CINCINNATI BELL TELEPHONE COMPANY v. KENTUCKY PUBLIC SERVICE COMMISSION; THE KENTUCKY PAYPHONE ASSOCIATION, INC. BELLSOUTH TELECOMMUNICATIONS, INC. v. HONORABLE WILLIAM L. GRAHAM PUBLIC SERVICE COMMISSION OF KENTUCKY; KENTUCKY PAYPHONE ASSOCIATION, INC.; CINCINNATI BELL TELEPHONE COMPANY; KENTUCKY ALLTEL, INC; ACCUCOM, INC.; ALLTEL KENTUCKY, INC.; AMERICAN COMMUNICATION SERVICES OF LOUISVILLE, INC.; ANNOX, INC.; AT&T COMMUNICATIONS OF THE SOUTH CENTRAL STATES, LLC; BALLARD RURAL TELEPHONE COOPERATIVE CORPORATION, INC.; BRANDENBURG TELEPHONE COMPANY; COIN PHONE MANAGEMENT COMPANY; DUO COUNTY TELEPHONE COOPERATIVE CORPORATION, INC.; FOOTHILLS RURAL TELEPHONE COOPERATIVE
Annotate this Case
Download PDF
RENDERED:
FEBRUARY 2, 2007; 2:00 P.M.
TO BE PUBLISHED
Commonwealth Of Kentucky
Court of Appeals
NO. 2004-CA-002659-MR
CINCINNATI BELL TELEPHONE COMPANY
v.
APPEAL FROM FRANKLIN CIRCUIT COURT
HONORABLE WILLIAM L. GRAHAM, JUDGE
ACTION NO. 03-CI-00797
KENTUCKY PUBLIC SERVICE COMMISSION;
THE KENTUCKY PAYPHONE ASSOCIATION,
INC.
AND
APPELLEES
NO. 2005-CA-001459-MR
BELLSOUTH TELECOMMUNICATIONS, INC.
v.
APPELLANT
APPEAL FROM FRANKLIN CIRCUIT COURT
HONORABLE WILLIAM L. GRAHAM
ACTION NO. 03-CI-00797
PUBLIC SERVICE COMMISSION OF KENTUCKY;
KENTUCKY PAYPHONE ASSOCIATION, INC.;
CINCINNATI BELL TELEPHONE COMPANY;
KENTUCKY ALLTEL, INC; ACCUCOM, INC.;
ALLTEL KENTUCKY, INC.; AMERICAN
COMMUNICATION SERVICES OF LOUISVILLE,
INC.; ANNOX, INC.; AT&T COMMUNICATIONS
OF THE SOUTH CENTRAL STATES, LLC;
BALLARD RURAL TELEPHONE COOPERATIVE
CORPORATION, INC.; BRANDENBURG
TELEPHONE COMPANY; COIN PHONE
MANAGEMENT COMPANY; DUO COUNTY
TELEPHONE COOPERATIVE CORPORATION, INC.;
FOOTHILLS RURAL TELEPHONE COOPERATIVE
CORPORATION, INC. D/B/A FOOTHILLS LONG
APPELLANT
DISTANCE; GTE SOUTH INCORPORATED N/K/A
VERIZON SOUTH, INC.; HAROLD TELEPHONE
COMPANY, INC.; HIGHLAND TELEPHONE
COOPERATIVE, INC.; INTER MOUNTAIN
CABLE, INC.; LEGAL AID SOCIETY, INC.;
LEWISPORT TELEPHONE COMPANY; LOGAN
TELEPHONE COOPERATIVE, INC.;
MOUNTAIN RURAL TELEPHONE COOPERATIVE CORPORATION,
INC.; MOUNTAIN TELEPHONE COOPERATIVE, INC.
NORTH CENTRAL TELEPHONE COOPERATIVE
CORPORATION; PEOPLES RURAL TELEPHONE
COOPERATIVE CORPORATION, INC.; SOUTH
CENTRAL RURAL TELEPHONE COOPERATIVE
CORPORATION, INC.; SOUTH CENTRAL
TELECOM, LLC; SOUTHEAST TELEPHONE, INC.;
TDS-TELECOM SOUTHEAST DIVISION;
THACKER-GRIGSBY TELEPHONE COMPANY,
INC.; WEST KENTUCKY RURAL TELEPHONE
COOPERATIVE CORPORATION, INC.; AND
LARKINS COMMUNICATIONS, INC. N/K/A
JACK LARKINS ENTERPRISES, INC.
AND
NO. 2005-CA-001644-MR
CINCINNATI BELL TELEPHONE COMPANY
v.
