Opinion ID: 1961637
Heading Depth: 2
Heading Rank: 1

Heading: Separations Disallowances.

Text: Proper ratemaking for NET requires separating property attributable to intrastate service from that attributable to interstate service to insure that NET's Maine test-year income-and-expense statement reflects only the cost of intrastate service and that NET is compensated for the expenses of such service. The recovery of interstate service costs is regulated by the Federal Communications Commission (FCC). NET complains that the Commission improperly allocated to the interstate jurisdiction certain costs that have been traditionally allocated to the intrastate jurisdiction. The allocations complained of, which involve foreign exchange (FX) service minutes of use and certain administrative adjustments, resulted in a downward adjustment of $1,301,400 in NET's expenses account and a concomitant downward adjustment of $842,000 in the Maine rate base. 1. Foreign Exchange (FX) Minutes of Use. FX service allows a customer located in city A to obtain local-business-line service in distant city B by paying a set monthly charge for a dedicated private line. The FX customer can then place calls to and receive calls from the city B exchange without incurring any toll charges. Whenever the FX service involves exchanges in different states, regulatory jurisdiction is divided between the FCC and the interested state commissions. In the present case, NET assigned the costs associated with interstate FX lines wholly to the interstate jurisdiction but assigned the costs associated with FX minutes of use [21] even in interstate FX serviceentirely to the intrastate jurisdiction. Believing the latter allocation by NET to be improper, the Commission staff argued that correct assignment of the costs associated with interstate FX minutes of use would place those costs within the interstate jurisdiction. The Commission agreed with the staff and accepted the calculations of staff witness Allen Buckalew, reducing NET's expenses and rate base for calculating Maine rates. NET contends that the Commission's allocation of interstate FX minutes of use to interstate jurisdiction was error, arguing that the federal government has preempted the field of federal-state separation of telephone plant used for both interstate and intrastate services so that the Commission is without authority to regulate in this area. Alternatively, NET contends that the Commission's refusal to allocate FX usage to the intrastate jurisdiction creates a hiatus between the federal and Maine jurisdictions: since the FCC allocates all FX minutes of use to the intrastate jurisdiction, some portion of plant and expenses would not be included in either jurisdiction under the Maine Commission's ruling. By creating that hiatus, NET argues that the Commission acted unreasonably, arbitrarily, and in disregard of the goal of uniformity in the separations field. We do not decide whether Congress by statute or the FCC by regulation has preempted the field of federal-state separation of joint telephone plant, for we hold that it was unreasonable for the Commission, in this case, to allocate costs associated with interstate FX minutes of use to the interstate jurisdiction contrary to the present practice of the FCC. We reach that conclusion after careful examination of the federal statutory scheme and the interrelationship between federal and state regulation of telephone plant used jointly for both interstate and intrastate communications. The provisions of the Communications Act of 1934, which define the FCC's authority with respect to the communications industry, apply to all interstate and foreign communication by wire or radio. 47 U.S.C. § 152(a) (1976). [22] In general, jurisdiction over intrastate communication service by wire or radio remains in the states. 47 U.S.C. §§ 152(b) & 221(b) (1976 & Supp. 1980). [23] Under the Act, the FCC is empowered to classify the property of carriers engaged in wire telephone communication and to determine what property of said carrier shall be considered as used in interstate or foreign telephone toll service. 47 U.S.C. § 221(c) (1976). [24] This classification is to be made only after a hearing and upon notice to the carrier and the regulatory commission of any state where the carrier's property is located. Id. Separation of telephone plant used in common for both interstate and intrastate services is thus an integral part of FCC ratemaking and control over interstate communications. Similarly, 35 M.R.S.A. § 51 (1978) imposes on the Commission the duty and responsibility of setting just and reasonable rates for utility service rendered within the State of Maine. In so doing, the Commission must fix a reasonable value upon all the utility's property used or required to be used in its service to the public within the State. 