LOUISIANA PUBLIC SERVICE COMM'N v. FEDERAL COMMUNICATIONS COMMISSION (FCC)
Legal provision: Communication Act of 1934
ORAL ARGUMENT OF LAWRENCE G. MALONE, ESQ., ON BEHALF OF THE APPELLANT AND PETITIONERS
Chief Justice Warren E. Burger: We will hear arguments next in Louisiana Public Service Commission against the Federal Communications Commission and related cases.
Mr. Malone, you may proceed whenever you are ready.
Lawrence G. Malone: Mr. Chief Justice, and may it please the Court, this is a consolidated case.
It is here on three petitions for writs of certiorari to the Fourth Circuit Court of Appeals.
They have been brought by California, Ohio, and Florida.
And there is a separate appeal which has been instituted by the state of Louisiana.
The issue raised by these cases is whether the 1934 Communications Act empowers the FCC to preempt the state's regulation of depreciation in accounting matters for local telephone ratemaking purposes.
From 1934 to 1983, the FCC did not attempt to preempt.
It took the position that the Act as written deserved a system of dual, that's state and federal regulation over these matters.
So this dual regulation took hold, and a primitive telephone network eventually became the most technologically advanced, efficient, and reliable system in the world.
Then in 1983 the Commission took a new position.
It found at the behest of the utility industry that the Act as originally written not only allowed but required preemption, and that even if its new reading of the Act was inaccurate, it still could preempt because a failure to do so would frustrate the implementation of its general responsibility to maintain an efficient interstate telephone network.
So it told the states to base local rates on its perception of the correct way to depreciate and to account for the costs in plant which are assigned to the states under the long accepted separations principle.
Now, that decision, if upheld by the courts, will require local telephone customers to pay very substantial telephone rate increases with no assurance that a single dollar of those added payments will go to fulfilling the purpose for which the FCC preempted.
That is, plant modernization.
On appeal, the lower court, the Fourth Circuit, had affirmed by a two to one vote, and it has done so based not on agreement with the Commission's new reading of the Communications Act, but rather on this implied preemption theory, the syllogism that competition will breed a need for plant replacement or accelerated depreciation, and that can be facilitated by preemption.
The lower court should be reversed for several reasons.
The first is that it ignores the will of Congress.
It ignores the fact that Congress back in 1934 carefully constructed a jurisdictional boundary which divided the FCC's jurisdiction from that of the states, and in doing so preserved to the states local depreciation and accounting regulation.
Now, depreciation by definition is the recovery of a capital asset over its life.
So in sitting down to set up depreciation accruals, a company manager or a regulator asks him or herself three questions.
Is this cost or is this asset depreciable?
That is, they classify the property.
The second question is, what is it worth?
What is its value?
That is the valuation of the property.
And the third question is, how long is this going to live, because I want to allow the company to recover this capital value over its life, and that is the process that results in the calculation of a specific depreciation percentage.
Unidentified Justice: That is straight line depreciation.
Lawrence G. Malone: That is straight line depreciation, Your Honor.
Now, having developed this percentage, you then simply apply that to the capital asset and derive specific dollar and cent depreciation charges to recover each year.
The fundamental flaw with the FCC's position that it is able to preempt and able to set local depreciation charges is that each of these three functions, each tool involved in this task has been denied the FCC by Congress.
First, let's look at valuation.
Section 213 of the Communications Act empowers the FCC to value plant, but Section 213(h) expressly and unequivocally provides that the states retain the power to value the plant which is under their jurisdiction.
So, certainly if the FCC cannot dictate to the states the value of the plant which is subject to intrastate regulation, then they can't dictate the specific depreciation accruals which are designed to reimburse companies for the value of that plant.
In other words, the FCC order assumes unto itself a power expressly denied it by Section 213(h).
Let's look at the other two functions, classification of the property and the development of these specific depreciation percentages to apply to the property's value.
Well, the government, the FCC argues that Section 220(b) of the Act, and that is the general depreciation and accounting section, gives them the authority not only to set up classifications and these specific depreciation percentages for the plant under their jurisdiction, but it also gives them the authority to set up classifications and percentages for the plant and the assets under the state's jurisdiction and authority.
That is the new reading.
That is the reading that they never took from 1934 to 1983, and that the Fourt Circuit was not willing to embrace.
But they argue that Section 220(b) expressly authorizes them to take over these two functions, but when one reads Section 220 in its full context, with particular reference to Section 220(j), one sees that Congress did not give them the authority to classify plant or to develop depreciation percentages with respect to the plant in the state's jurisdiction.
Now, of course, this is--
Unidentified Justice: Mr. Malone, what kind of physical plant or equipment are we talking about?
Is it telephone instruments?
Lawrence G. Malone: --It could be telephone poles, Your Honor, telephone lines, all of the plant which really goes into... the vast majority of the plant which goes into the provision of telephone service.
Certainly there is a certain amount of plant which is assigned solely to the provision of intrastate service, but what we are dealing with here is the FCC's attempt to take over the costs mainly which are devoted to jointly used plant.
Unidentified Justice: And jointly used plant means plant whether it is telephones or lines or both that are used for both intrastate and interstate?
Lawrence G. Malone: That's correct, Your Honor.
Now, if one considers the fact that in 1934 the vast majority of this plant was valued on a fair value basis, and fair value is attune inextricably to the length of lives, it really makes no sense that Congress would have ever told the states that you can value the plant but say to the FCC with the states valuing it, you can assume how long it is going to live.
That is like asking two people to drive a car at one time with one person having their foot on the accelerator and the other person steering.
It just couldn't possibly work.
But the FCC here is saying that it has the power to classify this property, and really its position misreads Section 220(j).
Now, that was a provision, Your Honors, which caused a great deal of dispute in the enactment of the Communications Act.
The Senate wanted a 220(j) which would have assumed preemptive powers with the FCC, and would have called for a study to look into the reasonableness of undoing these powers, and the House wanted a 220(j) which would have expressly prohibited preemption.