APPELLEES
APPEAL FROM FRANKLIN CIRCUIT COURT
HONORABLE WILLIAM L. GRAHAM
ACTION NO. 03-CI-00797
KENTUCKY PUBLIC SERVICE COMMISSION;
THE KENTUCKY PAYPHONE ASSOCIATION, INC.;
BELLSOUTH TELECOMMUNICATIONS, INC.;
KENTUCKY ALLTEL, INC.; ACCUCOM, INC.;
ALLTEL KENTUCKY, INC.; AMERICAN
COMMUNICATIONS SERVICES OF LOUISVILLE,
INC.; ANNOX, INC.; AT&T COMMUNICATIONS
OF THE SOUTH CENTRAL STATES, LLC;
BALLARD RURAL TELEPHONE COOPERATIVE
CORPORATION, INC.; BRANDENBURG
TELEPHONE COMPANY; COIN PHONE
MANAGEMENT COMPANY; DUO COUNTY
-2-
APPELLANT
TELEPHONE COOPERATIVE CORPORATION,
INC.; FOOTHILLS RURAL TELEPHONE
COOPERATIVE CORPORATION D/B/A
FOOTHILLS LONG DISTANCE; GTE SOUTH
INCORPORATED N/K/A VERIZON SOUTH,
INC.; HAROLD TELEPHONE COMPANY, INC.;
HIGHLAND TELEPHONE COOPERATIVE, INC.;
INTER MOUNTAIN CABLE, INC.; LARKINS
COMMUNICATIONS, INC. N/K/A JACK
LARKINS ENTERPRISES, INC.; LEGAL AID
SOCIETY, INC.; LEWISPORT TELEPHONE
COMPANY; LOGAN TELEPHONE COOPERATIVE,
INC.; MOUNTAIN RURAL TELEPHONE
COOPERATIVE CORPORATION, INC.; MOUNTAIN
TELEPHONE COOPERATIVE, INC.; NORTH
CENTRAL TELEPHONE COOPERATIVE CORPORATION;
PEOPLES RURAL TELEPHONE COOPERATIVE
CORPORATION, INC.; SOUTH CENTRAL RURAL
TELEPHONE COOPERATIVE CORP. INC.;
SOUTH CENTRAL TELECOM, LLC; SOUTHEAST
TELEPHONE, INC.; TDS-TELECOM SOUTHEAST
DIVISION; THACKER-GRIGSBY TELEPHONE
COMPANY, INC.; AND WEST KENTUCKY
RURAL TELEPHONE COOPERATIVE GROUP, INC.
AND
NO. 2005-CA-001674-MR
KENTUCKY ALLTEL, INC.
v.
APPELLEES
APPELLANT
APPEAL FROM FRANKLIN CIRCUIT COURT
HONORABLE WILLIAM L. GRAHAM
ACTION NO. 03-CI-00797
KENTUCKY PAYPHONE ASSOCIATION,
INC.; PUBLIC SERVICE COMMISSION
OF KENTUCKY; BELLSOUTH
TELECOMMUNICATIONS, INC.; AND
CINCINNATI BELL TELEPHONE COMPANY
-3-
APPELLEES
OPINION
REVERSING
** ** ** ** **
BEFORE:
COMBS, CHIEF JUDGE; WINE, JUDGE; PAISLEY,1 SENIOR JUDGE.
COMBS, CHIEF JUDGE:
Three telecommunications companies,
Cincinnati Bell Telephone Co., Kentucky Alltel, Inc., and
BellSouth Telecommunications, Inc., appeal an order of the
Franklin Circuit Court that had affirmed an order of the
Kentucky Public Service Commission (the PSC or the Commission).
At issue is the validity of a refund ordered by the PSC.
The
telecommunication companies had collected sums of money from
independent payphone service providers pursuant to a rate
established in prior PSC proceedings.
The PSC order before us
has required a refund of a portion of those funds from the
payphone providers.
The appeals have been consolidated for
hearing and decision.
After our review of the extensive record
and briefs of each of the parties, we reverse.
These appeals involve a complex combination of
directives issued by the Federal Communications Commission
pursuant to the Telecommunications Act of 1996 and the
proceedings undertaken by the PSC in response.
In order to
provide an adequate background, a rather detailed summary of the
facts and the law is required.
1
Senior Judge Lewis G. Paisley sitting as Special Judge by assignment of the
Chief Justice pursuant to Section 110(5)(b) of the Kentucky Constitution and
KRS 21.580.
-4-
Background and History
During the 1980’s, incumbent local exchange carriers
such as Cincinnati Bell, Alltel, and BellSouth dominated local
wireline telephony.
