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09/29/75 Ralph Nader and Reuben B. v. Federal Communications

September 29, 1975








Company, United States Independent Telephone Association,

Air Transport Association of America, Telephone Users

Association, Inc., and Commonwealth of Pennsylvania,


America, Respondents, American Telephone and Telegraph

Company, Air Transport Association of America, et al.,

Commonwealth of Pennsylvania, and the American Broadcasting

Companies, Inc., et al., Intervenors

Nos. 73-1045, 73-2051 1975.CDC.189

Petitions for Review of Orders of the Federal Communications Commission.


Fahy, Senior Circuit Judge, and Tamm and Robinson, Circuit Judges. Opinion for the Court filed by Circuit Judge Tamm. Dissenting opinion filed by Senior Circuit Judge Fahy.


Petitioners seek review of four orders of the Federal Communications Commission arising from its investigation of American Telephone & Telegraph Co.'s (AT&T or Bell) 1971 rate increases. In the first order issued November 22, 1972, the Commission rejected AT&T's 1970 tariff filing intended to raise its rate of return to 9.5% and determined that a fair rate of return on AT&T's interstate investment would be 8.5%. 38 F.C.C.2d 213 (1972). *fn1 The second order supplemented the first by disposing of individual exceptions filed by the parties. 38 F.C.C.2d 492 (1972). The third implemented the November 22, 1972 order by accepting AT&T's rate increases designed to achieve the 8.5% return. 38 F.C.C.2d 984 (1973). The final order denied applications for rehearing of the first three. 42 F.C.C.2d 293 (1973).

Petitioners in 73-1045, Ralph Nader and Reuben Robertson, as telephone users and rate payers, challenge the validity of the Commission's November 22, 1972 order, arguing that the Commission erred by granting AT&T a rate of return as high as 8.5% and by refusing to adjust that figure to account for the earnings of AT&T's manufacturing subsidiary, Western Electric. Petitioners in 73-2051, Microwave Communications, Inc. and its affiliate, MCI Telecommunications Corp., (hereinafter petitioner or MCI) provide specialized communication service in competition with AT&T. MCI claims that the Commission abused its discretion and violated several sections of the Communications Act of 1934 by the manner in which it allowed AT&T to implement the November 22, 1972 decision. AT&T, who has a vital interest in the outcome of this case, has intervened in support of the Commission. Other intervenors have also presented a number of arguments.

After careful consideration of the arguments, we affirm the Commission. However, in the course of our deliberations, we became concerned that the parties' true complaint is the Commission's inability to resolve within a reasonable time the issues arising from its regulation of AT&T. At least two crucial issues are now entering their tenth year of consideration without a decision from the Commission. Pursuant to our obligation to scrutinize such delays, see 5 U.S.C. ยง 706(1) (1970), we find that the Commission has unreasonable delayed decision of issues vital to the parties, and provide herein directions to accomplish the orderly and expeditious resolution of these issues. I. Background

American Telephone & Telegraph Company, the world's largest utility, derives its interstate revenue from several classes of communication service; 80% is from message toll telephone service , in which the user dials his call or is assisted by an operator and pays for the service on a per-call basis. A variant of MTS, Wide Area Telephone Service , which allows the customer to make direct dialed telephone calls anywhere within a specified service area at monthly rates, accounts for approximately 7% of AT&T's interstate revenue. MTS and WATS are essentially monopoly services in which AT&T does not face competition.

The other 13% of AT&T's interstate revenue accrues from private line service, which can consist of telephone, telegraph, audio and video program transmission and data transmission services. These services provide the customer with continuous communication between fixed points without the necessity of establishing a new circuit for each message. Unlike MTS and WATS, several specialized carriers, including MCI, compete against AT&T in this part of the market.

In November 1970, AT&T filed tariffs designed to produce an additional $545 million in earnings before taxes and to increase AT&T's interstate rate of return to 9.5%. *fn2 The filing increased rates on its monopoly MTS and WATS services, but not on its competitive private line services. On January 12, 1971, the Commission requested AT&T to postpone the effective date of its proposed $545 million increase, and granted permission to file tariffs increasing net earnings before taxes to $250 million. AT&T agreed and substituted a tariff which increased MTS rates by $175 million and reduced costs by $75 million. Tariffs for private line services again remained unaffected.