35 M.R.S.A. § 52 (1978). Because NET is engaged in furnishing both interstate and intrastate communication service, the Commission must separate, for valuation purposes, property used in connection with furnishing intrastate service from that used in connection with furnishing interstate service. Failure by the Commission to make properly such jurisdictional separations may constitute reversible error. See City of Calais v. Calais Water & Power Co., 157 Me. 467, 174 A.2d 36 (1961); New England Tel. & Tel. Co. v. Public Util. Comm'n, 148 Me. 374, 94 A.2d 801 (1953). As the state and federal statutory schemes reveal, both the FCC and the Commission must engage in making jurisdictional separations for the purpose of ratemaking. If each agency acts wholly independently of the other in the separations process, the result will be conflicting decisions on whether particular property falls within the interstate or intrastate jurisdictional sphere. Accordingly, the FCC, state utility commissions and the affected telephone carriers have endeavored to achieve a uniform method for making jurisdictional separations. The result of their endeavor is the Separations Manual, jointly issued in 1971 by the FCC and the National Association of Regulatory Utility Commissioners (NARUC). The Separations Manual is intended to provide an outline of uniform separations procedures; i.e., procedures for separating telephone property costs, revenues, expenses, taxes and reserves between state and interstate jurisdictions. Separations Manual §§ 11.11 & 11.12. The FCC has incorporated by reference the Separations Manual as Part 67 of its rules and regulations, 47 C.F.R. § 67.1 (1981), and the Maine Commission concedes that it is normally guided by the Separations Manual in its separations determinations. The attainment of uniformity in the area of jurisdictional separations is important. Otherwise a hiatus between jurisdictions will develop, creating a situation where certain costs of plant and expenses associated with that plant will not be included in either jurisdiction, with the possible consequence that a telephone carrier may be deprived of a fair rate of return when interstate and intrastate jurisdictions are both taken into account. In this case, the Commission assigned the costs associated with interstate FX minutes of use to the interstate jurisdiction on the theory that it was applying the actual-use standard enunciated in Smith v. Illinois Bell Tel. Co., 282 U.S. 133, 51 S.Ct. 65, 75 L.Ed. 255 (1930). According to that standard, the Commission's prime consideration should be the actual use to which the telephone plant is put. The Commission claims to have relied on that standard, which has been accepted by this Court as a guiding principle in the making of separations determinations. See New England Tel. & Tel. Co. v. Public Util. Comm'n, 148 Me. 374, 389, 94 A.2d 801, 808-09 (1953). It claims also that its allocation of FX minutes of use to the interstate jurisdiction is not in conflict with the Manual. However, the Commission's application of the actual-use standard in this case is more apparent than real and its allocation of the costs in question to the interstate jurisdiction runs counter to FCC practice and the understanding of FCC and NARUC in adopting the procedures set forth in the Manual. The method by which the Commission made its allocation was a method prescribed in the Manual for allocating the costs associated with non-traffic-sensitive (NTS) plant in WATS and MTS services, which are different from FX and CCSA services. [25] In doing so, the Commission took an approach that was not contemplated by the FCC and NARUC when they promulgated the Manual. The current separations procedures in the Manual were developed on the theory that the plant costs associated with FX and CCSA minutes of use would continue to be counted as intrastate rather than interstate. In re Hawaiian Tel. Co., 87 F.C. C.2d 864, 872 (1981). It is true that there is an element of arbitrariness in the FCC treatment of plant costs of interstate FX private-line service, for such costs have both interstate and intrastate components. For precisely the same reason, however, the Commission's treatment of NET in the present case, allocating those costs entirely to the interstate jurisdiction, is also open to criticism for arbitrariness. Although the FCC's treatment does not reflect precisely the actual use to which telephone plant is put when interstate FX service is rendered, it does accommodate an intricate balancing of factors, including certain trade-offs, in the complicated field of telecommunications regulation. [26] Although, as the Commission points out, the FCC is in the process of reviewing the propriety of assigning openend private-line services wholly to the intrastate jurisdiction, it is doing so largely because of complaints that under existing procedures certain allocation factors ( see note 25 supra ) are resulting in excessive allocations to the interstate jurisdiction. In re Amendment of Part 67, 78 F.C.C.2d 837, 840 (1980). [27] See also In re Amendment of Part 67 of the Commission's Rules and Establishment of a Joint Board, 89 F.C.C.2d 1, 3-4 (1982). In the present case, the Commission's allocation of FX plant costs to the interstate jurisdiction, contrary to the FCC's practice, disregards the balancing arrangements under which the FCC-NARUC plan has been administered. Regardless of whether the Commission is bound by federal action in allocating NET's interstate FX minutes of use, it should defer to the practice currently followed by the FCC in carrying out the understandings embodied in the Separations Manual. Considering the importance of uniformity in the federal and state regulation of telecommunications, the desirability of according comity to FCC practice in this matter, and fairness in the treatment of NET, we believe that the Commission acted unreasonably in allocating the costs in question to the interstate jurisdiction. 