Opinion ID: 1433961
Heading Depth: 2
Heading Rank: 1

Heading: revenue neutrality

Text: K.S.A. 1996 Supp. 66-2005(c) provides: (c) Subject to the commission's approval, all local exchange carriers shall reduce intrastate access charges to interstate levels as provided herein. Rates for intrastate switched access, and the imputed access portion of toll, shall be reduced over a three-year period with the objective of equalizing interstate and intrastate rates in a revenue neutral, specific and predictable manner. The commission is authorized to rebalance local residential and business service rates to offset the intrastate access and toll charge reductions. Any remaining portion of the reduction in access and toll charges not recovered through local residential and business service rates shall be paid out from the KUSF pursuant to K.S.A. 1996 Supp. 66-2008. Rural telephone companies shall reduce their intrastate switched access rates to interstate levels on March 1, 1997, and every two years thereafter, as long as amounts equal to such reductions are recovered from the KUSF. K.S.A. 1996 Supp. 66-2008 provides in relevant part: On or before January 1, 1997, the commission shall establish the Kansas universal service fund, hereinafter referred to as the KUSF. (a) The initial amount of the KUSF shall be comprised of local exchange carrier revenues lost as a result of rate rebalancing pursuant to subsection (c) of K.S.A. 1996 Supp. 66-2005 and subsection (a) of K.S.A. 1996 Supp. 66-2007. Such revenues shall be recovered on a revenue neutral basis. The revenue neutral calculation shall be based on the volumes and revenues for the 12 months prior to September 30, 1996, adjusted for any rate changes. K.S.A. 1996 Supp. 66-2015 provides: The commission shall not enforce any provision of this act nor any order entered by authority of this act which is specifically preempted by the federal act. As noted previously, revenue neutral refers to the replacement of revenues lost to LECs by the ordered reductions in intrastate rates by payments from the KUSF, by an increase in pay telephone rates, and by the elimination of free directory assistance calls. In relevant part, the Court of Appeals stated: The revenue neutral concept is foreign to the Federal Act and was obviously intended by the Kansas Legislature to protect revenues by incumbent LECs facing a $111.6 million loss of earnings as a result of reductions in long distance rates and toll charges.... This legislation is inconsistent with the provisions of the Federal Act, specifically งง 254(b)(4), (b)(5), (f), and (i), and prevented the KCC from performing its regulatory responsibilities in general and insuring compliance by carriers with ง 254(k) of the Federal Act. .... ....The funding level of $111.6 million for the KUSF was preordained by the Kansas Legislature once the concept of revenue neutrality and the prohibition against investigation of profits was written into the Kansas Act.... This made inevitable the KCC decision to set the funding level of the KUSF in an amount equal to the intrastate access and toll reductions. The result is a final order that fully protects incumbent LECs by shifting lost revenues from one corporate pocket to another while requiring all other providers and consumers to bear the financial burden of revenue neutral regulation.... Finally, the KCC order has created a $111.6 million fund that bears no rational relation to the concept of universal service and its cost. ....  [T]he concept of revenue neutrality [is] clearly inconsistent with the obligation of the KCC to ensure just and reasonable rates and charges for the consumers of Kansas. .... CMT and KCFN maintain that KUSF contributions under the KCC orders are not made on an equitable and nondiscriminatory basis. In part, their argument is that the revenue neutral requirement of the Kansas Act gives the LECs an unfair competitive advantage.... We have no doubt that the KCC, upon remand, will give these issues careful consideration. CMT has also asserted that the KCC orders have a discriminatory impact against wireless companies ... and that it is anti-competitive to force them to subsidize the incumbent LECs.... .... Upon remand, the KCC must disregard the concept of revenue neutrality... as it is wholly inconsistent with the Federal Act and the public policy of Kansas as expressed in K.S.A. 1996 Supp. 66-2001. 