Judges Question FCC's Handling Of Nonbasic Services, Embedded Costs in Universal Service
Order
NEW ORLEANS—The FCC's interpretation of the 1996
Telecommunications Act is so broad that it would allow "E-rate" subsidies for
janitorial services in classrooms that have computers, according to a federal
appeals court judge.
That wasn't the only aspect of the FCC's universal service "scheme" that
seemed to trouble Judge Jerry E. Smith, who presided over oral arguments
Dec. 1 in Texas Public Utilities Counsel v. FCC and consolidated cases,
starting at no. 97-60421.
A recurring theme in Judge Smith's sharp questioning of attorneys
representing the FCC and parties intervening on the agency's behalf was the
Commission's decision to extend universal service contribution obligations
and funding eligibility to services other than "plain old telephone service."
Judge John M. Duhe Jr. repeatedly questioned the FCC's decision that
"historical costs don't matter" in determining the size of high-cost subsidies. In
"the real world" of regulated telcos, regulators have required the companies
to depreciate network investments over long periods, leaving them with "sunk
costs" still on their books, he insisted.
Emilio M. Garza rounded out the three-judge panel of the U.S. Court of
Appeals for the Fifth Circuit (New Orleans) that heard challenges to the
FCC's Common Carrier docket 96-45 universal service order (SLCR, May
16, 1997).
Of the three judges on this panel, only Judge Smith was a member of the Fifth
Circuit panel that recently ruled on another important telecom matter: SBC
Communications, Inc.'s claim that the Act's line-of-business restrictions on
Bell companies violate the U.S. Constitution's ban on "bills of attainder."
Judge Smith dissented from the majority's rejection of SBC's arguments; he
said the majority ignored precedent set by U.S. Supreme Court opinions.
Since adopting its 1997 universal service order, the Commission has issued a
series of reconsideration decisions, modified the administration of the
program in response to congressional criticism, and referred some issues
back to the federal-state joint board on universal service. It took the latter
action at the request of that board's state members.
Just days before the court heard oral arguments last week, the joint board
recommended that the FCC change several aspects of its original order,
prompting one challenger—BellSouth Corp.—to drop out of the appeal it
had submitted jointly with GTE Service Corp. and Southwestern Bell
Telephone Co. And two state regulatory agencies early last week asked the
court to delay consideration of certain issues raised in their appeal, although
they continued to seek review of other issues.
During the two-and-a-half-hour oral argument, Judge Smith questioned the
FCC's decision to include revenue from "discretionary services"—such as
call waiting or access charges—in the total "benchmark" revenue it expects a
telco to derive from an access line.
Under the FCC's May 1997 order, only 25% of a carrier's per-line costs
above the revenue benchmark are eligible for "high-cost" subsidies from the
interstate Universal Service Fund (USF).
The joint board's recent recommendations, however, included abolishing
both the 25% limitation and the revenue benchmark. Instead, the board
suggested subsidizing per-line costs at some yet-to-be-determined
percentage above national per-line costs.
FCC General Counsel Christopher J. Wright told the court that in light of the
joint board's recommendation, the issue of including discretionary service
revenue in the benchmark wasn't ripe for review. But he took a stab at
defending that aspect of the 1997 order anyway, saying that "the question is
how much we need to supplement what a company can expect to earn from
its customers."
Judge Smith interjected that the Commission ought to be looking at what
local exchange carriers earn "on the covered services."
Mr. Wright replied that "phone companies would be overcompensated" if
they received more than "a fair return on investment" from basic service
revenues, discretionary service revenues, and USF subsidies combined.
GTE General Counsel William P. Barr told the court that including
discretionary revenues in the benchmark would be unfair because it would (1)
count all existing implicit subsidies that are built into the rates for discretionary
services and (2) ignore disparities in demand for these services. Demand for
discretionary services is lower in rural, high-cost areas than in urban and
suburban areas, Mr. Barr said. This means that revenue for high-cost lines
tends to be lower than the national benchmark, he added.