Seeking to induce competition, the Federal
Communications Commission (FCC) issued an order in 1984
requiring local exchange carriers to offer payphone services
access to independent payphone service providers.
The
independent payphone service providers typically owned the
payphone units and contracted directly with property owners to
locate the units in profitable, high-traffic areas.
Since coin-
operated payphones remained integrated with and dependent upon
the local exchange carriers’ networks, the FCC’s effort to
“level the playing field” proved largely unsuccessful.
The
local exchange carriers were able to subsidize the costs of
providing their own payphone service to the public with revenues
derived from their other services, thus generally stifling the
ability of independent payphone service providers to compete.
Consequently, the payphone market remained relatively static.
See Benjamin Lipschitz, Payphone Regulation Under the
Telecommunication Act of 1996, 5 Media Law and Policy 13 (Winter
1996).
The Telecommunications Act of 1996 transformed
telecommunications regulation and renewed the FCC’s efforts to
stimulate competition and innovation -- particularly with
-5-
respect to local telecommunications markets.
Armed with a
mandate from Congress, including the authority to pre-empt
conflicting state regulations, the FCC began to act aggressively
to encourage a competitive free-market for advanced
telecommunications and information technologies services.2
Pursuant to section 276 of the Act, the FCC was
empowered “to promote competition among payphone service
providers and to promote the widespread deployment of payphone
services to the benefit of the general public.”
§276(b)(1).
47 U.S.C.
The FCC focused on the disproportionate competitive
advantage enjoyed by many of the entrenched local exchange
carriers and issued administrative orders commonly referred to
as the Payphone Orders.
These payphone orders required the
local carriers to establish forward-looking, cost-based rates
for the lines used by independent payphone service providers.
The new rates were to include only a fairly allocated portion of
the overhead costs of the local exchange carriers.
The new
payphone line rates charged to the independent payphone service
2
Despite its laudatory goals, critics have attacked the statute relentlessly
as having “failed to deliver on its large promises.” Reza Dibadj,
Competitive Debacle in Local Telephony: Is the 1996 Telecommunications Act To
Blame?, 81 Washington Univ. L. Q. 1, 2 (Spring 2003), citing Lance Liebman,
Foreward: The New Estates, 97 Columbia L. Rev. 819, 825 (1997). The Supreme
Court, too, has commented that “[i]t would be a gross understatement to say
that the 1996 Act is not a model of clarity. It is in many important
respects a model of ambiguity or indeed even self-contradiction. That is
most unfortunate for a piece of legislation that profoundly affects a crucial
segment of the economy worth tens of billions of dollars.” Reza Dibadj,
supra, at 2, citing, AT&T Corp. v. Iowa Utilities. Bd., 525 U.S. 366, 397
(1999).
-6-
providers had to comply with the “new services test,” a tariff
guideline that had evolved out of other FCC proceedings.
The
FCC explained that a period of transition would be necessary as
the market developed.
Therefore, the FCC would rely initially
on state commissions (with federal guidance) to implement its
policy.
A unique brand of “cooperative federalism” was created
in the arena of telecommunications regulation.
Reza Dibadj, 81
Washington Univ.L.Q. 1 at 25, citing Phillip J. Weiser, Chevron,
Cooperative Federalism, and Telecommunications Reform, 52 Vand.
L. Rev. 1, 33 (1999).
In early 1997, three local exchange carriers,
Cincinnati Bell, BellSouth, and Kentucky Alltel, filed detailed
cost studies with the PSC in support of their proposed tariffs.
These tariffs included payphone line rates.
examined the studies.
The Commission
A few days before the FCC’s deadline of
April 15, 1997, the PSC approved tariffs filed by the local
exchange carriers on an interim basis.
The Kentucky Payphone
Association (“KPA”), a consortium of independent payphone
service providers operating in Kentucky, immediately filed a
complaint with the PSC.
The KPA contended that the payphone
line rates established in the tariffs of BellSouth, Cincinnati
Bell, and Alltel failed to comply with the tariff guideline of
the new services test established by the FCC.
-7-
The PSC agreed with KPA.
Following its administrative
proceedings, the PSC adjusted downward the local exchange
carriers’ payphone line rates that had been established in the
interim order.
facts:
In issuing its ruling, the PSC examined two
(1) the payphone line rates charged by the local
exchange carriers exceeded their cost of providing the payphone
service to the independent payphone service providers; (2) that
initial rate had been approved strictly on an interim basis.
Therefore, the PSC now directed Cincinnati Bell, BellSouth, and
Alltel to issue refunds or credits for the overpayment.
