Give Peace A Chance: FCC-State Relations After California III

Jonathan Jacob Nadler*

Introduction
I. The Twenty Years' War A. Origins and Basis of the FCC-State Conflict 1. How Can the Federal-State Boundary be Determined? 2. When is FCC Preemption Permissible? B. The Early FCC Victories (1974-82) C. The FCC Overreaches (1982-86) 1. Depreciation 2. Inside Wiring 3. Enhanced Services D. The States Counter-Attack (1986-90) 1. Louisiana 2. NARUC III 3. California I 4. The Casualty Count 5. Scattered Federal Victories E. The FCC Retreats (1991) 1. Inside Wiring 2. Enhanced Services F. The States Overreach (1991-94) 1. Jurisdictional Challenges 2. Preemption Challenges
II. Four Principles of Peaceful Coexistence A. Jurisdiction is Determined on an End-To-End Basis B. The FCC Has Plenary Jurisdiction over Interstate Communications Facilities and Services C. The States Are Entitled to Regulate Intrastate Communications Services and Facilities D. The FCC May Preempt State Regulations Applicable to Carrier-Provided Intrastate Communications Facilities or Services to the Extent that, as a Practical Matter, Enforcement of Such Regulations Would Prevent the Application of Federal Regulations to Interstate Carrier-Provided Communications Services or Facilities 1. The Preemption Principle 2. The Principle Applied
III. Keeping the Peace A. Inseverability and the Intelligent Network B. "Jurisdictional Forbearance" After AT&T v. MCI C. Jurisdiction Over Telephone Company-Provided Video Services D. Jurisdiction Over Non-Carrier Communications Facilities and Services
Conclusion

Introduction

For nearly twenty years, the Federal Communications Commission (FCC or Commission) and the states have been engaged in a bitter "border war." The combatants have repeatedly clashed over two related issues: what is the dividing line between federal and state jurisdiction over telecommunications services and equipment(note 1) and, once that line is established, when may the FCC enter state "territory" to preempt regulations that are inconsistent with federal policies?(note 2)

Three recent appellate decisions-Georgia Public Service Commission v. FCC (Georgia PSC),(note 3) California II,(note 4) and California III(note 5)-provide an opportunity to bring the long-running dispute to an end. These decisions represent the culmination of a process by which the federal courts have clarified the principles governing FCC-state relations. These principles provide that the FCC and the states have control over telecommunications facilities and services within their respective jurisdictions. They further provide that the FCC is required to accept divergent state policies regarding intrastate common carrier facilities and services, but that where state regulation threatens to displace the FCC's jurisdiction over interstate common carriers, the FCC may carefully-but forcefully-exercise its preemptive power.

This Article first reviews the basis and history of the federal-state conflict, with particular emphasis on the three most recent judicial decisions. It then lays out a workable set of principles, grounded firmly in the case law, that can provide a basis for the cessation of hostilities between the FCC and the states. The Article concludes by highlighting several additional jurisdictional issues that will have to be resolved in the coming years.

I. The Twenty Years' War

The federal-state conflict has followed a classic format. After experiencing initial victories, an over-confident FCC ventured far into state territory. Thus overextended, the Commission was unable to withstand the inevitable state counter-attack. Stung by several sharp defeats, the FCC strategically retreated, dug in, and successfully fended off further state efforts to redraw the jurisdictional map.

A. Origins and Basis of the FCC-State Conflict

The origins of this dispute go back to 1934, when Congress enacted the Communications Act.(note 6) In adopting the Act, Congress had to make a decision: How would it divide the communications regulatory "turf" between the newly created FCC and the existing state regulatory authorities? Pursuant to its powers under the Commerce Clause,(note 7) Congress presumably could have ceded control over the entire field to the FCC, leaving no room for state regulation.(note 8) Alternatively, Congress might have divided responsibility between the FCC and the states, but authorized the FCC to displace any inconsistent state regulation.(note 9) Congress, however, chose neither of these approaches.(note 10)

What Congress did do was to create a system of "dual jurisdiction" over communications. Section 1 of the Communications Act grants the FCC authority to "regulat[e] interstate and foreign . . . communication by wire and radio."(note 11) At the same time, Section 2(b)(1) of the Act states that "nothing in this Act shall be construed . . . to give the Commission jurisdiction with respect to . . . charges, classifications, practices, services, facilities, or regulations for or in connection with intrastate communication service of any carrier."(note 12)

