City of Little Rock v. AT&T COMMUNICATIONS OF SOUTHWEST, INC. , 318 Ark. 616 ( 1994 )

Tom Glaze, Justice.

This case was originally decided by the Arkansas Public Service Commission which upheld the validity of a Little Rock ordinance that required AT&T Communications of the Southwest, Inc. to pay certain fees for the privilege of using the City’s public streets. The City of Little Rock had adopted the ordinance which granted each provider of interstate and intrastate toll (long distance) telephone services in the City a franchise to use the City’s public ways. The ordinance also levied a $.004 per minute charge on all long distance telephone calls that are billed to a city service address. AT&T filed its complaint with the PSC, challenging the validity of the ordinance, and the Commission designated an administrative law judge to hear the complaint.

The law judge issued Order No. 17, finding the ordinance valid and dismissing AT&T’s complaint. The Commission subsequently adopted Order No. 17 as its own. AT&T appealed from the Commission’s decision to the court of appeals and set out the following points for reversal: (1) The ordinance is unlawful as a tax or fee, and in particular, is not authorized by Ark. Code Ann. § 14-200-101 and is barred by Ark. Code Ann. § 23-17-101; (2) alternatively, the ordinance is an arbitrary, capricious and unreasonably discriminatory application of whatever franchise authority the City may possess; and (3) the ordinance is an unreasonable and therefore unconstitutional burden on interstate commerce. The court of appeals ruled in AT&T’s favor, reversing the Commission’s decision. AT&T Communications v. City of Little Rock, 44 Ark. App. 30, 866 S.W.2d 414 (1993). Specifically, it agreed with AT&T’s first point that the City’s ordinance levied an unauthorized tax. The court of appeals found it unnecessary to rule on AT&T’s other two points. Little Rock and the PSC petitioned this court to review the case, and we granted that petition. In doing so, we first consider the court of appeals’ decision which invalidated the City ordinance as levying an unauthorized tax.

In reaching its decision, the court of appeals put misplaced reliance upon City of Marion v. Baioni, 312 Ark. 423, 850 S.W.2d 1 (1993), and other similar cases where this court discussed the distinction between a fee and tax. We initially point out that the fee imposed by the City of Little Rock here against AT&T is called a “franchise” fee, and is wholly different from those fees discussed and dealt with in Baioni. By statutory law, a municipality may by ordinance assess and determine a rate/fee for service rendered by any public utility occupying streets (rights-of-way) within the municipality, and such an ordinance is deemed prima facie reasonable. Ark. Code Ann. §§ 14-200-101 — 14-200-104 (1987 and Supp. 1993). In common parlance, such franchise fees are, in form, rental payments for a public utility’s use of the municipality’s right-of-way, and such fees are reviewed by the PSC. § 14-200-101(b)(l).

Prior to AT&T’s divestiture, Little Rock assessed only one municipal franchise fee for the use of its rights-of-way for telephone service and that assessment was imposed only upon local calls. It was then generally believed that the imposition of a municipal franchise fee upon long distance service would violate the Commerce Clause. This practice was continued by Little Rock even after AT&T’s divestiture took place about eleven years ago when Southwestern Bell (SWB) and other regional companies received the local lines and property, and AT&T obtained the long-distance part of the telephone network. SWB continued its payments of the Little Rock franchise fees upon the local service. However, AT&T paid no similar fee on its long-distance service even though AT&T obtained access to originating and terminating caller locations within Little Rock over SWB’s facilities, a substantial portion of which occupy the City’s streets and rights-of-way. It was only after the Supreme Court’s decision in Goldberg v. Sweet, 488 U.S. 252 (1989), that Little Rock enacted the ordinance in issue here, whereby it assessed AT&T (and other companies) four mills on all long distance calls that originated or terminated within the City and were billed to a Little Rock address.

As previously mentioned, the court of appeals relied upon this court’s rationale in Baioni in holding Little Rock’s franchise fee or assessment is an unlawful tax, but in doing so, the court of appeals completely overlooked the fact that Baioni and related cases cited in that decision were not franchise fee cases.

In Baioni, the City of Marion charged sewer and water fees to certain developers. There, this court reached its decision by analyzing the evidence in light of the applicable rule in such cases that a governmental levy or fee, in order not to be denominated a tax, must be fair and reasonable and bear a reasonable relationship to the benefits conferred on those receiving the services. Baioni, and cases like it, involved fees charged directly to developers or residents for the construction or extension of certain services such as for sewer and water, and the general rule that the fees obtained for such purposes must be segregated and used for those purposes only.