So, a conference committee was called, and it ultimately gave both sides part of the loaf.
It gave the House the continuation of the status quo, which in 1934 was dual regulation with the states regulating these depreciation and accounting functions for local matters, and it gave the Senate a direction, not a request, but a direction to the FCC to study this dual regulation, and to come back and tell us whether it works.
If it is causing problems, do a study... whether it is causing problems or not, do a study, and come back to us, and if it is causing problems we will give you new legislation to give you preemptive authority.
But 220(j) clearly evidences Congress's position that the Act as written left the states with this power because it envisions a need for new legislation to harmonize what it describes as state and federal powers, not practices, but powers over depreciation in accounting matters.
So, the three functions, the classification of the property, its valuation, and the development of specific depreciation percentages to apply to that value in order to determine dollar and cents accruals are all reserved to the states.
Unidentified Justice: Well, Mr. Malone, one section you rely rather heavily on, I guess, is 152(b), and that talks about prohibiting Commission jurisdiction over charges, classifications, at cetera, in connection with interstate communications service.
Now, when you have got a telephone pole out there that has wires on it that are used both for intrastate and interstate, do you say that that section means that you allocate a part of that pole to intrastate service?
Lawrence G. Malone: Yes, Your Honor, but I think Congress has always recognized, Your Honor, that if you have a telephone pole in Lake Tahoe, it is subject to a very different climate than a telephone pole in Lake Placid, and it is--
Unidentified Justice: Are either one of them on dry land, I presume?
Lawrence G. Malone: --Yes, Your Honor.
But one is not going to last as long as the other.
By the same token, if you have a central office switch serving an area such as Tampa Bay, which is growing, and a central office switch serving an area such as Green Bay, they are subject to very different technological obsolescence, growth, very different factors that go into the development of these service lives and these depreciation percentages.
And Congress back in '34 wisely recognized that the state regulators on the scene were best able to take measure of these differences and to set meaningful depreciation charges in accounting classifications.
Unidentified Justice: Did the Commission then allow the states or did it follow the states' methods when it came to depreciating for interstate communications service?
Lawrence G. Malone: Well, for interstate communications services, the Commission eventually grew into a position where it was able to develop its own depreciation charges with respect to the costs that were separated to it.
Let's assume we have a telephone pole that costs $100, and we assume that 75 percent of that pole's usage is devoted to intrastate services and 25 percent is devoted to interstate.
What we do is, we assign the states responsibility for dealing with the $75 on that pole, and the FCC is responsible for dealing with the other $25.
Unidentified Justice: So the allocation is between a percentage of value of a single physical entity.
Lawrence G. Malone: That's right, Your Honor.
And with respect to Section 152, Your Honor, that is a jurisdictional overlay to the act.
It tell us how to read the other provisions.
Subdivision (a) assigns the FCC jurisdiction of interstate matters, and subdivision (b) tells the FCC and the states what the FCC can't do.
Subdivision (b), which you referred to, Your Honor, prohibits the FCC from asserting jurisdiction over charges, classifications, and practices devoted to the provision of intrastate services.
So, clearly the threshold question with respect to that provision is, do these terms, charges, classifications, and practices refer to local or intrastate matters?
Because if they do, the FCC is violating 152(b) as well as 213(h) and 220(j).
Now, charges, classifications, and practices traditionally have been used to refer to depreciation charges or classification and accounting classifications or practices.
Congress in fact in Section 220, which is the lynchpin for the FCC's preemption theory in this case that general depreciation and accounting statutes uses the term "charges" seven times to refer to depreciation, and it uses the term "classifications" to refer to accounting.
Academicians, state regulators, the utility industry, the FCC, and before it the ICC have all consistently used these terms found in Section 152(b) to refer to depreciation and accounting.
So, I don't think there is any question that if we read 152(b) consistently with its general usage, that it prohibits preemption by preserving to the states and to their jurisdiction regulatory control over local depreciation charges and accounting classifications.
But how does the FCC... how does it answer these claims?
How did the Fourth Circuit answer them?
Well, the Fourth Circuit did not give a great deal of attention to the law because it went on to Section 151 and the implied preemption theory.
But on appeal, the respondents have argued that Section 152(b), although by its express design it refers to all of Title 2 other than the pole attachment statute, and therefore would refer to Section 220, and although Section 152 uses the very same terms as appear in Section 220, they argue that it has no relevance to depreciation accounting.
They claim that the terms charges, classifications, and practices refer to rate structures or rates for services, but their position ignores the fact that that statute uses very different language than Congress had intended to just refer to rates for services.
It says that the FCC cannot assert jurisdiction over charges, classifications, and practices for or in connection with local rates, and it is the in connection with language which clearly encompasses depreciation and accounting.
Their position also in claiming that it has no reference to 220 and simply refers to rate structure attributes extreme redundancy to Congress by assuming that Congress used six terms to mean one.
With respect to Section 220(j), and that is the provision again which calls for a study by the FCC to look into the reasonableness of harmonizing state and federal powers over depreciation, they argued that that provision was nothing more than a paraphrase of the Senate pro-preemption 220(j).
But again, that statute belies their position, because it calls for the harmonization of state and federal powers, and clearly by calling for the harmonization of powers, it assumed that the states did have powers under the law as written, a position directly contrary to that which formed the basis for the preemption order.
With regard to Section 213(h), they haven't answered us, and frankly, we can't criticize them for not doing so, because our position on that evolves from our analysis of allegations made by the respondents in their briefs concerning Section 213(h), GTE in particular, so they haven't had an opportunity to respond on that.
But we have here two very different readings of the Communications Act.
We have a reading by the states which, of course, is consistent with the reading that the FCC took for its first 50 years which has all of the pieces of the legislative puzzle fitting.
They are structurally coherent.
They supplement one another.
