers

Watershed Ass’n, Inc. v. Town of Scituate, 949 F.2d 552, 556 n.6 (1st Cir. 1991).

Legislative records are not always distinguished for their candor and accuracy,

Schwegmann Bros. v. Calvert Distillers Corp., 341 U.S. 384, 396, 71 S. Ct. 745, 751

(1951) (Jackson, J., concurring), and the more that courts have come to rely on

legislative history, the less reliable it has become. Rather than reflecting the issues

actually debated by the legislature, legislative history frequently consists of selfserving statements favorable to particular interest groups prepared and included in the

legislative record solely to influence the courts’ interpretation of the statute. National

Small Shipments Traffic Conf., Inc. v. Civil Aeronautics Bd., 618 F.2d 819, 828 (D.C.

Cir. 1980); ANTONIN SCALIA,AMATTER OF INTERPRETATION:FEDERAL COURTS AND

THE LAW 34 (1997); W. David Slawson, Legislative History and the Need to Bring

Statutory Interpretation Under the Rule of Law, 44 Stan. L. Rev. 383, 397-98 (1992);

Kenneth W. Starr, Observations About the Use of Legislative History, 1987 Duke L.

J. 371, 377; Note, Why Learned Hand Would Never Consult Legislative History

Today, 105 Harv. L. Rev. 1005, 1018-19 (1992).

Even the statements of sponsors during legislative debate should be evaluated

cautiously. 2A Norman J. Singer, Statutes and Statutory Construction § 48:15 (rev.
-17-

5th ed. 1992). These comments cannot alter the plain meaning of a statute., D.

Canale & Co. v. Celauro, 765 S.W.2d 736, 738 (Tenn. 1989); Elliott Crane Serv.,

Inc. v. H.G. Hill Stores, Inc., 840 S.W.2d 376, 379 (Tenn. Ct. App. 1992), because

to do so would be to open the door to the inadvertent, or perhaps planned,

undermining of statutory language. Regan v. Wald, 468 U.S. 222, 237, 104 S. Ct.

3026, 3035 (1984). Courts have no authority to adopt interpretations of statutes

gleaned solely from legislative history that have no statutory reference points.

Shannon v. United States, 512 U.S. 573, 583, 114 S. Ct. 2419, 2426 (1994).

Accordingly, when a statute’s text and legislative history disagree, the text controls.

Stromberg Metal Works, Inc. v. Press Mechanical, 77 F.3d 928, 931 (7th Cir. 1996).

B. 

THE SCOPE OF A TENN. CODE ANN. § 65-5-209 AUDIT

The pivotal dispute between BellSouth and the Commission involves the scope

and purpose of the audit required by Tenn. Code Ann. § 65-5-209. BellSouth, citing

the statute, asserts that the audit’s sole purpose is to verify the accuracy of its most

recent Form PSC-3.01 report. The Commission, citing a portion of the statute’s

legislative history, responds that the audit is more akin to a traditional earnings

investigation and that its audit power under Tenn. Code Ann. § 65-5-209 includes the

power to reduce a company’s rate of return and to order the company to reduce its

rates. We turn first to the statute itself for an answer to this dispute.

1.

The 1995 telecommunications reform legislation requires the Commission to

set the initial rates of any incumbent local telephone company that applies for a price

regulation plan. Tenn. Code Ann. § 65-5-209(c) requires that these initial rates must

be the same as the applicant’s existing rates if the rate of return on the company’s

most recent Form PSC-3.01 report is equal to or less than the company’s currently

authorized rate of return. The comparison of the company’s existing rate of return

with its currently authorized rate of return must be preceded by a staff audit of the

company’s most recent Form PSC-3.01 report conducted in accordance with Tenn.

Code Ann. § 65-5-209(j).
24Tenn. Code Ann. § 65-5-209(c) envisions that the process will be completed within ninety

days after the company files its application for a price regulation plan.