The Communications Act thus appears to divide the communications world "neatly into two hemispheres-one comprised of interstate service, over which the FCC would have plenary authority, and the other made up of intrastate service, over which the states would retain exclusive juris-diction."(note 13) However, if Congress hoped to create a clearly marked border and to erect armed fortifications that would keep the FCC and the states on their respective sides, its efforts were destined to fail. As the Supreme Court has recognized, the "realities of technology and economics" make "such a clean parcelling of responsibility" impossible.(note 14)

The reason is simple: the same facilities are used to provide both interstate and intrastate telecommunications services. Thus, a telephone subscriber in Los Angeles must use the same customer premises equipment (CPE),(note 15) the same inside wiring,(note 16) the same "local loop,"(note 17) and the same central office switching facilities(note 18) to call San Francisco as he does to call New York City. This creates two distinct problems.

1. How Can the Federal-State Boundary be Determined?

As is the case with many border wars, the first matter in contention between the FCC and the states is where the boundary line between the two jurisdictions lies. Although Congress may have wished it to be otherwise, the location of the border is not immediately obvious. In the above example, the CPE, inside wiring, local loop, and switches used by the caller in Los Angeles are physically present within California. Moreover, the overwhelming majority of the calls carried over these facilities are likely to terminate within the state.(note 19) Therefore, regulatory authority over these facilities (and the services provided over them) could be assigned exclusively to the intrastate jurisdiction. On the other hand, because these facilities are used to transport some calls that cross state lines, they could be considered to be within the federal regulatory domain.

The difficulty of "mapping the boundaries" between the federal and state domains has been compounded by the growth of enhanced services, which combine basic communications transport with computer processing applications.(note 20) When a subscriber in Los Angeles places a telephone call to San Francisco, it is usually safe to assume, the transmission does not leave California; when he calls New York, the transmission assuredly crosses the state line. In contrast, when a researcher in Los Angeles accesses a nationwide electronic information service, she may interact-in the course of a single on-line session-with a "gateway" menu in Baltimore, a local server in Beverly Hills, and a remote database in Boston, without ever knowing from where the information has come. Indeed, even the local exchange carrier (LEC) that provides the connection from the researcher's home to the information service provider's local "point of presence" may be unable to determine whether any of the information that it is carrying to the subscriber originated outside the state.(note 21)

2. When is FCC Preemption Permissible?

The location of the border between the interstate and the intrastate jurisdictions is not the only point of contention between the two sides. Regulation of jointly used facilities (or the services provided over them) by state regulatory authorities can significantly affect the FCC's ability to advance its policy goals. For example, a state policy preventing residents from interconnecting user-provided terminal equipment to the telephone network in order to place intrastate telephone calls is likely to impair federal policies allowing the use of such equipment for interstate calls.(note 22) Similarly, a state policy requiring the use of the "whole life" method for depreciating the "intrastate component" of LECs' central office equipment in order to keep local telephone rates low is likely to frustrate federal policies that seek to promote network modernization by requiring the use of accelerated depreciation for the "interstate component" of that equipment.(note 23) And a state policy requiring common carriers to provide jurisdictionally intrastate enhanced services using separate facilities and personnel is likely to undermine the federal policy promoting the provision of jurisdictionally interstate basic and enhanced services on an integrated basis.(note 24)

B. The Early FCC Victories (1974-1982)

The opening salvo in the federal-state conflict was fired by North Carolina.(note 25) The issue was whether telephone subscribers should have the right to attach user-provided CPE to the interstate telephone network, rather than being required to use equipment provided by the carrier. After years of litigation, the FCC concluded that subscribers should have this right.(note 26) In 1974, however, the North Carolina Public Utilities Commission (NCUC) announced its intention to prohibit the attachment of user-provided CPE to the telephone network-unless the equipment was to be used exclusively for interstate calls. The FCC promptly responded, issuing an order preempting state restrictions on interconnection.(note 27)

North Carolina challenged the preemption order in the Fourth Circuit. The state argued that the FCC had exceeded its authority under Section 2(b)(1) of the Communications Act which, on its face, deprives the FCC of jurisdiction over carrier-provided intrastate communications services and facilities.(note 28) If necessary, North Carolina suggested, subscribers could be required to purchase two pieces of CPE (and two transmission lines) one for interstate calls, and one for intrastate calls.

