Bellsouth Telecommunications, Inc. D/B/A South Central Bell Telephone Co. v. Tennessee Regulatory Authority ( 1997 )

IN THE COURT OF APPEALS OF TENNESSEE
MIDDLE SECTION AT NASHVILLE
FILED
BELLSOUTH TELECOMMUNICATIONS, INC. )
d/b/a SOUTH CENTRAL BELL TELEPHONE ) October 1, 1997
COMPANY, )
)
Petitioner/Appellant, ) Public Service
) Commission Crowson
Cecil W.
VS. ) No. 95-03383
) Appellate Court Clerk
H. LYNN GREER, Chairman, SARA KYLE, ) Appeal No.
Director, and MELVIN J. MALONE, Director, ) 01A01-9601-BC-00008
Constituting the Tennessee Regulatory Authority, )
)
Respondents/Appellees. )
BELLSOUTH TELECOM MUNICATIONS, INC., )
) Public Service
Petitioner, ) Commission
) No. 95-02614
VS. )
) Appeal No.
TENNESSEE PUBLIC SERVICE COMMISSION, ) 01A01-9602-BC-00066
)
Respondent. )
STATE OF TENNESSEE, on relations of )
BELLSOUTH TELECOM MUNICATIONS, INC., )
)
Petitioner/Appellant, ) Davidson Chancery
) No. 95-2965-II
VS. )
)
KEITH BISSELL, STEVE HEW LETT, and ) Appeal No.
SARA KYLE, in their capacity as Commissioners ) 01A01-9601-CH-00016
of the Tennessee Public Service Commission, )
)
Respondents/Appellees. )
APPEAL FROM
THE TENNESSEE PUBLIC SERVICE COMMISSION
NASHVILLE, TENNESSEE
For BellSouth Telecommunications, For Tennessee Public Service Comm.:
Inc.:
Charles W. Burson
Guy M. Hicks, III Attorney General & Reporter
Bennett L. Ross
Nashville, Tennessee Michael E. Moore
Solicitor General
James G. Harralson
Atlanta, Georgia Michael W. Catalano
Associate Solicitor General
Nashville, Tennessee
For AT&T Communications of the
South Central States, Inc.:
For Tennessee Consumers:
Val Sanford
John Knox Walkup Charles W. Burson
Gullett, Sanford, Robinson & Martin Attorney General & Reporter
Nashville, Tennessee
Michael E. Moore
Solicitor General
L. Vincent Williams
Consumer Advocate
Nashville, Tennessee
VACATED AND REMANDED
WILLIAM C. KOCH, JR., JUDGE
OPINION
This consolidated appeal of three separate proceedings involves the efforts of
BellSouth Telecommunications, Inc. to take advantage of the 1995 legislation easing
the traditional regulatory burdens on telecommunications service providers. After
making significant adjustments in BellSouth’s reported operating results, the
Tennessee Public Service Commission determined that BellSouth’s current earned
rate of return exceeded its authorized rate of return and that BellSouth was receiving
$56.285 million in excess revenues. The Commission directed BellSouth to reduce
its rates by $56.285 million and set the initial rates in the company’s price regulation
plan accordingly. On this appeal, BellSouth and another intervening party take issue
with the procedures employed by the Commission to consider and act upon
BellSouth’s application for a price regulation plan. We have determined that these
proceedings were not preempted by the federal Telecommunications Act of 1996.
We have also determined that the General Assembly did not give the Commission
authority to adjust BellSouth’s reported operating results and that the Commission
should have convened a contested case hearing when BellSouth took issue with the
Commission’s decision to adjust its reported operating results. Accordingly, we
vacate the Commission’s January 23, 1996 order and all earlier related orders.
I.
Almost ten years ago, the Tennessee Public Service Commission began its
efforts to modernize Tennessee’s telecommunications network and to explore less
cumbersome ways to regulate the telephone companies under its jurisdiction.1 The
Commission’s work culminated in its first regulatory reform rule that took effect on
January 10, 1993.2 One day later, BellSouth Telecommunications, Inc. filed its
conditional election to operate under this rule.
On August 20, 1993, the Commission entered an order governing BellSouth’s
rates from 1993 through 1995. See In re Earnings Investigation of South Central Bell
Telephone Co., 1993-1995, Docket No. 92-13527. Based on the results of an
1
The details of these early efforts are recounted in Tennessee Cable Television Assoc. v.
Tennessee Pub. Serv. Comm’n, 844 S.W.2d 151, 155-58 (Tenn. Ct. App. 1992).
2
Tenn. Comp. R. & Regs. r. 1220-4-2-.55 (1993). This rule was revised again in June 1995.
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earnings investigation that had been commenced in 1992, the Commission concluded
that a range of return on BellSouth’s rate base of 10.65% to 11.85% would be just and
reasonable. The Commission adopted BellSouth’s recommendation that future rate
adjustments and deferred revenue account contributions should be based on the
company’s actual first-year results, as opposed to projections.3 It also determined that
there would be no rate adjustment for 1993 because BellSouth’s forecasted rate of
return for 1993 fell within the approved range. This court approved the
Commission’s order in all respects. American Assoc. of Retired Persons v. Tennessee
Pub. Serv. Comm’n, 896 S.W.2d 127 (Tenn. Ct. App. 1994).
In December 1994, the Consumer Advocate4 requested the Commission to
resolve what he considered to be inappropriate expense allocations in BellSouth’s
Form PSC-3.01 reports.5 When the Commission did not respond, the Consumer
Advocate filed a petition on January 23, 1995 requesting the Commission to
commence an investigation into BellSouth’s earnings. In March 1995, the
Commission announced that it was commencing another earnings investigation with
regard to BellSouth.
In the meantime, two competing telecommunications bills were introduced in
the first session of the Ninety-Ninth General Assembly that had convened in January
1995. The avowed purpose of both bills was to ease the traditional regulatory
constraints on local telephone companies and to permit greater competition for local
telecommunications services. Filed concurrently with these bills was a bill to replace
the Commission with a new regulatory entity. On May 26, 1995, the Governor
signed a bill replacing the Commission with the Tennessee Regulatory Authority
3
The Commission specifically declined to follow its staff recommendation favoring forecasts
because the company’s actual earnings had been below the forecasted earnings. The Commission
noted that “[c]ontinuation of a policy similar to that which we started in 1990 could, if forecasts
continue to be missed, result in rate decreases for companies that need rate increases, and rate
increases for companies that are overearning.” In re Earnings Investigation of South Central Bell
Telephone Co., 1993-1995, Docket No. 92-13527, at 7.
4
The Consumer Advocate Division in the Office of the Attorney General and Reporter was
created in 1994 for the purpose of representing the interests of Tennessee’s consumers before the
Commission. Tenn. Code Ann. § 65-4-118(c) (Supp. 1996).
5
The Form PSC-3.01 report is a monthly report containing a telephone company’s intrastate
operating results in accordance with rules and forms established by the Commission. See Tenn.
Comp. R. & Regs. r. 1220-4-1-.10(2)(a)(1), - .10(3)(a) (1988).
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effective July 1, 1996.6 Two weeks later, the Governor signed another bill
dramatically altering the regulation of local telephone companies and opening up the
local telecommunications market to unprecedented opportunities for competition.7
The expressed goal of the new regulatory structure was
to foster the development of an efficient, technologically
advanced, statewide system of telecommunications
services by permitting competition in all
telecommunications services markets, and by permitting
alternative forms of regulation for telecommunications
services and telecommunications services providers.
See Tenn. Code Ann. § 65-4-123 (Supp. 1996). In broad terms, the 1995 legislation
set out to accomplish this goal in five ways. First, it mandated the universal
availability of basic telephone service at affordable rates and froze basic and non-
basic telephone rates for four years.8 Second, it required incumbent local telephone
companies to make available non-discriminatory interconnection to their public
networks to other providers.9 Third, it eased the traditional limitations on the ability
of new providers to enter the market.10 Fourth, it provided a transition procedure to
enable existing local telephone companies to take advantage of the newly relaxed
regulatory environment.11 Fifth, it established a five-year, $10 million loan guarantee
program to induce small and minority businesses to enter the telecommunications
market.12
6
Act of May 24, 1995, ch. 305, 1995 Tenn. Pub. Acts 450.
7
Act of May 25, 1995, ch. 408, 1995 Tenn. Pub. Acts 703, codified at Tenn. Code Ann. §§
65-4-101, -123 & -124, 65-4-201, -203, -207, and 65-5-208 to -213 (Supp. 1996).