25The term “audit” appears only twice in Title 65 of the Tennessee Code Annotated. Other

than Tenn. Code Ann. § 65-5-209, it appear in Tenn. Code Ann. § 65-15-201 (Supp. 1996) which

relates to “safety management audits” for motor carriers. 

-18-

Tenn. Code Ann. § 65-5-209(j) states that the purpose of the audit is “to assure

that the Tennessee Regulatory Authority 3.01 report accurately reflects . . . the

incumbent local exchange telephone company’s achieved results.” The audit must

verify that the company reported its achieved results “in accordance with generally

accepted accounting principles as adopted in Part 32 of the Uniform System of

Accounts.” It must also verify that the company’s reported achieved results reflect

“the ratemaking adjustments to operating revenues, expenses and rate base used in

the authority’s most recent order applicable to the incumbent local exchange

telephone company.” 

Since Tenn. Code Ann. § 65-5-209(a) directs the Commission to set an

incumbentlocal telephone company’s initial rates “[u]sing the procedures established

in this section,” the statute is the sole source of the Commission’s authority to adopt

a price regulation plan. It envisions an expeditious,24 three-phase proceeding. The

purpose of the first phase is to verify the accuracy of the information contained in the

company’s most recent Form PSC-3.01 report. See Tenn. Code Ann. § 65-5-209(j).

The purpose of the second phase is to compare the company’s reported rate of return

with its currently authorized rate of return. See Tenn. Code Ann. § 65-5-209(c). No

further proceedings are required if the company’s rate of return based on its audited

achieved results in its most recent Form PSC-3.01 report is equal to or less than its

currently authorized rate of return. See Tenn. Code Ann. § 65-5-209(c). However,

a third phase is required if the company’s rate of return exceeds its currently

authorized rate of return. The purpose of the third phase is to set the company’s

initial rates in a traditional, rate-setting proceeding.

Tenn. Code Ann. § 65-5-209 contains no specific language suggesting that the

first or second phases of the proceeding have any of the attributes of a traditional ratesetting proceeding. The audit is conducted by the Commission’s staff, and the staff

has no specific statutory authority to make or recommend reductions in a company’s

rate of return. The term “audit” does not appear in any other statute or rule in

conjunction with the Commission’s rate-setting authority.25
26The staff audit report dated September 15, 1995 explains that 

the Staff has followed the statements of the sponsors of the Bills that became the new

law by auditing the Company’s financial records for the twelve months ended March

31, 1995, to determine if the amounts on the TPSC 3.01 Report:

* are accurately taken from the company’s books and

records;

* accurately reflect any Commission ordered rate

making adjustments;

* do not include unusual or abnormal financial

occurrences;

* were calculated following proper accounting rules and

procedures for separating the company’s interstate

and intrastate operations, as well as, its regulated and

nonregulated operations;

* accurately reflect allowable charges from affiliated

companies.

These points were taken from a memo by Dr. Chris Klein, Director of the

Utility Rate Division, and Mike Gaines, Manager of the Telecommunications

Section, to PSC Chairman Keith Bissell in response to a letter from Senator

Rochelle. This memo, and the transcripts of the “legislative intent” statements read

by Senator Rochelle and Representative Purcell on the Senate and House floors, are

attached as Appendices B, C, and D to this Report.

-19-

The textual analysis of Tenn. Code Ann. § 65-5-209 suggests that neither the

Commission nor its staff has the power to adjust any of the figures contained in the

applicant’s Form PSC-3.01 report as long as these reports are correct, based on

required auditing principles, and consistent with the Commission’s previously

ordered rate-making adjustments. The Commission, however, argues that the term

“audit” can mean more than simply a “methodical examination of records with intent

to verify their accuracy.” See National Health Corp. v. Snodgrass, 555 S.W.2d 403,

405 (Tenn. 1977). It asserts that an audit under Tenn. Code Ann. § 65-5-209 includes

investigating, deciding whether reported achieved results are accurate, and

determining the weight to be given these reported results. Citing a staff

memorandum that was read into the legislative record, the Commission insists that

its Tenn. Code Ann. § 65-5-209 authority to audit includes the authority to determine

whether the amounts reported on the Form PSC-3.01 “do not include unusual or

abnormal financial occurrences,” including “known charges.”26

Tenn. Code Ann. § 65-5-209 does not specifically authorize adjustments for

“unusual or abnormal financial occurrences.” Nonetheless, because the General

Assembly may have meant something different when it used the term “audit,” we

have reviewed the legislative history of Tenn. Code Ann. § 65-5-209 to determine
27Senate Bill No. 891/House Bill No. 695, Section 6.

