The opinion of the court was delivered by: Judge McGINLEY
AND NOW, this 16th day of February, 2010, it is ORDERED that the above-captioned opinion filed on December 15, 2009 shall be designated OPINION rather than MEMORANDUM OPINION, and it shall be reported.
BERNARD L. McGINLEY, Judge
Argued: September 14, 2009
BEFORE: HONORABLE BERNARD L. McGINLEY, Judge, HONORABLE RENÉE COHN JUBELIRER, Judge, HONORABLE JIM FLAHERTY, Senior Judge.
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 review*fn1 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 30*fn2 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.*fn3 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statutory background of Chapter 30 of the PUC Code entitled "Alternative Form of Regulation," 66 Pa.C.S. §§3001-3009 (repealed), and the amendments to Chapter 30 enacted under Act 183, 66 Pa.C.S. §§3010-3019.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.*fn4 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.
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. M-00021596 (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."*fn5
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.*fn6 The primary purpose of Act 183 was to provide rural LECs the incentive to accelerate their universal broadband service by up to 7 years without jeopardizing affordability. In other words, additional incentives were offered to persuade rural LECs to hasten the modernization of their networks.
One inducement for such acceleration was an increased revenue opportunity through the reduction or elimination of the 2% inflation offset, i.e., a rural LEC which committed to accelerate broadband availability to 100% of its customers was allowed to reduce and/or eliminate the previous 2% inflation offset. This modification of the price cap formula allowed the LEC's revenues to increase at the rate of inflation. 66 Pa.C.S. §3015(a)(1).
Pursuant to these provisions, Petitioners elected to accelerate their universal broadband availability beginning December 31, 2008. On February 25, 2005, Petitioners filed their Amended Alternative Regulation and Network Modernization Plans (Amended Plans) and served them on Office of Consumer Advocate (OCA) and Office of Small Business Advocate (OSBA).*fn7 Interested parties were permitted to file comments. In keeping with the concept of deregulation, the Amended Plans provided that "competitive" services "shall not be regulated on any basis including as to rates, tolls, charges rates structures rate base, rate of returns or earnings." Petitioners were free to price "competitive" services at their discretion.
The Amended Plans allowed for a restructuring of rates on a revenue-neutral basis so long as local rates were not increased by more than $3.50 per month. Petitioners Amended Plans also, consistent with the July 15, 2003, Joint Stipulation, allowed changes to access service rates in order to ensure each access service rate element recovered its cost. Whenever the Petitioners' SPI (service price index) allowed for an increase, Petitioners were required to provide a cost study to support the change.
With respect to "noncompetitive" services (such as the switched access service at issue) the Amended Plans provided that Petitioners "shall not use revenues earned or expenses incurred in conjunction with noncompetitive services to subsidize competitive services."*fn8 With respect to the "principles and procedures applicable to changes" in Petitioners' rates for "noncompetitive" services, the Amended Plan specifically stated that "nothing in this plan shall be construed to limit the requirement of 66 Pa.C.S. §1301, that rates shall be just and reasonable." Id. at 8. The Amended Plans also provided specifically that "all tariff filings for noncompetitive services are subject to review of this Plan" and that "Chapter 13, Sections 1301 (just and reasonable) remain applicable under the provisions of the Plan." Id. at 9. Thus, unlike the provisions relating to "competitive" services, the Amended Plans reserved the Commission's regulatory oversight over "noncompetitive" services to ensure that any proposed changes would further the purposes of Act 183 -- that noncompetitive or protected services remained reasonable and did not impede the development of competition.
The Commission found the basic tenets of Petitioners' Amended Plans compliant with Act 183 and approved them by orders dated June 3, 2005.
Petitioners' First Filings and Associated Tariffs Pursuant to the Amended Plans -- Commission's June 23, 2006 Order
On April 28, 2006, Petitioners filed their first annual Price Stability Index/Service Price Index Filings and associated tariffs to effectuate increases to local and access revenues pursuant to their approved Amended Plans. Petitioners' inflation offset was reduced from 2% to 0%. Petitioners proposed, though tariffs, to raise revenues by increasing (1) switched access service rates; and (2) increases to non-basic local service rates. Ninety-nine percent of these increases were allocated to increases in switched access service rates charged to other carriers, while one percent was allocated to increases in non-basic local service rates charged to customers.
In an Order dated June 23, 2006, the Commission permitted the implementation of the proposed rate changes. The Commission, however, voiced its concern about the increase in intrastate switched access charges and observed that the proposed increase was contrary to "the industry trend to move in the opposite direction by reducing access service charges so that they are closer to their actual cost."*fn9 The Commission noted that Petitioners' proposal to increase access rates was a departure from the current practice by LECs to recover revenue increases from local service rates or bank them for future increases. Accordingly, the Commission gave Petitioners three alternatives: to either (1) "bank" the remaining allowable revenue increases to their basic local exchange service rates, rather than to apply the increases to their access charges; (2) allocate the remaining allowable revenue increases to their basic local exchange service rates, rather than to apply the increases to their switched access charges; and (3) effectuate the proposed rate increases for switched access charges, subject to any final determinations on access reform, including the Commission's pending Rural Telephone Company Access Charge Investigation at Docket No. 1-00040105.
Petitioners filed a Motion for Reconsideration requesting the Commission to: (1) recall its "criticisms" against Petitioners for raising switched access charges; and (2) reverse the mandated changes to the manner in which ...