The Baioni holding is simply inapplicable to situations where cities are statutorily authorized to assess public utilities franchise fees for the use or occupancy of the cities’ rights-of-way. The court of appeals was wrong in failing to recognize this legal or statutory distinction.

As pointed out above, § 14-200-101 (a)(1) empowers Arkansas municipalities to assess utility franchises operating within the municipalities, and telephone companies are not excluded. See also Ark. Code Ann. § 23-4-201 (1987); S.W. Bell Tel. Co. v. City of Fayetteville, 271 Ark. 630, 609 S.W.2d 914 (1980); Hot Springs Elec. Light Co. v. Hot Springs, 70 Ark. 300, 67 S.W. 762 (1902) (court recognized a municipality had right to enact an ordinance requiring a company to pay a fee for erecting and maintaining poles in the city streets for electric light, telephone or certain other purposes). In the S.W. Bell Tel. Co. case, this court pointed out that § 14-200-101 (then Ark. Stat. Ann. § 73-208) granted cities the authority to determine reasonable terms and conditions, which included a franchise payment/fee, for the use of public streets. Significantly, § 14-200-101 was found by the court to apply to a telecommunications utility deriving the right to construct its system under the Telephone Company Act [Ark. Code Ann. § 23-17-101 — 307 (1987)]. In this respect, AT&T argues that, without exception, the Telephone Company Act allows telephone companies the right to use highways and city streets without charge. It concedes, however, that, over the years, telephone companies have paid franchise fees on local calls. Of course, if AT&T’s construction of the Act were true, municipal fees charged on either local or long distance service would be unlawful and undoubtedly would impact greatly on present municipal revenues.

As AT&T concedes by acknowledging the telephone companies’ payment of franchise fees during past years, its proposed construction of the Act has not been the one applied by the telephone companies and cities, and, in ascertaining the Act’s intent, this court examines the statute historically, as well as the contemporaneous conditions at the time of its enactment, consequences of interpretation, and matters of common knowledge within the limits of this court’s jurisdiction. Mears, County Judge v. Ark. State Hospital, 265 Ark. 844, 581 S.W.2d 339 (1979); see also Hot Springs Elec. Light Co., 709 Ark. 300, 67 S.W. 762. It appears clear that the telephone companies, municipalities and this court have recognized franchise fees over the past years, and only now, does AT&T claim the 1885 Telephone Company Act invalidates such fees. In any event, § 14-200-101 has been enacted since the passage of the 1885 Act, and that later statute, as discussed above, empowers municipalities to impose such fees. For these reasons, we conclude the Little Rock franchise and fee ordinance is authorized by law, and the court of appeals was wrong in holding otherwise.

We next turn to AT&T’s second argument that Little Rock’s ordinance and franchise fee is an arbitrary, capricious and unreasonable application of the City’s franchise authority. In considering this issue, we emphasize that our review is of the PSC’s decision, therefore, we are bound by long-settled law governing this court’s limited review of PSC administrative rulings. The Commission has broad powers and is vested with wide discretion; that, if the order of the Commission is supported by substantial evidence, is free from fraud and not arbitrary, it is the duty of this court to let it stand even though the court might disagree with the wisdom of the order. And for the Commission’s order to be invalid, the Commission’s action must lack rational basis. In Re Sugarloaf Mining Co., 310 Ark. 772, 840 S.W.2d 172 (1992); Harding Glass Company v. Ark. Public Service Commission, 229 Ark. 153, 313 S.W.2d 812 (1958).

Here, Little Rock, by ordinance, assessed AT&T and other like utilities franchise fees based upon the use of Little Rock streets. These utilities obtained enormous gross revenues from handling long distance calls within the city. The PSC agreed with Little Rock that, given the inherent nature of communication services provided by telephone utilities, the only rational basis for assessing fees is in measuring time in units. Under Arkansas law, Little Rock’s ordinance, using time-unit methodology in establishing AT&T’s fee, is by law presumptively reasonable. Ark. Code Ann. § 14-200-101 (a)(1) (1987). AT&T had the burden to show the Little Rock fee ordinance is unreasonable, but even its own expert, Dr. Charles Venus, testified he did not think “anyone knows whether the relationship in this particular case is reasonable or unreasonable.” In sum, Little Rock’s imposition of a fee on a per-minute basis for the effective use of the city’s rights-of-way has not been shown to be unreasonable or without a rational basis.