The Fourth Circuit was not persuaded. Deferring to the FCC's findings, the court observed that "[u]sually it is not feasible, as a matter of economics and practicality of operation, to limit the use of such equipment to either interstate or intrastate transmission."(note 29) Therefore, the court continued, the "practical effect" of the proposed North Carolina regulation would be to prohibit the attachment of customer-provided CPE to the interstate network, thereby preventing subscribers from exercising their federal right of interconnection.(note 30) The FCC, the court concluded, had the authority to preempt the state regulations in order to avoid being "frustrated in the exercise of that plenary jurisdiction over the rendition of interstate and foreign communication services that the Act has conferred upon it."(note 31) The Fourth Circuit reaffirmed these conclusions the following year.(note 32)

Shortly thereafter, California tried a different tack. Rather than challenging the authority of the FCC to enter state "territory" through the exercise of its preemption power, California simply tried to move the border. The precipitating event was a 1975 order in which the FCC directed the pre-divestiture Bell System to allow Southern Pacific Communications Company (the predecessor of Sprint Communications) to interconnect certain specialized facilities-which were capable of being used for both interstate and intrastate communications-to the Bell System's monopoly local exchange facilities.(note 33) California challenged the order, arguing that the FCC lacked jurisdiction over the local exchange facilities because they were physically located within individual states.

In California v. FCC,(note 34) the Court of Appeals for the D.C. Circuit rejected this argument. "Even though . . . facilities are located entirely within single states," the court declared, "`the physical location . . . is not determinative of whether they are interstate or intrastate for regulatory purposes. . . . [T]he key issue . . . is the nature of the communications which pass through the facilities . . . .'"(note 35) Because the Bell System's local exchange facilities were used (at least in part) to support interstate calls, the FCC had the authority to mandate interconnection. In the following years, this principle was reaffirmed in a number of cases,(note 36) culminating in National Ass'n of Regulatory Utility Commissioners v. FCC (NARUC II)(note 37) in which the the Court of Appeals for the D.C. Circuit stated unequivocally that physically "intrastate facilities and services used to complete even a single interstate call may become subject to the FCC regulation to the extent of their interstate use."(note 38)

Emboldened by its early victories, the FCC went on the offensive. The Commission previously had determined that carriers could not require subscribers to use carrier-provided CPE.(note 39) In the Second Computer Inquiry(note 40) the FCC took the next step, declaring that the provision of CPE was not a common carrier service subject to regulation under Title II of the Communications Act(note 41) and, therefore, that telephone companies would not be allowed to offer CPE as part of their regulated interstate transmission service.(note 42) Rather, carriers were to offer CPE on a "private contract" basis. The Commission further determined that imposition of common-carrier-type regulation by the states would undermine the FCC's policy of promoting a competitive CPE market. Acting pursuant to its "ancillary authority" under Title I of the Communications Act,(note 43) the FCC preempted all such state regulation.(note 44)

This decision was upheld by the Court of Appeals for the D.C. Circuit in Computer & Communications Industry Ass'n v. FCC (CCIA).(note 45) As in the NCUC cases, the court deferred to the FCC's finding that because "consumers use the same CPE in both interstate and intrastate communications and generally wish to purchase both interstate and intrastate transmission services,"(note 46) a state policy requiring tariffing of CPE used for intrastate calls could not feasibly coexist with the federal policy requiring the detariffing of CPE. "The conflicting state policy," the court stated, "would unavoidably affect the federal policy adversely. Therefore, here, as in NCUC I and II, the state regulatory power must yield to the federal."(note 47)

C. The FCC Overreaches (1982-86)

In the years that followed, the Commission launched a broad-based attack on state authority. Between 1982 and 1986, the FCC preempted state regulation of telephone company equipment depreciation rates, inside wiring, and enhanced services.

1. Depreciation

The first wave of the FCC attack came in the area of depreciation. Between 1980 and 1983, the FCC issued a series of orders designed to increase the speed with which the cost of regulated telephone company equipment would be "written off" and new equipment deployed.(note 48) "Adequate capital recovery," the FCC contended, was necessary to achieve the goal-specified in Title I of the Communications Act-of "`mak[ing] available . . . a rapid, efficient . . . communication service.'"(note 49) The Commission therefore required carriers to use a form of accelerated depreciation to recover the cost of the interstate component of their regulated plant.(note 50) The FCC also preempted state regulations that required use of a different method of depreciating the intrastate component of regulated telephone company equipment. The FCC reasoned that Section 2(b)(1) did not stand as a bar to exercise of its preemptive authority because "[s]tate depreciation rate prescriptions that do not adequately provide for capital recovery in the competitive environment . . . would frustrate the accomplishment of [the FCC's] policy."(note 51)

2. Inside Wiring

The Commission also sought to wrest control of the regulation of inside wiring from the states. Historically, the provision of inside wiring had been treated as a regulated common carrier activity. In 1986, however, the FCC directed that inside wiring be unbundled from the carriers' transmission service and offered on a non-regulated, private contract basis.(note 52) As it had done with CPE, the Commission also preempted the states from regulating inside wiring.(note 53)