Judge Smith also questioned the Commission's decision to allow competitive
local exchange carriers to receive high-cost support for universal service
offered exclusively in "bundles" with other services. And he suggested that a
provision of the Act directing the FCC to "enhance" schools' and libraries'
access to "advanced services" doesn't authorize subsidies for those services.
On the issue of giving carriers subsidies for the "basic" portion of bundled
services, Judge Smith said that "nothing in this scheme undermines universal
service more than requiring Aunt Tillie to spend $25 for add-on services"
before being able to buy basic services at a $15-per-month subsidized rate.
"How does it enhance universal service to allow ‘cream skimming?'" he
asked.
Numerous parties had challenged the May 1997 universal service order.
Challengers represented at the Dec. 1 oral argument were incumbent local
exchange carriers GTE Corp., Southwestern Bell Telephone Co., Cincinnati
Bell Telephone Co., Bell Atlantic Corp., and Ameritech Corp.; state utility
regulators from Texas, Florida, New York, Iowa, Pennsylvania, South
Dakota, Vermont, and Kansas; and paging service provider Celpage, Inc.
Attorneys for AT&T Corp. and the Education and Library Network
Coalition (EdLiNC) argued as intervenors on behalf of the FCC.
Barr Attacks ‘Hypothetical' Costs
Not all of the judges' remarks suggested that the FCC had been wrong.
When Mr. Barr of GTE said the Commission was trying to "hide costs" by
covering only the costs of a "hypothetical carrier," Judge Smith said the
FCC's approach was "an incentive for you to be efficient."
Mr. Barr replied that the high-cost subsidy "has to be sufficient to induce
someone to enter the market." He said the FCC wants to "shift costs onto
our backs" because it finds it "politically untenable" either to raise local
service rates or to make the costs explicit in a universal service mechanism.
The FCC "is leapfrogging the process [of competition] and trying to dictate
what would be the outcome of the process" if it were allowed to run its
course, Mr. Barr said. He told the court that the U.S. Supreme Court's 1920
decision in Brooks-Scanlon Co. v. Railroad Commission prevents regulators
from "forcing a company to sell below its costs." Even under the 1989
Supreme Court decision in Duquesne Light Co. v. Barasch, carriers "can't be
left with stranded investment," he said.
Washington attorney Elisabeth H. Ross, representing the Kansas Corporation
Commission and Vermont Department of Public Service, said the FCC had
"violated the law by failing to make rates reasonably comparable" in rural and
urban areas. It also "discriminated" by making the particular support
mechanisms used "dependent on the size of the company" serving the area,
she added.
Douglas E. Hart, an attorney for Cincinnati Bell, said the FCC doesn't have
the jurisdiction to assess USF contributions on intrastate service revenues, as
it did for the "E-rate" (educational discounts) and telemedicine portions of the
fund.
Judge Duhe asked whether section 254 (universal service) of the 1996 Act
was "unambiguous" enough to override section 2(b) of the 1934
Communication Act, which generally precludes FCC regulation of intrastate
communications. Mr. Hart said it wasn't. The only references to intrastate
service in section 254 are in the context of "state powers," he said.
Washington attorney Frederick M. Joyce, appearing for paging provider
Celpage, argued that his client shouldn't be required to contribute to E-rate
subsidies because it wouldn't benefit from "wires in schools and libraries."
On behalf of utility regulators in a number of states, including Florida, New
York, Iowa, Pennsylvania, and South Dakota, Rick Guzman of the Texas
Office of Public Counsel said the universal service mechanisms adopted by
the FCC wouldn't produce support that is "sufficient," as the Act requires.
The FCC, he said, seemed to assume that the states would shift implicit
subsidies in intrastate rates to state universal service funds. But Congress
didn't mandate that states "render their support explicit," Mr. Guzman said.
Richard G. Taranto, appearing for Bell Atlantic and Ameritech, said his
clients were raising "one narrow issue": the FCC's "breach" of section 2(b) of
the 1934 Act by forbidding telcos to disconnect subscribers' local exchange
service for nonpayment of toll charges. Disconnection under such
circumstances is a "term" of providing local exchange service, and section
254 of the 1996 Act doesn't give the FCC authority "to dictate the terms of
provision" of an intrastate service, he said.
