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 for the D.C.
Circuit issued a decision that has come to be known as NARUC III.(note 75)
The court rejected the FCC's contention that, because it had determined that the provision of inside wiring did not constitute regulated common carriage at the interstate level, the Section 2(b)(1) limit on FCC regulation of common carrier activity at the intrastate level did not apply. Such "circular" reasoning, the court chided, would give the FCC "unchecked authority to force state deregulation of any activity it chose to deregulate at the interstate level."(note 76) The court further rejected the FCC's argument that, even under Section 2(b)(1), preemption was permissible because the interstate and intrastate components of inside wiring are physically inseparable. As in Louisiana, the court concluded, the FCC could use the jurisdictional separations process to preserve a sphere for state regulation.(note 77)
NARUC III raised considerable concern about the continued validity of CCIA, which had upheld FCC preemption of all state regulation of CPE. CPE and inside wiring are conceptually indistinguishable: both facilities are physically located on a customer's premises and are used in connection with interstate and intrastate calls. If the FCC could not adopt a generalized order preempting all state regulation of inside wiring, how could it adopt such an order regarding CPE? The court's effort to rationalize the disparate results was unavailing.(note 78)
3. California I
The low point came for the FCC a year later when the Ninth Circuit, in
California v. FCC (California I),(note 79) struck down the FCC's principal Computer
III orders.(note 80) California
I was a double defeat for the FCC. The court first rejected the FCC's
decision to replace structural separation with nonstructural safeguards at
the interstate level,(note 81) finding that
the FCC had failed to demonstrate that nonstructural safeguards were
adequate to reduce the risk of BOC anticompetitive conduct.(note 82) The court then turned to the FCC's decision to
preempt the states from adopting additional or different regulations at
the intrastate level. Following the D.C. Circuit's lead, the court
rejected the FCC's assertion that Section 2(b)(1) did not limit the
Commission's ability to preempt state regulation of enhanced services
because such services were provided on a private contract, rather than a
common carriage, basis.(note 83) The court
noted that the restriction on FCC regulation applied to "intrastate
communication service . . . of any carrier." The court reasoned:
the plain meaning of the language "of any carrier" is that [Section 2(b)(1)] applies to communications services provided by common carriers such as AT&T and the BOCs as distinguished from communications services provided by non-common carriers such as IBM. Thus, the distinction made by the statute is between providers of communi-cations services, i.e., between carriers and non-carriers.(note 84)Applying Section 2(b)(1), the court went on to strike down the Computer III preemption orders in their entirety.(note 85)
4. The Casualty Count
In a few short years, the FCC's jurisdictional gains had seemingly
evaporated. In a thought-provoking article written in the early 1990s,
Michael Zpevak concluded that the FCC's preemption powers had been
"whittled down to their statutory base" and, perhaps, even
"emasculated."(note 86) Indeed, Zpevak
suggested, it was "unclear . . . how the FCC will continue to set
national policy . . . while not intruding on state
terri-tory."(note 87)
Rumors of the demise of the FCC's preemption authority were premature. To be sure, Louisiana, NARUC III, and California I were stunning blows to the FCC's once-invincible preemption wehrmacht. Yet, none of these was an unmitigated loss.
Despite the sweeping language in Louisiana, the actual holding was carefully limited to the specific situation before the Supreme Court. The jurisdictional separations process, the Court held, made it possible for disparate federal and state depreciation policies to coexist.(note 88) The FCC might not be able to allow carriers to recover costs as quickly as it wished, but it could require application of its chosen depreciation methodology to the interstate component of the carriers' equipment.(note 89) Preemption, therefore, was impermissible.
At the same time, the Court recognized that the separations process did not resolve all jurisdictional conflicts. Where it is "not possible to separate the intrastate and interstate components of asserted federal regulation" and where "state regulation would negate" FCC regulations, the Court observed, FCC preemption is permissible.(note 90) In formulating this so-called "impossibility" exception to Section 2(b)(1), the Court cited with approval the Fourth Circuit's decisions in the NCUC cases.(note 91)
Similarly, the D.C. Circuit's opinion in NARUC III had some encouraging words for the beleaguered Commission. Relying on Louisiana and the NCUC cases, the court observed that "there are circumstances where state authority must yield to national imperatives."(note 92) Thus, the court went on, the FCC could preempt state regulations that would "negate[] the exercise by the FCC of its own lawful authority over interstate communications."(note 93) However, the court added, the FCC "has the burden . . . of showing with some specificity" that a particular state regulation would "necessarily thwart or impede" federal policy.(note 94) The FCC had simply failed to meet its burden necessary to preempt exercise of "any regulatory authority" by the states over inside wiring.(note 95)
The court's observations regarding tariffing of inside wiring were particularly interesting. The court recognized that a state that set the tariffed rates for the intrastate component of carrier-provided inside wiring below cost would "interfere with the Commission's achievement of its valid goal of providing interstate telephone users with the benefits of a free market . . . [in] inside wiring" because this would "allow telephone companies to undercut alternative providers," who lacked the ability to cross-subsidize inside wiring with revenues from monopoly local exchange service.(note 96) The FCC, the court indicated, could lawfully preempt such tariffs.(note 97)
Even California I provided the FCC with some basis for optimism. Following the D.C. Circuit's lead, the Ninth Circuit recognized that-notwithstanding Section 2(b)(1)-the FCC has the authority to preempt state regulation of carrier-provided enhanced services that would "thwart or impede valid FCC regulatory goals."(note 98) For example, the court observed, "a state-imposed requirement that carriers use separate physical facilities for all basic telephone and enhanced services offered on an intrastate basis would almost certainly force carriers to separate their interstate services as well."(note 99) Because this would "frustrate" the FCC's efforts to promote the integration of interstate basic and enhanced services, the FCC could preempt such regulations.(note 100)
At the same time, the court observed that some forms of state-imposed enhanced service regulation plainly would not "negate" federal policy. The court's example, however, was a narrow one. State imposition of structural separation requirements on carrier-provided enhanced services (such as telephone-based alarm services) offered on an exclusively intrastate basis, the court stated, would not prevent carriers from offering other interstate enhanced services on an integrated basis.(note 101) Once again, the FCC simply had failed to demonstrate why it was necessary to preempt "all state regulation" in order to achieve its goals.(note 102)
5. Scattered Federal Victories
Even during this period, the FCC won three significant skirmishes
outright. In each case, the D.C. Circuit held that state regulations had
to give way to allow the application of the FCC's rules to interstate
service.