8
Tenn. Code Ann. §§ 65-5-207, -208, -209(f), (h) (Supp. 1996).
9
Tenn. Code Ann. § 65-4-124(a).
10
Prior to 1995, the Commission could not permit new competitors to enter a market already
served by another provider unless it found that the current service was “inadequate to meet the
reasonable needs of the public.” Tenn. Code Ann. § 65-4-203(a) (Supp. 1996). The 1995 legislation
exempts telecommunications service providers from this requirement. Tenn. Code Ann. § 65-4-
203(c). The 1995 legislation also permits new competitors to enter a market if they demonstrate that
they will adhere to the applicable legal requirements and that they possess sufficient managerial,
financial, and technical abilities to provide the service. Tenn. Code Ann. § 65-4-201(c).
11
Tenn. Code Ann. § 65-5-209.
12
Tenn. Code Ann. § 65-5-212, -213. For the purposes of this program, a “small business”
is one with annual gross revenues of less than $4,000,000. Tenn. Code Ann. § 65-5-212.
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The transition procedure for existing local telephone companies was designed
to be simple and expeditious. It requires an existing local telephone company
desiring to take advantage of the new regulatory environment to file an application
for a price regulation plan and envisions that the Commission will act on the
application within ninety days. See Tenn. Code Ann. § 65-5-209(c). It requires the
Commission to base its decision whether to grant the application on an audit of the
applicant’s most recent Form PSC-3.01 report. See Tenn. Code Ann. § 65-5-209(c),
-209(j).
Tenn. Code Ann. § 65-5-209(c) states that the company’s rates existing on June
6, 1995 will be the initial rates under its price regulation plan if the company’s earned
rate of return on its most recent Form PSC-3.01 report is less than its current
authorized fair rate of return existing when the application was filed. The statute also
empowers the Commission or Authority to initiate a contested rate-making
proceeding if the audit of the Form PSC-3.01 report reveals that the company’s
earned rate of return is greater than its current authorized fair rate of return.
Conversely, the statute permits the company to request a contested rate-making
hearing if the audit reveals that its earned rate of return is less than its current
authorized fair rate of return.
The Commission’s revised regulatory reform rules took effect one week after
the Governor signed the telecommunications reform legislation.13 On June 20, 1995,
BellSouth filed its application for a price regulation plan. On July 24, 1995, the
Commission permitted AT&T Communications of the South Central States, Inc. to
intervene in the proceeding. Approximately two weeks later, the Commission
directed its staff to conduct the audit of BellSouth’s most recent Form PSC-3.01
report in accordance with Tenn. Code Ann. § 65-5-209(c), (j).
On August 17, 1995, the Commission’s staff issued the results of its audit of
BellSouth’s Form PSC-3.01 report for the twelve-month period ending on December
31, 1994. At the outset, the staff determined that, except for four minor
discrepancies, BellSouth’s December 1994 report accurately reflected the company’s
books and records, that it reflected the Commission’s previously ordered rate-making
adjustments, and that it complied with the generally accepted accounting principles
13
Tenn. Comp. R. & Regs. r. 1220-4-2-.55 (1995).
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as adopted in Part 32 of the Uniform System of Accounts. Accordingly, the staff
concluded that BellSouth’s corrected rate of return for 1994, as taken from its books,
was 10.21%.
Even though BellSouth’s corrected rate of return for 1994 was less than its
authorized rate of return in the Commission’s August 20, 1993 order, the
Commission’s staff decided that BellSouth’s audited rate of return should be adjusted
to reflect “out-of-period and non-recurring items” and “known charges” occurring
during the audit period. Accordingly, the staff concluded that BellSouth’s adjusted
rate of return for 1994 was 12.29% and that this adjusted rate of return “more
accurately reflects the earnings potential of the rates in effect at the end of the audit
period.” Since this adjusted rate of return exceeded BellSouth’s currently authorized
rate of return, the staff recommended that the Commission initiate a contested rate-
making proceeding under Tenn. Code Ann. § 65-5-209(c) to establish the initial rates
for Bell South’s price regulation plan.
The staff’s August 17, 1995 report and recommendations provoked a swift and
strong reaction from BellSouth. On September 12, 1995, the company filed a petition
for a declaratory order pursuant to Tenn. Code Ann. § 4-5-223(a) (1991) questioning
the staff’s authority to recommend adjustments to its corrected Form PSC-3.01 report.
In the meantime, the Commission rejected the August 17, 1995 report because it was
based on an incorrect Form PSC-3.01 report14 and directed its staff to audit the proper
Form PSC-3.01 report.
On September 15, 1995, the Commission’s staff issued its second audit report -
this time covering BellSouth’s Form PSC-3.01 report for the twelve months ending
on March 31, 1995. This report employed the same audit methodology used in the
August 17, 1995 report. The staff made three corrections to BellSouth’s Form PSC-
3.01 report and then concluded that the corrected report accurately reflected the
company’s books and records and the Commission’s previously ordered rate-making
adjustments and that it complied with the generally accepted accounting principles
14
Tenn. Code Ann. § 65-5-209(c) required an audit of the existing telephone company’s most
recent Form PSC-3.01 report available when the company filed its application for a price regulation
plan. When BellSouth filed its application for a price regulation plan, it had already filed a Form
PSC-3.01 report for the twelve months ending on March 31, 1995. This report, as opposed to the
report for the twelve months ending on December 31, 1994, was BellSouth’s most recent report.
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as adopted in Part 32 of the Uniform System of Accounts. As a result of its
corrections, the staff concluded that BellSouth’s corrected rate of return for the
twelve months ending on March 31, 1995 was 10.30%.15
The staff again recommended making “adjustments” to the results in
BellSouth’s Form PSC-3.01 report. It recommended fifteen “out-of-period”
adjustments to remove items recorded on BellSouth’s books during the twelve
months ending on March 31, 1995 that applied to months prior to April 1994 and for
items recorded outside the audit period that applied to the audit period. It
recommended nine additional adjustments for abnormal or unusual expenses that
were not expected to occur. Finally, it recommended twelve adjustments for “known
changes” reflecting the annualized cost of rate changes or volume changes occurring
during the period covered by the Form PSC-3.01 report. As a result of these
adjustments, the Commission’s staff concluded that BellSouth’s adjusted rate of
return was 12.74%. Since this adjusted rate of return exceeded BellSouth’s currently
authorized rate of return, the staff again recommended that the Commission initiate
a contested rate-making proceeding to establish BellSouth’s initial rates.
On September 20, 1995, the Commission accepted its staff’s September 15,
1995 report and convened a contested case proceeding to set BellSouth’s initial rates.
Approximately one month later, it also convened a contested case proceeding to
consider BellSouth’s petition for a declaratory order concerning the staff’s audit
methodology and directed that the proceeding be consolidated with the pending
contested rate-making proceeding. The consolidated proceeding commenced on
November 1, 1995. After denying BellSouth’s request for a declaratory order without
permitting BellSouth to introduce proof substantiating its challenge to the staff’s
audit methodology and conclusions,16 the Commission proceeded with the proof
establishing a fair rate of return for BellSouth. On November 7, 1995, the
Commission determined that BellSouth’s rate of return should be 10.35% and, based
15
BellSouth had reported a 10.20% earned rate of return on its Form PSC-3.01 report and
contested the corrections made by the Commission’s staff. We need not resolve this dispute here.
16
The Commission entered an order on November 9, 1995 formally denying BellSouth’s
petition for a declaratory order. BellSouth filed a Tenn. R. App. P. 12 petition in this court on
January 5, 1996, seeking appellate review of this order. BellSouth Telecommunications, Inc. v.
Greer, App. No. 01A01-9601-BC-00008.
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on the adjustments in its staff’s September 15, 1995 report, directed BellSouth to
reduce its rates by $56.285 million.
On November 20, 1995, the Commission resumed its hearing to consider
recommendations from BellSouth, the Consumer Advocate, and AT&T concerning
the most appropriate way to reduce BellSouth’s rates by $56.285 million. On January
23, 1996, the Commission entered an order formally determining that BellSouth’s
rate of return should be 10.35% and, therefore, that BellSouth was earning $56.285
million in excess revenues. The Commission prescribed changes in BellSouth’s rate
design to eliminate these excess revenues17 and determined that BellSouth’s rates
would be affordable for the purpose of Tenn. Code Ann. § 65-5-209(c) once these
reductions were in place.