In an
order entered in January 1999, the PSC determined that the
refunds owed to the KPA members would be retroactive to April
15, 1997 -- the FCC’s deadline for compliance with the newly
enacted regulations.
The telecommunications companies did not
object to the PSC’s new calculations or to its order to refund a
portion of the sums collected pursuant to the interim rate.
However, the KPA petitioned the PSC for rehearing.
KPA contended that the Commission’s January order
adjusting the payphone line rate failed to take into account the
Subscriber Line Charges (SLC) billed to its members.
If the
local exchange carriers were permitted to collect this
additional, federally imposed charge, the KPA contended that the
local exchange carriers would recover more than their costs of
providing the payphone line in violation of the FCC’s orders.
-8-
KPA requested an additional downward adjustment to the payphone
line rates.
The PSC specifically rejected KPA’s position.
“The
FCC does not state that the use of revenue received from the SLC
should be used to offset payphone costs.
declines to reach that conclusion.”
The commission also
In the Matter of
Deregulation of Local Exchange companies’ Payphone Service, Case
No. 361, February 15, 1999, at 5.
None of the parties appealed
this decision.
Public service commissions around the country
continued to struggle to implement the requirements of the new
services test and to enforce the new regulations on payphone
line rates.
Litigation abounded.
See Reza Dibadj, 81 Wash.
U.L.Q. at 2, 16; see also, North Carolina Utilities Commission
v. The North Carolina Payphone Association, 560 S.E.2d 400 (N.C.
App. 2002); Illinois Public Telecommunications Assoc. v. FCC,
117 F.3d 555 (D.C. Cir. 1997).
Finally, in January 2002, the
FCC issued its opinion and order In the Matter of Wisconsin
Public Service Commission, CCB/CPD No. 00-01, Memorandum Opinion
and Order FCC 02-25 (the Wisconsin Order).
In its Wisconsin Order, the FCC conceded that state
commissions had been using quite a variety of methods to apply
the new services test.
Memorandum Opinion and Order at 2.
the Wisconsin Order, the FCC hoped to assist state public
-9-
With
service commissions in applying the test in order to insure
uniform compliance with the Payphone Orders and the
Congressional directives of section 276.
Id.
During this proceeding, the FCC also reconsidered
whether it had the authority to impose federal jurisdiction upon
intrastate payphone line rates charged by local exchange
carriers that were not Bell Operating Companies (BOC’s).
“BOC’s” was a term defined in the Act to include a group of
specifically named telephone companies and their successors or
assigns.
After closely re-examining the language of the
Telecommunications Act conferring jurisdiction, the FCC
concluded that it lacked authority to govern all local exchange
carriers.
It acknowledged that that it could compel only those
carriers designated by Congress as BOC’s to provide intrastate
payphone service at cost-based rates.
In its Wisconsin Order, the FCC also expanded upon the
requirements of the new services test.
It held that BOCs must
demonstrate that their proposed payphone line rates do not
recover more than the direct costs of the service -- plus “a
just and reasonable portion of the carrier’s overhead costs.”
Memorandum Opinion and Order FCC 02-25 at 8.
With respect to
an allocation of just and reasonable overhead costs, the FCC
stated that “the BOC must demonstrate that in setting its
payphone line rates it has taken into account other sources of
-10-
revenue (e.g. subscriber line charges (SLC) . . . ).” Id. at 9.
Otherwise, the Commission explained, the BOC would realize a
double recovery of costs.
Under the new services test, the BOC may not
charge more for payphone line service than
is necessary to recover from [payphone
service providers] all monthly recurring
direct and overhead costs incurred by BOCs
in providing payphone lines. The forwardlooking cost studies used to make these
determinations are usually calculations of
total costs, not jurisdictionally separated
costs. If an incumbent BOC files in its
state tariff a charge that fully recovers
these unseparated costs and also assesses on
the [payphone service provider] its
federally tariffed SLC, the BOC will overrecover its costs, and the [payphone service
provider] will over-pay, in violation of the
new services test and the cost-based
requirement of the Payphone Orders. . . .
Therefore, in establishing its cost-based,
state-tariffed charge for payphone line
service, a BOC must reduce the monthly per
line charge determined under the new
services test by the amount of the
applicable federally tariffed SLC. . . . At
whatever point in time a state reviews a
BOC’s payphone line rate for compliance with
the new services test, it must apply an
offset for the SLC that is then in effect.
Id.
(Emphasis added).
In an opinion rendered in July 2003, the
United States Court of Appeals, D.C. Circuit, affirmed the FCC’s
Wisconsin Order.