In Illinois Bell,(note 103) the D.C. Circuit considered the FCC's preemption of state regulations that were inconsistent with the Commission's requirement that the BOCs allow noncarrier CPE vendors to obtain commissions for marketing Centrex, a BOC-provided basic service used in connection with both interstate and intrastate calls. The court held that there was no practical way to apply different federal and state sales commission rules depending on whether the Centrex service was to be used in connection with interstate or intrastate calls. Federal preemption of state rules that were inconsistent with the federal regulatory regime was, therefore, permissible.(note 104)
The FCC also won a small, but significant, victory in Public Utility Commission of Texas v. FCC (ARCO).(note 105) ARCO concerned an order by the Texas Public Utilities Commission that barred Southwestern Bell Telephone Company from providing one of its customers, Atlantic Richfield Company (ARCO), with additional telephone lines at ARCO's Dallas headquarters. Texas was concerned that ARCO was undermining the state's system of exclusive telephone franchises by transporting calls, via a private microwave system, from its research facility in Plano, Texas (which was served by a different LEC) and delivering them, via Southwestern's lines, to the public-switched telephone network in Dallas. The FCC preempted the Texas order, reasoning that it was inconsistent with the FCC's policy of allowing customers to interconnect with the public-switched telephone network for the purposes of making interstate calls.(note 106)
As in the NCUC cases, it would have been possible for the FCC to have required Southwestern to provide ARCO with two sets of facilities-lines to be used for intrastate calls and lines to be used for interstate calls-and to allow ARCO to interconnect its microwave system only with the interstate lines, thereby allowing federal interconnection and state franchise regulations to coexist. However, the court upheld the FCC's finding that such a requirement would be "`impractical and inefficient'" and that federal preemption was therefore permissible.(note 107)
A third D.C. Circuit preemption case, Public Service Commission of Maryland v. FCC (Maryland PSC), again upheld an FCC preemption order.(note 108) In that case, the D.C. Circuit affirmed an FCC order preempting states from setting the rates that LECs charged long distance carriers for cutting off service to customers that did not pay their long distance bills.(note 109) Once again, the court was confronted with the argument that it was possible for separate federal and state regulations to coexist because "it may be possible technologically to cut off interstate access independently of local service."(note 110) And, once again, the court deferred to the FCC, noting that "[a]t the time it issued [its order], the FCC believed that such a separation was not practical."(note 111)
E. The FCC Retreats (1991)
Although the losses in Louisiana, NARUC III, and
California I, may not have been as dramatic as they initially
appeared, they left the FCC badly bruised. In response, the Commission
initiated a strategic retreat on all fronts.
The FCC recognized immediately that the "depreciation battle" was a lost cause; the Supreme Court's decision in Louisiana had made clear that the states had an incontrovertible right to control the rates at which the intrastate component of common carrier plant was written off. The Commission responded by promptly evacuating from that region.(note 112) In the ensuing years, it has not attempted to venture across the jurisdictional border on this issue.
In contrast, the NARUC III and California I decisions left the Commission with a fair amount of maneuvering room in the inside wiring and enhanced services areas. Two orders, both adopted on November 21, 1991, signalled that the Commission intended to pull back to more defensible lines.(note 113)
1. Inside Wiring
The more comprehensive FCC pull-back came on the inside wiring front. The
FCC returned most of the intrastate regulatory territory it had occupied,
leaving only a "strategic outpost" and a "reconnaissance team."
The outpost was an order preempting the states from requiring carriers to bundle inside wiring with charges for tariffed transmission service.(note 114) There was no question the FCC could defend this limited incursion; the D.C. Circuit had expressly authorized it in the NARUC III opinion.(note 115) The reconnaissance operation was the Commission's idea. It announced that it would "monitor the states's actions" and "revisit the area in the event that information gained from monitoring and other sources showed that state actions were impeding federal policies or injuring consumers."(note 116) Again taking its cue from the D.C. Circuit,(note 117) the FCC expressly stated that it was not preempting state regulations requiring LECs to function as inside wiring "providers of last resort."(note 118)
2. Enhanced Services
The FCC's retreat in the enhanced services area was somewhat more limited,
although still quite significant.
In Computer III Remand Order,(note 119) the FCC reaffirmed its decision-made in the original Computer III orders-to lift the requirement that the BOCs provide interstate enhanced services pursuant to structural separation.(note 120) In its place, the FCC imposed nonstructural safeguards that it claimed were stronger than the ones found inadequate in California I.(note 121) For example, the FCC required the BOCs to obtain prior consent from customers with more than twenty lines before using customer proprietary network information to develop or market enhanced services.(note 122) The Commission also reaffirmed the network information disclosure rule.
