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12/24/97 IRWIN A. POPOWSKY v. PENNSYLVANIA PUBLIC

December 24, 1997

IRWIN A. POPOWSKY, CONSUMER ADVOCATE
v.
PENNSYLVANIA PUBLIC UTILITY COMMISSION, APLT AT NO. 107; APPEAL OF: BELL ATLANTIC-PENNSYLVANIA, INC AT NO. 101; PENNSYLVANIA CABLE TELEVISION ASSOCIATION V. PENNSYLVANIA PUBLIC UTILITY COMMISSION, APLT AT NO. 108; APPEAL OF: BELL ATLANTIC-PENNSYLVANIA, INC AT NO. 102; MCI TELECOMMUNICATIONS CORP. V. PENNSYLVANIA PUBLIC UTILITY COMMISSION, APLT AT NO. 109; APPEAL OF: BELL ATLANTIC-PENNSYLVANIA, INC AT NO. 103; CENTRAL ATLANTIC PAYPHONE ASSOCIATION V. PENNSYLVANIA PUBLIC UTILITY COMMISSION, APLT AT NO. 110; APPEAL OF: BELL ATLANTIC-PENNSYLVANIA, INC AT NO. 104; AT&T COMMUNICATIONS OF PENNSYLVANIA, INC. V. PENNSYLVANIA PUBLIC UTILITY COMMISSION, APLT AT NO. 111; APPEAL OF: BELL ATLANTIC-PENNSYLVANIA, INC AT 105; CITY OF PITTSBURGH V. PENNSYLVANIA PUBLIC UTILITY COMMISSION, APLT AT NO. 112; APPEAL OF: BELL ATLANTIC-PENNSYLVANIA, INC AT NO. 106



Appeal from the Order of the Commonwealth Court of Pennsylvania dated December 22, 1995 at Nos. 1798 C.D. 1994, 1799 C.D. 1994, 1831 C.D. 1994, 1848 C.D. 1994, 1856 C.D. 1994, and 1882 C.D. 1994, vacating in part, reversing in part, and affirming in part the June 28, 1994 order of the Pennsylvania Public Utility Commission at No. P-00930715. Mr. Chief Justice Flaherty. Madame Justice Newman did not participate in the consideration or decision of this case. Mr. Justice Cappy files a Concurring opinion which is joined by Mr. Justice Castille.

The opinion of the court was delivered by: Flaherty

OPINION OF THE COURT

MR. CHIEF JUSTICE FLAHERTY

DECIDED:DECEMBER 24, 1997

Under a new telecommunications statute, Bell Atlantic -- Pennsylvania, Inc., filed a network modernization plan which proposed alternative regulation for noncompetitive services that featured a price cap formula for changing rates; classification of six specific services as competitive and therefore subject to deregulation; and a commitment to substantial investment in Bell's telecommunications infrastructure. Following extensive hearings, the Pennsylvania Public Utility Commission (PUC) required major modifications to the plan, which Bell accepted. Parties opposed to Bell's petition and plan appealed, and the Commonwealth Court vacated in part, reversed in part, and affirmed in part. We granted allocatur due partly to the novelty and importance of issues arising under the new statute, as well as our concern that the Commonwealth Court might have exceeded its scope of review.

In July 1993, the Pennsylvania legislature enacted chapter 30 of the Public Utility Code, 66 Pa.C.S. §§ 3001-3009, titled "Alternative form of regulation of telecommunications services." Its purpose was to encourage the accelerated deployment of a state-of-the-art broadband *fn1 communications network which would be affordable and universally available. To induce local phone companies to commit to the considerable investment necessary to achieve such extensive modernization in the telecommunications infrastructure, the law permits the PUC to approve an alternative form of regulation other than the traditional rate base-rate of return regulation. A company may apply for an alternative form of regulation by filing a proposed network modernization implementation plan, wherein the company must commit to converting 100% of its interoffice and distribution network to broadband capability by the end of the year 2015. An implementation plan must also guarantee a reasonable deployment between rural, urban, and suburban areas, and must provide for deployment along public rights-of-way abutting public schools, industrial parks, and health care facilities. 66 Pa.C.S. § 3003(b).

Among the criteria which must be met by a petition for alternative regulation is an assurance that rates for noncompetitive services will be just, reasonable, and not unduly discriminatory. The statute allows this criterion to be accomplished through the use of a "price stability mechanism." The law states that, subject to PUC approval, a price stability mechanism which allows total annual revenues from noncompetitive services to increase or decrease from the previous year's totals by the rate of inflation minus 2.25% "may meet the requirements of this section." 66 Pa.C.S. § 3004(d)(2).