2. Administrative Adjustments. Although the Separations Manual specifies which factors are to be used in making separations determinations, it does not describe the precise method of measuring those factors. The mechanics of making such measurements are considered an administrative matter determined by the telephone carriers themselves. In re New England Tel. & Tel. Co., 42 P.U.R.4th 182, 220 (Me.P.U.C.1981). In this case, NET's parent company, AT&T, had presented to NARUC for consideration several administrative adjustments affecting the measurement of separations factors. Those proposed adjustments concerned calendar-day-usage studies, current composite-station ratios (CSR), Ozark-formula SPF calculations, and simplification of land-and-buildings separations. The Bell operating companies, such as NET, delayed implementation of those proposed administrative adjustments, however, pending the approval of several related substantive changes by the Federal-State Communications Joint Board in the Separations Manual. Noting that NET had recently implemented other administrative changes in the separations process, the Commission imputed to NET the revenue impact of the four contemplated but as yet unimplemented administrative adjustments. The Commission agreed with the staff that NET should not be permitted to employ selectively improvements in cost-measurement techniques. On appeal NET claims that no other state commission has ever unilaterally ordered an operating telephone company to make any of the four proposed administrative adjustments. It argues that the proposed administrative adjustment in the interstate-intrastate apportionment of costs for land and buildings requires a change in the Separations Manual and thus cannot be carried out without FCC approval. NET further argues that for the Commission unilaterally to order NET to implement the four proposed adjustments before the Federal-State Communications Joint Board completes its separations study contravenes the important goal of uniformity in the implementation of separations procedures. NET contends that because of the complexity of the separations process any action on these administrative adjustments should be deferred until the Joint Board, which is currently considering the effect of these and other proposed changes, completes its study. See In re Amendment of Part 67, 78 F.C. C.2d 837 (1980); In re Reservation Telephone Cooperative, No. E-81-5 (F.C.C. July 17, 1981). It was unreasonable for the Commission, in this case, to attribute to NET the revenue impact of the four proposed administrative adjustments. The Commission admits that determining which cost-measurement methods to use is primarily an administrative decision for NET to make. The four proposed adjustments have not yet been implemented by NET and are currently the subject of study and debate by NARUC and the Joint Board. In the circumstances, the Commission should not have imputed to NET the revenue impact of the four proposed changes. As we noted in discussing the Commission's allocation of interstate FX minutes of use to the interstate jurisdiction, the Commission should be chary of acting unilaterally in the separations field. Appropriate resolution of the separations problem is a polycentric task involving many interdependent variables. In this field the treatment in isolation of particular types of administrative measurements of costs may be unsound. It is uncertain at present what effect proposed substantive changes in the Separations Manual may have on the administrative adjustments that NET is considering. Recently, for example, the FCC, accepting a recommendation of the Joint Board, ordered an interim SPF (subscriber plant factor) freeze at 1981 levels in order to limit the magnifying effect, in determining interstate allocations, of the SPF formula on interstate subscriber-line usage. [28] In re Amendment of Part 67 of the Commission's Rules and Establishment of a Joint Board, 89 F.C.C.2d 1, 3 (1982). Also, the FCC has recognized the importance of having the informed, collective, expert opinion of the Joint Board on calendar-day usage, the subject of one of the four adjustments in this case. In re Reservation Telephone Cooperative, supra. It was unreasonable for the Commission to impute to NET the revenue impact of the four inchoate administrative adjustments described above, in view of the fact that they are under study by the Joint Board as part of a systematic reexamination of separations by the FCC and NARUC.