Turning to the preemption question, the FCC began by extending the olive branch to the states. "It is inevitable," the FCC observed, that:
state commissions will have different experiences and perspectives that may lead them to adopt safeguards that are at variance with each other, and with federal safeguards. These differences should be accommodated wherever possible. Preemption of state regulation in this area should be as narrow as possible to accommodate differing state views while preserving federal goals.(note 123)The order that followed demonstrated that the FCC had traded its preemption sword for a finely honed stiletto. Only three forms of state enhanced service regulation were preempted: regulations requiring carriers(note 124) to offer the intrastate portion of jurisdictionally mixed enhanced services using personnel or facilities different from those used with basic telephone service;(note 125) regulations requiring carrier personnel responsible for marketing enhanced services to obtain customer consent prior to accessing CPNI in circumstances in which FCC regulations allow access without prior customer approval;(note 126) and regulations requiring carriers to disclose network information to competing ESPs at a time prior to that required by FCC rules.(note 127)
In a marked departure from past practice, the FCC carefully justified each element of its preemption order. The Commission began with its preemption of certain state structural separation regulations. In theory, the FCC conceded, a carrier could use separate personnel and facilities to provide intrastate basic and enhanced services while combining its interstate basic and enhanced services in a single entity.(note 128) However, the FCC recognized that "[a]s a practical matter" such an arrangement would impose significant inefficiencies.(note 129) The result, the FCC stated, would be that "state structural separation requirements [applicable to personnel and facilities used to provide intrastate enhanced services] will compel carriers to use structural separation for interstate services and, therefore, will negate the federal policy for interstate enhanced services."(note 130)
The FCC then turned to its preemption of certain state nonstructural safeguards. The FCC justified its decision to bar states from imposing more stringent prior customer authorization requirements before carrier personnel could obtain CPNI as necessary to allow carriers to provide basic and enhanced services on an integrated basis. Allowing a state to impose more stringent requirements, the Commission reasoned, would "effectively require the separation of marketing and sales personnel dealing with interstate enhanced services from personnel dealing with interstate basic services."(note 131)
Finally, the FCC concluded that it was justified in preempting state regulations that required disclosure of network information at a time prior to that provided by the FCC rules. "[I]nitial disclosure [of network information]," it stated, "can occur only once. . . . [A] state rule that required initial disclosure at a time that differs from the time specified in the federal rule would negate the federal timing . . . ."(note 132)
The FCC went on to expressly describe the limits of its incursion into state territory. According to the Commission, the states were free to adopt structural separation requirements in connection with any purely intrastate (as opposed to jurisdictionally mixed) carrier-provided enhanced service.(note 133) The states also could adopt structural separation requirements (other than those expressly preempted) applicable to jurisdictionally mixed enhanced services.(note 134) Finally, the states were free to impose any non-structural safeguard not expressly barred by the order.(note 135) The FCC declined to even consider preempting states from imposing entry, exit, and tariff regulation on carrier-provided intrastate enhanced services.(note 136)
F. The States Overreach (1991-94)
While the states had won some significant battles in the late 1980s, they
were not in as strong a position as they thought. Their overconfidence led
to some serious miscalculations. Following the California I
decision, the states launched a two-prong attack on the FCC's powers.
First, the states again attempted to redefine the boundary between federal
and state authority by trying to carve out an "intrastate segment" of
services that previously were viewed as jurisdictionally interstate.
Second, the states tried to erect new barriers to federal preemption of
those services that were within the intrastate jurisdiction. Just as the
courts turned back the FCC's overreaching, they now rejected the
extravagant claims the states advanced.
1. Jurisdictional Challenges
The first prong of the states' attack was to reopen the debate-seemingly
resolved in NARUC II(note
137)-over the ability of the FCC to regulate the physically intrastate
segment of an interstate communication. Most of this effort centered on
the rapidly emerging enhanced service market. For example, Florida
announced that it would assert jurisdiction over communications between an
ESP's customer located in Florida and the ESP's "point of presence"
elsewhere in the state. The fact that the communication might terminate at
a database located in another state, Florida concluded, "is not
relevant."(note 138) A number of states
also declared that their jurisdiction extended to enhanced services
sessions that originate and terminate within their state, even if
information passes through other jurisdictions over federally tariffed
interstate lines.(note 139) California
took a different approach, announcing that it would require carriers to
allocate 100 percent of the cost of enhanced services to the intrastate
jurisdiction, thereby allowing the state to exercise regulatory authority
over all carrier-provided enhanced services offered within the state.(note 140)
The most controversial state decision during this period concerned MemoryCall, an enhanced service offered by BellSouth that stores incoming voice messages for subsequent retrieval by the subscriber. An investigation by the Georgia PSC concluded that BellSouth had engaged in a variety of anti-competitive activities in connection with its offering of this service.(note 141) Seeking to curb these abuses, Georgia issued an order in which it declared that, because the enhanced function (information storage and retrieval) was performed by facilities that were physically present in Georgia, MemoryCall was a purely intrastate service within the Georgia PSC's jurisdiction.(note 142) Exercising its supposed exclusive authority, Georgia barred BellSouth from providing MemoryCall to new customers for an indefinite period.(note 143)
At BellSouth's request, the FCC issued a declaratory ruling preempting Georgia's action. The FCC first found that-because MemoryCall can be used to store voice messages that originate both inside and outside of Georgia-it was a jurisdictionally mixed (rather than purely intrastate) service(note 144) and that the interstate component was within the FCC's plenary interstate jurisdiction.(note 145) The FCC went on to find that, as a practical matter, Georgia's ban on the use of MemoryCall in connection with intrastate calls would have the effect of preventing subscribers from using the service in connection with interstate calls. This, the FCC concluded, was irreconcilable with its regulation allowing BellSouth to offer MemoryCall to interstate subscribers.(note 146)
Georgia appealed the FCC's order, again arguing that MemoryCall was a "purely intrastate" service and that the FCC had no authority to preempt state regulation. The Eleventh Circuit disposed of the state's claims in a single sentence: "The record fully supports both the jurisdictional aspect and the reasonableness of the order entered by the Federal Communications Commission."(note 147)
The states did not limit their jurisdictional attacks to enhanced services. As part of its Computer III orders, the FCC had required the BOCs to implement a system of Open Network Architecture (ONA). Under ONA, the carriers were required to "unbundle" their basic communications networks and allow ESPs to obtain the individual "building blocks" needed to provide enhanced services.(note 148) In its subsequent ONA Order, the FCC adopted a "common ONA model," which divided the network "building blocks" into two principal categories: Basic Serving Arrangements (BSAs) and Basic Service Elements (BSEs).(note 149) BSAs are physically intrastate transmission links that can be used to provide access to the interstate communications network. BSEs are other network "features and functions," such as calling number identification and call routing, that ESPs may find useful in providing service.(note 150)
Because ONA services are used to provide enhanced services on both an interstate and intrastate basis, the ONA Order addressed the question of how responsibility for regulating these services should be divided between the Commission and the states. Several states argued that BSEs are subject to exclusive state jurisdiction because they are provided using software that is resident in physically intrastate telephone company switches.(note 151) The FCC rejected these arguments, finding that BSEs used to provide enhanced services that cross state lines are jurisdictionally interstate. It therefore determined that BSEs should be "subject to regulation . . . on both the state and federal levels."(note 152) The FCC subsequently approved the ONA plans submitted by the BOCs.(note 153)
California (joined by several other states) appealed the FCC's decision to require joint tariffing of BSEs.(note 154) The states renewed their argument that BSEs were subject to exclusive state regulation. The states further argued that, even if BSEs were jurisdictionally mixed, the FCC was obligated to "adopt a federal tariffing requirement [for interstate BSEs] that was narrowly crafted" to avoid interfering with state policies-especially some states' efforts to require the BOCs to price ONA services above cost in order to create a subsidy for other services.(note 155)
This time it took the court an entire paragraph to dispose of the states' jurisdictional arguments. In California II, the Ninth Circuit held that:
[The ONA orders] clearly establish a dual federal and state tariffing structure for BSEs, and the states will retain authority to set rates for those BSEs that are used for intrastate service. This system complies with the Supreme Court's decision in Louisiana that the Communications Act is designed to establish a dual regulatory scheme. Essentially, the state is seeking to preempt FCC regulations of communications, and this violates the Act just as FCC preemption of state regulation did in Louisiana and California I.(note 156)The states' effort to "shift the boundary" between the interstate and intrastate jurisdictions had been no more successful in the early 1990s than it had been a decade earlier.
