Testimony, Comments & Press Releases

QUESTIONS PRESENTED FOR REVIEW

Whether a utility can claim an unlawful confiscation under the Takings Clause where it has failed to demonstrate that the challenged rate decision has resulted in substantial harm to the financial integrity of the company.

Whether a utility can claim an unlawful confiscation by attacking the methodology employed in setting its rates absent a showing that the end result of the challenged order will have a significant adverse impact on its financial condition.

LIST OF PARTIES BELOW

The following is a list of the parties to the Fifth Circuit proceeding:

Ad Hoc Telecommunications Users Committee

AirTouch Communications, Inc.

Alliance for Community Media

American Library Association

America’s Carriers Telecommunication Association

Ameritech Corporation

Association for Local Telecommunication Services

AT&T Corporation

Bay Springs Telephone Co., Inc.

Bell Atlantic Telephone Companies

BellSouth Corporation and BellSouth Telecommunications

Benton Foundation

Celpage, Inc.

Center for Media Education

Cincinnati Bell Telephone Company

Comcast Cellular Communications, Inc.

Commonwealth of the Northern Mariana Islands

Competition Policy Institute

Comsat Corporation

Consumer Action

Contel of California, Inc.

Contel of Minnesota, Inc.

Contel of the South, Inc.

Edgemont Neighborhood Coalition, et al.

Education and Library Networks Coalition

Electronic Data Systems Corp.

Florida Public Service Commission

Frontier Corporation

GTE Service Corporation

GTE Alaska Incorporated

GTE Arkansas Incorporated

GTE California Incorporated

GTE Florida Incorporated

GTE Hawaiian Telephone Company Incorporated

GTE North Incorporated

GTE Northwest Incorporated

GTE South Incorporated

GTE Southwest Incorporated

GTE West Coast Incorporated

Global Villages Schools Institute

Information Technology Association of America

Information Technology Industry Council

International Business Machines Corporation

Iowa Utilities Board

Legal Aid Society of Dayton

Louisiana Public Service Commission

MCI Telecommunications Corp.

Migrant Legal Action Program

Motorola, Inc.

National Association for Migrant Education

National Association of State Utility Consumer Advocates

National Cable Television Association, Inc.

National Emergency Number Association

National Rural Telecommunication Association

Nevada Bell

New Jersey Division of the Ratepayer Advocate

OPASTCO

Orion Network Systems, Inc.

Pacific Bell

PanAmSat Corporation

Pennsylvania Public Utility Commission

People of the State of California

People of the State of New York

Pronet, Inc.

Public Service Commission of Nevada

Public Utilities Commission of the State of California

Public Utilities Commission of the State of New York

Puerto Rico Telephone Company

Rural Telephone Coalition

South Dakota Public Utilities Commission

Southern New England Telephone Company

Southwestern Bell Telephone Company

Sprint Corporation

Sprint Spectrum L.P.

Telecommunications Resellers Association

Texas Office of Public Utility Counsel

The State Corporation Commission of the State of Kansas

United States Catholic Conference

United States Telephone Association

U S WEST, Inc.

Vanguard Cellular Systems, Inc.

Vermont Department of Public Service

Washington Legal Clinic for the Homeless

Western Alliance

Worldcom, Inc.

 

OUTLINE OF THE ARGUMENT 

I. Supreme Court Precedent Establishes the Principle That Utilities Do Not Have a Constitutionally Guaranteed Right to Recover Any Specific Type or Item of Cost 7

A. Introduction 7

B. The Supreme Court Has Rejected Challenges To Utility Rate Decisions On The Basis Of Objections To The Use Of A Particular Cost Recovery Methodology Or Specific Cost Allowances 8

C. The Supreme Court Has Repeatedly and Consistently Held That, in Determining Whether a Rate Order Can Be Challenged as Confiscatory, it Is the Overall End Result Reached, Not the Method Employed, That Is Controlling 9

D. The Supreme Court Has Rejected Arguments That Utilities Such as GTE Have a Constitutional Right to Recover Every Dollar They Invest in Providing Utility Service, Even Where Those Investments Were Found to Have Been Prudently Made 12

II. GTE’s Takings Claim is Premature, Speculative and Unsubstantiated 19

A. GTE Does Not Have a Legitimate Takings Claim Because the Total Effect of The Challenged Order is Not Yet Known 19

B. The FCC Order Under Review Has Not Deprived GTE of Any of its Property 21

C. GTE Has No Factual Basis upon Which to Demonstrate an Unconstitutional Taking Because the Overall Impact of the FCC Pricing Methodology on the Company’s Financial Integrity Is Not Yet Known 23

D. GTE Is Not Able to Show, Nor Can it Allege, That the FCC Pricing Methodology Has Had a Substantial Negative Impact on GTE’s Financial Integrity 27

E. GTE’s Reliance on the Brooks-Scanlon Case is Misguided 29

F. GTE Has Failed To Account For Its Revenues From Many Sources In Its Constitutional Takings Claim 30

TABLE OF AUTHORITIES

CASES

ADMINISTRATIVE DECISIONS

STATUTES & REGULATIONS

Telecommunications Act of 1996,

Pub. L. No. 104-104, 110 Stat. 56

1-3, 16, 20, 21, 26, 29, 32 47 U.S.C. § 254(c) and (f) 32

MISCELLANEOUS

OPINIONS AND ORDERS BELOW

The Opinion and Order of the Fifth Circuit Court of Appeals is reported at Texas Office of Public Utility Counsel, et al. v. Federal Communications Commission, 183 F.3d 393 (5^th Cir. 1999).

The Order of the Federal Communications Commission which is the subject of this appeal is reported at In the Matter of Federal-State Joint Board on Universal Service, Report & Order, 12 F.C.C.R. 8776 (May 7, 1997).