-20-

whether the General Assembly used the term “audit” in its common, ordinary

meaning. 

2.

The original substance of the telecommunications reform legislation was far

different from the substance of the legislation that eventually became law. The

original legislation contained no procedure for re-examining an incumbent local

telephone company’s rates. Instead, it simply provided that the company’s “rates,

terms and conditions for the services provided on February 1, 1995" were just and

reasonable and that these rates would be the company’s initial rates.

27 This provision

encountered immediate opposition from the Consumer Advocate and other consumer

groups because they believed that it would enable BellSouth to earn between $350

and $800 million in excess revenues. 

The concern about excess revenues was the focus of the debate on April 11,

1995, when the Senate State and Local Government Committee considered the bill

and a proposed amendment containing what would later become Tenn. Code Ann. §

65-5-209. Several committee members expressed concern about using BellSouth’s

existing rates because the Commission had not reviewed the company’s rate of return

since 1992. The Consumer Advocate pointed out that the proposed amendment

substituted an “audit of . . . [the Form PSC-3.01 report] . . . for an earnings review.”

Whitfield Burcham, the former director of the Commission’s Utility Rate Division

who appeared on behalf of the American Association of Retired Persons, echoed the

Consumer Advocate’s concern about the efficacy of an audit of the Form PSC-3.01

report. He stated that “we believe that if you have an evidentiary hearing, there’s a

high probability that the evidence will show that the telephone company’s prices need

to be adjusted.” These statements prompted Senator Cohen, the chair of the

committee, and Senator Gilbert to suggest that there should be a full rate review

before BellSouth’s initial rates should be set. A BellSouth representative responded

to this suggestion by stating that “[w]e don’t feel that a rate hearing is necessary

because we are earning within the authorized range.”
-21-

The Senate State and Local Government Committee convened on April 18,

1995 to continue its consideration of the bill. The hearing again focused on the

advisability of conducting a “full-blown rate hearing” before approving BellSouth’s

initial rates. The Commission’s General Utility Counsel described an audit of the

Form PSC-3.01 report as follows:

in order to audit the 3.01 statement . . . it’s not just a matter

of adding up math on a single sheet of paper. It’s knowing

that they [the company] have accurately reported those

figures to us. So that we will send our auditors on site,

they’ll look at all the items as reported on the company’s

books and correlate that with the statement. And that’s

what we mean by a full audit . . . When the staff concludes

their audit, and they may find some discrepancies or some

items that need to be corrected, that’ll be re-presented to

the Commission for approval in a contested case format .

. .

The current Director of the Utility Rate Division also informed the Committee that

the Commission’s staff had already commenced an audit of BellSouth and that they

intended to proceed with the audit no matter which telecommunications bill passed.

He explained that an audit of a Form PSC-3.01 report was an “historical audit” of the

company’s earnings for the preceding twelve months and that the staff planned to

complete its work in September 1995. 

Commissioner Steve Hewlett also pointed out to the Committee that “looking

at the backup on a 3.01 is significantly different than a full blown audit.” Mr.

Burcham repeated that the Form PSC-3.01 report, which he designed, “wouldn’t give

you a representative picture of the future.” In addition, he pointed out that he had

objected to similar language in the Commission’s proposed rule and that he had

attempted “to get the Commission to change that language, and we were

unsuccessful in doing that; and we think this language here is so restrictive that,

really, you’re not going to get an earnings investigation.” The Consumer Advocate

agreed with Mr. Burcham. He pointed out again that the Form PSC 3.01 report

“doesn’t accurately state what prices should be in the future” and that “the rate review

only goes forward if you meet certain tests, and the test is whether or not the PSC

3.01 is within the range. If it’s within the range, the different ranges, then there’s no

earnings review.” 
28See Amendment No. 2 to Amendment No. 2, Senate Journal of the Ninety-Ninth General

Assembly of the State of Tennessee, First Session, 1157-58 (1995) (“Senate Journal”).