2. Preemption Challenges
The states' final assault started, where the war had begun, with Section
2(b)(1). In the Computer III Remand Order, the FCC had
significantly scaled back its earlier enhanced service preemption order.
Nonetheless, the FCC-relying on its Title I power-had again preempted
certain state structural and nonstructural separation requirements
applicable to intrastate enhanced services.(note 157) The states again appealed to the Ninth
Circuit, arguing that the FCC had still gone too far.
The states made two principal thrusts at the FCC's jurisdiction. The first was to assert that the Supreme Court's decision in Louisiana "unequivocally rejected" the claim that the FCC could use its preemption power to advance Title I goals. The second was to contend that, even when acting under Title II, the FCC could only preempt state regulation where simultaneous compliance with divergent federal and state rules was a "literal impossibility." In a consolidated case, MCI claimed that the FCC's new structural separation requirements remained inadequate to prevent BOC cross-subsidization and discrimination at the interstate level.
In California III, the Ninth Circuit found for MCI, again rejecting the FCC's decision to replace BOC structural separation with nonstructural safeguards at the interstate level.(note 158) Turning to the preemption issue, the court first addressed the question whether the FCC can preempt under its Title I authority.(note 159) Again, a paragraph was all that was necessary to dispose of the states' claim. Louisiana, the court recognized, had held that Section 2(b)(1) limited the FCC's authority under both Title I and Title II.(note 160) Although the preemption order rejected in Louisiana was based on the FCC's Title I power, the Ninth Circuit made clear that-if it could make the proper showing-the FCC could justify preemption under that Title.(note 161)
The court then turned to the question of what the proper showing would be. To resolve this issue, it went back to the NCUC cases. In those cases, FCC preemption had been permissible because compliance with conflicting federal and state regulations governing interconnection, while possible, was highly unlikely due to practical and economic considerations. The present case, the court concluded, was "similar."(note 162) While BOC compliance with conflicting federal and state rules governing the use of separate facilities or personnel and access to CPNI was literally possible, the FCC had demonstrated that "as in the NCUC cases . . . it would not be economically or operationally feasible for them to do so."(note 163) The FCC, therefore, had met its obligation of "demonstrating that [its] order is narrowly tailored to preempt only such state regulation as would negate valid regulatory goals."(note 164) The battle had come full circle.
II. Four Principles of Peaceful Coexistence
The FCC and the states are at a crossroads. After more than a dozen
engagements, it has become clear that neither side can conquer the other.
The prudent course of action is for both sides to take stock of their
experience and try to agree to a set of principles that will allow them to
turn their litigators' swords into regulatory pruning hooks. The cases
outlined above suggest the basis for such a peace treaty. It is not a
peace based on shared values; it is one based on respect for each other's
authority. The principles of the proposed peace treaty are as follows:
Jurisdiction is determined on an end-to-end basis. Any communication that crosses state lines between its point of origin and its point of termination is jurisdictionally interstate. Physically intrastate facilities and services used in connection with interstate communications are jurisdictionally interstate to the extent of their interstate use.
The FCC has plenary jurisdiction over interstate communications facilities and services. The states may not regulate such facilities and services directly or by reclassifying interstate facilities and services as intrastate.
The states are entitled, in the first instance, to regulate intrastate communications facilities and services. In so doing, they may adopt common carrier policies that differ from those adopted by the FCC.
The FCC may preempt state regulations applicable to carrier-provided intrastate communications facilities or services to the extent that the agency concludes, as a practical matter, that enforcement of such regulations would prevent the application of federal regulations to interstate carrier-provided communications services or facilities.
Each of these principles is discussed below.
A. Jurisdiction is Determined on an End-to-End
Basis
Peace is not possible if the FCC and the states cannot agree on where the
border between their jurisdictions lies. Fortunately, the Communications
Act provides clear guidance in resolving this question.
The Act defines a "wire communication" as "the transmission of writing, signs, signals, pictures, and sounds of all kinds . . . between the points of origin and reception."(note 165) The Act further provides that when such a transmission goes "from any State . . . to any other State," it is deemed an interstate communication.(note 166) Taken together, these provisions require that jurisdictional determinations be made on an end-to-end basis. Any communication by wire or radio that crosses state lines at any point between its "origin and reception" is jurisdictionally interstate.(note 167) Similarly, any communication by wire or radio that does not cross state lines between its point of origin and its point of termination is jurisdictionally intrastate.