On February 14, 1996, BellSouth filed a Tenn. R. App. P. 12 petition to review
the Commission’s January 23, 1996 order. BellSouth Telecommunications, Inc. v.
Tennessee Pub. Serv. Comm’n, App. No. 01A01-9602-BC-00066. On February 27,
1996, this court stayed the Commission’s January 23, 1996 order and, in orders filed
on February 27, 1996 and March 30, 1996, consolidated this appeal with two other
related appeals by BellSouth.18 On April 3, 1996, we clarified our earlier stay order
by stating that it applied to both the rate reductions ordered by the Commission as
well as the implementation of BellSouth’s price regulation plan. On this appeal, both
BellSouth and AT&T take issue with numerous aspects of the procedure and
reasoning employed by the Commission to dispose of BellSouth’s application for a
price regulation plan under Tenn. Code Ann. § 65-5-209.
17
The Commission allocated $21.5 million to reduce IntraLATA long distance message toll
rates, $27.4 million to eliminate the $1.50 residential touchtone rates, and $7.4 million to eliminate
the $1.00 zone charge. The Commission also directed BellSouth to waive the service connection
charges for computer lines at schools and libraries and to provide a flat-rate option to customers who
have expressed a desire to be included in Metro Area Calling.
18
BellSouth had already appealed from an October 16, 1995 order entered by the Chancery
Court of Davidson County dismissing its petition for a writ of mandamus to compel the Commission
to implement its price regulation plan. State ex rel. BellSouth Telecommunications, Inc. v. Bissell,
App. No. 01A01-9601-CH-00016. This appeal and the appeal from the Commission’s denial of
BellSouth’s petition for a declaratory order, BellSouth Telecommunications, Inc. v. Greer, App. No.
01A01-9601-BC-00008, were consolidated with the appeal from the Commission’s January 23, 1996
order. Later, on BellSouth’s motion, we dismissed the appeal in the mandamus case on the grounds
of mootness but reserved taxing costs pending the resolution of this appeal. State ex rel. BellSouth
Telecommunications, Inc. v. Bissell, App. No. 01A01-9601-CH-00016 (Tenn. Ct. App. May 3,
1996).
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II.
PREEMPTION BY THE TELECOMMUNICATIONS ACT OF 1996
As a threshold matter, we take up AT&T’s assertion that this appeal should be
remanded to enable the Authority to determine whether the federal
Telecommunications Act of 1996 preempts state law authorizing BellSouth to begin
operating under a price regulation plan.19 AT&T claims that the preemption issue
should be addressed before the approval of BellSouth’s price regulation plan because
the interconnection provisions in state law differ from those in the
Telecommunications Act of 1996 and because state law contains no provision for
modifying a price regulation plan once it has been approved. We have determined
that the possibility of preemption is not so pressing that it requires a remand to the
Authority for further proceedings.
A.
Our federal system of government recognizes the dual sovereignty of the
federal government and the various state governments. Printz v. United States, ___
U.S. ___, ___, 117 S. Ct. 2365, 2376 (1997); Gregory v. Ashcroft, 501 U.S. 452, 457,
111 S. Ct. 2395, 2399 (1991). The states possess sovereignty within their particular
spheres concurrent with the federal government subject only to the limitations
imposed by the Supremacy Clause, U.S. Const. art. VI, cl. 2. Tafflin v. Levitt, 493
U.S. 455, 458, 110 S. Ct. 792, 795 (1990).
The Supremacy Clause provides Congress with the power to preempt state
law.20 The courts are, however, reluctant to presume that preemption of state law has
19
The Commission ceased to exist on June 30, 1996. While the General Assembly provided
transition provisions with regard to the Commission’s rules, employees and property, see Tenn. Code
Ann. § 65-1-301 to -306 (Supp. 1996), it did not address the status of regulatory proceedings
pending before the Commission or of pending judicial proceedings involving actions of the
Commission. The members of the Authority did not succeed to the offices of the members of the
Commission. However, the Authority has assumed the regulatory power formerly possessed by the
Commission with regard to the matters at issue on this appeal. Accordingly, on July 16, 1996, we
substituted the members of the Authority in place of the members of the Commission.
20
Preemption may result from action by Congress itself or by action of a federal agency
acting within the scope of its authority. City of New York v. F.C.C., 486 U.S. 57, 63-64, 108 S. Ct.
1637, 1642 (1988); Louisiana Pub. Serv. Comm’n v. F.C.C., 476 U.S. 355, 369, 106 S. Ct. 1890,
1898-99 (1986). Federal agencies must declare their intent to preempt state law with some
specificity. Schneidewind v. ANR Pipeline Co., 485 U.S. 293, 309 n.12, 108 S. Ct. 1145, 1155 n.12
(1988).
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occurred. Building & Constr. Trades Council v. Associated Builders & Contractors
of Massachusetts/Rhode Island, Inc., 507 U.S. 218, 224, 113 S. Ct. 1190, 1194
(1993); Exxon Corp. v. Governor of Maryland, 437 U.S. 117, 132, 98 S. Ct. 2207,
2217 (1978). Thus, the courts work from the assumption that the historic powers of
the states are not displaced by a federal statute unless that was the clear and manifest
intent of Congress. California Div. of Labor Standards Enforcement v. Dillingham
Contr., N.A., ___ U.S. ___, ___, 117 S. Ct. 832, 838 (1997); BFP v. Resolution Trust
Corp., 511 U.S. 531, 544, 114 S. Ct. 1757, 1765 (1994); Louisiana Pub. Serv.
Comm’n v. F.C.C., 476 U.S. at 368, 106 S. Ct. at 1898.
Preemption occurs when there is an outright or actual conflict between federal
and state law. Freightliner Corp. v. Myrick, 514 U.S. 280, 287, 115 S. Ct. 1483, 1487
(1995); Louisiana Pub. Serv. Comm’n v. F.C.C., 476 U.S. at 368, 106 S. Ct. at 1898.
It can also occur by implication when compliance with both federal and state law is
impossible or when state law obstructs the accomplishment of Congress’s objectives.
Boggs v. Boggs, ___ U.S. ___, ___, 117 S. Ct. 1754, 1760-61 (1997); CSX Transp.,
Inc. v. Easterwood, 507 U.S. 658, 663, 113 S. Ct. 1732, 1737 (1993); California Fed.
Sav. & Loan Ass’n v. Guerra, 479 U.S. 272, 281, 107 S. Ct. 683, 689 (1987).
Preemption may also arise when Congress’s legislation is so pervasive that it leaves
no room for state legislative action. Cipollone v. Liggett Group, Inc., 505 U.S. 504,
516, 112 S. Ct. 2608, 2617 (1992); Louisiana Pub. Serv. Comm’n v. F.C.C., 476 U.S.
at 368, 106 S. Ct. at 1898.
Preemption is basically a question of Congressional intent. Barnett Bank of
Marion County, N.A. v. Nelson, ___ U.S. ___, ___, 116 S. Ct. 1103, 1107 (1996);
Hawaiian Airlines, Inc. v. Norris, 512 U.S. 246, 252, 114 S. Ct. 2239, 2243 (1994);
R.J. Reynolds Tobacco Co. v. Durham County, 479 U.S. 130, 140, 107 S. Ct. 499, 506
(1986). This intent must be reflected in the text and structure of the federal statute.
Ingersoll-Rand Co. v. McClendon, 498 U.S. 133, 138, 111 S. Ct. 478, 482 (1990);
Shaw v. Delta Air Lines, Inc., 463 U.S. 85, 95, 103 S. Ct. 2890, 2899 (1983). The
best evidence of preemptive intent is an express preemption clause. CSX Transp.,
Inc. v. Easterwood, 507 U.S. at 664, 113 S. Ct. at 1737. However, in the absence of
explicit preemption language, the courts must also examine the structure and purpose
of the federal statute for implicit preemptory intent. De Buono v. NYSA-ILA Medical
& Clinical Servs. Fund, ___ U.S. ___, ___, 117 S. Ct. 1747, 1751 (1997); Barnett
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Bank of Marion County, N.A. v. Nelson, ___ U.S. at ___, 116 S. Ct. at 1108; FMC
Corp. v. Holliday, 498 U.S. 52, 56-57, 111 S. Ct. 403, 407 (1990).
The courts begin their inquiry with the presumption that Congress did not
intend to preempt state law. Building & Constr. Trades Council v. Associated
Builders & Contractors of Massachusetts/Rhode Island, Inc., 507 U.S. at 224, 113
S. Ct. at 1194. The proper approach is to reconcile the federal and state laws, Merrill
Lynch, Pierce, Fenner & Smith, Inc. v. Ware, 414 U.S. 117, 127, 94 S. Ct. 383, 389-
90 (1973), rather than to seek out conflict where none clearly exists. Exxon Corp. v.