-22-

When the Senate State and Local Government Committee considered the bill

again on April 25, 1995, Chairman Cohen offered an amendment requiring the

continuation of rate hearings for basic telephone services through 1996. Senator

Rochelle, the bill’s sponsor, opposed this amendment on the ground that “rate of

return regulation . . . encourages everybody to be fat; it encourages monopolistic

practices; it encourages lack of innovation.” After tabling Chairman Cohen’s

amendment, the Committee approved the bill as amended for passage by a 6 to 3

vote.

The debate over the need for a full-blown rate hearing before permitting

incumbent local telephone companies to operate under a price regulation plan

continued on the Senate floor on May 11, 1995 when the bill came up for third and

final reading. Senator Rochelle offered an amendment to the bill containing what

would later become Tenn. Code Ann. § 65-5-209(j)28 and explained that “[t]here was

a concern that they [the incumbent local telephone companies] could cook the books,

and what this does is expressly state that the Commission shall conduct an audit of

the audit to verify that the figures are correct.” After the Senate tabled Senator

Cohen’s motion to invite Mr. Burcham to address them concerning Senator

Rochelle’s amendment, Senator Rochelle reiterated that the purpose of his

amendment was to “[set] out very exactly that the Public Service Commission has the

. . . power to do a full blown audit of that audit [the Form PSC-3.01 report] to make

sure they’ve been given correct figures.” He also stated categorically that this

amendment “doesn’t address rate setting. This addresses auditing of an audit.”

Upon hearing Senator Rochelle’s explanation of his proposed amendment,

other senators, including Senators Cohen, Cooper, and Gilbert pointed out that the

amendment would permit the Commission to make sure that the numbers are correct

but not to go behind the numbers. These senators asserted that the Commission

should conduct a traditional earnings investigation before approving an incumbent

local telephone company’s initial rates. Senator Rochelle opposed these suggestions

on the ground that the rate hearings demanded by these senators would be a “three-
29Senate Journal, at 1159.

30Amendment No. 8 was tabled by a vote of 18 to 15. See Senate Journal, at 1160.

31Amendment No. 9 failed by a vote of 13 to 16. See Senate Journal, at 1164-65.

32Amendment No. 18 failed under Senate Rule 39(3) by a vote of 11 to 19 to 1. See Senate

Journal, at 1167.

-23-

year ordeal.” The Senate finally adopted Senator Rochelle’s amendment on a voice

vote.29

The adoption of Senator Rochelle’s amendment did not end the matter. The

Senate considered and defeated three other amendments that would have replaced the

audit of the Form PSC-3.01 report with a more traditional rate proceeding. One

amendment would have authorized the Commission to conduct a contested case

proceeding “to determine the justness and reasonableness of the existing rates” and

to “make appropriate adjustments to arrive at just and reasonable rates.”30 Another

amendment was to the same effect.

31 The third amendment would have required the

Commission to “make public the anticipated revenues and profits each provider will

make under such plan.”32

Senator Rochelle opposed each of these amendments on the ground that they

were motivated by the “greed” of BellSouth’s competitors who desired to delay the

company’s ability to compete in a less regulated market. He disagreed with Senator

Gilbert’s observation that it would make “better sense to have a full evidentiary

hearing before we turn those market forces loose.” When asked by Senator Gilbert

to point out the language in his amendment that permitted the Commission to adjust

the rate “if there is a problem with the audit or that things have not been stated as they

should have been stated,” Senator Rochelle responded:

[W]e’re using the existing rules that have already been

adopted by the PSC and that gives them the ability to set

the rates. It wouldn’t be in the bill. We’re using existing

practices, rules, and statutes.