Each word in each statute has a meaning, and we had the respondents' reading, the new reading, which has pieces in the legislative puzzle clashing.
You have Section 152(b) referring clearly to other provisions of the Act, including Section 220, but under their position having no relevance to Section 220.
You have six terms of art in Section 152(b), according to their position, meaning only one term.
You have Sections 220(h), referring to waivers, and Section 220(i), a notice statute, as proposed by the states, directly at odds with Section 220(j) as originally proposed by the states.
In other words, their new reading of the Act violates a number of rules of statutory construction, but the Fourth Circuit was still willing to preempt, and it did so by reasoning that even though this increase or this order by the FCC is really designed to increase local rates, that is still justified because it is going to further general responsibilities found in Section 151 of the Act.
But that sort of reasoning, as the lower court dissent indicated, really allows an agency to overreach with its general purpose language.
It invites an agency to hold general purpose language such as 151, which really has no legislative history to it, and simply tells the FCC, go and regulate interstate matters, to hold that language up to the light and to manipulate it until it is able to derive a stream of unstated purposes which are really predesigned to conflict with the state law to be overridden.
And that process is particularly bothersome when it overrides historic, deeply routed police powers which preexisted with the states at the time that the Communications Act was passed.
We don't think that this Court has ever endorsed this sort of stepping stone or bootstrap preemption.
Indeed, in the Pacific Gas and Electric case, this Court indicated where Congress has clearly evidenced a willingness to tolerate dual regulation, there is no basis for implying preemptive authority in an agency to preempt in order to avoid the effects of the dual regulation which Congress has indicated a willingness to live with.
What we have in this case is a classic example of--
Unidentified Justice: I think the thrust of your argument is that there just isn't any room under the Act for any kind of an implied preemption.
It is just contrary to the express terms of the Act.
Lawrence G. Malone: --Exactly, Your Honor.
What we have here is, we have an Act of Congress which clearly sets up dual regulation, which constructs this jurisdictional wall between the states and the federal government, and then we have an administrative order which simply circumvents that wall, and it is based not on new law, or it is based not on the study which was called for by Congress, but simply on the FCC's adoption of an agency argument that competition had triggered a need for accelerated depreciation, which triggered a need for preemption, and that argument ignores--
Unidentified Justice: I take it you would be making the same argument even if you accepted, which I gather you don't, that dual regulation permitting the states to set depreciation rates for interstate, intrastate equipment would frustrate the FCC's powers.
Lawrence G. Malone: --We would make the same argument, Your Honor--
Unidentified Justice: Yes.
Lawrence G. Malone: --and you are right, we do not accept that assumption which is the basis for the FCC's action.
We don't accept that assumption for several reasons, one of which is that depreciation is but one of many factors, and it is far down the list on the list of factors which affect a management's decision to modernize plant or to replace it.
Certainly rate of return, the trading value of stock, interest rates and all of these other factors are much more important in the equation, and if the FCC is allowed to preempt on a deeply routed police power based upon this guise of plant modernization which it was able to derive from its general responsibility by the power of its imagination, then where do we draw the line?
What can't it preempt?
What the FCC is really doing by asking the Court to adopt this general responsibility language as a gateway to preemption is inviting a trolley ride.
It is one way.
It has no brakes on it.
And it is destined inevitably to result in the dissolution of dual regulation.
But Section 220(j) of the Act tells the FCC that if it has problems with dual regulation, it isn't to do away with it by administrative order.
It is to do a study and make its case to Congress.
But the FCC hasn't made its case to Congress, and it hasn't asked for new legislation.
It has simply taken unto itself an attempt to expand its jurisdictional guidelines.
We think that the Fourth Circuit has clearly erred in endorsing that order, and that it should therefore be reversed.
Unidentified Justice: I've got a little bit of confusion over one of your figures of speech, your analogies.
You use the analogy of someone handling the steering wheel and someone else on the accelerator and the brakes.
It cuts against you a little bit here, doesn't it?
Lawrence G. Malone: No, Your Honor, because what that analogy refers to is the fact that... let me explain what the analogy meant, and then why I don't think it cuts against us at all.
By the analogy I was referring to the fact that the FCC is attempting to tell the states, in fact the very purpose of its order is to tell the states what dollar and cent depreciation accruals have to be included in local rates.
Now, Section 213(h) preserves to the states the power to classify property or the power to value property, and the valuation of property... picture yourself attempting to determine what a telephone pole is worth under a fair value jurisdiction, which was the brunt of the jurisdiction back in 1934.
One question you would ask yourself is, how long is it going to last?
Their position is that the states can go out... well, they haven't conceded this, but Section 213(h) clearly provides that the states would go out and ask that question, how long is it going to last, to determine the value, but that the FCC would come in and tell them how long it is going to last for the purpose of developing depreciation charges.
And that is inconsistent, and that is what I meant when I referred to on person on the accelerator and the other person on the wheel.
You wouldn't be able to develop depreciation charges that way.
It wouldn't work.
I think the implication of your question, Your Honor, is, if we have two different bodies setting depreciation charges for one telephone pole, don't we have one person on the pedal and another person on the wheel, and the answer is no because Congress, I think, correctly recognized that you can easily separate the costs, and then each jurisdiction can deal with the costs under its power for the purpose of developing local rates and allowing capital recovery.
And 47 years of history demonstrate that the process has worked extremely well.
Unidentified Justice: Mr. Malone, if you should not prevail here, how much of a disaster really is it to the state?
Lawrence G. Malone: Well, Your Honor, I think there would be disasters in two forms.
One would be the immediate rate effect, which we estimate at about a billion dollars a year that local customers would have to bear in rates, and the problem--
Unidentified Justice: Because of accelerated depreciation?
Lawrence G. Malone: --Because of the ELG and the remaining life concepts, which would be forced onto states by the FCC.
It would be about a billion dollars a year.
And as the--
Unidentified Justice: Countrywide?