Governor of Maryland, 437 U.S. at 130, 98 S. Ct. at 2216. State law should be
displaced by federal law only to the extent there is a conflict. Dalton v. Little Rock
Family Planning Servs., ___ U.S. ___, ___, 116 S. Ct. 1063, 1064 (1996).
B.
AT&T asserts that the case should be remanded to the Authority to consider
whether the Telecommunications Act of 1996 preempts state law because the federal
Act’s interconnection provisions differ from their state law counterparts. However,
the mere existence of a federal regulatory program does not imply preemption of
similar state laws. English v. General Electric Co., 496 U.S. 72, 87, 110 S. Ct. 2270,
2279 (1990). Thus, AT&T must demonstrate something more if its preemption
argument is to succeed.
The goals of the federal Telecommunications Act of 1996 and Tennessee’s
1995 telecommunications legislation are similar.21 Neither the federal Act nor the
regulations promulgated by the Federal Communications Commission pursuant to the
Act contain explicit preemption provisions. In fact, the Act specifically states that
“[t]his Act and the amendments made by this Act shall not be construed to modify,
21
The Telecommunications Act of 1996 “promotes competition and reduces regulation in
order to secure lower prices and higher quality services for American telecommunications consumers
and to encourage the rapid development of new telecommunications technologies.” House Rpt. No.
104-204, 104th Cong., 2d Sess. 47, reprinted in 1996 U.S.C.C.A.N. 10, 11. One of the principal
ways it accomplishes its goal is to impose a general duty of interconnection on all
telecommunications carriers thereby requiring local telephone companies to offer competitors access
to part of their networks. 47 U.S.C.A. § 251 (West Supp. 1997); House Rpt. No. 104-204, 104th
Cong., 2d Sess. 48, reprinted in 1996 U.S.C.C.A.N. 10, 11. Tenn. Code Ann. § 65-4-123 states a
similar purpose, and Tenn. Code Ann. § 65-4-124(a) (Supp. 1996) imposes a similar duty of
interconnection on local telephone companies.
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impair, or supersede Federal, State, or local law unless expressly provided in such Act
or amendments.” Telecommunications Act of 1996, § 601(c)(1), 47 U.S.C.A. § 152
note (West Supp. 1997). Congress included this provision to prevent “affected
parties from asserting that the bill impliedly pre-empts other laws.” House
Conference Report No. 104-458, 104th Cong., 2d Sess., 201, reprinted in 1996
U.S.C.C.A.N. 124, 215. With specific reference to the interconnection issue, the Act
also states that it should not be construed to prohibit state commissions from
enforcing or promulgating regulations or from imposing additional requirements that
“are necessary to further competition in the provision of telephone exchange service
or exchange access” as long as they are “not inconsistent” with the Act. See 47
U.S.C.A. § 261(b), (c) (West Supp. 1997).22
The Telecommunications Act of 1996 contains no explicit preemption
language and does not contain provisions that are in outright or actual conflict with
state law. Accordingly, AT&T’s preemption argument can succeed only if it can
demonstrate that Congress’s regulatory statutes have completely occupied the field,
that it is impossible to comply with the requirements of both the federal and state law,
or that the state law somehow obstructs the accomplishment of the objectives of the
Telecommunications Act of 1996. AT&T has failed on all counts. Nothing in the
text or structure of the Act supports its unfocused preemption claims.
Congress plainly did not desire to displace local telecommunications regulation
when it enacted the Telecommunications Act of 1996. The Act itself makes it clear
that state commissions play a pivotal role in implementing telecommunications
policy. They provide a forum for resolving disputes between existing local telephone
companies and their competitors seeking access to an existing telephone network.
See 47 U.S.C.A. § 252. By the same token, the text of the Act and Tennessee’s
telecommunications statutes do not suggest that telephone companies will be unable
to comply with the requirements of both or that compliance with the state statutes will
somehow obstruct the objectives of the Telecommunications Act of 1996.
22
See also 47 U.S.C.A. § 251(d)(3) (West Supp. 1997) which directs the Federal
Communications Commission not to promulgate regulations that prevent state commissions from
enforcing local regulations, orders, or policies (1) that establish local telephone companies’ access
and interconnection obligations, (2) that are “consistent” with the 47 U.S.C.A. § 251, and (3) that
do not substantially prevent the implementation of the requirements of 47 U.S.C.A. § 251 or the
Telecommunications Act of 1996.
-13-
AT&T has already invoked the remedies before the Authority made available
by 47 U.S.C.A. § 252. In March 1996, it initiated interconnection negotiations with
BellSouth. One month later, it requested BellSouth to provide information
concerning BellSouth’s costs for providing certain telecommunications services.
After BellSouth declined to provide the information on the ground that it was not
relevant to the interconnection negotiations, AT&T filed a petition in May 1996
requesting the Authority to resolve the dispute over the issue of access to the
requested information. As far as this record shows, this proceeding remains before
the Authority. This type of proceeding, and others like it, provide the parties with an
appropriate forum to air out and resolve more clearly defined issues concerning the
possible preemptive effect of specific provisions of the Telecommunications Act of
1996 or of the Federal Communications Commission’s regulations.
III.
PRICE REGULATION PLANS UNDER TENN. CODE ANN. § 65-5-209
The determinative issues on this appeal involve the Commission’s process for
considering BellSouth’s application for a price regulation plan. BellSouth essentially
asserts that the Commission and its staff exceeded the plain mandate of Tenn. Code
Ann. § 65-5-209. For its part, AT&T argues that the Commission did not go far
enough in fashioning the details of BellSouth’s price regulation plan. The resolution
of these issues requires us to construe Tenn. Code Ann. § 65-5-209 and other related
statutes enacted by the General Assembly in 1995 to foster the development of an
efficient, technologically advanced, statewide system of telecommunications in
Tennessee.
A.
The search for the meaning of statutory language is a judicial function.
Roseman v. Roseman, 890 S.W.2d 27, 29 (Tenn. 1994); State ex rel. Weldon v.
Thomason, 142 Tenn. 527, 540, 221 S.W. 491, 495 (1920). Courts must ascertain and
give the fullest possible effect to the statute without unduly restricting it or expanding
it beyond its intended scope. Perry v. Sentry Ins. Co., 938 S.W.2d 404, 406 (Tenn.
1996); Kultura, Inc. v. Southern Leasing Corp., 923 S.W.2d 536, 539 (Tenn. 1996).
At the same time, courts must avoid inquiring into the reasonableness of the statute
-14-
or substituting their own policy judgments for those of the legislature. State v.
Grosvenor, 149 Tenn. 158, 167, 258 S.W. 140, 142 (1924); State v. Henley, 98 Tenn.
665, 679-81, 41 S.W. 352, 354-55 (1897); Hamblen County Educ. Ass’n v. Hamblen
County Bd. of Educ., 892 S.W.2d 428, 432 (Tenn. Ct. App. 1994).
When approaching statutory text, courts must also presume that the legislature
says in a statute what it means and means in a statute what it says there. Connecticut
Nat’l Bank v. Germain, 503 U.S. 249, 253-54, 112 S. Ct. 1146, 1149 (1992); Worley
v. Weigel’s, Inc., 919 S.W.2d 589, 593 (Tenn. 1996). Accordingly, we must construe
statutes as they are written, Jackson v. Jackson, 186 Tenn. 337, 342, 210 S.W.2d 332,
334 (1948), and our search for the meaning of statutory language must always begin
with the statute itself. Neff v. Cherokee Ins. Co., 704 S.W.2d 1, 3 (Tenn. 1986); Pless
v. Franks, 202 Tenn. 630, 635, 308 S.W.2d 402, 404 (1957); City of Nashville v.
Kizer, 194 Tenn. 357, 364, 250 S.W.2d 562, 564-65 (1952).
Statutory terms draw their meaning from the context of the entire statute, Lyons
v. Rasar, 872 S.W.2d 895, 897 (Tenn. 1994); Knox County ex rel. Kessel v. Lenoir
City, 837 S.W.2d 382, 387 (Tenn. 1992), and from the statute’s general purpose. City
of Lenoir City v. State ex rel. City of Loudon, 571 S.W.2d 297, 299 (Tenn. 1978);
Loftin v. Langsdon, 813 S.W.2d 475, 478 (Tenn. Ct. App. 1991). We give these
words their natural and ordinary meaning, State ex rel. Metropolitan Gov’t v.