In response to Senator Rochelle’s explanation, Senator Gilbert then pointed out to his

colleagues that 

We’re passing a statutory scheme that may be interpreted

to override every one of those existing rules. Let me tell

you why he can’t point to any language in subsection (c)

that tells you that the PSC will change . . . the rates if they

find out through their audit that something’s wrong,
33Senate Journal, at 1168.

34Amendment No. 17, § 1, 2 House Journal of the Ninety-Ninth General Assembly of the

State of Tennessee, First Session, 1847 (1995) (“House Journal”).

35Amendment No. 17, § 15, House Journal, at 1858.

36Amendment No. 17, § 17, House Journal, at 1859-60.

-24-

because there isn’t any language in that section that allows

them to do that.

Senator Rochelle ended the colloquy by pointing out that the Commission could

adjust the rates if it determined that BellSouth’s earnings were above the company’s

authorized rate of return. The Senate thereafter approved the amended version of

Senate Bill No. 891 by 24 to 8 to 1 vote and sent the bill to the House of

Representatives.33

The House leadership was not satisfied with the Senate’s version of the bill.

Accordingly, when Senate Bill 891 came on for third and final reading on May 24,

1995, Representative Purcell, one of the bill’s House sponsors, convinced his

colleagues to adopt an amendment that added several new provisions to the Senate’s

version of the bill. This amendment contained the restated version of the

telecommunications policy that now appears in Tenn. Code Ann. § 65-4-123,34 the

provision requiring the General Assembly to review the implementation of the Act

every two years that now appears in Tenn. Code Ann. § 65-5-211 (Supp. 1996),35 and

the provisions creating a $10 million small and minority telecommunications

business assistance program that now appear in Tenn. Code Ann. §§ 65-5-212, -

213.36

The House amendment did not alter the portions of the Senate amendment

containing Tenn. Code Ann. § 65-5-209(c) and adding the language that was to

become Tenn. Code Ann. § 65-5-209(j). In fact, the differences between an earnings

investigation and an audit of a Form PSC-3.01 report that had preoccupied the Senate

were never mentioned during the House discussion of the bill. In his closing remarks

after the House cut off further debate on the bill, Representative Purcell told his

colleagues:

I need to, at this point, with your indulgence, read three

brief statements into the record for legislative intent

purposes as this bill leaves this House and goes to the

Senate. The first was requested by the AARP. The audit
37Representative Purcell is referring to an April 13, 1995 memorandum from Chris Klein and

Mike Gaines to Chairman Keith Bissell. The memorandum describes the intended scope of the

compliance audit that had already been initiated by the Commission in March 1995. The

Commission’s staff later cited this memorandum as authority for the scope of the audit of

BellSouth’s most recent Form PSC-3.01 report on which its September 15, 1995 report was based.

38Representative Purcell’s description of the scope of the compliance audit was drawn

completely from the April memorandum written by Messrs. Klein and Gaines. The version of his

remarks appearing in the House Journal contains minor, nonsubstantive differences with his actual

remarks on the House floor. See House Journal, at 1865.

39See House Journal, at 1864. TheHouse Journal infers that Representative Purcell’s remarks

followed the final vote on the bill; however, the tapes of the legislative debates show to the contrary.

-25-

provisions in this bill were requested by the AARP, and it

was their hope that we would, as a matter of legislative

intent, make it clear what we mean. And so, let me say on

the subject of Section 13, legislative intent is that this bill

establishes a process by which consumers are assured

affordable rates. To achieve this, the bill provides that the

rates of incumbent local exchange companies will be based

on an audit of the company’s actual achieved results and

not on a speculative forecast. 

An audit consistent with the provisions of this bill is

currently being performed by the TPSC staff by their

compliance unit of SCB’s TPC 3.01 form. As stated by Dr.