New England Public Communications Council,
Inc., v. Federal Communications Commission,
Cir., 2003).
-11-
334 F.3d 69 (D.C.
In January 2002, nine months after the FCC’s release
of the Wisconsin Order, KPA petitioned the PSC to reopen its
1999 proceedings.
The KPA renewed its contention that revenue
derived from the SLC must be considered when determining the
appropriate cost-based rate to be charged by the local exchange
carriers under the requirements of the new services test.
Relying on the written record and its review of the FCC’s
Wisconsin Order, the PSC determined that the local exchange
carriers were required to reduce the costs of their payphone
line rates by an amount equal to the SLC.
This order was held
to apply not only to BellSouth, the only BOC operating in
Kentucky, but also to Cincinnati Bell and to Alltel.
The
Commission observed as follows:
The Wisconsin Order indicates that Section
276 is only applicable to Bell Operating
Companies (BOCs) but that a state commission
may find it appropriate to apply the
decisions in the Wisconsin Order to all
[local exchange carriers]. Since the
commission has previously held [Cincinnati
Bell and Alltel] to the same standard as
BellSouth . . . it is appropriate that it
should continue to do so. Section 276 of
the Act was designed to make payphone
services competitive. Applying the New
Services Test to [Cincinnati Bell and
Alltel] furthers that goal.
Order, Case No. 361, May 1, 2003, at 3.
The PSC agreed that KPA members had overpaid for the
payphone lines based on the Wisconsin Order.
-12-
However, it
rejected KPA’s demand for a refund of the amounts that its
members had paid for the SLC.
The PSC noted that its 1999
decision had been based on the law as it was then understood,
explaining that “[t]he FCC had not provided any guidance with
regard to the SLC in consideration of setting payphone access
line rates.”
Id.
“If the KPA believed that the Commission had
erred in its decision, it should have contested the Order.”
Id.
The PSC also noted that rates are final until formally modified.
“They may not lawfully be changed and refunded based upon issues
that were unknown at the time that they were set.”
Id.
None of the local exchange carriers challenged the
PSC’s authority to require the reduction of their payphone line
rates on a prospective basis.
Each of them timely filed revised
tariffs in compliance with the order of the PSC.
KPA filed a petition for rehearing.
It argued again
that its members were entitled to refunds based on their payment
of the local exchange carriers’ inflated payphone line rates.
The PSC continued to reject the argument that refunds were owed
to the independent payphone service providers dating back to
April 15, 1997.
However, KPA’s contention that refunds ought to
be paid from January 31, 2002, the date upon which the FCC had
issued its Wisconsin Order, now found support.
The PSC
determined that the local exchange carriers “should have taken
action to adjust their rates – at least on a going-forward basis
-13-
– when the FCC issued its January 31, 2002 Order explaining that
SCL (sic) must be considered when setting payphone access
rates.”
Order, Case No. 361, June 5, 2003, at 3.
The
Commission ordered Cincinnati Bell, BellSouth, and Alltel to
refund to KPA members the amounts paid “in excess of the
appropriate payphone access rate.”
Id.
Both KPA and the local exchange carriers appealed the
decision to the Franklin Circuit Court.
The appeals were
consolidated pursuant to KPA’s motion.
The circuit court
affirmed the order of the PSC in its entirety.
These appeals by
the telecommunications companies followed.
Standard of Review on Appeal
The jurisdiction of the PSC extends to all utilities
in Kentucky, and it has “exclusive jurisdiction over the
regulation of rates and service of utilities.”
Statutes (KRS) 278.040(2).
Kentucky Revised
Consequently, the standard of review
for an order entered by the PSC is necessarily circumscribed.
Pursuant to the provisions of KRS 278.430, any party seeking to
set aside a determination of the PSC shall bear the burden of
proof to show by clear and satisfactory evidence that the
determination is unreasonable or unlawful.
Although the PSC is granted sweeping authority to
regulate public utilities pursuant to the provisions of KRS
Chapter 278, it is nonetheless a creature of statute.
-14-
Therefore, it “has only such powers as granted by the General
Assembly.”
PSC v. Jackson County Rural Elec. Coop., Inc., 50
S.W.3d 764, 767 (Ky.App. 2000).
Whether the PSC exceeded the
scope of its authority is a question of law that we scrutinize
closely and review de novo.
Transportation Cabinet v. Weinberg,
150 S.W.3d 75 (Ky.App. 2004).
On appeal, Cincinnati Bell, Alltel, and BellSouth (the
companies) contend that the circuit court erred by affirming the
order of the PSC directing the companies to refund sums that
exceeded the proper rate as prescribed by the FCC’s Wisconsin
Order.