STATEMENT OF JURISDICTION

This Court has jurisdiction of this matter under 28 U.S.C. § 1254(1).

CONSTITUTIONAL PROVISION AND STATUTES INVOLVED

This matter involves the Takings Clause of the Fifth Amendment to the United States Constitution, U.S. Const. amend. V; and the Telecommunications Act of 1996, Pub. L. No. 104-104, 110 Stat. 56. The Telecommunications of 1996 amends the Communications Act of 1934, 47 U.S.C. § 151, et seq.

STATEMENT OF THE CASE

The instant matter comes to this Court on a challenge by GTE and other Incumbent Local Exchange Carriers ("ILECs") of the decision of the Fifth Circuit Court of Appeals in the matter of Texas Office of Public Utility Counsel, et al. v. Federal Communications Commission, 183 F.3d 393 (5^th Cir. 1999) ("TOPUC"). The TOPUC case dealt with challenges mounted by a number of parties to an Order by the Federal Communications Commission ("FCC") in its Universal Service proceeding. In the Matter of Federal-State Joint Board on Universal Service, Report & Order, 12 F.C.C.R. 8776 (May 7, 1997) ("Universal Service Order"). The FCC issued its Universal Service Order to comply with the Congressional mandate in the Telecommunications Act of 1996 ("Telecom Act") to ensure that all Americans would have affordable local telephone service. 47 U.S.C. §§ 151 and 254.

Through its enactment of the Telecom Act, Congress sought to modify the system of support for universal service while remaining committed to the goals of affordable telephone service for all consumers. Congress directed that universal service be preserved and advanced and that a system be designed to continue universal service in a future competitive telecommunications industry. See, 47 U.S.C. § 254. Congress directed Federal and State authorities to establish a funding mechanism that would preserve and advance universal service. 47 U.S.C. § 254(b)(5) and (d). The Order under review in the instant proceeding seeks to accomplish the Congressional goals relative to universal telephone service.

The FCC Order here under review was one of a series of orders issued by the Commission pursuant to the Telecom Act. On November 2, 1999, the FCC issued its Ninth Report and Order, further clarifying the means by which incumbent local exchange carriers would receive federal universal service support. In the Matter of Federal-State Joint Board on Universal Service, Ninth Report & Order and Eighteenth Order on Reconsideration, 14 F.C.C.R. 20432 (November 2, 1999).

The FCC, in issuing its Universal Service Orders endeavored to remain faithful to the Congressional directive of universal service continuation and expansion. Of particular relevance here, the FCC’s Universal Service Orders have established that the amount of federal universal service support for carriers providing service in high-cost areas would be based, in part, on the forward-looking economic costs of providing such service. Universal Service Order, 12 F.C.C.R. at 8899, ¶ 224. Forward-looking costs are to be determined using a methodology known as Total Element Long Run Incremental Cost ("TELRIC") which the FCC adopted in its Local Competition Order. In the Matter of Implementation of the Local Competition Provisions in the Telecommunications Act of 1996, First Report and Order, 11 F.C.C.R. 15499 (August 1, 1996) ("Local Competition Order"). In this matter, GTE bases its attack on the constitutionality of the FCC’s Order on the premise that TELRIC allegedly will not allow the company to recover all the costs it believes it has incurred in the fulfillment of its universal service obligations.

The National Association of State Utility Consumer Advocates ("NASUCA"), a party to the proceedings below, submits this Brief in opposition to GTE and in support of affirmance of the FCC and Fifth Circuit decisions in this matter. In particular, NASUCA urges this Honorable Court to reject any suggestion that the Orders below are in any way confiscatory or in violation of the Takings Clause of the Fifth Amendment to the United States Constitution.

SUMMARY OF THE ARGUMENT

For more than half a century, this Court has consistently adhered to the principle that a utility cannot claim an unconstitutional confiscation of property in the ratemaking context unless it can first show that the complained-of regulatory action has resulted in real financial harm to the company. In reviewing an order that affects the rates of a utility, the Court has held that, "it is the result reached not the method employed which is controlling," and that "[i]f the total effect of the rate order cannot be said to be unjust and unreasonable, judicial inquiry is at an end." FPC v. Hope Natural Gas Co., 320 U.S. 591, 602 (1944). This Court reiterated this basic lesson of Hope in Duquesne Light Co. v. Barasch, 488 U.S. 299 (1989), where it stated that, "Today we reaffirm these teachings of Hope Natural Gas: ‘[I]t is not theory but the impact of the rate order which counts.’" Duquesne at 310.

In the present appeal, GTE has come before this Court to ask that the FCC’s Universal Service Order be declared unconstitutional under the Takings Clause of the Fifth Amendment. GTE claims that the FCC’s Order will deprive it of full recovery of costs incurred in the fulfillment of its universal service obligations. The company argues that the FCC’s adoption of the TELRIC methodology for determining a portion of its universal service support was constitutionally impermissible because the agency failed to determine "in advance" that the rates produced by the TELRIC method would result in revenues that GTE would deem to be "sufficient." However, GTE does not argue that the rates produced by the FCC’s chosen economic technique in any way jeopardize the financial integrity of the company.

GTE cannot claim an unconstitutional confiscation where the basis for its challenge of the FCC Order is that the agency chose the wrong methodology to determine universal service support. Pursuant to Hope and Duquesne, the method employed to arrive at the rates of the utility is not determinative. If the total effect of the rate order cannot be said to be unreasonable, the Court will not recognize a regulatory takings claim.

GTE has not presented any evidence to suggest that the FCC’s adoption of the TELRIC methodology caused the type of financial harm required for a utility to claim an unconstitutional confiscation. Absent a showing by GTE that the FCC’s Order has produced overall rates that result in financial harm, GTE has not even met the threshold test for establishing a takings claim under Hope and Duquesne. As such, GTE’s regulatory takings claim in this case must be rejected.