Chris Klein, Director of the PSC’s Utility Rate Division, in

a letter sent earlier this year,37 the TPSC 3.01 form is a

monthly report showing monthly, year-to-date, and twelve

month-to-date financial information including rate of

return, adjusted to reflect the Commission’s prior ratemaking decision. The compliance audit verifies that the

amounts shown on the TPSC 3.01, (1) are actually taken

from the company’s books and records; (2) accurately

reflect any Commission order of rate making adjustments;

(3) do not include unusual or abnormal financial

occurrences; (4) were calculated following proper

accounting rules and procedures for separating the

company’s interstate and intrastate operations, as well as

its regulated and non-regulated operations; and finally,

accurately reflect allowable charges from affiliated

companies. 

Section 13 makes clear that this TPSC 3.01

compliance audit of actual achieved results and without

speculative forecasts will be completed, and affordable

rates will be set pursuant to Section 10 (c) and (j) of this

bill.38

See House Journal, at 1865. The House then passed Senate Bill No. 891 by an 89 to

8 vote.39
40See Senate Journal, at 1631.

41See Senate Journal, at 1631-32.

-26-

The bill containing the House amendments was returned to the Senate and was

called up for consideration on May 25, 1995. On this occasion, Senator Rochelle

read the same statement that Representative Purcell had read the previous day. When

asked to explain how the amended bill would assure affordable telephone service,

Senator Rochelle replied 

we have read . . . for legislative intent purposes, the

language requested that helped everybody understand that

the authority of the Consumer Advocate and the authority

of the PSC and such as that remains in place and is there to

. . . help insure that all reports, audits and such as that are

based on actual figures, not speculative forecasts and such

as that. So I would refer you to the statement of legislative

intent, and to the language that’s previously been in the

bill, plus the language in Amendment No. 2 to 2.

When asked how the House’s version of the bill differed from the Senate’s version,

Senator Rochelle explained that the principal change was the creation of the fund for

small and minority businesses and that “there are language changes, of course, but

they were changes that were worked out with the AARP, they were after consultation

with the AARP, Mr. Burcham, and these other folks.” The Senate proceeded to

concur in the House amendments by a 23 to 10 vote.40 Both Senator Rochelle and

Senator Gilbert, who had voted against the bill and the House amendments, requested

that Senator Rochelle’s statements concerning the scope of the audit of the Form

PSC-3.01 report be included verbatim in the Senate Journal.

41

3.

The legislative history of Tenn. Code Ann. § 65-5-209 reveals several

significant milestones in the formulation of this statute. The original version of the

bill contained no procedure of any sort for reviewing incumbent local telephone

companies’ rates. The bill’s critics objected to this omission because they believed

that it would enable the telephone companies to earn excessive profits and argued that

the Commission should hold one last “full blown” traditional earnings investigation

before the competitive market forces were turned loose. The bill’s proponents

opposed this suggestion and proposed instead that the Commission audit the

telephone companies’ most recent Form PSC-3.01 report. Their adversaries asserted
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that this proposal did not go far enough because auditing the Form PSC-3.01 report

would not provide a representative picture of the companies’ future earnings. The

only concession that the bill’s proponents were willing to make was to specifically

empower the Commission to satisfy itself that the information on the Form PSC-3.01

report was accurate. The opponents tried repeatedly to convince their legislative

colleagues to require one last traditional rate-setting proceeding. When they were

rebuffed three times, they abandoned their efforts to amend the bill and resorted to

the tactic of including a statement in the legislative record containing an

interpretation of the legislation similar to the position that their colleagues had

repeatedly declined to adopt. 

The statements concerning the scope of the audit read into the record by

Senator Rochelle and Representative Purcell are inconsistent with the language of

Tenn. Code Ann. § 65-5-209. By its own terms, this statute, not the Commission’s

other statutes and regulations, governs the manner in which the Commission must

consider and act upon applications for price regulation plans. The Commission’s

powers under Tenn. Code Ann. § 65-5-209 are more limited than its powers in the

context of a traditional earnings investigation, as long as the company’s rate of return

on its Form PSC-3.01 report is less than its currently authorized rate of return. 