We agree.
While the companies have asserted numerous arguments,
they overlap in many instances.
Although we have reviewed all
of the arguments, we shall analyze in detail only those upon
which our decision is based.
Arguments of non-BOC’s:
Cincinnati Bell and Alltel
Cincinnati Bell and Alltel together argue strenuously
that the PSC lacked jurisdiction to impose the terms of the
Wisconsin Order on them directly because they are not designated
as Bell Operating Companies (BOC’s) under the federal
legislation.
In its 1997 proceedings, the PSC was expressly
relying on the guidance of the FCC:
(1) as it reviewed the cost
studies submitted by all the local exchange carriers (including
BOCs and non-BOCs); (2) as it approved -- on an interim basis --
-15-
the carriers’ payphone line rates; and (3) as it reduced those
rates following the 1999 proceedings.
At that time, the FCC
interpreted the requirements of the federal act to apply to all
local exchange carriers –- including non-BOCs.
Acting pursuant
to the federally-imposed deadline, the PSC implemented the
federal requirements as they were construed by the FCC.
In its Wisconsin Order of January 2002, the FCC
reversed its initial position by declaring for the first time
that it lacked Congressional authority to direct that the new
services test be applied to non-BOCs.
While the FCC
“encourage[d] states to apply the new services test to all
[local exchange carriers],” this decision was ultimately left to
the various state commissions.
14.
(Emphasis added).
Memorandum Opinion and Order at
Prior to the entry of the order now
under review, the PSC had relied entirely upon federal
directives.
Even though it had clearly expressed its own state-
based initiative to encourage competition in the payphone
segment of the telecommunications industry, the PSC based its
decisions not upon its own policy preferences but upon the
formal position of the FCC.
After the Wisconsin Order, it would have been
reasonable to assume that the PSC would continue to follow the
FCC and to adopt a policy implementing the FCC’s orders across
the board.
However, it was neither reasonable nor legal for the
-16-
PSC to order a retroactive rate change based upon an arguable
state policy that had never been articulated as a matter of fact
at that point.
It cannot retroactively conjure up a state
policy that had never come into being in order now to assert an
expedient but fallacious basis for a retroactive rate change.
Again, the PSC had relied exclusively on the FCC’s
initial interpretation of the legislation.
Thus, Cincinnati
Bell and Alltel were entitled under the express terms of the
Wisconsin Order to await a prospective decision of the PSC as to
how it would regulate -- as a matter of state policy -- the nonBOCs operating in Kentucky.
According to the terms of the
Wisconsin Order, the PSC was under no obligation to impose the
conditions of the new services test upon non-BOCs.
Consequently, Cincinnati Bell and Alltel were not required to
reduce sua sponte the rates they charged for payphone line as of
the date of the Wisconsin Order.
They were entitled to rely
upon the PSC’s final 1999 rate-setting order until such time
that the PSC might announce its intentions:
whether to apply
the new services test to non-BOCs as a matter of state
regulatory policy and whether to amend its 1999 order pursuant
to newly articulated state standards.
Therefore, the PSC lacked any precedent or authority
to order a retroactive reduction of the payphone line rates -including a refund of sums exceeding the rates duly established
-17-
in prior proceedings involving BOC’s.
However, the circuit
court construed the Wisconsin Order as giving rise to a
“preemptive determination” that non-BOCs automatically could not
continue to charge the rates established by the PSC in 1999.
It
disregarded any prospective announcement by the PSC as to its
intentions following the Wisconsin Order and instead
impermissibly reached its own conclusions as to the impact of
the Wisconsin Order.
It clearly erred in so concluding.
The
order as it applies to non-BOC’s must be reversed.
Arguments of BellSouth
Next, we shall address the separate arguments advanced
by BellSouth.
BellSouth contends that the PSC’s order directing
the telephone companies to issue refunds was both unreasonable
and unlawful.
It contends that the PSC’s order violates the
“filed-rate doctrine” and the prohibition against retroactive
ratemaking.
Thus, it claims that the circuit court erred in
affirming the PSC.
BellSouth also asserts that the Wisconsin
Order did not impose an obligation upon telephone companies to
modify unilaterally commission-approved rates; nor did it preempt state statutes authorizing an order of refunds only under
narrowly prescribed circumstances.
We shall address each of
these contentions in turn.
BellSouth relies first upon the filed-rate doctrine.
That doctrine in essence stands for the proposition that when
-18-
the legislature has established a comprehensive ratemaking
scheme, the filed rate defines the legal relationship between
the regulated utility and its customer with respect to the rate
that the customer is obligated to pay and that the utility is
authorized to collect.
