BUFFALO TELEPHONE CO. v. PUB. UTILITY COM'N

990 A.2d 67

BUFFALO VALLEY TELEPHONE COMPANY, Conestoga Telephone and Telegraph Company, and Denver and Ephrata Telephone and Telegraph Company, Petitioners v. PENNSYLVANIA PUBLIC UTILITY COMMISSION, Respondent.

Irwin A. Popowsky, Consumer Advocate, Petitioner v. Pennsylvania Public Utility Commission, Respondent.

Nos. 847 C.D. 2008, 940 C.D. 2008.

Commonwealth Court of Pennsylvania.

Argued September 14, 2009.

Decided December 15, 2009.

Publication Ordered February 16, 2010.

Norman J. Kennard, Harrisburg, for petitioner, Buffalo Valley Telephone Company.

Elizabeth H. Barnes, Asst. Counsel, Harrisburg, for respondent.

Suzan DeBusk Paiva, Philadelphia, for intervenor, Verizon, Pennsylvania, Inc.

Steven C. Gray, Harrisburg, for intervenor, Office of Small Business Advocate.

Joel H. Cheskis, Harrisburg, for intervenor, Office of Consumer Advocate.

BEFORE: McGINLEY, Judge, and COHN JUBELIRER, Judge, and FLAHERTY, Senior Judge.

OPINION BY Judge McGINLEY.

Buffalo Valley Telephone Company, Conestoga Telephone and Telegraph Company and Denver and Ephrata Telephone and Telegraph Company (hereinafter "Petitioners") are three small local exchange carriers (LECs) that serve rural territories in Pennsylvania. Petitioners request this Court to review¹ three orders of the Public Utility Commission (Commission) concerning their "2006 Annual Price Stability Index/Service Price Index Filings" filed pursuant to the modifications and amendments to Chapter 30² of the Public Utility Code, 66 Pa.C.S. § 3015 (hereinafter "Act 183"). This dispute centers around whether Petitioners have the right to increase "noncompetitive" rates for "switched access services" charged to long-distance telephone companies, such as Verizon.³ The crux of the controversy involves Petitioners' right to increase these switched access charges (which generate noncompetitive revenue for Petitioners) and the Commission's authority to preclude them from doing so. Further, Petitioners challenge the Commission's directive that Petitioners must increase rates charged to their end-user/customers, not the rates charged to other carriers, if they wish to raise revenues. The Commission's waiver of an $18 residential rate cap to make possible such an increase in Petitioners' revenue is likewise challenged on the grounds that the Commission exceeded its authority under Act 183.

To resolve the issues, it is necessary to understand switched access charges, the statutory background of Chapter 30 of the PUC Code entitled "Alternative Form of Regulation," 66 Pa.C.S. §§ 3001-3009 (repealed), and the amendments to Chapter 30 enacted under Act 183, 66 Pa.C.S. §§ 3010-3019.

Switched Access Charges — A Source of Noncompetitive Revenue

Switched access charges refer to amounts rural LECs charge to long-distance companies, such as Verizon, to carry non-local calls on their local networks to and from their local customers. It is compensation paid by long distance carriers to rural LECs, like Petitioners, for the use of their network and local switching facilities.⁴ Switched access charges are designed to recover a portion of the loop and switching costs of rural LECs.

Because switched access is provided from one telephone company to another, it is considered to be a "noncompetitive service." A "noncompetitive service" is one that telephone companies do not compete to provide, unlike like toll rates which are a competitive service.

Chapter 30 of the PUC Code — Alternative Regulation Plans

Chapter 30 of the PUC Code was enacted in July 1993, to encourage the deployment of an advanced broadband communications network which would be affordable and universally available to all residents in this Commonwealth. Chapter 30 offered financial incentives to smaller rural LECs, such as Petitioners, to convert their existing communication networks to 100% broadband capability by the end of the year 2015. As inducement, Chapter 30 provided rural LECs the opportunity to be regulated under what is referred to as an "alternative form of regulation." That is, they could elect to have their rates regulated under a price cap formula instead of the traditional rate based/rate of return regulation. If a rural LEC opted to be regulated under the new "alternative form of regulation," it was permitted to adjust its rates annually at the rate of inflation, offset by a 2% productivity factor. This offered rural LECs an opportunity for substantial revenue. Chapter 30 also provided LECs with a "streamlined regulation" designed to reduce numerous regulatory obligations and decrease regulatory delays and costs.