Lawrence G. Malone: --Yes.
In New York we estimate the effect for this year would be about $120 million, Your Honor, and the problem with that is the brief, the amicus brief of TRACER, the Telephone Ratepayers for a Cost Based and Equitable Rates, which was a business association of business users of telephone service, points out that that rate increase, which the Department of Defense indicated below would not be justified and wouldn't really serve any purpose, would have the affect of causing business customers to try to get off the network, and that would lead to investment which was out there... it wouldn't be serving anybody... called stranded investment, which would force other rates upward.
You would have a spiraling effect, self-perpetuating, which would then force other people off the system, all based upon the FCC's application of a broad brush to a set of circumstances really requiring a fine stroke.
We may have competition out there.
And the states recognize that.
And we are willing to deal with that in the development of depreciation charges, but certainly you don't have the same competition in Peoria that you do in Houston, and it is the regulators in those states who are best able to evaluate this competition and determine its effect on depreciation lives.
So, the first effect would certainly be increased rates, and that would be deleterious to the states.
The second effect, Your Honor, that we are concerned with is, if the FCC is upheld, where does that lead us?
If it is able to preempt depreciation and accounting based upon this broad-gauged approach of plant modernizing, which isn't even set forth in the Act, why can't it then attempt to preempt all of the factors on the list of relevance to plant modernization which are above depreciation, such as rate of return and other factors which are again an integral part of state regulation?
Thank you, Your Honor.
Unidentified Justice: Of course, a good bit of it, that is, the federal system will... on your approach will increase rates, too, does increase rates.
Lawrence G. Malone: If the FCC takes action simply for the--
Unidentified Justice: For the interstate.
Lawrence G. Malone: --Yes.
Unidentified Justice: And has it in fact driven away customers into other areas?
Lawrence G. Malone: With respect to interstate usage?
Unidentified Justice: Yes.
Lawrence G. Malone: Oh, yes, there is no question there has been bypass which has resulted from rate increases.
Unidentified Justice: And the Republic hasn't come to an end.
Lawrence G. Malone: The Republic hasn't come to an end, Your Honor, no.
Chief Justice Warren E. Burger: Mr. Solicitor General.
ORAL ARGUMENT OF CHARLES FRIED, ESQ., ON BEHALF OF THE FEDERAL PARTIES
Charles Fried: Thank you, Mr. Chief Justice, and may it please the Court, I should first begin by making a remark about the effect on rates.
In the Maryland case, which is the case which you will be considering immediately after this, the Fourth Circuit Court of Appeals at Page 8 of the cert petition... Page 8A of the appendix to the cert petition estimated that the effect on rates was on the average a penny a day per customer, and there is no reason to suppose that Maryland is unusual in this respect.
Our affirmative argument is straightforward, so I would like to just set the predicate for it, and then move on to some of the concerns that have been raised by petitioners and others.
The basis for federal intervention here is, I think, rather palpable.
We are talking about maintaining--
Unidentified Justice: Mr. Fried, excuse me for interrupting, but I just was turning around in my mind here your opening remarks as a response to his figure, I guess it will be a billion dollars or something.
You are saying, well, in Maryland it is only a penny a day.
Are you disagreeing with his overall figure, or are you just saying it isn't very much in Maryland?
Charles Fried: --I don't know quite how to deal with that overall figure.
It is an estimate.
I don't know of any finding to that effect, and when we are talking about telephone rates nationwide, I am not able on the spur of the moment to decide whether a billion dollars is a lot or a little, but I don't want to concede--
Unidentified Justice: That is why I didn't know how you got a penny a day, either.
Charles Fried: --I don't want to concede that billion dollars.
I thought the penny... a penny a day was a--
Unidentified Justice: What does a penny a day translate into in dollars per year for the whole state?
Do you know?
Charles Fried: --I can't tell you that.
Unidentified Justice: There are four million people in Maryland.
You figure $4 a year, you are talking about $16 million in Maryland on your figures.
Charles Fried: And perhaps that way we can begin to approach Mr. Malone's figure, and we are both right.
Unidentified Justice: Well, there--
There seems to be some difference between the effect in New York and the effect in Maryland if you are both right.
Maybe it is the Mason-Dixon line.
Charles Fried: Well, perhaps my brother, Mr. Boudin, can assist on some of these matters, but I do want to call the Court's attention to the findings of the Court of Appeals in the Maryland case, because there there is a specific finding which brings the matter down to the effect on consumers.
Now, we are talking about the physical integrity and the modernity and the financial soundness of the very channels of interstate communication, and what depreciation is about is paying for physical equipment as it wears out, technologically or physically.
And all that the preemption order sought to do is to make sure that the preemption calculations were made in as accurate a fashion as possible, and that is very important.
Unidentified Justice: The what, the preemption calculation?
Charles Fried: I am sorry, the depreciation calculations, Justice White, that the depreciation calculations were made in is accurate a way as possible, that they reflected as accurately as possible what in fact was happening to those assets out there in the world.
Now, all of these assets are used both in inter and intrastate communications because, as Justice Burger said when he was on the D.C. Court of Appeals, in terms of facilities, we have one integrated system, and when the switch fails in a local exchange or a telephone pole which is rotted blows down, the effect is as much on interstate as it is on intrastate communication.
Now, the basis for what the FCC did here is, as Mr. Malone pointed out, first of all in Section 1 of the Act, Section 151, in which the FCC has an overriding mandate to make available to all the people of the United States rapid, efficient nationwide facilities at reasonable charges, and Section 220(b), which says that the Commission shall prescribe depreciation charges.
Those are the two statutory bases.
Now, let me address some of the concerns that have been raised apart from the concerns about rate increases.
First, there is a very real concern about federalism.
It is an important concern.
It is one that we share.
But here, unlike some other cases the court has had to consider, there is no setting of the state's regulatory agenda, no mandating of state procedures, as one Justice has put it, no kidnapping of the state procedures at all, just the familiar instance of federal law supplying one of the determinants in an element in a calculation which otherwise goes forward wholly according to state procedures and concerns.