The FCC stated that Section 2(b)(1) did not prevent it from displacing state inside wiring regulations. That provision, the FCC observed, deprived the Commission of jurisdiction over "charges, classifications, practices, services, facilities, or regulations for or in connection with intrastate communication service by wire or radio of any carrier."(note 54) Because it had determined that the provision of inside wiring is not common carriage, the FCC reasoned, Section 2(b)(1) did not limit its power to preempt state regulation.(note 55) The FCC further reasoned that-even if Section 2(b)(1) were applicable-federal preemption was permissible because "a federal program of competitive, deregulated provision of inside wiring cannot coexist with a state system providing for regulated carrier provision of inside wiring absent a requirement that consumers obtain two systems of inside wiring."(note 56)

3. Enhanced Services

The FCC's most ambitious offensive against state jurisdiction came in the area of enhanced services. Under rules adopted during the Second Computer Inquiry, and modified following AT&T divestiture,(note 57) the Bell Operating Companies (BOCs) were required to provide interstate enhanced services on a non-regulated basis using corporate affiliates that were structurally separate from the carriers' basic transmission service operations.(note 58) The structural separation requirement was intended to prevent the BOCs from leveraging their monopoly control over the local exchange to obtain a competitive advantage in the emerging enhanced services market.(note 59)

The FCC's commitment to structural separation was not long-lived. In Third Computer Inquiry, the FCC announced that it had concluded that the cost of structural separation resulting from the reduction of carrier efficiency outweighed the benefits resulting from the reduced risk of BOC anticompetitive conduct.(note 60) The FCC therefore replaced structural separation with a regime under which the BOCs may integrate their interstate basic and enhanced service operations, subject to certain nonstructural safeguards.(note 61) The nonstructural safeguards included a requirement that the BOCs disclose to enhanced service providers (ESPs) information necessary to achieve interconnection with the carriers' basic transmission network (the network disclosure rule). Such disclosure was to be made at least six months before a BOC's introduction of an enhanced service that uses a network interface that had not been previously disclosed.(note 62) The non-structural safeguards also required the BOCs to allow ESPs to have access to certain information regarding customers' use of the basic transmission network that could be useful in developing and marketing enhanced services (the customer proprietary network information (CPNI) rule).(note 63)

Once again, the FCC wielded its preemption sword. The Computer III Phase I Order preempted all state structural separation requirements and any state nonstructural safeguards that were in addition to or different from the federal nonstructural safeguards.(note 64) The order also preempted all forms of state enhanced service tariff regulation.(note 65) The order did not so much as mention Section 2(b)(1).(note 66)

D. The States Counter-Attack (1986-90)

By 1985, the FCC blitzkrieg seemed unstoppable. In a landmark article on FCC preemption published that year, Bob McKenna observed that he was "unable to visualize any likely regulatory question or legal issue of any importance affecting telephone companies" where the FCC could not exercise preemption power.(note 67) All the FCC need do, he concluded, was to make a "plausible case" that a state rule "substantially affects" the FCC's exercise of its authority.(note 68)

Just one year later, however, the tide began to turn. As a result of a series of judicial victories between 1986 and 1990, the states were able to use Section 2(b)(1) to repulse each of the federal incursions into their territory.

1. Louisiana

The states' first, and perhaps most dramatic, victory came in Louisiana Public Service Commission v. FCC (Louisiana).(note 69) By a 5 to 2 majority, the Supreme Court struck down the FCC's order preempting states from adopting depreciation methods for the intrastate component of telephone company equipment that differed from the method that the FCC prescribed for the interstate component of that equipment.(note 70) Section 2(b)(1) of the Communications Act, the Court declared, "fences off from FCC reach or regulation intrastate matters."(note 71) The FCC did not have the right to stray across that jurisdictional fence-even if it did so to promote the Title I goal of "the creation of a rapid and efficient telephone service."(note 72)

The FCC's trespass, the Court went on, was not unavoidable. The jurisdictional separations process provided a ready means to facilitate the application of different depreciation methodologies within the interstate and intrastate jurisdictions.(note 73) Therefore, the Court concluded, the FCC must allow the states to apply their own depreciation methodology to the intrastate component of the telephone company plant.

2. NARUC III

Rallied by their victory in Louisiana, the states went on the offensive.(note 74) Their next target was the FCC's decision to preempt all state regulation of inside wiring. Their efforts met success in 1989, when the Court of Appeals