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Southwestern Bell Corporation v. Federal Communications Commission and United States of America, Ameritech Operating Companies, Bell Atlantic Telephone Companies, American Telephone and Telegraph Company, United States Telephone Association, National Association of Regulatory Commissioners, U.S. West, Inc., Gte Telephone Operating Companies, Western Union Corporation, Centel Corporation, National Cable Television Association, Independent Data Communications Manufacturers Association, North American Telecommunications Association, New York Telephone Company, Bellsouth Corporation, International Business MacHines Corporation, Contel Corporation, State of Michigan, Ad Hoc Telecommunications Users Committee, Intervenors. Gte Service Corporation v. Federal Communications Commission and United States of America, Ameritech Operating Companies, American Telephone and Telegraph Company, United States Telephone Association, United Telephone System Companies, Bellsouth Corporation, Bell Atlantic Telephone Companies, New

Citations: 896 F.2d 1378; 283 U.S. App. D.C. 80; 67 Rad. Reg. 2d (P & F) 726; 1990 U.S. App. LEXIS 2966Docket: 89-1020

Court: Court of Appeals for the D.C. Circuit; March 1, 1990; Federal Appellate Court

Narrative Opinion Summary

This case involves petitions by Southwestern Bell Corporation and GTE Service Corporation challenging Federal Communications Commission (FCC) regulations regarding asset transfers between regulated telephone companies and their nonregulated affiliates. The petitioners contended that the FCC's rules, which require asset transfers to be recorded at market value or, when unavailable, at specified values based on whether the company is buying or selling, are arbitrary and capricious. The U.S. Court of Appeals for the District of Columbia Circuit, however, denied the petition, affirming the FCC's measures as necessary to prevent cost misallocation and protect ratepayers from increased charges resulting from non-arms-length transactions. The court recognized the FCC's authority under the Communications Act to ensure that expenses from nonregulated activities do not burden ratepayers of regulated services, especially given historical issues with affiliate transactions within telecommunications companies. The court granted deference to the FCC's regulatory expertise, emphasizing the importance of maintaining just and reasonable rates. The ruling affirmed the FCC's approach to addressing potential abuses in affiliate dealings, concluding that the rules are consistent with prior decisions and supported by state regulatory agencies.

Legal Issues Addressed

FCC Regulation of Asset Transfers

Application: The court upheld FCC rules that require asset transfers between regulated and nonregulated affiliates to be recorded at market price or, if unavailable, at the lesser of fair market value or net book cost for purchases, and the greater of the two for sales.

Reasoning: In 1987, the FCC established rules for asset transfers between regulated telephone companies and their nonregulated affiliates, stipulating that transactions must be recorded at market price if available.

FCC's Authority and Deference

Application: The court recognized the FCC's expertise in regulatory matters and granted deference to its rules aimed at mitigating potential abuses in affiliate transactions, provided they ensure just and reasonable rates.

Reasoning: The agency, possessing the necessary expertise, is entitled to deference in its regulatory choices, provided that rate orders are not unjust or unreasonable.

Prevention of Cost Misallocation

Application: The court found that the FCC rules are necessary to prevent cost misallocation that could lead to increased rates for ratepayers, particularly in transactions lacking a discernible market price.

Reasoning: The risk is heightened due to the lack of an arms-length basis in such transactions, where companies might inflate purchase prices to recover costs through increased rates charged to ratepayers, or sell assets at undervalued prices, allowing losses to impact ratepayers.

Scope of FCC Accounting Regulations

Application: The FCC's accounting regulations apply primarily to prevent ongoing cost misallocation and are supported by prior FCC experience with intracompany asset transfers.

Reasoning: The FCC's experience with intracompany asset transfers indicates the need for stringent accounting rules to mitigate potential abuses.