The Communications Act further provides that the interstate jurisdiction embraces "facilities and services . . . incidental to transmission" of an interstate communication.(note 168) Thus, any facility or service used in connection with an interstate communication is jurisdictionally interstate to the extent of its interstate use. The fact that such facilities and services may be physically intrastate is irrelevant.(note 169) Any facility or service used in connection with an intrastate communication is jurisdictionally intrastate to the extent of its intrastate use.(note 170)
The federal courts initially considered the division of authority between the federal and state jurisdictions in connection with basic telephone service.(note 171) However, the same principles are applicable to enhanced services. Thus, in Georgia PSC, the Eleventh Circuit affirmed the FCC's finding that BellSouth's voice messaging service was subject to FCC jurisdiction to the extent that it was used to store messages that originated out-of-state.(note 172) Conversely, as the Ninth Circuit found in California I, voice mail, burglar alarm monitoring services, and remote educational databases that are provided solely to "discrete locales within a state" are subject to exclusive state jurisdiction.(note 173)
B. The FCC Has Plenary Jurisdiction over Interstate
Communications Facilities and Services
Once the dividing line between federal and state jurisdiction is
established, the next step in the peace process is to determine the
authority of each party within its respective realm. In the case of the
federal sovereign, the answer is straightforward: the FCC has plenary
authority over jurisdictionally interstate communications.
In Louisiana, the Supreme Court observed that, under the Supremacy Clause,(note 174) a federal agency has the exclusive right to adopt regulations in any area in which "Congress has legislated comprehensively, thus occupying an entire field of regulation and leaving no room for the States to supplement federal law."(note 175) In such cases, state regulations are invalid even if they do not conflict with federal law.(note 176) Interstate communications plainly is one such area. The Communications Act vests the FCC with jurisdiction over "all interstate and foreign communications by wire or radio."(note 177) As the D.C. Circuit observed in NARUC II, regulatory authority over interstate communications is "totally entrusted to the FCC."(note 178) There is, quite simply, no room for state regulation in this area.
The FCC's plenary authority plainly precludes a state from enforcing a regulation that, on its face, purports to regulate interstate communications.(note 179) The states, moreover, may not do indirectly what they are forbidden to do directly. This explains why the courts have consistently turned back state efforts-such as Georgia's effort to declare MemoryCall a purely intrastate service,(note 180) or California's effort to have all network BSEs subject to exclusive state tariffing(note 181)-that would have allowed states to regulate jurisdictionally interstate communications services by "shifting the boundary" between the federal and state jurisdictions.
Other forms of state "jurisdictional gerrymandering" also are suspect. For example, the suggestion made by several states that an enhanced service session in which information crosses state lines can be "sliced up" into a physically intrastate segment (subject to state regulation) and a physically interstate segment (subject to FCC regulation), appears flatly inconsistent with the principle that the jurisdictional nature of a communication is determined on an end-to-end basis. Indeed, the Eleventh Circuit affirmed the FCC's rejection of just this sort of an argument in the Georgia PSC case.(note 182)
Another seemingly impermissible form of "border shifting" can occur if a state is able to require a carrier to allocate a disproportionate amount of its costs for a given facility or service to the intrastate jurisdiction. In the case of federally regulated basic telephone service, the FCC's jurisdictional separations process ensures that the correct proportion of costs will be assigned to the intrastate jurisdiction. This division is binding on the states.(note 183) The FCC, however, has declined to apply the jurisdictional separations process to facilities and services that are not regulated at the federal level, such as inside wiring and enhanced services.(note 184) The Commission also has announced that the states may adopt their own methods to determine the proportion of a carrier's costs related to these offerings that is within the intrastate jurisdiction.(note 185)
This approach is perfectly acceptable-so long as the states adopt reasonable measures to determine what portion of the carrier's costs are to be allocated to the intrastate jurisdiction.(note 186) However, if a state were to require carriers to assign all of their enhanced service and inside wiring costs to the intrastate jurisdiction-even though these offerings are jurisdictionally mixed-it would be able to exercise authority over jurisdictionally interstate facilities and services.(note 187) This seems flatly inconsistent with the Supreme Court's decision in Smith v. Illinois Bell, which recognized that, while considerable flexibility is allowed, it is impermissible to "ignore altogether" the division between federal and state jurisdiction by allocating all costs to the intrastate jurisdiction.(note 188)
Finally, the states cannot regulate interstate communications by requiring the FCC to forgo exercise of its plenary interstate jurisdiction in situations in which federal regulation would adversely affect the states in implementing their policies. As the Ninth Circuit recognized in California II, such "reverse preemption" has no place in the Communications Act.(note 189) When the FCC is acting within the scope of its plenary power over interstate communications, it need not seek to accommodate divergent state interests.(note 190)
C. The States are Entitled to Regulate Intrastate
Communications Services and Facilities
Under the division of responsibility embodied in the Communications Act,
the states have authority, in the first instance, to regulate common
carrier communications by wire or radio that originate and terminate
within the same state. They also may regulate physically intrastate
facilities and services used in connection with such communications to the
extent of their intrastate use. Because the vast majority of telephone
calls in the United States originate and terminate within the same
state,(note 191) this gives the states
significant power within the "dual regulatory" system.
In exercising its power over intrastate common carrier communications, a state may seek to advance policies that are at odds with those favored by the FCC. To the extent that the state is able to limit application of its regulation to facilities and services within its jurisdiction, Section 2(b)(1) provides it with the right to do so, free from federal interference.
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
Avoiding conflicts between federal and state authorities would be a simple
matter if the two sides could be kept within their respective
jurisdictions, separated by an ironclad boundary. Obviously, they cannot
be. The same facilities and services are frequently subject to both FCC
and state jurisdiction. Whenever the two regulatory authorities seek to
apply different rules to the same offerings, some degree of jurisdictional
tension is inevitable.
1. The Preemption Principle
The cases decided over the last two decades provide the basis for
resolving federal-state conflicts. The decisions reflect a
distinction-evident, although not discussed-between conflicts based on
divergent state policy regarding intrastate services, and conflicts
based on the de facto assertion of state jurisdiction
over interstate facilities and services. The cases teach that Section
2(b)(1) gives the states the right to advance their policies by applying
their own regulations to common carrier facilities and services within
their jurisdiction. The fact that a state may adopt a policy that thwarts
the FCC's achievements of its policy goals in this area does not, in
itself, provide a basis for federal preemption.