On January 21, 1971, the day before AT&T's revised tariff was to become effective, the Commission suspended its effectiveness for five days, made it subject to an accounting and refund order, *fn3 and instituted Docket 19129 to investigate the lawfulness of AT&T's original and revised rate increases. 27 F.C.C.2d 149 (1971). The first phase of Docket 19129 would consist of an investigation into the appropriate overall rate of return for interstate and foreign investment. Id. at 156-57. The investigation would then continue in a second phase to consider, inter alia, the relationship between AT&T's interstate earnings on communication services and earnings from its manufacturing subsidiary, Western Electric. The Commission also noted that AT&T's new tariffs:

rest on an implicit conclusion that the additional revenue requirements claimed by AT&T . . . should be met by imposing higher charges on users, to the exclusion of increases or adjustments in the rates of other classes of service provided by [it]. The basis for this assumption is not shown and we expect AT&T to carry the burden of proof on this issue in Docket No. 18128, in which we also expect AT&T to demonstrate that the instant rate increases do not involve any cross-subsidization of other services provided by the carriers involved.

Id. at 155-56.

The significance of this statement requires some explanation. The private line carriers who compete with AT&T claim that they are victims of its practice of cross-subsidization. Specifically, they assert that AT&T is able to charge unrealistically low rates where competition is present and yet still earn an adequate rate of return by increasing the charges for monopoly services, thus driving its competitors out of business.

These allegations of cross-subsidization are not wholly unfounded. In 1965, the Commission initiated an investigation into AT&T's rate structure after AT&T furnished a report, known as the sevenway cost study, which showed wide variations in the earnings among the various classes of AT&T's services. The study indicated that: "At one extreme, message toll telephone and WATS were earning at the rates of 10 and 10.2 percent respectively, while Telpak, [a private line service] at the other extreme, was earning at the rate of 0.3 percent. . . ." 2 F.C.C.2d 871 (1965). This investigation, Docket 16258, was initially divided into two phases. Phase I, was to investigate AT&T's total revenue requirements on interstate service and develop ratemaking principles in order to distribute properly the revenue to each class of service. 2 F.C.C.2d 142-43 (1965). Phase II was to examine, inter alia, the reasonableness of Western Electric's prices and the amounts properly includable in AT&T's investment or rate base. 9 F.C.C.2d 30, 35 (1967).

In December 1966, the Commission found that the rate of return portion of Phase I was advancing more rapidly than the development of ratemaking principles. Therefore, Phase I was separated into two proceedings: Phase IA, to investigate the rate of return, *fn4 and Phase IB to determine

Thus, to recapitulate, when the Commission commenced its Docket 19129 investigation into AT&T's November 1970 proposed increases, it set forth the following procedures: Phase I would determine whether AT&T was entitled to a rate of return higher than the 7-7.5% found reasonable in 1967; Phase II would determine how Western Electric's earnings would affect the Commission's revenue decision; and Docket 18128, composed in part of Phase IB of Docket 16258, would adjudicate the question of rate relationships among the various classes of interstate services and the cross-subsidization issue. Further, when the Commission instituted Docket 19129, it expected that the rate relationship and cross-subsidization issues in Docket 18128 would be decided by the end of the Phase I rate of return proceeding. 27 F.C.C.2d at 161. Thus, the Commission apparently contemplated, when it stated that rate adjustments may be made at the end of Phase I, that it would be able to determine whether any rate increases should be borne solely by MTS users to the exclusion of users of private line services. See id. at 157, 161.

Unfortunately, by April 1971, the Commission's trial staff concluded that Phase I of Docket 19129 would be concluded well in advance of Docket 18128. The staff therefore petitioned the Commission to clarify its January 21, 1971 order as to "whether the users, assuming that AT&T can demonstrate the need for additional revenue requirements, should bear the entire burden of any such increases even on an interim basis." 30 F.C.C.2d 503-04 (1971). In addition, the staff proposed that during Phase I, AT&T should justify why additional revenues should be raised solely through increases in MTS rates, and that in the absence of such justification, the increases should be apportioned across all classes of services. Id. at 504. In response, AT&T argued that whether its rate increases should be apportioned was the very issue to be decided in Docket 18128, and that any increases it proposed would be "'consistent with sound ratemaking principles on an interim basis.'" Id. In light of AT&T's position, the Commission rejected the staff's proposal. Id.

Thereafter, Phase I hearings were concluded and the Administrative Law Judge released his Initial Decision on August 30, 1971. The ALJ concluded that Bell's fair and reasonable rate of return would be 8.25% and that earnings in the range of 7.9-8.8% should not provoke another hearing. 41 F.C.C.2d 389, 441-42 (1971). Moreover, the ALJ rejected the contention of the Commission's trial staff, in its findings of fact, that a Phase I adjustment should be made to account for Western Electric's earnings. Id. at 447.