Mr. Wright of the FCC told the court that under the Supreme Court's 1984
ruling in Chevron USA, Inc., v. Natural Resources Defense Council, Inc.,
"we win as long as [the agency's interpretation of the statute] is a permissible
reading."
Mr. Wright said section 2(b) of the 1934 Act doesn't limit the FCC's
authority to establish universal service mechanisms affecting intrastate services
because in section 254 of the 1996 Act "nothing needs to be ‘construed.'"
Section 2(b) says that nothing in the Communications Act should be
"construed" to give the FCC authority over intrastate services.
Judge Smith wanted to know if the July 1, 1999, deadline for implementing
the new high-cost funding mechanism for nonrural carriers was "subject to
further revision." The FCC already has set aside a previous Jan. 1, 1999,
implementation deadline. Mr. Wright said the Commission was "aiming for
July 1, but the program can't take effect without further FCC action."
David W. Carpenter attempted to present AT&T's arguments in favor of
allowing high-cost support for basic local exchange service bundled with
other services. But the judges soon led him afield, asking him to defend the
"no-disconnect" rule—on which he said his client had no position—and the
use of forward-looking costs in setting subsidies. "The true cost of using
something today is what it would cost to replace it," he told Judge Duhe.
Telcos' statements that regulators require the use of "artificially long
depreciation terms" are "not true and are absolutely irrelevant," Mr.
Carpenter said. If they were true, the telcos' remedy would be to sue
regulators for breach of contract, he said.
When Judge Duhe persisted in saying that he didn't "understand why
historical cost is irrelevant," Mr. Carpenter said that subsidizing unamortized
investment through the Universal Service Fund would let competitors that win
customers away from telcos "recover" the telcos' unamortized investment.
Allowed finally to return to the "bundling" issue, Mr. Carpenter said states
could impose requirements—subject to the 1996 Act's prohibition on
creating barriers to market entry—for competitors to provide stand-alone
basic local exchange service, just as incumbent telcos must. But if the FCC
requires it as part of its rules implementing section 254, "we'll have to
advertize [unbundled local service]. Nobody in their right mind would spend
advertising money on that," he said.
Washington attorney Matthew C. Ames, appearing for EdLiNC, said parties
contending that only telecom services should receive E-rate and telemedicine
subsidies "assume service has to mean telecom service, even where it doesn't
say telecom service." An earlier version of the legislation did specify telecom
services in connection with E-rate and telemedicine programs, he said, but
the word telecom was removed from that provision in the final version of the
Act.
States Seek Delay on Some Issues
The Kansas Corporation Commission (KCC) and the Vermont Department
of Public Service (DPS) have asked the appeals court to suspend its review
of two issues affected by the joint board's recent recommended decision (see
separate story). The board has advised the FCC to scrap its previous
position that the interstate jurisdiction should support only 25% of required
high-cost support for nonrural telcos.
In their motion filed Nov. 30, the KCC and Vermont DPS asked the court to
hold in abeyance for no more than six months its review of two issues:
(1) Does the 25%-75% federal-state split comply with the statutory standard
that rural and urban rates be "reasonably comparable"? and
(2) Does the 25%-75% split "fail to provide sufficient universal service
support because it does not fund 100% of the universal service need that the
FCC defines and improperly casts on the states the lion's share of the burden
to support that need"?
During last week's oral argument, Judge Smith warned counsel for the states
not to expect a separate ruling on their Nov. 30 motion.
The KCC and the Vermont DPS still want the court to make decisions as
soon as possible on other issues that were unaffected by the joint board's
recommended decision—especially their argument that the FCC must define
clearly what would constitute reasonably comparable rates. Counsel for the
two state agencies told reporters that they weren't "necessarily pleased" with
the idea of a delay on the two issues specified in their Nov. 30 motion, but
that they had made their request so as not to waste "judicial resources." |