There is one-and only one-situation in which Section 2(b)(1) allows the FCC to cross the jurisdictional divide and displace state regulation of intrastate carrier facilities or services. This occurs when, as a practical matter, the application of a state's regulations to jurisdictionally intrastate carrier facilities or services would displace the FCC's ability to apply its "rule of decision" to jurisdictionally interstate carrier facilities or services. In such case, one sovereign or the other must give way. Under our federal system, as embodied in the Supremacy Clause,(note 192) it is the states that must defer.
The difference between a state adopting a divergent policy and a state effectively asserting jurisdiction over interstate services is clearly illustrated by comparing Louisiana with the NCUC cases. Louisiana involved a difference in federal and state policy: the FCC wanted carriers to modernize their plant quickly, the states wanted to keep telephone rates low.(note 193) The fact that some states sought to achieve their goal by requiring carriers to use relatively conservative depreciation methods for the "intrastate component" of their plant doubtless thwarted the FCC's effort to promote plant modernization. The FCC, however, was powerless to prevent the states from doing so. The reason is simple: nothing the states did in the intrastate jurisdiction threatened the ability of the FCC to apply its depreciation rules within the interstate jurisdiction.(note 194)
The NCUC cases also involved a policy difference. The FCC wanted to allow a competitive CPE market; the states did not. Here, too, application of the state policy would have "thwarted" the FCC's goals. Yet, in this instance, the FCC's preemption order was upheld. The difference is fundamental. In the NCUC cases, allowing the states to adopt a rule preventing interconnection of user-provided CPE for intrastate communications, as a practical matter, would have resulted in subscribers using carrier-provided equipment for both interstate and intrastate calls. The FCC's ability to apply its "rule of decision" allowing interconnection of user-provided CPE to the interstate network would have been eliminated.(note 195)
The proper resolution of FCC-state conflicts has been made more difficult by the semantic conventions used in the cases. Most courts have phrased the preemption test in terms of goals and policies. The FCC is said to be able to preempt state regulation that would either "thwart or impede" or "frustrate" valid FCC goals.(note 196) These phrases suggest that preemption involves some sort of "balancing of interests" between federal and state policies. Other decisions have stated that the FCC can only preempt state regulation where it is "not possible to separate the interstate and intrastate components" of a given regulation(note 197)-suggesting that the FCC is powerless to challenge a state regulation if there is any conceivable way in which divergent federal and state regulations can coexist.
What matters, of course, is what the courts do, not what they say. However, considerable confusion would be avoided if the courts were to formulate the preemption test in a manner that more clearly reflects the underlying principles. Such a reformulated test might read as follows: The FCC may preempt state regulations applicable to carrier-provided intrastate communications facilities or services to the extent that the FCC concludes, as a practical matter, that enforcement of such regulations would prevent the application of federal regulations to interstate carrier-provided communications facilities or services.(note 198)
The phrase "as a practical matter" is crucial. There are some cases in which it is literally impossible for conflicting federal and state regulations to coexist. For example, as the Ninth Circuit recognized in California III, an FCC rule requiring carriers to disclose network interfaces six months before introducing a new service cannot coexist with a state rule requiring disclosure at an earlier date.(note 199) Initial public disclosure of a network interface can be made only once; application of a divergent state rule would inevitably displace the federal rule. The FCC plainly has the authority to protect its interstate jurisdiction by preempting such rules.(note 200)
In most situations, however, it is not "literally impossible" for divergent federal and state rules governing the same facility or service to coexist. In the NCUC cases, FCC rules allowing interconnection of CPE to the network for interstate purposes could have coexisted with state rules barring interconnection for intrastate purposes.(note 201) In California III, requiring carriers to use separate personnel and facilities to provide intrastate basic and enhanced services, while allowing them to use the same personnel and facilities to provide interstate basic and enhanced services, was far from a physical impossibility.(note 202)
The fact that simultaneous application of divergent federal and state rules was possible in the NCUC cases and California III was not dispositive. The decisive factor in those cases was that, as a practical matter, application of the state rule would have displaced the federal rule. Thus, in the NCUC cases, the Fourth Circuit recognized that no rational consumer would have bought a competitively provided telephone to make interstate calls if he was required to use a carrier-provided telephone to make intrastate calls.(note 203) If the FCC lacked preemptive authority, the state rule barring interconnection of competitively provided CPE would have become the applicable "rule of decision" in the interstate sphere as well. Similarly, in California III, the Ninth Circuit recognized that the likelihood that a carrier required to employ separate personnel and facilities to provide intrastate enhanced services would integrate its basic and enhanced services at the interstate level was virtually non-existent.(note 204) In the absence of federal preemption, a state rule requiring structural separation at the intrastate level also would have governed carriers' provision of interstate enhanced services.
In reaching their conclusions about the practicality of divergent FCC-state regulations, the courts have shown substantial deference to the FCC.(note 205) In effect, the courts have treated the FCC's determination as to whether the coexistence of conflicting federal and state regulations is "impractical" or "infeasible" as a matter within the FCC's expert judgment. Under established administrative law principles, such determinations are not disturbed unless they are found to lack record support or to be arbitrary and capricious.(note 206)
While the FCC's determination as to the need to preempt state regulation is entitled to substantial deference, the Commission's decision as to the extent of any preemption order is subject to more searching judicial review. The courts have made clear that the FCC is under an affirmative obligation to "narrowly tailor" any preemption order; it may only displace state regulations to the extent necessary to protect its interstate jurisdiction. The burden, moreover, is on the FCC to demonstrate that it has done so.(note 207) Were the Commission to go any further, it would trample the "jurisdictional fence" that Section 2(b)(1) erects around state regulation of intrastate facilities and services.