ARGUMENT

I. Supreme Court Precedent Establishes the Principle That Utilities Do Not Have a Constitutionally Guaranteed Right to Recover Any Specific Type or Item of Cost.

A. Introduction

More than fifty years ago, this Court established the principle that a utility cannot claim an unconstitutional confiscation unless the overall rates set for that utility result in substantial harm to the financial integrity of the company. In the landmark decision in FPC v. Hope Natural Gas Co., 320 U.S. 591 (1944), this Court ruled that, "it is the result reached not the method employed which is controlling" and that "[i]f the total effect of the rate order cannot be said to be unjust and unreasonable, judicial inquiry... is at an end." 320 U.S. at 602. The underlying principle of Hope is that a utility does not have a constitutional right to recover costs associated with specific items of investment. Rather, it is the overall impact of the rates established for that utility which control whether a utility may claim an unconstitutional taking. Id.

The Hope decision was expressly affirmed by this Court in 1989 in rejecting the challenge of two Pennsylvania electric utilities that claimed a constitutional right to recover the costs for four cancelled nuclear power plants. In Duquesne Light Co. v. Barasch, 488 U.S. 299 (1989), this Court stated that, "Today we reaffirm these teachings of Hope Natural Gas: ‘[I]t is not theory but the impact of the rate order which counts.’" Duquesne at 310. GTE’s suggestion that its confiscation claim in this case is somehow supported or compelled by this Court’s decision in Duquesne is so utterly without merit that it must be summarily rejected by this Court.

B. The Supreme Court Has Rejected Challenges To Utility Rate Decisions On The Basis Of Objections To The Use Of A Particular Cost Recovery Methodology Or Specific Cost Allowances.

In its Brief in this matter, Petitioner GTE argues that the pricing provisions of the FCC’s Universal Service Order would effect an unconstitutional taking of the Company’s property. GTE claims that the FCC’s use of forward-looking, economically efficient costs in determining Universal Service support would fail to cover its actual costs by (1) prohibiting consideration of ostensibly higher historical costs incurred by the Company in building its networks, and (2) by basing forward-looking costs on projections from a local network employing "the most efficient technology for reasonably foreseeable capacity requirements." Local Competition Order, 11 F.C.C.R. at 15849, ¶ 685.

GTE duly cites the leading United States Supreme Court and United States Courts of Appeals cases that address confiscation of property in a utility rate setting process. However, GTE’s presentation of the relevant precedent wholly misperceives the nature and effect of those rulings, even beyond the speculation inherent in the Company’s claims of confiscation. GTE, in effect, calls on this Court to reverse more than fifty years of established constitutional law. Whatever GTE may think of the economic merits of the TELRIC method adopted by the FCC, it is simply impossible, under applicable United States Supreme Court precedent, for GTE to claim that the FCC’s selection of this method, in and of itself, would accomplish an unconstitutional taking.

C. The Supreme Court Has Repeatedly and Consistently Held That, in Determining Whether a Rate Order Can Be Challenged as Confiscatory, it Is the Overall End Result Reached, Not the Method Employed, That Is Controlling.

In the landmark decision of FPC v. Hope Natural Gas, supra, the United States Supreme Court ended decades of constitutional review of minute ratemaking details when it declared that, for purposes of its review, "it is the result reached not the method employed which is controlling," and that "[i]f the total effect of the rate order cannot be said to be unreasonable, judicial inquiry ... is at an end. The fact that the method employed to reach that result may contain infirmities is not then important." Hope at 602 (emphasis added). Hope thus marked the end of an era of judicial intervention in utility ratemaking decisions during which the courts had ruled that, as a matter of constitutional right, the "fair value" of the property on which a utility’s rates were set had to include some measure of the present value or reproduction cost, rather than be based upon the original or historical cost of the property. Id. at 599-600.

NASUCA submits that the Hope decision essentially established a two-part test to examine utility confiscation claims arising from a rate order. First, the Court will determine whether the end result of the rate order produces substantial harm to the investor interest. If the rate allowance permits the utility to operate successfully and to attract capital, the utility cannot claim confiscation, and the constitutional review of the rate order is at an end. Second, if the rate order results in substantial harm to investors, the Court will then examine whether such harm is justified by countervailing public policy or consumer interests. In Hope, the Court did not reach the second part of the test because it found that the end result did not substantially harm investor interests. Id. at 603.

In the instant case, GTE has failed to meet the threshold requirements prescribed by Hope to establish an unconstitutional confiscation. Instead, GTE has fashioned its own test. According to GTE, "[t]he agency’s duty under both the statute and the Constitution was to determine what costs should be recovered and whether its approach would allow their recovery." GTE Brief at 23. GTE contends that, "ratemaking requires a regulator to define the acceptable outcome in advance and to choose a method designed to achieve that end." GTE Brief at 22 (emphasis added). This is not the constitutional standard for deciding a confiscation claim under this Court’s takings jurisprudence. GTE has not provided any evidence tending to show that the Company has suffered financially as a result of the FCC’s Order. Instead, GTE complains that the FCC failed to determine "in advance" that the Company would be able to recover all its "actual" costs under the methodology adopted by the FCC. GTE Brief at 21-23. This is exactly the opposite of the constitutional standard set forth in Hope. The "end result" cannot be determined "in advance."