Spicewood Creek Watershed Dist., 848 S.W.2d 60, 62 (Tenn. 1993), unless the
legislature used them in a specialized, technical sense. Cordis Corp. v. Taylor, 762
S.W.2d 138, 139-40 (Tenn. 1988).
The legislative process does not always produce precisely drawn laws. When
the words of a statute are ambiguous or when it is just not clear what the legislature
had in mind, courts may look beyond a statute’s text for reliable guides to the
statute’s meaning. We consider the statute’s historical background, the conditions
giving rise to the statute, and the circumstances contemporaneous with the statute’s
enactment. Still v. First Tenn. Bank, N.A., 900 S.W.2d 282, 284 (Tenn. 1995);
Mascari v. Raines, 220 Tenn. 234, 239, 415 S.W.2d 874, 876 (1967); Davis v.
Aluminum Co. of Am., 204 Tenn. 135, 143, 316 S.W.2d 24, 27 (1958). We also resort
to legislative history. Storey v. Bradford Furniture Co. (In re Storey), 910 S.W.2d
-15-
857, 859 (Tenn. 1995); University Computing Co. v. Olsen, 677 S.W.2d 445, 447
(Tenn. 1984); Chapman v. Sullivan County, 608 S.W.2d 580, 582 (Tenn. 1980).23
Courts consult legislative history not to delve into the personal, subjective
motives of individual legislators, but rather to ascertain the meaning of the words in
the statute. The subjective beliefs of legislators can never substitute for what was, in
fact, enacted. There is a distinction between what the legislature intended to say in
the law and what various legislators, as individuals, expected or hoped the
consequences of the law would be. The answer to the former question is what courts
pursue when they consult legislative history; the latter question is not within the
courts’ domain.
Relying on legislative history is a step to be taken cautiously. Piper v. Chris-
Craft Indus., Inc., 430 U.S. 1, 26, 97 S. Ct. 926, 941 (1977); North & South Rivers
Watershed Ass’n, Inc. v. Town of Scituate, 949 F.2d 552, 556 n.6 (1st Cir. 1991).
Legislative records are not always distinguished for their candor and accuracy,
Schwegmann Bros. v. Calvert Distillers Corp., 341 U.S. 384, 396, 71 S. Ct. 745, 751
(1951) (Jackson, J., concurring), and the more that courts have come to rely on
legislative history, the less reliable it has become. Rather than reflecting the issues
actually debated by the legislature, legislative history frequently consists of self-
serving statements favorable to particular interest groups prepared and included in the
legislative record solely to influence the courts’ interpretation of the statute. National
Small Shipments Traffic Conf., Inc. v. Civil Aeronautics Bd., 618 F.2d 819, 828 (D.C.
Cir. 1980); ANTONIN SCALIA, A MATTER OF INTERPRETATION: FEDERAL COURTS AND
THE LAW 34 (1997); W. David Slawson, Legislative History and the Need to Bring
Statutory Interpretation Under the Rule of Law, 44 Stan. L. Rev. 383, 397-98 (1992);
Kenneth W. Starr, Observations About the Use of Legislative History, 1987 Duke L.
J. 371, 377; Note, Why Learned Hand Would Never Consult Legislative History
Today, 105 Harv. L. Rev. 1005, 1018-19 (1992).
Even the statements of sponsors during legislative debate should be evaluated
cautiously. 2A Norman J. Singer, Statutes and Statutory Construction § 48:15 (rev.
23
Some courts have even cited a statute’s legislative history to buttress their interpretation
when a statute is not ambiguous. See, e.g., Worley v. Weigel’s, Inc., 919 S.W.2d at 593; VanArsdall
v. State, 919 S.W.2d 626, 632 (Tenn. Crim. App. 1995).
-16-
5th ed. 1992). These comments cannot alter the plain meaning of a statute., D.
Canale & Co. v. Celauro, 765 S.W.2d 736, 738 (Tenn. 1989); Elliott Crane Serv.,
Inc. v. H.G. Hill Stores, Inc., 840 S.W.2d 376, 379 (Tenn. Ct. App. 1992), because
to do so would be to open the door to the inadvertent, or perhaps planned,
undermining of statutory language. Regan v. Wald, 468 U.S. 222, 237, 104 S. Ct.
3026, 3035 (1984). Courts have no authority to adopt interpretations of statutes
gleaned solely from legislative history that have no statutory reference points.
Shannon v. United States, 512 U.S. 573, 583, 114 S. Ct. 2419, 2426 (1994).
Accordingly, when a statute’s text and legislative history disagree, the text controls.
Stromberg Metal Works, Inc. v. Press Mechanical, 77 F.3d 928, 931 (7th Cir. 1996).
B.
THE SCOPE OF A TENN. CODE ANN. § 65-5-209 AUDIT
The pivotal dispute between BellSouth and the Commission involves the scope
and purpose of the audit required by Tenn. Code Ann. § 65-5-209. BellSouth, citing
the statute, asserts that the audit’s sole purpose is to verify the accuracy of its most
recent Form PSC-3.01 report. The Commission, citing a portion of the statute’s
legislative history, responds that the audit is more akin to a traditional earnings
investigation and that its audit power under Tenn. Code Ann. § 65-5-209 includes the
power to reduce a company’s rate of return and to order the company to reduce its
rates. We turn first to the statute itself for an answer to this dispute.
1.
The 1995 telecommunications reform legislation requires the Commission to
set the initial rates of any incumbent local telephone company that applies for a price
regulation plan. Tenn. Code Ann. § 65-5-209(c) requires that these initial rates must
be the same as the applicant’s existing rates if the rate of return on the company’s
most recent Form PSC-3.01 report is equal to or less than the company’s currently
authorized rate of return. The comparison of the company’s existing rate of return
with its currently authorized rate of return must be preceded by a staff audit of the
company’s most recent Form PSC-3.01 report conducted in accordance with Tenn.
Code Ann. § 65-5-209(j).
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Tenn. Code Ann. § 65-5-209(j) states that the purpose of the audit is “to assure
that the Tennessee Regulatory Authority 3.01 report accurately reflects . . . the
incumbent local exchange telephone company’s achieved results.” The audit must
verify that the company reported its achieved results “in accordance with generally
accepted accounting principles as adopted in Part 32 of the Uniform System of
Accounts.” It must also verify that the company’s reported achieved results reflect
“the ratemaking adjustments to operating revenues, expenses and rate base used in
the authority’s most recent order applicable to the incumbent local exchange
telephone company.”
Since Tenn. Code Ann. § 65-5-209(a) directs the Commission to set an
incumbent local telephone company’s initial rates “[u]sing the procedures established
in this section,” the statute is the sole source of the Commission’s authority to adopt
a price regulation plan. It envisions an expeditious,24 three-phase proceeding. The
purpose of the first phase is to verify the accuracy of the information contained in the
company’s most recent Form PSC-3.01 report. See Tenn. Code Ann. § 65-5-209(j).
The purpose of the second phase is to compare the company’s reported rate of return
with its currently authorized rate of return. See Tenn. Code Ann. § 65-5-209(c). No
further proceedings are required if the company’s rate of return based on its audited
achieved results in its most recent Form PSC-3.01 report is equal to or less than its
currently authorized rate of return. See Tenn. Code Ann. § 65-5-209(c). However,
a third phase is required if the company’s rate of return exceeds its currently
authorized rate of return. The purpose of the third phase is to set the company’s
initial rates in a traditional, rate-setting proceeding.
Tenn. Code Ann. § 65-5-209 contains no specific language suggesting that the
first or second phases of the proceeding have any of the attributes of a traditional rate-
setting proceeding. The audit is conducted by the Commission’s staff, and the staff
has no specific statutory authority to make or recommend reductions in a company’s
rate of return. The term “audit” does not appear in any other statute or rule in
conjunction with the Commission’s rate-setting authority.25
24
Tenn. Code Ann. § 65-5-209(c) envisions that the process will be completed within ninety
days after the company files its application for a price regulation plan.
25
The term “audit” appears only twice in Title 65 of the Tennessee Code Annotated. Other
than Tenn. Code Ann. § 65-5-209, it appear in Tenn. Code Ann. § 65-15-201 (Supp. 1996) which
relates to “safety management audits” for motor carriers.