Unidentified Justice: But, Mr. Fried, your opponent argues, and I would be interested in your response to this, but if you could take care of this one element, what about all the other elements, such as rate of return, and rate base, and other factors that go into rate?
Could you take over those as well?
Charles Fried: Well, in this case, though the Court of Appeals spoke in terms of Section 1, the Commission was very assiduous to rely on Section 220(b), which specifically spoke about depreciation.
So, if there is a slippery slope here, the FCC has not sought to put its foot on it.
It has rested firmly on Section 220(b).
Now, Section 152(b) is... 2(b)(1) is the one which causes most difficulties for the petitioners.
And here I must say we read the legislative history rather differently from petitioners because what we see happening, happened back there in 1934 was that the state commissioners were alarmed about federal intervention in depreciation, and sought from the House a provision, 220(j), sought a 220(j) which would block any federal effect on intrastate depreciation rates, and they failed to get that provision.
What they got seems to me to look like a typical face-saving compromise which gave them some sort of compromise language, but not at all the substance of what they were seeking.
Now, the language also of 152(b) does not do what petitioners claim.
The petitioners read 152(b) as if it said, if you have a facility which exists in both interstate and intrastate communication, then the fact that it exists in intrastate communication precludes federal jurisdiction over it.
That reading is a reading which has been consistently urged upon the commission and consistently rejected.
It was first urged and first rejected back in 1947, when the Commission began its long trek towards the situation which now obtains where you can buy your telephone rather than having to rent it from the phone company.
And what the Commission did to bring about that result, and of course it doesn't obtain just in respect to the telephone you have in your home, but it relates to private exchange systems, to all kinds of complicated computer equipment and the like.
What the Commission did was to mandate that the state commissions remove from their tariffs any requirement that customers pay for and lease their phones from the phone company.
Now, that telephone, which you now can buy because of the FCC orders, that telephone is used 97 percent, it is estimated, in intrastate communication, yet the remaining 3 percent is crucial to interstate and was found to be sufficient for a federal regime about customer terminal equipment.
Unidentified Justice: Ninety-seven percent of intrastate and three--
Charles Fried: Most... yes--
Unidentified Justice: --percent in interstate?
Charles Fried: --Yes, Justice Rehnquist.
Most... the telephone you use in your home probably is used 97 percent intrastate, and the regime which now obtains is a regime that was imposed by the FCC against exactly the same 2(b)(1) argument that you are hearing today.
The regime which has been imposed on the transmission of--
Unidentified Justice: Mr. Solicitor General, that regime wasn't imposed pursuant to 220(b), was it?
Charles Fried: --No, it was--
Unidentified Justice: That is what really raises my question that you answered before by saying, well, the Commission has merely acted pursuant to 220(b) here.
But if they are right on 220(b) and the one involving the use of the phone, why couldn't they also use the same argument or 220(a) to prescribe rates of return and capital investment and all the rest?
Charles Fried: --As we read, as we read--
Unidentified Justice: First, let me ask you, do you think they could?
Charles Fried: --I think that would be a long stretch, and a very serious move which I would not--
Unidentified Justice: That is a matter of--
Charles Fried: --which I would... I myself would be very hesitant to embrace, because if you see what remains, Justice Stevens, and I think the question really points out what this case is about, because if you see what remains of the states' capacity here, what they are left with is that part which is peculiarly appropriate to state concern, the rate design questions.
For instance, will businesses subsidize residences?
Will large users subsidize small users?
Are we going to have lifeline rates?
Are we going to have special rates for low income users?
All of these things are exactly the kinds of things which are--
Unidentified Justice: They have said that depreciation was one of those things for the last 50 years, too, but that the FCC has now taken a different view, and might it also not take a different view of rate of return, capital investment, and all the rest?
Charles Fried: --I think that depreciation with respect is not one of those things.
Unidentified Justice: Well, it is true that the states have done it for themselves for 50 years, is it not?
Charles Fried: --I think that that is a rather--
Unidentified Justice: At least as to intrastate components.
Charles Fried: --I don't think that can be affirmed wholeheartedly, Justice Stevens, because in fact what has been happening for the last 50 years on depreciation rates is that they are set in three-way meetings between the FCC, state commissioners, and the telephone companies, and at the end of those three-way meetings a depreciation rate is set by the FCC, and by and large it is followed.
Now, what has not happened is that--
Unidentified Justice: Did that necessarily govern the depreciation rate for purely intrastate facilities?
Charles Fried: --It has so far.
Yes, Your Honor.
Yes, it has.
Now, it has never come to a conflict.
Those three-way meetings have by and large... I can't say universally, but by and large been the basis for depreciation rates throughout the country, and those are meetings with those three components leading to the setting of a rate by the FCC.
There has been one reported case in which there was resistance to that, and the state court decision which held, as Mr. Malone has argued, but beyond that, the universal practice has been one of accommodation, no particular conflict, under the aegis and leadership of the FCC.
Unidentified Justice: Well, it was working so well, what was the reason for a change?
Charles Fried: The reason for the change is the reason which the Commission gave, which is that in the new technological and competitive environment, the inaccurate depreciation formulas, the whole life formulas and the vintage group formulas, and that is what we are talking about, that is all we are talking about here, and essentially those are formulas which have to do... at least the whole life formulas have to do with how you adjust to misestimates.
Unidentified Justice: So it didn't think the three-way meeting would accomplish what it wanted to accomplish?
Charles Fried: I think that what happened--
Unidentified Justice: And why not?
Charles Fried: --What happened was, in the first... the first depreciation order, the one which... where the Commission has departed from that, they assume that the states would go along, and there had been this kind of collaboration.
What happened, and this is set out in Footnote 14 of Paragraph 37 of the FCC's order, to their surprise, for the first time 14 states refused to follow them on one element of the depreciation order, and nine on another.