The FCC's obligation to narrowly tailor its preemption of state common carrier regulation is evident in both NARUC III and California I. In neither case did the court suggest that the FCC was without preemptive power. To the contrary, the D.C. and Ninth Circuits specifically identified possible subjects of FCC preemption in the inside wiring and enhanced services areas.(note 208) In each case, however, the court found that the FCC's preemption order suffered from the same fatal defect: the order preempted all state regulation of the subject. The FCC had made no effort to limit the order to those state regulations that could not feasibly coexist with federal regulations.(note 209)
While the FCC's duty to narrowly tailor its preemption orders is a significant one, the Commission need not show that it has crafted the narrowest possible preemption order.(note 210) Thus, the FCC is free to reject means of narrowing its preemption order that it concludes are not feasible. For example, in Maryland PSC the D.C. Circuit rejected a claim that federal preemption of state regulation of an LEC-provided telephone disconnection service could be narrowed by requiring carriers to limit the service to one that disconnected intrastate calls only. In reaching its decision, the court deferred to the FCC's finding, based on the record, that it was not technically feasible to limit the service in that manner.(note 211)
The FCC also is not obligated to think of every conceivable method of narrowing its preemption orders. Thus, in the ARCO case, the D.C. Circuit declined to consider a suggestion by one of the intervening parties that the FCC could have narrowed its preemption order by requiring ARCO to limit the use of its interconnected microwave facilities to interstate calls. As the court observed, "[t]he FCC bears the burden of showing that its pre-emption order is necessary on the basis of the record developed before it. The Commission is not, however, required to anticipate any conceivable argument that might be raised by intervenors on appeal."(note 212)
Finally, it seems indisputable that the FCC may exercise its pre-emptive power to protect all aspects of its interstate jurisdiction-including its Title I authority. The Communications Act does not expressly discuss the affirmative scope of the FCC's preemption power. Rather, preemption power is an adjunct to any lawful exercise of the FCC's authority. Thus, the FCC may preempt state regulations under Title I, just as it may under Title II. The only limitation is that, where common carriers are involved, the FCC's preemption power must be exercised in a manner that is consistent with Section 2(b)(1).
This conclusion has been repeatedly upheld in the courts. For example, the Computer II order preempting state regulation of CPE was adopted pursuant to the FCC's Title I authority.(note 213) This order was affirmed by the D.C. Circuit in CCIA, which specifically considered whether the FCC could preempt under its Title I power. In holding that it could, the court stated that it "perceive[d] no critical distinction between preemption by Title II regulation and preemption by the exercise of ancillary [i.e., Title I] jurisdiction."(note 214) Three subsequent D.C. Circuit decisions-Illinois Bell,(note 215) NARUC III,(note 216) and Maryland PSC(note 217)-all upheld FCC preemption orders based on the Commission's Title I authority.(note 218) The preemption order affirmed in California III had the same jurisdictional basis. As the Ninth Circuit recognized, these cases are fully consistent with the Supreme Court's decision in Louisiana.(note 219)
2. The Principle Applied
By its terms, the limit on FCC preemption contained in Section 2(b)(1) of
the Communications Act applies equally to state regulations governing
"charges, classifications, practices, services, [or] facilities . . .
[used] for or in connection with intrastate communication service."(note 220) In practice, however, the FCC's
preemption power may vary significantly from one area to another-depending
on the feasibility of applying different rules within the federal and
state jurisdictions.
At one extreme is the question of depreciation. As the Louisiana case makes clear, state imposition of a depreciation methodology to the jurisdictionally intrastate component of a telephone company plant imposes no impediment to the FCC's application of its own depreciation method-ology to the interstate component.(note 221) There is, therefore, no room for FCC preemption in this area.
A second area in which the FCC appears devoid of preemptive authority is state regulation of purely intrastate carrier-provided services. An example of such a service might be a burglar alarm service that uses dedicated telephone lines to link residences within a state to a monitoring facility elsewhere within the same state. It is not clear how many purely intrastate carrier-provided communications services exist. Doubtless, however, there are some.(note 222) What is certain is that a state's decision to apply its own regulations to a purely intrastate carrier-provided service cannot oust the FCC of its jurisdiction over an interstate service. At most, state regulation of such a service could frustrate the implementation of a federal policy-such as one favoring the non-regulated provision of enhanced services. Such policy differences, however, do not provide a sufficient basis for FCC preemption.
FCC preemption of state tariffs raises more difficult issues. The D.C. Circuit's decision in NARUC III contains language that suggests that, while it cannot preempt all state tariff regulation, the FCC could preempt state tariffs that would "interfere with the Commission's achievement of its valid goal[s]."(note 223) The court's emphasis on advancing the FCC's policy goals seems unsound. The relevant issue is whether imposition of state tariffing requirements on intrastate services, as a practical matter, would prevent the FCC from applying its rules at the interstate level.
In NARUC III, the FCC rule at issue required carriers to "detariff" the interstate component of inside wiring. Arguably, it would be possible-if a bit awkward-for the cost of the intrastate component of jointly used inside wiring to be recovered through tariffs, while the cost of the interstate component is recovered through competitively set prices. For example, a state could require that a specified amount of the revenue from carrier sales of inside wiring be applied to the carrier's intrastate regulated accounts. Such a requirement would be inconsistent with the federal policy favoring the detariffing of inside wiring. However, as long as the state tariff was cost-based, the FCC still could apply its rule requiring the cost of carrier-provided inside wiring to be recovered through market transactions, with the proceeds (in excess of the state tariff) assigned to the carrier's interstate unregulated accounts.(note 224)
At the same time, however, there doubtless are situations in which the FCC may preempt state tariffing regulations. For example, as the D.C. Circuit concluded in NARUC III, the FCC was plainly within its authority to preempt state tariff provisions that bundle inside wiring with basic transmission service.(note 225) Inside wiring either is, or is not, provided as part of the regulated transmission service. Requiring the "intrastate component" to be provided as part of the regulated transmission offering inevitably would prevent application of the FCC's rule requiring the unbundling of the "interstate component" of inside wiring from the basic interstate common carrier network.
Outside of the tariffing area, the FCC's ability to preempt state regulations of carrier-provided services seems considerably greater. Many state rules govern the terms and conditions under which a communications service will be provided or the obligations of the carrier to do, or refrain from doing, a particular act. The FCC's structural separation requirements and nonstructural safeguards plainly fall within this category. In some cases, simultaneous compliance with inconsistent federal and state rules will be a literal impossibility. In many other instances, there will be no practical way for the carrier to comply with inconsistent rules. In either situation, the FCC has ample authority to protect its plenary jurisdiction over interstate communications services through the use of its preemption power.