24 Kan. App.2d at 237-41. In its petition for review, the KCC argued that the Federal Act does not preclude revenue neutrality for local exchange companies when making implicit support explicit; the revenue neutral phase-down of access charges represents a transition to a cost-based universal service fund; if the KUSF had been called something else, such as the Transition Fund, no section of the Federal Act would have been applicable to the revenue neutral phase-down; the KCC, with regard to the KUSF, is more or less following the path of the FCC, with regard to the Federal Universal Service Fund (FUSF); an abrupt transition to cost-based rates could be highly disruptive to the industry and have an unfavorable impact on customers; the Kansas Act's provision for initial revenue neutral recovery, when access charges are reduced, and the KCC orders to that effect, minimize the likelihood of such a disruption; the Kansas Legislature, not the Court of Appeals, has the authority to determine how best to implement the federal mandate to make implicit subsidies explicit; and the legislature has determined that revenue neutrality is required in the first instance during a transition phase. In their joint petition for review, SLA and Independent Telecommunications Group complain, among other things, that the Court of Appeals incorrectly commingled the concept of revenue neutrality with the no audit or earnings review provision. In its petition for review, SWBT argued that, at the federal level, the FCC has taken actions implementing price cap regulation and universal service that mirror the requirements of the Kansas Act and, over a decade ago, the FCC restructured interstate access charges in a revenue neutral manner. SWBT concludes from this that the revenue neutral provisions of the Kansas Act are clearly consistent with federal policies. Sprint addressed the issue in its petition for review by arguing that revenue neutrality is transitional and that because the KCC's decision to establish an initial transitional KUSF, based on current funding requirements subject to future modification, is similar to the FCC's Universal Service Report and Order, it is obvious that the KCC's Order is consistent with the Federal Act. Sprint further argues, among other things, that nowhere in the Federal Act does it state that revenue-neutral plans are prohibited. In its response to the KCC petition for review, Multimedia Hyperion, KCFN, and CMT Partners argued that (1) revenue neutrality was not transitional but a permanent feature of the KUSF; (2) even if it were transitional, the Federal Act contains no exemption for transitional programs; (3) the FCC's means of implementing a federal universal service fund is irrelevant; and (4) revenue neutrality is a means to protect LEC revenue, not a means to ensure affordable telecommunications services for Kansas residents. The KCC takes the position that (1) the FCC, not the courts, has jurisdiction over the matter of barriers to entry; (2) revenue neutrality is a necessary first step in removing implicit support payments; and (3) [T]he KCC is statutorily required to `periodically review the KUSF to determine if the costs of qualified telecommunications public utilities... to provide local service justify modification of the KUSF.' K.S.A. [1996 Supp.] 66-2008(d). Thus, although the KCC was required to assure the local exchange companies revenue neutrality when they reduced their access charges, in the long term the KCC is required to review the cost of providing local service and modify the KUSF accordingly. SWBT argues that revenue neutrality as well as the KUSF is subject to eventual change. The parties have filed a multitude of other supplemental briefs. We have examined the record and studied the briefs. The legislature determines utility policy, and so long as a legislative act does not contravene federal or state law, courts should not interfere with it, even though the action taken appears, to the court, to be unsound and not the best way, or even a good way, to carry out the stated purpose of the act. Prior to the revenue neutrality concept, the KCC had procedures in place to give the telecommunications industry an opportunity to make a profit. A large part of the revenue came from access charges and long distance rates. The legislature heeded the concern that lost revenue from reduced access charges needed to somehow be replaced by the Act. Supposedly, the consumers were paying a fair total price for services prior to the Kansas Act. The legislature based the Act, which replaced the lost revenues, on that premise. That premise, when placed under close scrutiny, does not, and cannot, always show that each part of the cost-shifting act is a fair change. However, a constant arranging and rearranging of additional costs goes on between the regulatory agency and the public utilityโalways with the purpose of arriving at a fair total price. Here, the legislature sets up a procedure to insure that the utilities would have the same revenue under the new Act as they had prior to the Act. We hold the revenue neutral concept is not prohibited by or contrary to the Federal Act. When Kansas passed the Act in question, there were no federal regulations in place. We do not have before us the federal regulations concerning the Federal Act.