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The textual analysis of Tenn. Code Ann. § 65-5-209 suggests that neither the
Commission nor its staff has the power to adjust any of the figures contained in the
applicant’s Form PSC-3.01 report as long as these reports are correct, based on
required auditing principles, and consistent with the Commission’s previously
ordered rate-making adjustments. The Commission, however, argues that the term
“audit” can mean more than simply a “methodical examination of records with intent
to verify their accuracy.” See National Health Corp. v. Snodgrass, 555 S.W.2d 403,
405 (Tenn. 1977). It asserts that an audit under Tenn. Code Ann. § 65-5-209 includes
investigating, deciding whether reported achieved results are accurate, and
determining the weight to be given these reported results. Citing a staff
memorandum that was read into the legislative record, the Commission insists that
its Tenn. Code Ann. § 65-5-209 authority to audit includes the authority to determine
whether the amounts reported on the Form PSC-3.01 “do not include unusual or
abnormal financial occurrences,” including “known charges.”26
Tenn. Code Ann. § 65-5-209 does not specifically authorize adjustments for
“unusual or abnormal financial occurrences.” Nonetheless, because the General
Assembly may have meant something different when it used the term “audit,” we
have reviewed the legislative history of Tenn. Code Ann. § 65-5-209 to determine
26
The staff audit report dated September 15, 1995 explains that
the Staff has followed the statements of the sponsors of the Bills that became the new
law by auditing the Company’s financial records for the twelve months ended March
31, 1995, to determine if the amounts on the TPSC 3.01 Report:
* are accurately taken from the company’s books and
records;
* accurately reflect any Commission ordered rate
making adjustments;
* do not include unusual or abnormal financial
occurrences;
* were calculated following proper accounting rules and
procedures for separating the company’s interstate
and intrastate operations, as well as, its regulated and
nonregulated operations;
* accurately reflect allowable charges from affiliated
companies.
These points were taken from a memo by Dr. Chris Klein, Director of the
Utility Rate Division, and Mike Gaines, Manager of the Telecommunications
Section, to PSC Chairman Keith Bissell in response to a letter from Senator
Rochelle. This memo, and the transcripts of the “legislative intent” statements read
by Senator Rochelle and Representative Purcell on the Senate and House floors, are
attached as Appendices B, C, and D to this Report.
-19-
whether the General Assembly used the term “audit” in its common, ordinary
meaning.
2.
The original substance of the telecommunications reform legislation was far
different from the substance of the legislation that eventually became law. The
original legislation contained no procedure for re-examining an incumbent local
telephone company’s rates. Instead, it simply provided that the company’s “rates,
terms and conditions for the services provided on February 1, 1995" were just and
reasonable and that these rates would be the company’s initial rates.27 This provision
encountered immediate opposition from the Consumer Advocate and other consumer
groups because they believed that it would enable BellSouth to earn between $350
and $800 million in excess revenues.
The concern about excess revenues was the focus of the debate on April 11,
1995, when the Senate State and Local Government Committee considered the bill
and a proposed amendment containing what would later become Tenn. Code Ann. §
65-5-209. Several committee members expressed concern about using BellSouth’s
existing rates because the Commission had not reviewed the company’s rate of return
since 1992. The Consumer Advocate pointed out that the proposed amendment
substituted an “audit of . . . [the Form PSC-3.01 report] . . . for an earnings review.”
Whitfield Burcham, the former director of the Commission’s Utility Rate Division
who appeared on behalf of the American Association of Retired Persons, echoed the
Consumer Advocate’s concern about the efficacy of an audit of the Form PSC-3.01
report. He stated that “we believe that if you have an evidentiary hearing, there’s a
high probability that the evidence will show that the telephone company’s prices need
to be adjusted.” These statements prompted Senator Cohen, the chair of the
committee, and Senator Gilbert to suggest that there should be a full rate review
before BellSouth’s initial rates should be set. A BellSouth representative responded
to this suggestion by stating that “[w]e don’t feel that a rate hearing is necessary
because we are earning within the authorized range.”
27
Senate Bill No. 891/House Bill No. 695, Section 6.
-20-
The Senate State and Local Government Committee convened on April 18,
1995 to continue its consideration of the bill. The hearing again focused on the
advisability of conducting a “full-blown rate hearing” before approving BellSouth’s
initial rates. The Commission’s General Utility Counsel described an audit of the
Form PSC-3.01 report as follows:
in order to audit the 3.01 statement . . . it’s not just a matter
of adding up math on a single sheet of paper. It’s knowing
that they [the company] have accurately reported those
figures to us. So that we will send our auditors on site,
they’ll look at all the items as reported on the company’s
books and correlate that with the statement. And that’s
what we mean by a full audit . . . When the staff concludes
their audit, and they may find some discrepancies or some
items that need to be corrected, that’ll be re-presented to
the Commission for approval in a contested case format .
..
The current Director of the Utility Rate Division also informed the Committee that
the Commission’s staff had already commenced an audit of BellSouth and that they
intended to proceed with the audit no matter which telecommunications bill passed.
He explained that an audit of a Form PSC-3.01 report was an “historical audit” of the
company’s earnings for the preceding twelve months and that the staff planned to
complete its work in September 1995.
Commissioner Steve Hewlett also pointed out to the Committee that “looking
at the backup on a 3.01 is significantly different than a full blown audit.” Mr.
Burcham repeated that the Form PSC-3.01 report, which he designed, “wouldn’t give
you a representative picture of the future.” In addition, he pointed out that he had
objected to similar language in the Commission’s proposed rule and that he had
attempted “to get the Commission to change that language, and we were
unsuccessful in doing that; and we think this language here is so restrictive that,
really, you’re not going to get an earnings investigation.” The Consumer Advocate
agreed with Mr. Burcham. He pointed out again that the Form PSC 3.01 report
“doesn’t accurately state what prices should be in the future” and that “the rate review
only goes forward if you meet certain tests, and the test is whether or not the PSC
3.01 is within the range. If it’s within the range, the different ranges, then there’s no
earnings review.”
-21-
When the Senate State and Local Government Committee considered the bill
again on April 25, 1995, Chairman Cohen offered an amendment requiring the
continuation of rate hearings for basic telephone services through 1996. Senator
Rochelle, the bill’s sponsor, opposed this amendment on the ground that “rate of
return regulation . . . encourages everybody to be fat; it encourages monopolistic
practices; it encourages lack of innovation.” After tabling Chairman Cohen’s
amendment, the Committee approved the bill as amended for passage by a 6 to 3
vote.
The debate over the need for a full-blown rate hearing before permitting
incumbent local telephone companies to operate under a price regulation plan
continued on the Senate floor on May 11, 1995 when the bill came up for third and
final reading. Senator Rochelle offered an amendment to the bill containing what
would later become Tenn. Code Ann. § 65-5-209(j)28 and explained that “[t]here was
a concern that they [the incumbent local telephone companies] could cook the books,
and what this does is expressly state that the Commission shall conduct an audit of
the audit to verify that the figures are correct.” After the Senate tabled Senator
Cohen’s motion to invite Mr. Burcham to address them concerning Senator
Rochelle’s amendment, Senator Rochelle reiterated that the purpose of his
amendment was to “[set] out very exactly that the Public Service Commission has the
. . . power to do a full blown audit of that audit [the Form PSC-3.01 report] to make
sure they’ve been given correct figures.” He also stated categorically that this
amendment “doesn’t address rate setting. This addresses auditing of an audit.”
Upon hearing Senator Rochelle’s explanation of his proposed amendment,
other senators, including Senators Cohen, Cooper, and Gilbert pointed out that the
amendment would permit the Commission to make sure that the numbers are correct
but not to go behind the numbers. These senators asserted that the Commission
should conduct a traditional earnings investigation before approving an incumbent
local telephone company’s initial rates. Senator Rochelle opposed these suggestions
on the ground that the rate hearings demanded by these senators would be a “three-
28
See Amendment No. 2 to Amendment No. 2, Senate Journal of the Ninety-Ninth General
Assembly of the State of Tennessee, First Session, 1157-58 (1995) (“Senate Journal”).