On November 22, 1972, the Commission issued its final decision on Phase I, holding that AT&T's overall minimum fair rate of return should be

In its November 22, 1972 order, the Commission also responded to the contention that either AT&T should not be allowed interim relief until the cross-subsidization issue was decided in Docket 18128 or that any interim rate increase should be apportioned across all classes of services. The Commission again rejected these arguments, observing that they had already been fully considered, that the increases were subject to an accounting and refund order, and that: "In view of the demonstrated need of Bell for increased earnings to attract capital on reasonable terms and to maintain its credit, we see no sound reason to defer any increased rates until after we decide Docket 18128." Id. at 246.

In response to the Commission's November 22, 1972 decision, AT&T filed new interim tariffs for Commission review, again placing the entire rate increase on MTS and WATS users. In its January 12, 1973 decision reviewing this increase, the Commission stated that:

The essential and single issue, is whether AT&T has made a sufficient showing that its proposed rate schedules have been reasonably designed to afford it the revenue relief in the amount we determined in Phase I of this proceeding to be required. If this issue is resolved in the affirmative, then, in accordance with the procedures we have heretofore established . . . such proposed rates may be allowed to become effective on an interim basis subject to further hearings as to the lawfulness of the specific components of the revised rate schedules, and subject, further, to our decision in Docket No. 18128.

38 F.C.C.2d at 985. Concluding that AT&T's revisions appeared reasonably designed to raise $145 million in revenues, id. at 987, the Commission again refused to reject the tariff for AT&T's failure to allocate any of the increase to private line service because:

whether AT&T can properly support its choice of the particular rate elements increase or can support its decision not to increase the private line service rates are matters to be resolved in Phase II herein and in Docket 18128. We hold only that AT&T has given sufficient reasons in support of the proposed rate schedule to warrant our allowing it to be filed as an interim rate schedule subject to accounting, refunds and further hearings as to the lawfulness thereof.

Id. at 987.

On the same day that the Commission released its opinion accepting AT&T's new interim tariffs, January 12, 1973, petitioners Nader and Robertson filed their petition for review of the Commission's November 22, 1972, Phase I decision. Because several petitions for reconsideration were pending before the Commission, this court, on April 16, 1973, stayed the appeal until the Commission ruled. On August 10, 1973, the Commission reaffirmed its prior orders in all respects. 42 F.C.C.2d 293 (1973). MCI's petition for review in this court followed, and on November 1, 1973, we consolidated its appeal with that of Nader and Robertson.

In view of the proliferation of dates, dockets, and parties, we have summarized the proceedings as follows:

Docket 19129 - Proceeding from which these appeals emanate. Instituted to investigate lawfulness of AT&T's November 20, 1970 tariff filing. 27 F.C.C.2d 149 (1971).

Phase I - Adjudicated rate of return issue. Decided November 22, 1972. 38 F.C.C.2d 213 (1972). Implemented January 12, 1973. 38 F.C.C.2d 984 (1973).

Phase II - Was considering issues of AT&T's expenses and investment, and reasonableness of Western Electric's earnings. See 27 F.C.C.2d 149 (1971).

Docket 16258 - First comprehensive investigation into the lawfulness of AT&T's rates. Instituted December, 1965. 2 F.C.C.2d 142 (1965).

Phase I - Initiated to determine AT&T's total revenue requirements and ratemaking principles for distributing these requirements to each class of interstate service.

Phase IA - Determined total revenue requirements, i.e., rate of return. 9 F.C.C.2d 30 (1967).

Phase IB - Was to consider applicable rate-making principles including cross-subsidization issue. Terminated in 1969, and record incorporated into Docket 18128.

Phase II - Was to investigate adjustments to be made to AT&T's rate base and expenses, and what adjustments were necessary to account for Western Electric's earnings. Phase II of Docket 16258 was terminated along with Phase II of Docket 19129 on December 23, 1971. 32 F.C.C.2d 701 (1971). Apparently because the issues were similar, Phase II of Docket 16258 was not renewed.

Docket 18128 - Consolidated with Phase IB of Docket 16258 in 1969, 18 F.C.C.2d 761 (1969). Currently considering rate relationships among various classes of services includes cross-subsidization issue. II. The Issues in No. 73-1045

Under the principle that a utility is entitled to rates that allow it, under honest, economical, and efficient management, to achieve a fair overall return, e.g., Bluefield Water Works & Improvement Co. v. Public Service Commission, 262 U.S. 679, 692-95, 43 S. Ct. 675, 67 L. Ed. 1176 (1923), the Commission set out in Phase I of Docket 19129 to determine what AT&T's rate of return on its interstate investment should be. Essentially, AT&T's rate of return is a composite of the return on the two components of AT&T's investment - debt and stockholder's equity. The Commission found that AT&T's cost of debt was 6.0% and that the cost of raising equity capital (the fair return on equity) was ...

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