Big Rivers Elec. Corp. v. Thorpe, 921
F.Supp. 460 (W.D.Ky. 1996).
While the doctrine has not been
applied by name in Kentucky, its underlying principles are
incorporated and recognized in both our statutory and our case
law.
See Boone County Sand & Gravel Co. v. Owen County Rural
Elec. Coop. Corp., 779 S.W.2d 224 (Ky.App. 1989).
The PSC’s statutory rate-making authority is derived
from an integrated, comprehensive system aimed at providing
stability and notice to all entities involved in the rate
process.
KRS 278.160 provides, in part, as follows:
(1)
(2)
Under rules prescribed by the
commission, each utility shall file
with the commission, within such time
and in such form as the commission
designates, schedules showing all rates
and conditions for service established
by it and collected or enforced. . . .
No utility shall charge, demand,
collect, or receive from any person a
greater or less compensation for any
service rendered or to be rendered than
that prescribed in its filed schedules,
and no person shall receive any service
from any utility for a compensation
greater or less than that prescribed in
such schedules.
KRS 278.390 provides that:
-19-
Every order entered by the commission shall
continue in force until the expiration of
the time, if any, named by the commission in
the order, or until revoked or modified by
the commission, unless the order is
suspended, or vacated in whole or in part,
by order of decree of a court of competent
jurisdiction. (Emphasis added.)
Similarly, KRS 278.180(1) provides as follows:
Except as provided in subsection (2) of this
section, no change shall be made by any
utility in any rate except upon thirty (30)
days’ notice to the commission, stating
plainly the changes proposed to be made and
the time when the changed rate will go into
effect. . . . The commission may order a
rate change only after giving an identical
notice to the utility . . . .
With respect to how rates are adjusted, KRS 278.270
provides as follows:
Whenever the commission, upon its own motion
or upon complaint as provided in KRS
278.260, and after a hearing had upon
reasonable notice, finds that any rate is
unjust, unreasonable, insufficient, unjustly
discriminatory or otherwise in violation of
any of the provisions of this chapter, the
commission shall by order prescribe a just
and reasonable rate to be followed in the
future. (Emphasis added).
Finally, with respect to rate changes initiated by a
public utility and the authority of the commission to order a
refund of sums collected, KRS 278.190 provides, in part, as
follows:
(1)
Whenever any utility files with the commission
any schedule stating new rates, the commission
may, upon its own motion, or upon complaint as
-20-
provided in KRS 278.260, and upon reasonable
notice, hold a hearing concerning the
reasonableness of the new rates.
Pending the hearing and the decision thereon,
and after notice to the utility, the commission
may, at any time before the schedule becomes
effective, suspend the operation of the
schedule and defer the use of the rate, charge,
classification, or service, but not for a
longer period than five (5) months beyond the
time when it would otherwise go into effect if
an historical test period is used, or longer
than six (6) months if a forward-looking test
period is used. . . . If the proceeding has
not been concluded and an order made at the
expiration of five (5) months, or six (6)
months, as appropriate, the utility may place
the proposed change of rate, charge,
classification, or service in effect at the end
of that period after notifying the commission,
in writing, or its intention so to do. Where
increased rates or charges are thus made
effective, the commission may, by order,
require the interested utility or utilities to
maintain their records in a manner as will
enable them, or the commission, or any of its
customers, to determine the amounts to be
refunded and to whom due in the event a refund
is ordered, and upon completion of the hearing
and decision may, by further order, require
such utility or utilities to refund to the
persons in whose behalf the amounts were paid
that portion of the increased rates, or charges
as by its decision shall be found unreasonable.
(2)
(Emphasis added).
BellSouth contends that the rate approved by the PSC
in January 1999, was and remained at all relevant times the
“filed rate.”
Thus, based upon the constraints of the filed-
rate doctrine, that rate could not be altered retroactively by
the PSC.
We agree.
-21-
In its 1999 proceedings, the PSC duly adjusted the
1997 interim rates of local exchange carriers for the local
exchange carriers.
final rate.
Each of the parties accepted the PSC’s new,
In light of the General Assembly’s comprehensive
rate-making scheme, including only a narrowly defined
circumstance under which refunds can be ordered, the filed rate
can only be lawfully altered prospectively.
KRS 278.270, supra.
Under the requirements of the statutes, the rate that the PSC
authorized BellSouth to charge payphone service providers
remained in full force and effect until the Commission modified
it by its order of May 2003.
Consequently, as a matter of law,
BellSouth was never overpaid; no credits accrued; and no refunds
were owed.