GTE comes before this Court asking that the methodology adopted by the FCC to establish universal service support for its network be declared unconstitutional under the Takings Clause. GTE’s request constitutes an attempt to have this Court reject 50 years of established takings doctrine in the context of utility regulation. GTE asks this Court to declare the FCC’s TELRIC methodology unconstitutional under the Fifth Amendment even though the Company has not even attempted to demonstrate that it has suffered substantial financial harm. Adopting GTE’s approach would immerse the Court in a constitutional examination of ratemaking theory for the telecommunications industry. This is exactly the sort of action the Court refused to take in Hope and its progeny. This Court has repeatedly stated that, in deciding a takings claim, it will not look to the methodology employed in arriving at utility rates. Instead, this Court has stated that it will first examine the end result of the rate decision to determine whether a confiscation claim can even be made. Hope at 602; Duquesne at 310.

D. The Supreme Court Has Rejected Arguments That Utilities Such as GTE Have a Constitutional Right to Recover Every Dollar They Invest in Providing Utility Service, Even Where Those Investments Were Found to Have Been Prudently Made.

Prior to Hope, the Supreme Court and other appellate courts engaged in the very type of constitutional judicial scrutiny that GTE is calling on this Court to perform here. In many of those early cases, the utilities argued that they had a constitutional right to reproduction costs (or fair value), which were ostensibly higher than original or embedded costs. The Court in Hope upheld the use of original cost by the Federal Power Commission, but more importantly concluded that it is the end result reached, not the methodology employed, that is controlling. In the present matter, by focusing on certain embedded costs and the purported infirmities of the FCC’s forward-looking treatment of costs, GTE demonstrates its misconception that utility investors have a constitutionally guaranteed interest in the recovery of specific items of cost or investment, rather than the overall justness and reasonableness of their rates.

Indeed, decisions from this Court after Hope confirmed that there are instances in which less might be allowed than is necessary to satisfy even the overall investor interests described in Hope. For example, just one year after Hope, the Court unanimously ruled in Market Street Railway Co. v. Railroad Commission, 324 U.S. 548 (1945), that the rates set for a failing street railway company were not confiscatory. In response to the company’s claim that the rate order was confiscatory under Hope, because it did not insure the financial integrity of the enterprise, the Court responded:

It was noted in the Hope Natural Gas case that regulation does not assure that the regulated business make a profit. 320 U.S. at 603; see, Federal Power Commission v. Natural Gas Pipeline Co., 315 U.S. 575, 590. All that was held was that a company could not complain if the return which was allowed made it possible for the company to operate successfully.

Market Street Railway at 566.

In the present case, GTE insists that, "the FCC had the duty to ensure that funding mechanisms were designed to produce the full compensation due." GTE Brief at 21. Whatever GTE means by "the full compensation due," it is clear that the Constitution does not guarantee that a utility will recover every dollar of investment. Nor does the Constitution guarantee that the utility will make a profit on its investment.

The United States Supreme Court has clearly found no constitutional flaw in the fact that certain rates might not permit some utilities to recover a return of and a return on all of their prudent investments. In Permian Basin Area Rate Cases, 390 U.S. 747 (1968), the Court held that there was "no constitutional infirmity" in the adoption of an area rate system for certain gas producers. Id. at 774. The Court upheld, as a matter of administrative necessity, a ratesetting procedure that was based on the average costs of a large number of natural gas producers and did not specifically address the investor interests in the capital costs of individual producers. The Court noted that, while the investor interests set forth in Hope remain "pertinent," they "scarcely exhaust the relevant considerations." Permian Basin at 791.

Any doubt that it is the result reached, not the method employed, that is of constitutional significance was eliminated by the Supreme Court’s decision in Duquesne Light Co. v. Barasch, 488 U.S. 299 (1989). In that case, two Pennsylvania electric utilities were denied any recovery whatsoever for costs that were incurred on four cancelled nuclear power plants. This Court decided that utilities could not claim an unlawful taking even if they received zero recovery of certain specific cost items unless they could show that the overall rate levels were not just and reasonable. The Court held that a "scheme of utility regulation does not ‘take’ property simply because it disallows recovery of capital investments that are not ‘used and useful in service to the public,’" even where it excludes costs that were prudent and reasonable when made. Id. at 301-02. In so doing, the Court stated, "Today we reaffirm these teachings of Hope Natural Gas: ‘[I]t is not theory but the impact of the rate order which counts.’" Duquesne at 310.

In Duquesne, the Court summarily rejected the suggestion that utilities are constitutionally entitled to a return of and on all prudent investment. The Court stated that selection of a single prudent investment standard would "signal a retreat from 45 years of decisional law." Id. at 315. Furthermore, the Court stated that "an otherwise reasonable rate is not subject to constitutional attack by questioning the theoretical consistency of the method that produced it." Id. at 314. In the instant appeal, it is precisely the theoretical consistency of the FCC methodology that GTE attacks, without any demonstration that the end result is unjust and unreasonable.

To suggest, as GTE does, that Duquesne stands for the proposition that utilities have a constitutional right to recover all their costs is simply wrong. With respect to the specific investments at issue in Duquesne, the utilities did not recover their historical cost; they did not recover their incremental cost; they did not recover anything. In Duquesne, this Court upheld its long-standing constitutional standard and decided that, unless the overall end result was unjust and unreasonable, the utilities had no constitutional claim.

According to GTE, under Duquesne, "when a regulator switches ratemaking methods, it must ensure that the new method continues to provide compensation for past investment that is constitutionally sufficient as measured under the old methodology." GTE Brief at 15. NASUCA respectfully submits that GTE’s assertions regarding this issue are clearly refuted by the plain language of the Duquesne opinion.

There is no constitutional prohibition against a regulatory agency adopting a new method of setting utility rates. While the Court observed in Duquesne that "a State’s decision to arbitrarily switch back and forth between methodologies in a way which required investors to bear the risk of bad investments at some times while denying them the benefit of good investments at others would raise serious constitutional questions," Duquesne at 315, that is not what occurred in Duquesne, and that is not what occurred here. The Court in Duquesne recognized that, "circumstances may favor the use of one ratemaking procedure over another." Duquesne at 316.