The Commission, like any other administrative agency, must conform its

actions to its enabling legislation. Tennessee Pub. Serv. Comm’n v. Southern Ry., 554

S.W.2d 612, 613 (Tenn. 1977); Pharr v. Nashville, C. & St. L. Ry., 186 Tenn. 154,

161, 208 S.W.2d 1013, 1016 (1948). It has no authority or power except that found

in the statutes. Tennessee-Carolina Transp., Inc. v. Pentecost, 206 Tenn. 551, 556,

334 S.W.2d 950, 953 (1960). While its statutes are remedial and should be

interpreted liberally, see Tenn. Code Ann. § 65-4-106 (Supp. 1996), they should not

be construed so broadly as to permit the Commission to exercise authority not

specifically granted by law. Pharr v. Nashville, C. & St. L. Ry., 186 Tenn. at 161, 208

S.W.2d at 1016.

Both the language of Tenn. Code Ann. § 65-5-209 and its legislative history

confirm that the General Assembly established a three-phase process for considering

applications for a price regulation plan. The first and second phases involve verifying

the accuracy of the information in the applicant’s Form PSC-3.01 report and
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comparing the applicant’s reported rate of return with its currently authorized rate of

return. During these phases, the Commission and its staff are empowered to audit the

applicant’s most recent Form PSC-3.01 report for three purposes: (1) to verify that

the information on the report accurately reflects the information in the applicant’s

books and records, (2) to verify that the report was prepared consistently with

generally accepted accounting principles, and (3) to verify that the applicant’s

calculationsreflected the Commission’s previously issued orders. The Commission’s

authority to adjust the figures on the Form PSC-3.01 report is limited to correcting

errors with regard to these three categories. The Commission may only adjust an

applicant’s rate of return after it determines that the rate of return reported on the

applicant’s most recent Form PSC-3.01 report exceeds the applicant’s currently

authorized rate of return.

The Commission exceeded its authority under Tenn. Code Ann. § 65-5-209(c)

& (j) by adjusting the figures in BellSouth’s Form PSC-3.01 report to compensate for

out of period items, abnormal or unusual expenses, and known charges. It had

already concurred with its staff’s conclusion that the rate of return on BellSouth’s

corrected Form PSC-3.01 report was 10.30%. Since this rate of return did not exceed

BellSouth’s currently authorized rate of return of between 10.65 and 11.85%, the

Commission should have found that BellSouth’s existing rates were affordable under

Tenn. Code Ann. § 65-5-209(a) and should have approved BellSouth’s application

for a price regulation plan based on BellSouth’s rates existing on June 6, 1995 as

required by Tenn. Code Ann. § 65-5-209(c).

C.

BELLSOUTH’S RIGHT TO A CONTESTED CASE HEARING

BellSouth also asserts that the Commission should have granted its request for

a contested case hearing to challenge the legal and factual basis for the adjustments

to BellSouth’s Form PSC-3.01 report. The Commission responds that BellSouth is

not entitled to a contested case hearing because the first two phases of a Tenn. Code

Ann. § 65-5-209 proceeding are essentially an audit, and an audit is not a contested

case. The Commission overlooks two significant points. First, BellSouth desired to

challenge the Commission’s interpretation and use of its staff’s audit. Second, the

Commission’s use of the audit affected BellSouth’s legal rights and privileges.
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The Commission relies on National Health Corp. v. Snodgrass, 555 S.W.2d

403 (Tenn. 1977) to support its argument; however, this case is significantly different

from the one before us. In National Health Corp., the state comptroller audited

several related intermediate care facilities to determine whether their charges were

consistent with federal and state law. After the auditors concluded that the company

had overcharged the State, the Department ofPublic Health informed National Health

Corp. that it intended to withhold a portion of its next regularly scheduled payment

to offset the overcharge. Instead of proceeding against the Department of Public

Health, National Health Corp. sought judicial review of the comptroller’s audit under

the Uniform Administrative Procedures Act.