So, for the first time, the FCC was faced with a real confrontation, a confrontation which had not existed until this time.
Now, if I may go back, Justice Stevens, to your question, because I think it is an important one, there is a big difference between depreciation on one hand and these rate design questions on the other.
Unidentified Justice: Yes, I would suppose that one could argue that rate of return is something of national interest, and on a nationwide basis the federal agents would be best able to value what the money market was for the whole country, and therefore be thoroughly justified in saying the rate of return ought to be 12 percent rather than 6 percent.
Charles Fried: Well, rate of return seems to us to be different from depreciation.
Unidentified Justice: It is more a local matter, do you think?
Charles Fried: Well, it may be more local.
Of course, it is subject to federal constitutional limitations, which... these other elements are not, at least not directly, but the other aspect of depreciation is depreciation is a fact in the world.
It is not really a... it is not really a normative judgment at all.
When you decide whether you are going to have businesses subsidizing residences, that is a political judgment and one which we can understand the state commissioners would like to reserve for themselves, but how quickly something depreciates, and what you do about misestimates of depreciation, which is what remaining life versus whole life is all about that is about facts in the world.
Unidentified Justice: But even with respect to the accountants--
--You don't think the accountants disagree about these things?
We are saying the same thing.
Charles Fried: I am sorry, Justice--
Unidentified Justice: I think Justice Stevens and I both wanted to ask you, don't respected accountants disagree about how depreciation should be handled?
Charles Fried: --Well, indeed they do, Justice Rehnquist.
But the question is that in the face of such a disagreement, is the FCC out of bounds or is it not in fact exercising the authority given to it in Section 220 to resolve that question and to resolve that question on a record which shows that the previous rule had resulted in something like $20 billion of unrecovered phantom assets as the result of too slow depreciation and an unwillingness or an inability under the old whole life formulas to recapture when you have made an initial mistake?
So it was a response, to be sure.
Accountants will differ.
They are probably like lawyers.
They will differ about almost anything.
But the question is whether the determination here was a reasonable one--
Unidentified Justice: Well, the question isn't so much whether the determination here was a reasonable one, but whether the concept or element of depreciation is so dramatically different from the other elements of rate as you have made them out to be, that those are kind of political judgment questions, and this is just purely a question of historical fact.
I don't think it is quite that simple.
Charles Fried: --I perhaps am oversimplifying somewhat, but I think depreciation is in the end... accountants would agree to this, that depreciation in the end is an attempt to reflect year by year a fact about the world.
And they may differ about the best way to do that.
When you are designing rates, nobody disagrees that that is a political judgment about who ought to be paying what and who ought to be subsidizing who.
So, it is in that respect that I think the two are rather different.
Unidentified Justice: But certainly rate base is equally factual, isn't it, the capital investment and plant at any given time?
Charles Fried: Well, in respect to rate base--
Unidentified Justice: It is the other side of the coin from depreciation.
Charles Fried: --Rate base is a matter of valuation, and there... at least it starts out with the initial valuation of the asset, and there I believe 213 does speak directly to that; and as I understand it, the Commission here has not sought in any way to intervene on the subject of the initial valuation of these assets.
It has made no attempt to say anything on that subject.
I think one of the positions which needs to be... which is a matter of concern is the question of the FCC's having changed its position, and one is used to regulatory commissions sometimes turning on a dime.
That is not an unfamiliar process.
But here I think that turnaround should not he exaggerated, because in fact the way was prepared because of the assumption, because of the assumption that the states would go along with what the FCC had determined, and the subsequent experience which is raised for you by the Ohio case which you are holding, I suppose, for the result in this case, as shown in the Ohio case and in many other cases where for the first time there was confrontation.
Now, I think that Judge Tuttle in the Fourth Circuit explained very well why there is this confrontation.
There is in depreciation... I thank the Court.
Chief Justice Warren E. Burger: Mr. Boudin.
ORAL ARGUMENT OF MICHAEL BOUDIN, ESQ., ON BEHALF OF AT&T AND THE BEEL SYSTEM OPERATING COMPANIES
Michael Boudin: Mr. Chief Justice, and may it please the Court, the position of the telephone industry in this case is that the FCC's preemption order is correct and should be sustained.
I want to make clear at the outset what the facilities are, what the FCC has and is doing, and what the states are asking to do in this case.
The facilities in question are telephone poles, lines, and switching systems along with the buildings that house them that are used jointly in interstate and intrastate communication.
The FCC, as it has for many years, is determining the percentages, the useful lives, the depreciation formulas so that in the end you say of a telephone pole, this pole will last five years, it must be depreciated at 20 percent a year.
And what the states are saying is that they are entitled with respect to this same telephone pole to say, no, it is going to last ten years, depreciated at 10 percent a year.
It is exactly the case of two hands on the steering wheel.
The Chief Justice was absolutely right.
And this is not a remarkable reversal of past practice.
The FCC has had rules relating to depreciation since its foundation.
It has been prescribing depreciation for about 95 percent of the telephone plant in the United States since the late forties and early fifties, and the states have in fact with very rare and unimportant exceptions followed those depreciation rates in intrastate proceedings because you are talking about depreciation of exactly the same facility.
You cannot in fact have accurate depreciation for the telephone pole, mathematically cannot do it except by one in a billion chance.
You have two different regimes of depreciation, two different formulas for the same physical facilities.
GTE actually put in a mathematical illustration demonstrating it which is in the joint appendix, but the practical consequences are what are of importance to us.
Unidentified Justice: May I ask, Mr. Boudin, must they also have the same evaluation on the capital investment?
Michael Boudin: The valuation is a red herring.
There has been no dispute about valuation.
Its original cost is what is used since Hope Natural Gas.
That 213(h), which was not addressed--
Unidentified Justice: Isn't it original cost less depreciation?