-22-
year ordeal.” The Senate finally adopted Senator Rochelle’s amendment on a voice
vote.29
The adoption of Senator Rochelle’s amendment did not end the matter. The
Senate considered and defeated three other amendments that would have replaced the
audit of the Form PSC-3.01 report with a more traditional rate proceeding. One
amendment would have authorized the Commission to conduct a contested case
proceeding “to determine the justness and reasonableness of the existing rates” and
to “make appropriate adjustments to arrive at just and reasonable rates.” 30 Another
amendment was to the same effect.31 The third amendment would have required the
Commission to “make public the anticipated revenues and profits each provider will
make under such plan.”32
Senator Rochelle opposed each of these amendments on the ground that they
were motivated by the “greed” of BellSouth’s competitors who desired to delay the
company’s ability to compete in a less regulated market. He disagreed with Senator
Gilbert’s observation that it would make “better sense to have a full evidentiary
hearing before we turn those market forces loose.” When asked by Senator Gilbert
to point out the language in his amendment that permitted the Commission to adjust
the rate “if there is a problem with the audit or that things have not been stated as they
should have been stated,” Senator Rochelle responded:
[W]e’re using the existing rules that have already been
adopted by the PSC and that gives them the ability to set
the rates. It wouldn’t be in the bill. We’re using existing
practices, rules, and statutes.
In response to Senator Rochelle’s explanation, Senator Gilbert then pointed out to his
colleagues that
We’re passing a statutory scheme that may be interpreted
to override every one of those existing rules. Let me tell
you why he can’t point to any language in subsection (c)
that tells you that the PSC will change . . . the rates if they
find out through their audit that something’s wrong,
29
Senate Journal, at 1159.
30
Amendment No. 8 was tabled by a vote of 18 to 15. See Senate Journal, at 1160.
31
Amendment No. 9 failed by a vote of 13 to 16. See Senate Journal, at 1164-65.
32
Amendment No. 18 failed under Senate Rule 39(3) by a vote of 11 to 19 to 1. See Senate
Journal, at 1167.
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because there isn’t any language in that section that allows
them to do that.
Senator Rochelle ended the colloquy by pointing out that the Commission could
adjust the rates if it determined that BellSouth’s earnings were above the company’s
authorized rate of return. The Senate thereafter approved the amended version of
Senate Bill No. 891 by 24 to 8 to 1 vote and sent the bill to the House of
Representatives.33
The House leadership was not satisfied with the Senate’s version of the bill.
Accordingly, when Senate Bill 891 came on for third and final reading on May 24,
1995, Representative Purcell, one of the bill’s House sponsors, convinced his
colleagues to adopt an amendment that added several new provisions to the Senate’s
version of the bill. This amendment contained the restated version of the
telecommunications policy that now appears in Tenn. Code Ann. § 65-4-123,34 the
provision requiring the General Assembly to review the implementation of the Act
every two years that now appears in Tenn. Code Ann. § 65-5-211 (Supp. 1996),35 and
the provisions creating a $10 million small and minority telecommunications
business assistance program that now appear in Tenn. Code Ann. §§ 65-5-212, -
213.36
The House amendment did not alter the portions of the Senate amendment
containing Tenn. Code Ann. § 65-5-209(c) and adding the language that was to
become Tenn. Code Ann. § 65-5-209(j). In fact, the differences between an earnings
investigation and an audit of a Form PSC-3.01 report that had preoccupied the Senate
were never mentioned during the House discussion of the bill. In his closing remarks
after the House cut off further debate on the bill, Representative Purcell told his
colleagues:
I need to, at this point, with your indulgence, read three
brief statements into the record for legislative intent
purposes as this bill leaves this House and goes to the
Senate. The first was requested by the AARP. The audit
33
Senate Journal, at 1168.
34
Amendment No. 17, § 1, 2 House Journal of the Ninety-Ninth General Assembly of the
State of Tennessee, First Session, 1847 (1995) (“House Journal”).
35
Amendment No. 17, § 15, House Journal, at 1858.
36
Amendment No. 17, § 17, House Journal, at 1859-60.
-24-
provisions in this bill were requested by the AARP, and it
was their hope that we would, as a matter of legislative
intent, make it clear what we mean. And so, let me say on
the subject of Section 13, legislative intent is that this bill
establishes a process by which consumers are assured
affordable rates. To achieve this, the bill provides that the
rates of incumbent local exchange companies will be based
on an audit of the company’s actual achieved results and
not on a speculative forecast.
An audit consistent with the provisions of this bill is
currently being performed by the TPSC staff by their
compliance unit of SCB’s TPC 3.01 form. As stated by Dr.
Chris Klein, Director of the PSC’s Utility Rate Division, in
a letter sent earlier this year,37 the TPSC 3.01 form is a
monthly report showing monthly, year-to-date, and twelve
month-to-date financial information including rate of
return, adjusted to reflect the Commission’s prior rate-
making decision. The compliance audit verifies that the
amounts shown on the TPSC 3.01, (1) are actually taken
from the company’s books and records; (2) accurately
reflect any Commission order of rate making adjustments;
(3) do not include unusual or abnormal financial
occurrences; (4) were calculated following proper
accounting rules and procedures for separating the
company’s interstate and intrastate operations, as well as
its regulated and non-regulated operations; and finally,
accurately reflect allowable charges from affiliated
companies.
Section 13 makes clear that this TPSC 3.01
compliance audit of actual achieved results and without
speculative forecasts will be completed, and affordable
rates will be set pursuant to Section 10 (c) and (j) of this
bill.38
See House Journal, at 1865. The House then passed Senate Bill No. 891 by an 89 to
8 vote.39
37
Representative Purcell is referring to an April 13, 1995 memorandum from Chris Klein and
Mike Gaines to Chairman Keith Bissell. The memorandum describes the intended scope of the
compliance audit that had already been initiated by the Commission in March 1995. The
Commission’s staff later cited this memorandum as authority for the scope of the audit of
BellSouth’s most recent Form PSC-3.01 report on which its September 15, 1995 report was based.
38
Representative Purcell’s description of the scope of the compliance audit was drawn
completely from the April memorandum written by Messrs. Klein and Gaines. The version of his
remarks appearing in the House Journal contains minor, nonsubstantive differences with his actual
remarks on the House floor. See House Journal, at 1865.
39
See House Journal, at 1864. The House Journal infers that Representative Purcell’s remarks
followed the final vote on the bill; however, the tapes of the legislative debates show to the contrary.
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The bill containing the House amendments was returned to the Senate and was
called up for consideration on May 25, 1995. On this occasion, Senator Rochelle
read the same statement that Representative Purcell had read the previous day. When
asked to explain how the amended bill would assure affordable telephone service,
Senator Rochelle replied
we have read . . . for legislative intent purposes, the
language requested that helped everybody understand that
the authority of the Consumer Advocate and the authority
of the PSC and such as that remains in place and is there to
. . . help insure that all reports, audits and such as that are
based on actual figures, not speculative forecasts and such
as that. So I would refer you to the statement of legislative
intent, and to the language that’s previously been in the
bill, plus the language in Amendment No. 2 to 2.
When asked how the House’s version of the bill differed from the Senate’s version,
Senator Rochelle explained that the principal change was the creation of the fund for
small and minority businesses and that “there are language changes, of course, but
they were changes that were worked out with the AARP, they were after consultation
with the AARP, Mr. Burcham, and these other folks.” The Senate proceeded to
concur in the House amendments by a 23 to 10 vote.40 Both Senator Rochelle and
Senator Gilbert, who had voted against the bill and the House amendments, requested
that Senator Rochelle’s statements concerning the scope of the audit of the Form
PSC-3.01 report be included verbatim in the Senate Journal.41
3.
The legislative history of Tenn. Code Ann. § 65-5-209 reveals several
significant milestones in the formulation of this statute. The original version of the
bill contained no procedure of any sort for reviewing incumbent local telephone
companies’ rates. The bill’s critics objected to this omission because they believed
that it would enable the telephone companies to earn excessive profits and argued that
the Commission should hold one last “full blown” traditional earnings investigation
before the competitive market forces were turned loose. The bill’s proponents
opposed this suggestion and proposed instead that the Commission audit the
telephone companies’ most recent Form PSC-3.01 report. Their adversaries asserted
40
See Senate Journal, at 1631.
41
See Senate Journal, at 1631-32.
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that this proposal did not go far enough because auditing the Form PSC-3.01 report
would not provide a representative picture of the companies’ future earnings. The
only concession that the bill’s proponents were willing to make was to specifically
empower the Commission to satisfy itself that the information on the Form PSC-3.01
report was accurate. The opponents tried repeatedly to convince their legislative
colleagues to require one last traditional rate-setting proceeding. When they were
rebuffed three times, they abandoned their efforts to amend the bill and resorted to
the tactic of including a statement in the legislative record containing an
interpretation of the legislation similar to the position that their colleagues had
repeatedly declined to adopt.