The Chancery Court for Davidson County dismissed National Health Corp.’s

petition for review under Tenn. Code Ann. § 4-5-322 (Supp. 1996) based on its

conclusion that the comptroller’s audit reports were not contested cases, and the

Tennessee Supreme Court affirmed the decision. The court concluded that the audit

was not a contested case because an audit

in and of itself, does not determine any legal rights, duties

or privileges of any party to the audit. It is merely a report

of factual material, with recommendations of the auditor.

If some action is taken or decision is made by a state

official based on the audit report, the decision made or

action taken may constitute a “contested case,” but not the

audit or the report based on the audit, which at most would

be only “evidence” to support the decision or action taken.

National Health Corp. v. Snodgrass, 555 S.W.2d at 405-06.

BellSouth has the right to have its application for a price regulation plan

considered in accordance with Tenn. Code Ann. § 65-5-209. It also has the right to

base its initial rates on its existing rates if its earned rate of return does not exceed its

currently authorized rate of return. The Commission’s decision to trigger a ratesetting proceeding by adjusting the figures on BellSouth’s Form PSC-3.01 report

affected BellSouth’s rights. While the Commission permitted BellSouth to present

legal arguments concerning its authority to adjust its Form PSC-3.01 report, it did not

provide BellSouth with an opportunity to prove that the staff’s findings or

conclusions with regard to the “out-of-period adjustments,” “abnormal or unusual

expenses,” and “known charges” were factually incorrect. Given the interests at
42AT&T made a similar argument with regard to the Commission’s approval of the price

regulation plan for United Telephone Southeast, Inc. This court did not reach the substance of this

argument because a majority of the panel that heard the case concluded that the court lacked

jurisdiction over the appeal. AT&T Communications of the South Central States, Inc. v. Greer,

App. No. 01A01-9512-BC-00556, 1996 WL 697945, at 7 (Tenn. Ct. App. Dec. 6, 1996) (No

Tenn. R. App. P. 11 application filed).

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stake, the Commission should have permitted BellSouth to prove that the suggested

adjustments

were incorrect or not supported by the facts.

IV.

REVIEW OF ALL BELLSOUTH’S RATES AND TARIFFS

AT&T also argues that the Commission did not complete its task because it

failed to review each of BellSouth’s rates and tariffs to determine whether they were

affordable and non-discriminatory.42 We need not address this issue in light of our

holding that the Commission should have approved BellSouth’s application for a

price regulation plan based on the rates in existence on June 6, 1995. Since the

Commission had already determined that these rates and tariffs were just and

reasonable and nondiscriminatory, it is not required to make this determination again

absent some specific reason to do so.

V.

In summary, we vacate the Commission’s January 23, 1996 order and all

related earlier orders with regard to BellSouth’s application for a price regulation

plan. Since the Commission has adopted its staff’s conclusion that BellSouth’s rate

of return reported on its Form PSC-3.01 report for the twelve months ending March

31, 1995 is less than its current authorized rate of return, we remand the case to the

Tennessee Regulatory Authority with directions to approve BellSouth’s application

for a price regulation plan. In light of our conclusion that the Commission did not

have the authority to adjust the actual results on BellSouth’s Form PSC-3.01 report,

we need not consider the remaining issues raised by BellSouth and AT&T. These

issues and all other issues raised by the parties are accordingly pretermitted. 

We tax the costs of this appeal which includes BellSouth Telecommunications,

Inc. v. Greer, App. No. 01A01-9601-BC-00008 and BellSouth Telecommunications,
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Inc. v. Tennessee Pub. Serv. Comm’n, App. No. 01A01-9602-BC-00066 to the

Tennessee Regulatory Authority. We tax the costs of the appeal in State ex rel.

BellSouth Telecommunications, Inc. v. Bissell, App. No. 01A01-9601-CH-00016 to

BellSouth Telecommunications, Inc. and its surety for which execution, if necessary,

may issue.

__________________________

WILLIAMC.KOCH,JR.,JUDGE

CONCUR:

_________________________________

SAMUEL L. LEWIS, JUDGE

_________________________________

BEN H. CANTRELL, JUDGE