Michael Boudin: --Original cost less depreciation is the rate base, but the valuation is the original cost less the accumulated depreciation.
Unidentified Justice: Does it mean, then, that the Commission rule has the effect of determining what the rate base will be for all the--
Michael Boudin: No, because you have to make a large number of different determinations with respect to rate base, some of which are historical, some of which are legal or public policy.
It does not.
This is solely the determination as to the length of time and the spreading out of that cost, whatever it may be.
Unidentified Justice: --Well, confining it to the telephone pole for a moment, must the remaining cost, the remaining value of the telephone pole be the same for both federal and state purposes in determining rate base?
Michael Boudin: It will virtually always... in fact there is very little disagreement.
Unidentified Justice: Well, but must it be the same under the commission--
Michael Boudin: You mean if the states try to set a different value?
Unidentified Justice: --Say they wanted to use their old-fashioned method of depreciation for purposes of measuring original cost.
Could they do so?
Michael Boudin: They cannot use an old-fashioned method of depreciation.
They may or may not be able to use a different method of valuation.
Unidentified Justice: Under the regulations as they exist today?
Michael Boudin: Yes.
Unidentified Justice: Could the commission forbid them from using a different original cost measure--
Michael Boudin: It would be a significantly more difficult case, because it would take you back to the distinction between valuation and depreciation.
The FCC has clear statutory authority with respect to depreciation.
On valuation, you can make a great deal of argument.
I want to--
Unidentified Justice: --On valuation of a telephone pole, I am wondering if you can have one person driving and another one working the--
Michael Boudin: --Well, that would be... that is another case, and it is a harder case for the telephone company and the commission.
Let me make that clear by turning back to the argument on the legal issue in the case, and on the statutory language that Congress enacted, because we think Section 220 is the key to this case.
It solves this case without deciding more difficult cases later on, and the result in this case is very clear.
Congress in Section 220 of the Act told the commission that on this issue, depreciation and accounting, the FCC shall determine the depreciation for subject carriers.
The subject carriers shall not use any other method of depreciation, and the FCC shall consider the views and recommendations of the state, views and recommendations, but not the binding veto.
That statutory language was taken from Section 20(5) of the Interstate Commerce Act, because the Interstate Commerce Commission had the same power.
Unidentified Justice: --Mr. Boudin, why did the Court of Appeals shy away from reliance on this section?
Michael Boudin: Because the other ground, agency preemption, was so clearly established in the Fourth Circuit by the two North Carolina cases that there was nothing new to decide as long as they didn't bother with the new statute.
It is nevertheless the clearest ground for affirmance and it is the narrowest ground, and that is why I am arguing it.
That statutory language, Section 220(b), was taken virtually verbatim from Section 220(5) of the Interstate Commerce Act enacted in 1920.
The Interstate Commerce Commission has interpreted that language in 118 ICC in 1926, its major decision on depreciation, as establishing that ICC depreciation rates would preempt when the ICC adopted them.
That information was no secret to Congress when it came to frame the Communications Act because the states bitterly complained of it.
Nevertheless, Congress reenacted that identical language which the ICC had interpreted as being automatically preemptive if and when the depreciation rates were determined.
Third, Congress refused a specific state request to enact a reservation which would have specifically entitled the states to prescribe their own depreciation rates for intrastate ratemaking purposes.
Congress considered the proposal.
It listened to a lot of testimony on it, including explanations that it would be a deviation from the existing law, and the sponsors of that amendment, the House report, Congressman Rayburn, said that it would be a change in the existing law if that reservation were adopted, and Congress refused to adopt it.
The Pacific Gas and Electric case was mentioned earlier.
Justice White at Page 220 of that case pointed out that it is an improper construction of a federal statute to read it as embodying a statement which Congress considered and specifically refused to enact, and that is exactly what the states are requesting here.
They are asking you to read Section 220 as if Congress passed a provision about which it considered specifically and refused to enact it.
Unidentified Justice: So your argument, of course, is that the statute does the preempting, and it is not a case of agency preemption.
The agency couldn't do anything else but.
Michael Boudin: Well, the agency is entitled under 220 to cede the authority to the state if it wishes to, so it could do something else, but only after an--
Unidentified Justice: Why is it entitled to do so?
Michael Boudin: --The section provides, 220(h), that it can cede its 220 powers to the states if it wishes to.
Unidentified Justice: And did it for a long time or not?
Michael Boudin: It prescribed the depreciation itself, but it did so after consultation, the three-way meeting with the states.
All that the FCC is doing here is insisting on the continuation of a practice that has been going on for 30 years.
Now that the states have decided on this particular method of calculating depreciation, they no longer want to follow the FCC's lead.
And I say again, to close, this is a two hands on the steering wheel case on this single issue.
It involves only depreciation.
There are good economic arguments for having separate rates of return.
There is much less statutory authority, certainly no legislative history suggesting that the FCC could regulate it, and it is simply an issue that does not get reached if the Court agrees that Section 220 resolves this case.
And I might add that Section 220 also solves the Section 2(b)(1) argument without having to parse 2(b)(1) for 25 other situations, because I ask the Court to consider this.
If Congress did, as we think the legislative history clearly shows, decide in 1934 that it should continue to allow the federal agency to determine this common issue of depreciation, then the one thing you know is that some general language elsewhere in the statute can't be read to contradict that specific legislative intent.
Most preemption cases are quite difficult.
They involve guesses as to what Congress would have done if it had thought about the issue.
They involve occupation of the field conjectures, possibilities of frustration.
This is not such a case.
This is a case where we know that Congress thought about this precise issue, and on depreciation, as on one or two other issues in the Act, it decided in favor of federal authority.
Unidentified Justice: Well, what about... what was your response to... his response to 152(b), Section 152(b), where the commission is denied jurisdiction with respect to charges and so on with respect to intrastate communication?
Michael Boudin: The answer to that is twofold.