The present case does not deal with a situation where the FCC is switching back and forth between methodologies in a manner that is detrimental to the investor interest in every instance. GTE Brief at 29. The adoption of TELRIC by the FCC was an economic and policy judgment that the FCC made in order to implement the Congressional directive of the Telecommunications Act of 1996. While GTE may disagree with the theoretical basis for that determination, it cannot be claimed to have effected an unconstitutional confiscation unless and until the end result of the methodology is shown to have caused substantial financial harm to the utility. There has been absolutely no such showing here.

In support of its argument, GTE cites the concurrence by Justice Scalia in the Duquesne case, which reads as follows:

We cannot determine whether the payments a utility has been allowed to collect constitute a fair return on investment, and thus whether the government’s action is confiscatory, unless we agree upon what the relevant ‘investment’ is. For that purpose, all prudently incurred investment may well have to be counted. As the Court’s opinion describes, that question is not presented in the present suit, which challenges techniques rather than consequences.

Duquesne at 317 (concurring opinion, emphasis added).

The concurring opinion in Duquesne is not supportive of GTE’s arguments in this case. In that concurring opinion, Justices Scalia, White and O’Connor confirmed the basic principle of Duquesne that the consequence of regulation, not the technique used, is the critical consideration in determining whether a takings claim can be made. The issue addressed in the Duquesne concurrence is whether, for purposes of confiscation analysis, it is necessary to look at all of a utility’s "prudent investment" or only the assets that were "used and useful" in serving the public. As noted in Justice Scalia’s concurring opinion, however, the Court did not have to reach that question in Duquesne because, in that case, the utilities "challenge[d] techniques rather than consequences." Id. Challenging techniques, of course, is precisely what GTE has done in the present appeal. It has challenged the "technique" of the FCC’s adoption of the TELRIC methodology rather than the consequences. Thus, GTE’s argument fails just as clearly under the concurring opinion in Duquesne authored by Justice Scalia as it does under the Court’s Opinion authored by Chief Justice Rehnquist.

It should be noted that the question framed by Justice Scalia’s concurrence in Duquesne closely echoed the terms of a vigorous contemporaneous debate that resulted in a series of highly contested decisions in the D.C. Circuit Court of Appeals. In the en banc decision in Jersey Central Power & Light Co. v. FERC, 810 F.2d 1168 (D.C. Cir. 1987), three separate opinions emerged, discussing which rule to use to determine a regulatory taking. Judge Bork, writing for the majority, said it was necessary to consider all "prudent investment"; the dissenting opinion authored by Judge Mikva advocated the application of the "used and useful" rule; and Judge Starr, while voting with the majority, suggested that it was appropriate to consider a combination of both measures to arrive at a balanced determination. Jersey Central at 1169, 1188, 1194. Most important here, however, despite this disagreement regarding how much of the utility’s property to consider in deciding a takings claim, there was no dispute in the Jersey Central case that, under this Court’s precedents, there can be no finding of a taking without a showing of substantial financial harm to the utility. As Judge Bork explained,

Under Hope, as we have stated repeatedly, the only circumstance under which there is a possibility of a taking of investors’ property by virtue of rate regulation is when a utility is in the sort of financial difficulty described in Justice Douglas’ opinion. ..... But absent the sort of deep financial hardship described in Hope, there is no taking, and hence no obligation to compensate, just because a prudent investment has failed and produced no return.

Jersey Central at 1181 n.3 (emphasis added).

Under the present record in the appeal to this Court, GTE has not alleged -- nor could the company demonstrate -- the requisite "deep financial hardship" described above.

II. GTE’s Takings Claim is Premature, Speculative and Unsubstantiated.

A. GTE Does Not Have a Legitimate Takings Claim Because the Total Effect of The Challenged Order is Not Yet Known.

It is premature for GTE to claim that the FCC Order is confiscatory. In FPC v. Texaco Inc., 417 U.S. 380 (1974), the Court rejected a facial attack on a proposed method for "indirect regulation" of small gas producers under the Natural Gas Act, and noted:

Any broadside assertion that indirect regulation will be confiscatory is premature. The consequences of indirect regulation can only be viewed in the entirety of the rate of return allowed on investment, and this effect will be unknown until the Commission has applied its scheme in individual cases over a period of time.

Id. at 392.

This principle was also confirmed in Mobil Oil Corp. v. FPC, 417 U.S. 283 (1974), in which the Court rejected an attack against the area rates established for certain gas producers. In that case, the Court noted that the premise of the arguments -- that certain provisions of the order can be isolated and viewed without regard to the total effect of the order -- was in error. Id. at 315. The Court further rejected Mobil’s argument that assumed that there was only one just and reasonable rate possible for each vintage of gas, and that this rate must be based entirely on cost plus a reasonable rate of return. Id. at 316.

In FERC v. Pennzoil Producing Co., 439 U.S. 508 (1979), the Court criticized the Court of Appeals in that case for attempting to limit the discretion of the Federal Energy Regulatory Commission (FERC) in setting rates under the Natural Gas Act. While agreeing that the FERC Order, which granted exceptions to area rate levels, had to be remanded, the Court also stated:

We are also convinced, however, that the Court of Appeals trenched upon the ratemaking authority vested in the Commission when it strongly suggested that the Commission is required to grant the relief Producers request in this case so long as the increase in royalty costs is not imprudent and the relief, when granted, will merely sustain rather than increase Producers’ profits.

Id. at 517. The Supreme Court thus flatly rejected the suggestion that a utility is entitled as a matter of constitutional law to recovery of all prudent costs.