The statute also allows local telephone companies, in conjunction with a petition for an alternative regulatory framework, to seek a PUC determination that any of its services is a "competitive service." Rates, tolls, charges, rate structures, rate base, rate of return, and earnings of competitive services may be completely deregulated. 66 Pa.C.S. § 3009(f). Notwithstanding deregulation, however, the PUC must establish regulations to prevent unfair competition and to require local telephone companies to offer their competitors reasonable nondiscriminatory access to all services and facilities necessary to provide competing service. 66 Pa.C.S. § 3005(b).

In October 1993, Bell filed a petition for an alternative regulatory framework, accompanied by a network modernization implementation plan and a proposal that certain services be deemed competitive. Three administrative law Judges held evidentiary hearings and public input hearings.

The ALJs recommended that Bell's petition and plan be denied. They concluded that the price stability mechanism did not ensure that rates for noncompetitive services were just, reasonable, and nondiscriminatory; the modernization plan was not sufficiently detailed and did not adequately balance deployment between rural, urban, and suburban areas; and the services sought to be deregulated did not meet the definition of competitive services and the proposal did not provide adequate competitive safeguards.

The PUC did not adopt the ALJs' recommendations, but approved Bell's petition and plan with a number of modifications. First, in relation to Bell's proposal of a price stability mechanism of inflation minus 2.25%, the PUC set the formula at inflation minus 2.93% for ten years. Second, the PUC froze rates on protected services until the end of 1999, rather than the end of 1996 as proposed by Bell. Third, the PUC required the modernization plan to be modified to speed up deployment in suburban and rural areas. Finally, the PUC held that the six services proposed by Bell for deregulation were competitive. As to the competitive services, the PUC initiated proceedings to establish rules guaranteeing the competitive safeguards required by 66 Pa.C.S. § 3005(b). Pursuant to its options in 66 Pa.C.S. § 3004(b), Bell advised the PUC within thirty days that it would accept the modifications.

The state consumer advocate and various Bell competitors, who had challenged the petition and plan, appealed the PUC order. The Commonwealth Court vacated the part of the PUC's order which had set the inflation offset figure at 2.93%. The court remanded, ordering the PUC to calculate and include an "input price differential." *fn2 With regard to the PUC's classification of six services as competitive, the court held that the PUC failed to make required findings before deciding that the services were competitive and erred in determining that the services were competitive without first finding that the statutory competitive safeguards had been met. The court therefore reversed the PUC as to four of the services, concluding that the competitive safeguards were inadequate. As to the other two services, the court vacated and remanded for further proceedings to determine the adequacy of the competitive safeguards. In all other respects, the Commonwealth Court affirmed.

We granted allocatur to review the issues raised by Bell and the PUC. They may be summarized as follows. First, whether there was substantial evidence to support the price stability mechanism adopted by the PUC, that is, inflation minus 2.93% with no input price differential. Second, whether the PUC correctly determined that services may be designated competitive before a determination is made that statutory safeguards have been met. Third, whether there was substantial evidence to support the PUC's finding that six of Bell's services are competitive.

A price stability mechanism is designed to calculate reasonable changes in rates for noncompetitive services, using a price change formula which starts with the general rate of inflation then adjusts for various factors. Bell proposed an offset of 2.25% as authorized in 66 Pa.C.S. § 3004(d)(2). Following evidentiary hearings, the PUC required Bell to limit rate increases to inflation minus 2.93%. The Commonwealth Court, however, required the PUC to include an additional element in the offset, the input price differential.

The standard of review to be applied by the Commonwealth Court when reviewing the PUC is that the court should not substitute its judgment for that of the PUC when substantial evidence supports the PUC's decision on a matter within the commission's expertise. The court itself has said:

Our duty is to determine only whether or not the PUC's findings are supported by substantial evidence; we may not substitute our judgment for that of the PUC, nor may we "indulge in the processes of weighing evidence and resolving conflicting testimony." Johnstown -- Pittsburgh Express, Inc. v. Public Utility Commission, 5 Pa. Commw. 521, 525, 291 A.2d 545, 547 (1972).

Philadelphia Electric Co. v. Pennsylvania Public Utility Comm'n, 61 Pa. Commw. 325, 433 A.2d 620, 624 (Pa. Commw. 1981), quoted in Barasch v. Pennsylvania Public Utility Comm'n, 507 Pa. 430, 490 A.2d 806, 809 (Pa. 1985). The decision at issue, involving complex financial determinations and weighing and interpreting statistical and economic evidence, is within the PUC's area of expertise. See Popowsky v. Pennsylvania Public Utility Comm'n, 542 Pa. 99, 665 A.2d 808 (Pa. 1995); West Penn Power Co. v. Pennsylvania Public Utility Comm'n, 147 Pa. Commw. 6, 607 A.2d 1132 (Pa. Commw. 1992).

The Commonwealth Court has alternatively expressed its standard of review in West Penn Power Co. v. Pennsylvania Public Utility Comm'n, 147 Pa. Commw. 6, 607 A.2d ...


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