First, that if you accept the reading of 220, you do not even reach the question of how 2(b) might be parsed in general, because this issue has been resolved, but the second answer is, if you turn to the language--
Unidentified Justice: What if you... if you read (b), you don't even get to 220.
Michael Boudin: --No, it is circular.
It can go around either way.
If you assume that Congress had a specific intent on the subject of depreciation and resolved that in a particular way, then the specific resolution of that issue prevails over any general language.
Unidentified Justice: Because 220 deals specifically with depreciation?
Michael Boudin: Exactly, and also involves the preemptive--
Unidentified Justice: I thought charges included depreciation.
Michael Boudin: --The term 2(b)(1) in our contention is a reference to rates charged to customers.
There is linguistic evidence to that effect in the Act.
Mr. Justice White, just to underscore that point, because I don't want to trespass further on the Court's time, we know what Congress was worried about when it enacted Section 2(b) because the legislative history addresses that, to.
It was not concerned with depreciation charges.
It was concerned with the Shrevport doctrine and rates charged to customers.
I thank the Court.
Chief Justice Warren E. Burger: Do you have anything further, Mr. Malone?
Lawrence G. Malone: Yes, Your Honor.
Chief Justice Warren E. Burger: You have five minutes remaining.
ORAL ARGUMENT OF LAWRENCE G. MALONE, ESQ., ON BEHALF OF THE APPELLANT AND THE PETITIONER -- REBUTTAL
Lawrence G. Malone: Thank you very much.
Your Honor, the telephone industry has argued that the Congress merely reenacted Section 25 of the Interstate Commerce Act which the ICC had read as allowing preemption although no court had, and rejected a number of arguments by the states and provisions which would have preserved the status quo, which at the time was the state's regulation of depreciation in accounting matters.
What the telephone industry has ignored is that Congress indeed did provide, and the legislative history clearly supports this, a number of provisions in response to the state's request that its authority be clarified.
Sections 220(j), 152(b), and 213(h) were all additions to the Communications Act from the Interstate Commerce Act clearly designed to protect the states.
With respect to the history, what has gone on for the last 50 years, the Solicitor General suggests that the three-way meetings have led to the FCC setting rates which the states have followed.
The facts are otherwise.
We have in our briefs references to state decisions which were published in the fifties, sixties, seventies, and eighties which deviated from the FCC practices.
We have a letter which is appended to the--
Unidentified Justice: Are we supposed to decide here which one of you is right about the history, what was the status quo at the time?
Lawrence G. Malone: --Your Honor, the decisions... it is documented in our briefs.
There is a letter from the FCC appended to the Louisiana brief which says to the state of New York, we know you have deviated from our rates and you have every right to because you have jurisdiction over these matters.
It is in black and white.
It is signed by the secretary of the FCC.
It is appended to the Louisiana reply brief.
At Page 45 of the California petition, the appendix to the California petition, the FCC says unequivocally, the states have the right, they have the right to deviate.
They have done so for 40 years.
We have no right to tell them to do otherwise.
I think the history is very clear.
Justices Rehnquist and Stevens asked, is it not true that accountants have differed over depreciation and accounting.
The answer is clearly yes, and so has the FCC, and the FCC admits that at Page 23 of the joint appendix, where it says there is no right or wrong to depreciation, and the suggestion by the telephone industry here today that unless there is one regulator setting depreciation charges, we won't have accurate depreciation is belied not only by the FCC's statement at Page 23 of the joint appendix, which it made before attempting to preempt, but also the fact that there are a number of telephone companies who are not here today.
Part of the Bell System, Pacific Telephone and Telegraph, they are not supporting this preemption case, because in those states the FCC is setting rates faster--
Unidentified Justice: Didn't Mr. Boudin say to us that all of the telephone companies were in support of this position?
Lawrence G. Malone: --They absolutely are not in support of it.
Pacific Telephone and Telegraph is not in support of the FCC's position.
Unidentified Justice: That is something else we have got to resolve?
Lawrence G. Malone: Your Honor, I think by just checking the service list to the telephone company's brief, we will see that there are many, many telephone companies... the telephone companies who are getting rates higher from the states are not supporting preemption because there is one issue here from the telephone company's point of view.
It is not accurate depreciation rates, it is money.
Unidentified Justice: Then when you refer to the telephone industry, it isn't the entire industry.
Lawrence G. Malone: Well, as far as Mr. Boudin is not representing the telephone industry, that is correct.
He is representing the telephone companies which have supported the FCC.
Unidentified Justice: Well, are there any who have not appeared here--
Lawrence G. Malone: Oh, yes.
Unidentified Justice: --who are supportive of your position?
Lawrence G. Malone: Who are supporting the--
Unidentified Justice: Affirmatively supporting your position?
Lawrence G. Malone: --Any telephone companies supporting our position affirmatively?
No, there are not, Your Honor.
That would be heresy.
I don't think that they would go quite that far.
Your Honor, with respect to valuation, there is no question that the cannot tell the states how to accrue specific depreciation charges without telling them the valuation of the assets that are at issue.
They seem to concede indirectly that that would be a very difficult case to take over valuation, but yet that is precisely what they are trying to do, and I would refer you to Page 35 of the FCC's brief.
Unidentified Justice: Why would it be such a difficult case?
Why would it be such a difficult case?
220(a) specifically says the Commission may prescribe forms of any and all accounts.
Why can't they just do that literally?
Lawrence G. Malone: Because 213(h), the valuation statute, says that the states have the right to set valuation.
Your Honor, with respect to the final point, which is whether there are in fact two hands on the wheel, and whether our position is the same as that which has been rejected by the lower courts with respect to Section 152(b) in the past, it is clearly not the same position.
You can uphold this in this case without touching those opinions at all, because we are dealing here with joint costs which have been separated and are in the jurisdiction of each, the state and the federal jurisdictions.
Thank you very much.
Chief Justice Warren E. Burger: Thank you, gentlemen.
The case is submitted.