Although this court on review must accept the PSC’s ruling unless it is arbitrary or capricious, AT&T (and a dissenting opinion) would force the PSC to require franchise fees based upon the number of miles of facilities AT&T (and like utilities) had located within the city’s rights-of-way. No authority is cited which requires such mileage methodology or formula, and we know of none. In fact, the Supreme Court has cautioned against such rigid formulas when dealing with telecommunication businesses which involve “the more intangible movement of electronic impulses through computerized networks.” Goldberg v. Sweet, 488 U.S. 252, 264 (1989). While other businesses may be more reasonably assessed on the basis of number of units owned or number of miles traveled, the Goldberg Court opined that a formula based upon “mileage or some other geographic division of individual telephone calls would produce insurmountable administrative and technological barriers” because “the exact path of thousands of electronic signals can neither be traced nor recorded.” Id. at 264-265, 266.

Finally, it is significant to point out that the time-use methodology selected by Little Rock and approved by the PSC results in the equality of treatment of all interexchange carriers. On the other hand, if Little Rock and the PSC had chosen the mileage right-of-way formula suggested by AT&T, disparity between telephone companies could be argued as AT&T does now in this appeal. The PSC is not required to mandate that the City use a mileage methodology in establishing fee charges for telecommunications business, especially when that formula is arguably discriminatory in nature.¹

In light of the Supreme Court’s reasoning in Goldberg v. Sweet, 488 U.S. 252 (1989), and the PSC’s finding that AT&T failed to show the City’s method of assessment was unreasonable, this court is not in a position to determine otherwise. As newer technologies, including cellular communications, continue to evolve, this court must abandon antiquated and simplistic formulas as that suggested by AT&T. Because there is sufficient evidence to support the PSC’s finding that the assessment based on $0,004 per minute of use is reasonable, we affirm that ruling.

Finally, we consider AT&T’s argument that the fee or charge under the Little Rock ordinance constitutes an unreasonable burden in violation of the Commerce Clause. AT&T cites Goldberg v. Sweet, wherein the Supreme Court upheld the validity of an Illinois Telecommunications Excise Act, finding the Act withstood scrutiny under the Commerce Clause. In so holding, the Supreme Court held that the Illinois Act satisfied the four-pronged test set forth in Complete Auto Transit, Inc. v. Brady, 430 U.S. 274, which required that the tax (1) must be applied to an activity with a substantial nexus with the taxing state, (2) is fairly apportioned, (3) does not discriminate against interstate commerce, and (4) is fairly related to the services provided by the state.

Here, AT&T does not question the first three test factors set out above, but it urges Little Rock’s ordinance fails the fourth criterion because the charge assessed by ordinance does not fairly relate to the services provided by Little Rock. AT&T specifically argues that it already pays a privilege license and sales taxes for general city services and the only added benefit the City purports to confer by its ordinance is a franchise or license to occupy Little Rock’s public streets. To state the obvious, all businesses do not pay the same amounts in sales taxes. It is equally apparent that only a few businesses have the privilege to occupy public rights-of-way. The proof showed that AT&T paid significantly less than the percentage of gross revenues paid by the electric, gas and water utilities using Little Rock public rights-of-way. In addition, we note that as a result of its use of these rights-of-way, AT&T has derived substantial benefits via gross receipts from its providing a commercial, profit-making, public utility service to the citizens of Little Rock. AT&T’s conclusory disagreement concerning its right of occupancy and contention that the franchise fee is excessive in comparison to the benefits afforded it by Little Rock is simply unpersuasive. Because AT&T failed to show the City’s franchise fee is an unreasonable burden on interstate commerce, we affirm the PSC’s ruling.

For the reasons given above, we reverse the court of appeals’ decision that the Little Rock ordinance levied an unauthorized tax, and affirm the PSC decision in all respects.

Dudley and Corbin, JJ., dissent; Special Justice Charles Roscopf joins this opinion; Newbern, J., not participating.

1 interestingly, the fee charged AT&T for its per-minute usage of Little Rock’s rights-of-way amounts to a lower percentage of its revenue than the percentage of revenue paid by the other following (except for one) utilities:

COMPANY_______PERCENTAGE

ALLTEL 1.69

AP&L 5.20

ARKLA 4.42

ARKLA (IN LITTLE ROCK) 5.20

AT&T (IN LITTLE ROCK) 1.92

LITTLE ROCK WATER WORKS 5.00

SOUTHWEST ARK. ELEC. COOP. CORP. 3.67

SOUTHWESTERN BELL TELEPHONE COMPANY 2.43

SOUTHWESTERN BELL TELEPHONE COMPANY (IN LITTLE ROCK) 7.32

STORER CABLE (IN LITTLE ROCK) 3.00