Petitioners elected to be regulated under the new "alternative form of regulation" and committed to make broadband service available to all customers by December 31, 2015. Petitioners' Chapter 30 Network Modernization Plans were initially approved by the Commission in January 2000.

The Global Order, Rate Rebalancing and the History of the PaUSF

Historically, switched access rates were a means of rate support for rural LECs which provided service in higher cost areas with lower populations and longer loop distances over rougher terrains, as opposed to lower cost areas, such as urban areas, with higher populations and shorter loop distances. Switched access rates were priced above cost in order to subsidize local rates and keep local basic service affordable. In 1997, after the implementation of the federal Telecommunications Act of 1996, 47 U.S.C. § 151, et seq., and around the time of the transition from monopoly to a more competitive environment, the Commission investigated switched access charges to determine if rural LECs were charging long distance carriers more for those services than their cost. Given that competition now existed among rural LECs and long-distance carriers, the Commission was concerned that rural LECs would gain a competitive advantage over long-distance carriers. The Commission invited interested parties, including Verizon and the Rural Telephone Company Coalition, to participate in "Global Settlement Talks." After hearings, the Commission entered a Global Order on September 30, 1999, which implemented, among other things, "revenue-neutral rate rebalancing." One of the purposes of revenue-neutral rate rebalancing was to bring switched access rates into line with costs in order to "level the playing field" and foster competition. This required a decrease in switched access charges and an increase in local rates charged to customers.

In order to avoid rate shock to the rural LECs' end-user customers, the Commission recognized the need to neutralize a rural LEC's revenue shortfalls as the consequence of the ordered reduction of switched access charges. The Global Order directed a Pennsylvania Universal Service Fund (PaUSF) be established to enable the rural incumbent LECs to reduce switched access charges and at the same time ensure that residential local service rates did not exceed the designated price cap of $16.00 per month. All Pennsylvania telecommunications providers (except wireless carriers) were directed to contribute to the PaUSF based upon their intrastate end-user revenues. Rural LECs were permitted to draw from the PaUSF to offset their immediate rate rebalancing revenue needs. The Global Order described the PaUSF as a "pass-through mechanism to facilitate the transition from a monopoly environment to a competitive environment — an exchange of revenue between telephone companies which attempts to equalize the revenue deficits occasioned by mandated decrease in their toll and access charges." In other words, long distance carriers paid into the PaUSF, and rural LECs withdrew the amount of their revenue deficits that resulted from decreasing switched access rates. Instead of rural LECs charging switched access charges above their costs, the PaUSF subsidized the actual amount of the LECs' revenue deficits. The Commission declared that the PaUSF was an interim funding mechanism to operate during the period of access charge reform. According to the Global Order, the PaUSF was originally scheduled to expire on December 31, 2003. In 2003, the PaUSF was extended to allow additional time to consider rate issues and modifications of fund regulations.

2003 Joint Stipulation

Three years after the Global Order, the Commission revisited switched access charges and the PaUSF for rural LECs. The 2003 Joint Stipulation Order filed by various parties, including Petitioners, was approved by the Commission. The Commission further reduced switched access charges for LECs and increased the cap on basic local service rates from $16.00 to $18.00. Access Charge Investigation per Global Order of September 30, 1999, Docket No. M00021596, 2003 WL 21921043 (Opinion and Order entered July 15, 2003). Joint Supplemental Appendix, Exhibit "I". If a rural LEC's average residential rate exceeded the $18 cap, as a result of the rate rebalancing, it was required to cap it at $18 and recover the shortfall from the PaUSF.

Subsequently, the Commission opened another investigation into whether switched access charges and total rates in rural areas should be even further decreased. The investigation was to provide the basis for any proposed regulatory changes. The matter was assigned to an Administrative Law Judge (ALJ) for proceedings to determine, inter alia, whether access charges should be further reduced and whether disbursements from the PaUSF should be reduced and/or eliminated. Investigation Regarding Intrastate Access Charges and IntraLATA Toll Rates of Rural Carriers and the Pennsylvania Universal Service Fund, Docket No. 1-00040105 (Opinion and Order entered December 20, 2004). Joint Supplement Appendix, Exhibit "L."⁵

New Chapter 30 (Act 183) — Approval of Petitioners' Amended Plans

On November 30, 2004, the General Assembly modified Chapter 30 through the passage of Act 183.⁶ The primary purpose of Act 183 was to provide rural LECs the incentive to accelerate their...