These cases uniformly stand for the proposition that no specific ratemaking method is either constitutionally required or constitutionally forbidden. These cases also demonstrate the Court’s reluctance to find a taking where there is a facial, broadside attack based not upon the end result, but rather upon the possible outcome of ratemaking methodologies not yet applied.

To the extent that GTE suggests in its brief that it is not claiming an actual taking in this case, but rather is urging a limiting interpretation of the Telecom Act that would prevent such a taking, GTE Brief at 20, 36-37, that argument must fail as well. As stated by the D.C. Circuit Court of Appeals in National Mining Association v. Babbitt, 172 F.3d 906 (D.C. Cir. 1999): "We will not ‘frustrate[] permissible applications of a statute or regulation,’ ... based on the specter -- rather implausible from what we can tell now -- of a future unconstitutional taking." Id. at 917 (quoting United States v. Riverside Bayview Homes, 474 U.S. 121, 127-28 (1985)).

Here, GTE’s speculative, theoretical claim does not justify a finding that a taking has occurred, nor does it justify a finding that, absent some limiting ruling by this Court, the FCC Order and the universal service provisions of the Telecom Act will somehow necessarily result in a future unconstitutional taking of GTE’s property.

B. The FCC Order Under Review Has Not Deprived GTE of Any of its Property.

In its Order, the FCC fully considered and properly rejected GTE’s confiscation arguments. The FCC methodology is not, as the Company contends, "solely theoretical." Nor did the FCC fail to fully articulate a reasonable basis for its decision. After a voluminous and detailed examination of various considerations advanced by all parties, the FCC concluded that its forward-looking incremental cost standard "is consistent with the Fifth Amendment and is not confiscatory." Local Competition Order, 11 F.C.C.R. at 15855, ¶ 701. The FCC cited several cases relied upon by the GTE in its present appeal, notably Hope Natural Gas, Permian Basin, and Duquesne. After citing these cases, the FCC noted:

Incumbent LECs argue that establishing a rate structure that does not permit recovery of historical or embedded costs is confiscatory. We disagree. As stated above, the Court has consistently held since Hope Natural Gas that it is the end result, not the method used to achieve that result, that is the issue to be addressed. Indeed, the Court has found that the "fixing of prices, like other applications of the police power, may reduce the value of the property which is being regulated. But the fact that the value is reduced does not mean that the regulation is invalid." Moreover, the Court has upheld as reasonable changes in ratemaking methodology when the change resulted in the exclusion of historical costs prudently incurred. Thus, the mere fact an incumbent LEC may not be able to set rates that will allow it to recover a particular cost incurred in establishing its regulated network does not, in and of itself, result in confiscation.

Local Competition Order, 11 F.C.C.R. at 15870-71, ¶ 736 (footnote omitted).

The FCC properly concluded after a full review of the record in its Local Competition proceeding that, "[n]o incumbent LEC has provided persuasive evidence that prices based on forward-looking economic cost methodology would have a significant impact on its ‘financial integrity.’" Id. at 15871, ¶ 738. In addition, the FCC correctly stated that the end result test considers the "overall regulatory framework" and whether the incumbent LECs have a reasonable opportunity to recover a return on their investment in light of the revenues from "the incumbent LECs’ overall rates.... including the revenues for other services under [the FCC’s] jurisdiction." Id. at 15871, ¶ 737.

C. GTE Has No Factual Basis upon Which to Demonstrate an Unconstitutional Taking Because the Overall Impact of the FCC Pricing Methodology on the Company’s Financial Integrity Is Not Yet Known.

Because Hope and its progeny establish that the courts must consider the end result of the regulation, it becomes apparent that the record in this matter is simply not sufficient to support the sweeping claims of confiscation made by GTE. The Court thus lacks the factual predicate upon which to make such a determination.

Under traditional "takings" jurisprudence, the Court must engage in "essentially ad hoc, factual inquiries" that address such factors as 1) the economic impact of the regulation; 2) the nature of the government action; and 3) the extent to which the regulation has interfered with investor-backed expectations. Penn Central Transp. Co. v. New York City, 438 U.S. 104, 124 (1978). At the present time, GTE and the other incumbents have presented this Court with little more than a competing alternative theory to the FCC’s pricing methodology, devoid of the essential facts regarding economic impact or interference with investor-backed expectations by which this Court could conclude that the FCC’s pricing methodology, once applied, could effect a taking. GTE’s assertion of harm is conditioned upon many factors in the future and is wholly speculative. It is thus premature for the Court to determine that the impact, or total effect, of the FCC’s Order would be unreasonable, given the absence of any present record demonstrating what overall returns may be earned by the Company or whether the FCC Order will have any significant impact upon the Company’s financial integrity.

When the Court has been faced with the question of whether an unconstitutional confiscation has occurred in the ratemaking context, it has examined the overall rates, not the specific items comprising those rates. This is consistent with the Court’s general "takings" jurisprudence where the Court has compared the value of the property allegedly taken to the value of the entire property at issue. As the Court explained in Keystone Bituminous Coal Association v. DeBenedictis, 480 U.S. 470 (1987),

Because our test for regulatory taking requires us to compare the value that has been taken from the property with the value that remains in the property, one of the critical questions is determining how to define the unit of property ‘whose value is to furnish the denominator of the fraction.’

Id. at 497. Thus, the Court must consider the "numerator" and the "denominator" in the financial equation to define the extent of the harm suffered by the utility as a result of the regulatory action under review. In the instant matter, GTE has not specified the value of the property allegedly taken, and it has failed to set forth the value of the entire property at issue. Because of the absence of this critical information, GTE cannot claim, much less show, that the FCC’s Order has caused substantial harm to its financial condition. Absent an allegation of a significant negative impact on its financial condition, GTE cannot claim an unconstitutional confiscation.