We cannot agree that the terms of the FCC’s Wisconsin
Order imposed any obligation on BellSouth to seek on its own an
immediate adjustment of the filed rate.
On the contrary, by its
own terms, the Wisconsin Order contemplated further action by
the appropriate state regulatory commission before the new
requirements would take effect.
The order expressly provided
that “[a]t whatever point in time a state reviews a BOC’s
payphone line rates for compliance with the new services test,
it must apply an offset for the SLC that is then in effect.”
Memorandum and Order at 20.
(Emphasis added).
The FCC was
keenly aware that state commissions had encountered confusion,
-22-
difficulty, and inconsistency in applying the new services test
and that uniform application had not been achieved.
The order
in no way directs BOC’s to seek state commission authority to
adjust any rate previously established by state regulators -even if such a rate had been based on an erroneous application
of the new services test.
In its Wisconsin Order, the FCC elected to leave
implementation of its new requirements to a time when state
regulators might review a BOC’s payphone line rates for
compliance.
That decision was wholly consistent with
traditional rate-making principles.
Regulatory rate-setting is
a remarkably complex process involving economic judgments
intertwined with and interdependent upon many factors.
While
individual elements are subject to almost constant fluctuation,
the filed rate is not altered on an ongoing basis to reflect
those changes.
Instead, the rate holds constant until a rate
change is formally requested or a challenge to the rate is
raised by an interested party.
Finally, we are not convinced that the FCC’s holdings
in the Wisconsin Order were intended to pre-empt our state
regulatory requirements in any way.
The FCC recognized that the
federal re-structuring of telecommunications regulation was
sweeping and that market changes contemplated by the legislation
would require a period of transition.
-23-
Although Congress had
authorized it to pre-empt conflicting state regulations, the FCC
expressed a strong interest in maintaining federal–state comity.
It chose to rely on the on the state regulatory mechanisms
already in place to effect the desired changes -- specifically
with respect to rate-setting proceedings.
The Wisconsin Order
did no more than to direct state agencies to implement the
refined requirements of the new services test in accordance with
their own statutory schemes.
We are reinforced in our opinion by the unique system
devised by Congress and reflected in the Act that requires the
cooperation of federal and state regulators in the so-called
“new federalism” without resort to pre-emptive measures.
Since
the PSC’s refund order clearly did not conform either to
Kentucky statutory authority or to its own policies, and since
no federal directive superseded those statutory requirements,
the order must be reversed.
Based upon the foregoing, the judgment of the Franklin
Circuit Court is reversed.
ALL CONCUR.
-24-
BRIEFS FOR APPELLANT
CINCINNATI BELL TELEPHONE
COMPANY:
BRIEF FOR APPELLEE PUBLIC
SERVICE COMMISSION OF
KENTUCKY:
Sheryl G. Snyder
Jack B. Harrison
Jason P. Renzelmann
Louisville, Kentucky
David S. Samford
Amy E. Dougherty
John E.B. Pinney
Frankfort, Kentucky
Ann Jouett Kinney
Cincinnati, Ohio
ORAL ARGUMENT FOR APPELLEE
PUBLIC SERVICE COMMISSION OF
KENTUCKY:
ORAL ARGUMENT FOR APPELLANT
CINCINNATI BELL TELEPHONE
COMPANY:
Amy E. Dougherty
Frankfort, Kentucky
Jason P. Renzelman
Louisville, Kentucky
BRIEFS FOR APPELLEE KENTUCKY
PAYPHONE ASSOCIATION:
BRIEFS FOR APPELLANT BELLSOUTH
TELECOMMUNICATIONS, INC.:
John Selent
Holly Wallace
Louisville, Kentucky
Mark R. Overstreet
Frankfort, Kentucky
Dorothy J. Chambers
Louisville, Kentucky
ORAL ARGUMENT FOR APPELLANT
BELLSOUTH TELECOMMUNICATIONS,
INC.:
Henry T. Kelly
Joseph E. Donovan
Chicago, Illinois
ORAL ARGUMENT FOR APPELLEE
KENTUCKY PAYPHONE ASSOCIATION:
Henry T. Kelly
Chicago, Illinois
Mark R. Overstreet
Frankfort, Kentucky
BRIEFS FOR APPELLANT KENTUCKY
ALLTEL, INC.
James H. Newberry, Jr.
Lexington, Kentucky
-25-
Some case metadata and case summaries were written with the help of AI, which can produce inaccuracies. You should read the full case before relying on it for legal research purposes.
This site is protected by reCAPTCHA and the Google Privacy Policy and Terms of Service apply.