The statements concerning the scope of the audit read into the record by
Senator Rochelle and Representative Purcell are inconsistent with the language of
Tenn. Code Ann. § 65-5-209. By its own terms, this statute, not the Commission’s
other statutes and regulations, governs the manner in which the Commission must
consider and act upon applications for price regulation plans. The Commission’s
powers under Tenn. Code Ann. § 65-5-209 are more limited than its powers in the
context of a traditional earnings investigation, as long as the company’s rate of return
on its Form PSC-3.01 report is less than its currently authorized rate of return.
The Commission, like any other administrative agency, must conform its
actions to its enabling legislation. Tennessee Pub. Serv. Comm’n v. Southern Ry., 554
S.W.2d 612, 613 (Tenn. 1977); Pharr v. Nashville, C. & St. L. Ry., 186 Tenn. 154,
161, 208 S.W.2d 1013, 1016 (1948). It has no authority or power except that found
in the statutes. Tennessee-Carolina Transp., Inc. v. Pentecost, 206 Tenn. 551, 556,
334 S.W.2d 950, 953 (1960). While its statutes are remedial and should be
interpreted liberally, see Tenn. Code Ann. § 65-4-106 (Supp. 1996), they should not
be construed so broadly as to permit the Commission to exercise authority not
specifically granted by law. Pharr v. Nashville, C. & St. L. Ry., 186 Tenn. at 161, 208
S.W.2d at 1016.
Both the language of Tenn. Code Ann. § 65-5-209 and its legislative history
confirm that the General Assembly established a three-phase process for considering
applications for a price regulation plan. The first and second phases involve verifying
the accuracy of the information in the applicant’s Form PSC-3.01 report and
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comparing the applicant’s reported rate of return with its currently authorized rate of
return. During these phases, the Commission and its staff are empowered to audit the
applicant’s most recent Form PSC-3.01 report for three purposes: (1) to verify that
the information on the report accurately reflects the information in the applicant’s
books and records, (2) to verify that the report was prepared consistently with
generally accepted accounting principles, and (3) to verify that the applicant’s
calculations reflected the Commission’s previously issued orders. The Commission’s
authority to adjust the figures on the Form PSC-3.01 report is limited to correcting
errors with regard to these three categories. The Commission may only adjust an
applicant’s rate of return after it determines that the rate of return reported on the
applicant’s most recent Form PSC-3.01 report exceeds the applicant’s currently
authorized rate of return.
The Commission exceeded its authority under Tenn. Code Ann. § 65-5-209(c)
& (j) by adjusting the figures in BellSouth’s Form PSC-3.01 report to compensate for
out of period items, abnormal or unusual expenses, and known charges. It had
already concurred with its staff’s conclusion that the rate of return on BellSouth’s
corrected Form PSC-3.01 report was 10.30%. Since this rate of return did not exceed
BellSouth’s currently authorized rate of return of between 10.65 and 11.85%, the
Commission should have found that BellSouth’s existing rates were affordable under
Tenn. Code Ann. § 65-5-209(a) and should have approved BellSouth’s application
for a price regulation plan based on BellSouth’s rates existing on June 6, 1995 as
required by Tenn. Code Ann. § 65-5-209(c).
C.
BELLSOUTH’S RIGHT TO A CONTESTED CASE HEARING
BellSouth also asserts that the Commission should have granted its request for
a contested case hearing to challenge the legal and factual basis for the adjustments
to BellSouth’s Form PSC-3.01 report. The Commission responds that BellSouth is
not entitled to a contested case hearing because the first two phases of a Tenn. Code
Ann. § 65-5-209 proceeding are essentially an audit, and an audit is not a contested
case. The Commission overlooks two significant points. First, BellSouth desired to
challenge the Commission’s interpretation and use of its staff’s audit. Second, the
Commission’s use of the audit affected BellSouth’s legal rights and privileges.
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The Commission relies on National Health Corp. v. Snodgrass, 555 S.W.2d
403 (Tenn. 1977) to support its argument; however, this case is significantly different
from the one before us. In National Health Corp., the state comptroller audited
several related intermediate care facilities to determine whether their charges were
consistent with federal and state law. After the auditors concluded that the company
had overcharged the State, the Department of Public Health informed National Health
Corp. that it intended to withhold a portion of its next regularly scheduled payment
to offset the overcharge. Instead of proceeding against the Department of Public
Health, National Health Corp. sought judicial review of the comptroller’s audit under
the Uniform Administrative Procedures Act.
The Chancery Court for Davidson County dismissed National Health Corp.’s
petition for review under Tenn. Code Ann. § 4-5-322 (Supp. 1996) based on its
conclusion that the comptroller’s audit reports were not contested cases, and the
Tennessee Supreme Court affirmed the decision. The court concluded that the audit
was not a contested case because an audit
in and of itself, does not determine any legal rights, duties
or privileges of any party to the audit. It is merely a report
of factual material, with recommendations of the auditor.
If some action is taken or decision is made by a state
official based on the audit report, the decision made or
action taken may constitute a “contested case,” but not the
audit or the report based on the audit, which at most would
be only “evidence” to support the decision or action taken.
National Health Corp. v. Snodgrass, 555 S.W.2d at 405-06.
BellSouth has the right to have its application for a price regulation plan
considered in accordance with Tenn. Code Ann. § 65-5-209. It also has the right to
base its initial rates on its existing rates if its earned rate of return does not exceed its
currently authorized rate of return. The Commission’s decision to trigger a rate-
setting proceeding by adjusting the figures on BellSouth’s Form PSC-3.01 report
affected BellSouth’s rights. While the Commission permitted BellSouth to present
legal arguments concerning its authority to adjust its Form PSC-3.01 report, it did not
provide BellSouth with an opportunity to prove that the staff’s findings or
conclusions with regard to the “out-of-period adjustments,” “abnormal or unusual
expenses,” and “known charges” were factually incorrect. Given the interests at
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stake, the Commission should have permitted BellSouth to prove that the suggested
adjustments
were incorrect or not supported by the facts.
IV.
REVIEW OF ALL BELLSOUTH’S RATES AND TARIFFS
AT&T also argues that the Commission did not complete its task because it
failed to review each of BellSouth’s rates and tariffs to determine whether they were
affordable and non-discriminatory.42 We need not address this issue in light of our
holding that the Commission should have approved BellSouth’s application for a
price regulation plan based on the rates in existence on June 6, 1995. Since the
Commission had already determined that these rates and tariffs were just and
reasonable and nondiscriminatory, it is not required to make this determination again
absent some specific reason to do so.
V.
In summary, we vacate the Commission’s January 23, 1996 order and all
related earlier orders with regard to BellSouth’s application for a price regulation
plan. Since the Commission has adopted its staff’s conclusion that BellSouth’s rate
of return reported on its Form PSC-3.01 report for the twelve months ending March
31, 1995 is less than its current authorized rate of return, we remand the case to the
Tennessee Regulatory Authority with directions to approve BellSouth’s application
for a price regulation plan. In light of our conclusion that the Commission did not
have the authority to adjust the actual results on BellSouth’s Form PSC-3.01 report,
we need not consider the remaining issues raised by BellSouth and AT&T. These
issues and all other issues raised by the parties are accordingly pretermitted.
We tax the costs of this appeal which includes BellSouth Telecommunications,
Inc. v. Greer, App. No. 01A01-9601-BC-00008 and BellSouth Telecommunications,
42
AT&T made a similar argument with regard to the Commission’s approval of the price
regulation plan for United Telephone Southeast, Inc. This court did not reach the substance of this
argument because a majority of the panel that heard the case concluded that the court lacked
jurisdiction over the appeal. AT&T Communications of the South Central States, Inc. v. Greer,
App. No. 01A01-9512-BC-00556, 1996 WL 697945, at 7 (Tenn. Ct. App. Dec. 6, 1996) (No
Tenn. R. App. P. 11 application filed).
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Inc. v. Tennessee Pub. Serv. Comm’n, App. No. 01A01-9602-BC-00066 to the
Tennessee Regulatory Authority. We tax the costs of the appeal in State ex rel.
BellSouth Telecommunications, Inc. v. Bissell, App. No. 01A01-9601-CH-00016 to
BellSouth Telecommunications, Inc. and its surety for which execution, if necessary,
may issue.
__________________________
WILLIAM C. KOCH, JR., JUDGE
CONCUR:
_________________________________
SAMUEL L. LEWIS, JUDGE
_________________________________
BEN H. CANTRELL, JUDGE
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