There is absolutely no basis at this time for the Court to conclude that the application of the FCC pricing rules will have a confiscatory impact. "A court cannot determine whether a regulation has gone ‘too far’ unless it knows how far the regulation goes." MacDonald, Sommer & Frates v. Yolo County, 477 U.S. 340, 348 (1986). Further, an administrative agency is entitled to observe the actual result of the operation of its regulations for a reasonable period of time before a court could conclude that the agency’s actions were arbitrary or capricious. Tenoco Oil Co. v. Dept. of Consumer Affairs, 876 F.2d 1013, 1028 (1st Cir. 1989). In Tenoco Oil, the First Circuit held that a takings clause challenge to gasoline pricing restrictions was not ripe for constitutional review, in large measure because the record was not adequately developed, and the agency had expressed a willingness to adjust its price order upon receipt of subsequent evidence. Tenoco Oil at 1026. The Court emphasized that until the wholesalers had requested and been refused relief pursuant to procedures set forth in the agency’s order, a federal court could not yet know whether the agency’s regulations confiscate property. Id.

The FCC has recognized the evolving and fact-specific nature of its Local Competition Order:

Incumbent LECs may seek relief from the Commission’s pricing methodology if they provide specific information to show that the pricing methodology, as applied to them, will result in confiscatory rates. We also do not completely foreclose the possibility that incumbent LECs will be afforded an opportunity to recover, to some extent, their embedded costs through a mechanism separate from rates for interconnection and unbundled network elements. As stated above, we intend to explore this issue in detail in our upcoming access reform proceeding.

Local Competition Order, 11 F.C.C.R. at 15872, ¶ 739.

Although the Fifth Amendment protects utilities from regulatory actions that are so unjust as to be confiscatory, A[i]t is not enough that a party merely speculates that a government action will cause it harm.@ Alenco Communications, Inc., et al. v. FCC, 201 F.3d 608, 624 (5^th Cir. 2000) (emphasis added). In Alenco, a large number of rural local telephone companies challenged two FCC Orders promulgated to make changes to universal service consistent with the 1996 Telecommunications Act. The telephone companies in Alenco made takings claims similar to those raised by GTE in its brief in this matter, and the Fifth Circuit Court flatly rejected those claims. The Court found that the phone companies in Alenco had failed to show a taking because they relied on mere speculation to support their Fifth Amendment arguments. The Alenco Court explained that,

petitioners must wait to experience the actual consequences of the Order before a court may even begin to consider whether the FCC has effected a constitutional taking. Until it is known what level of universal service funding each petitioner will receive under the Order, and under what circumstances the Commission will grant a waiver, we cannot seriously entertain a Takings Clause challenge.

Alenco at 624.

In the instant matter, GTE is in the same position as the Alenco petitioners. GTE cannot be said to have made a sufficient showing of a taking because none of the deprivations of company property claimed by GTE has occurred. In fact, there is no evidence that GTE has experienced any financial harm due to the FCC’s Order, and even if such an adverse effect would ever materialize, it may not amount to an unconstitutional taking under the Fifth Amendment to the U.S. Constitution.

D. GTE Is Not Able to Show, Nor Can it Allege, That the FCC Pricing Methodology Has Had a Substantial Negative Impact on GTE’s Financial Integrity.

 

In the present appeal, there is nothing to support GTE’s broad, unproven confiscation allegations. As discussed further below, GTE has not provided any evidence upon which this Court could make a determination that GTE has suffered the kind of financial hardship which could qualify as a taking. This Court should therefore defer evaluation of the constitutional impact of the FCC Order until its actual results can be demonstrated.

At the moment, there is no indication that the FCC’s pricing rules have resulted in the type of deep financial hardship necessary to show an unconstitutional taking. In fact, there is publicly reported data indicating that the FCC’s TELRIC methodology has not resulted in financial losses for the incumbents. In the March 2000 edition of the Federal Communications Law Journal, economists David Gabel and David I. Rosenblum present data that indicate that no taking has resulted from TELRIC pricing. Gabel & Rosenblum, Who’s Taking Whom: Some Comments and Evidence on the Constitutionality of TELRIC, 52 Fed. Com. L.J. 239 (March 2000). Following a review of financial information submitted to the FCC by 150 of the largest telephone companies in the country, Messrs. Gabel and Rosenblum conclude that,

Given the rates of return on regulated investment, and the rates of return on embedded investment, it seems clear that the majority of telephone companies in the survey are earning returns that are more than sufficient to assure confidence in the financial integrity of their enterprises, maintain credit worthiness and to enable them to attract additional capital. Based on this data it would seem that the ILECs and their supporters’ contention, that the use of the TELRIC methodology, on its face, results in a taking, is not grounded in the reality depicted by their earnings reports.

 

52 Fed. Com. L.J. at 265 (footnote omitted).

Publicly available FCC reports demonstrate that GTE continues to realize substantial earnings from its investments. The most current financial reports from the FCC demonstrate in 1999 that GTE realized net income of $2.1 billion on stockholder’s equity of $10.3 billion. GTE certainly has not demonstrated that the FCC has forced it to operate at a loss. There is no basis to conclude that the FCC has not fully satisfied the investor interest under the standards announced in Hope. Hope at 603.

There is, quite simply, no basis for any claim that GTE has suffered severe financial harm as a result of the FCC Order on appeal. In the absence of such harm, GTE may still argue that the FCC Order violates the Telecommunications Act of 1996 or that it represents bad economic theory, but GTE is foreclosed from arguing that the Order was confiscatory. For that latter purpose, it is the result reached, not the method employed, that is controlling. Hope at 602; Duquesne at 310.

E. GTE’s Reliance on the Brooks-Scanlon Case is Misguided.

 

In its brief, GTE suggests that the FCC should not be permitted to consider the multitude of other revenue sources available to GTE and the other incumbent providers. GTE Brief at 24-25. In asserting that the FCC cannot consider "other revenues" (presumably revenues unrelated to universal service), GTE incorrectly relies upon Brooks-Scanlon Co. v. Railroad Comm’n of Louisiana, 251 U.S. 396 (1920). In Brooks-Scanlon, a sawmill had developed a railroad as a subsidiary business in order to bring logs to the sawmill. Brooks-Scanlon at 398. After all of the timber had been cut, the railroad operated at a loss, but Brooks-Scanlon was denied permission to terminate its railroad operation by the Louisiana Railroad Commission. The United States Supreme Court reversed that decision. In that case, the Supreme Court simply held that where a railroad serving the public is owned and operated by a lumber company, it is the business of the railroad, and not the profits from the lumber company, which determines whether the railroad may abandon service as unprofitable.

The applicability of Brooks-Scanlon to the issues in the present case is called into question by subsequent decisions of this Court. In Broad River Power Co. v. South Carolina, 281 U.S. 537 (1930), the Supreme Court explained that its holding in Brooks-Scanlon was made on the basis that "the private business [the lumber company] was not devoted to a public use or a part of the public franchise." Id. at 544. In the Broad River case, the Court considered the overall business of a profitable electric company and its unprofitable subsidiary railway, both of which were devoted to a public use. Similarly, in Baltimore & O.R. Co. v. United States, 345 U.S. 146 (1953), when a railroad complained that its rates for carrying certain kinds of vegetables were confiscatory, the Court responded that, "So long as a railroad is not caused by such regulation to lose money on its overall business, it is hard to think that it could successfully charge that its property was being taken for public use ‘without just compensation.’" Id. at 148.

A critical fact in Brooks-Scanlon was that the utility owner wished to withdraw entirely from offering any public utility service. The Court agreed that it should be permitted to exit the railroad business, but explained that, if a public utility wished to continue to operate under its regulatory charter, then a regulatory commission "may require it to fulfill an obligation imposed by the charter even though fulfillment in that particular may cause a loss." Brooks-Scanlon at 399 (citing Missouri Pacific Ry. Co. v. Kansas, 216 U.S. 262, 276, 278 (1910). GTE certainly has not suggested that it wishes to abandon its vast telecommunications network. Nor has GTE suggested that the FCC is forcing it to operate its telecommunications network at a loss. The Brooks-Scanlon case does not support GTE’s position in this case.

F. GTE Has Failed To Account For Its Revenues From Many Sources In Its Constitutional Takings Claim.

NASUCA has explained above the many reasons why GTE has failed to present a constitutional claim that the Court should recognize. Even if the Court finds that GTE has presented a constitutional claim that the court should review, GTE has failed to acknowledge the many sources of revenues that must be considered in reviewing such a takings claim.

The crux of GTE’s argument appears to be that "incumbents are being compelled to provide universal service at below-cost rates." GTE Brief at 17. GTE later references a supposed "gap between below-cost rates and the amount the utility is constitutionally due." GTE Brief at 19. GTE asks this Court to make a constitutional determination concerning an assumed shortfall of revenues below its costs without adequately explaining what revenues should be counted in comparison to costs and why certain revenues should be dismissed from the revenue/cost analysis. The fundamental problem with this argument is that GTE has not adequately explained what GTE service revenues should be considered in comparison with GTE’s costs in any constitutional takings analysis. GTE apparently is arguing that the FCC is required, as a matter of constitutional law, to offer to GTE universal service support so as to make up the difference between its "universal service cost" and its retail revenues from universal service and its FCC determined payments from a Universal Service Fund.

GTE has presented no authority by which it can contend that it is constitutionally entitled to recover specific costs of providing service to specific customers solely from universal service revenues and the FCC-determined universal service fund. GTE still has an opportunity to recover additional costs from the myriad of services that it sells to its customers, as well as from its state universal service funds. Neither the Telecommunications Act of 1996 nor the United States Constitution guarantee full cost recovery from only one category of service.

GTE does not have a constitutional right to earn a profit on every telephone call it carries. Nor does it have a constitutional right to earn a profit from every customer it serves. GTE also has no constitutional right to assign all of the costs of its multiple products and services network to universal service. NASUCA respectfully submits that this Court must view GTE’s constitutional takings claim in light of the many services that GTE sells to consumers over the same or similar facilities. Such facilities are used in a joint and common fashion to produce basic local telephone service, a significant component of universal service, as well as toll and many other services. Revenue to cost relationships will necessarily vary based upon the characteristics of the customers and the services they purchase. GTE should not prevail on a theoretical takings claim based upon only a small number of services sold to a portion of its customers.

NASUCA emphasizes that what ultimately matters under the test set forth in Hope "is whether that order ‘viewed in its entirety’" presents a constitutional takings claim. Hope at 602. This Court explained that: "It is not theory but the impact of the rate order which counts." Id. In order to examine GTE’s takings claim, this Court must consider the financial position of GTE in light of the broad range of revenues that it receives related to its vast array of telecommunications operations. Any such consideration will lead to the conclusion that GTE has not suffered the type of overall financial harm that is necessary to raise a constitutional takings claim.

CONCLUSION

For the reasons set forth above, NASUCA submits that the FCC Order here under review cannot be challenged as confiscatory. There has been no showing whatsoever that the Order violates the longstanding test established by the United States Supreme Court for determining whether confiscation has occurred in the utility ratemaking context. The Court should affirm the ruling of the Fifth Circuit Court of Appeals in this matter.

National Association of State Utility Consumer Advocates
8380 Colesville Road, Suite 101, Silver Spring, MD  20910
Phone: (301) 589-6313 Fax: 589-6380
e-mail: nasuca@nasuca.org