III. Keeping the Peace
The principles outlined above provide a basis on which the FCC and the
states can move forward cooperatively. At the same time, however, it is
only natural to anticipate that, as the communications market continues to
develop, new issues of inter-governmental relations will need to be
addressed. Four of these issues are described below.
A. Inseverability and the Intelligent Network
One situation in which FCC preemption is permissible occurs when the
inability to physically separate the interstate and intrastate
components of a given facility or service makes it impossible for
divergent federal and state regulation to exist. This situation is
sometimes referred to as "inseverability."(note 226)
This situation is illustrated by the Georgia PSC and Maryland PSC cases. In Georgia PSC, the Eleventh Circuit affirmed the FCC's conclusion that there was no possible way, given current technology, to prevent the use of BellSouth's voice messaging service, MemoryCall, in connection with intrastate calls, while allowing the service to be used in connection with interstate calls.(note 227) Similarly, in Maryland PSC, the D.C. Circuit deferred to the FCC's finding that it would not be technically possible for an LEC to offer a service that cuts off customers' ability to use their telephone for intrastate telephone calls, while allowing them to continue to have full use of their telephones for interstate calls.(note 228) Because it was not possible to limit the physical consequence of state regulation to the intrastate sphere, the courts held that the FCC could preempt state regulations that were inconsistent with the Commission's rules.
Technology is not static. The introduction of new "advanced intelligent network" features, such as Signaling System 7, has increased the capabilities of the carriers' networks.(note 229) If it is not here already, there will soon come a time when technology makes it possible to determine the jurisdictional nature of any communication. Once this occurs, it will be possible for a carrier to offer an "interstate only" voice messaging service or an "intrastate only" telephone disconnection service, thereby making divergent federal and state regulation physically possible. These techno-logical developments will require the courts to rethink the validity of cases such as Georgia PSC and Maryland PSC.
One possibility is that the courts will conclude that-where techno-logical advances make physical separation of federal and state components of a facility or service possible-FCC preemption is no longer permissible. That, however, is not the inevitable result. The courts may, for example, decline to require carriers to make use of new technologies to physically separate interstate and intrastate facilities services if the FCC concludes that doing so would be unreasonably costly or would degrade network efficiency.(note 230)
Even if technology makes it practical to physically separate additional services into intrastate and interstate offerings, the courts still might find that federal preemption is permissible where-as a practical matter-the service could be marketed only on a jurisdictionally mixed basis. As the D.C. Circuit observed in Illinois Bell, "[m]arketing realities might themselves create inseparability."(note 231) Again, the Georgia PSC case provides a ready example. A good argument can be made that a voice messaging service that only stores messages that originate out-of-state would not be commercially viable. Therefore, a state regulation that prevents a carrier from offering voice messaging service for use in connection with intrastate calls, as a practical matter, also would prevent it from offering such a service in connection with interstate calls. Because this would preclude application of the FCC's rules allowing for the provision of interstate voice messaging service, federal preemption might still be appropriate.
B. "Jurisdictional Forbearance" After MCI v.
AT&T
One way in which conflicts between sovereigns are sometimes avoided is
through the exercise of comity. In effect, one sovereign recognizes
that-while it has jurisdiction in a given area-it will decline to assert
its authority in the interest of good relations with the other
sovereign.(note 232) Within our federal
system, such arrangements also can promote administrative efficiency.
The FCC has deferred to state regulations in numerous areas. For example, the FCC has declined to require federal tariffing of certain LEC-provided services, such as Centrex or call waiting, even though these services can be used in conjunction with both interstate and intrastate communications.(note 233) Similarly, the Commission has declined to assert authority over private line networks on which less than 10 percent of the traffic is jurisdictionally interstate.(note 234)
The recent decision of the Supreme Court in MCI Telecommunications Corp. v. AT&T(note 235) calls into question the continued ability of the FCC to decline to regulate jurisdictionally interstate services in the interest of comity. In MCI, the Court struck down the FCC's "permissive detariffing" policy, under which the Commission did not enforce the requirement, contained in Section 203 of the Communications Act, that "[e]very common carrier" shall provide interstate basic telephone service pursuant to filed tariffs.(note 236) The FCC sought to justify its "forbearance" policy on the grounds that exempting "non-dominant carriers" from the tariff filing requirement would promote competition.(note 237) The Court flatly rejected this argument. "Compliance with [the statutory tariffing] provisions," the Court held, "`is utterly central to the administration of the Act.'"(note 238) The FCC did not have authority to ignore this requirement in order to achieve its policy goals.(note 239)
Comity, it can be argued, is a kind of forbearance: the FCC declines to regulate basic common carrier service-plainly subject to its jurisdiction under Title II-in order to advance a policy goal, such as better relations with the states or administrative efficiency. The Supreme Court's decision in MCI v. AT&T could be read to suggest that such a course of action is impermissible because it ignores the mandatory requirement in the Communications Act that interstate basic services be provided pursuant to federal tariffs. On the other hand, it is possible to distinguish the two situations. The FCC's "permissive detariffing" policy sought to eliminate tariff regulation of more than 40 percent of all interstate basic services. Here, in contrast, the FCC is merely transferring administration of certain categories of rate regulation from the federal to the state level. This distinction may provide a sufficient basis for the continuation of the FCC's comity policy.
C. Jurisdiction Over Telephone Company-Provided Video
Services
Congress created the rules governing federal-state relations in an age in
which communications and voice telephony were nearly synonymous. The
convergence of communications and computing during the 1970s and 1980s
required the courts and the FCC to apply these rules to enhanced services.
The impending "multimedia convergence"-which will see the combination of
telephony, consumer electronics, and video programming-doubtless will
raise new issues about the division of regulatory authority between the
FCC and the states.
For the last several years, the FCC has been developing a regulatory regime designed to allow LECs to enter the video programming market in order to provide a competitive alternative to cable service, which generally is provided on a monopoly basis. The ability of the LECs to do so has been limited, however, by the terms of the "cross-ownership" restriction contained in the Cable Communications Policy Act of 1984, which prevents an LEC from providing "cable service" in its telephone service area.(note 240) To get around this restriction, the FCC in the late 1980s developed the concept of "video dialtone." The notion was that-while the cross-ownership ban precluded them from acting as video program "packag-ers"-the LECs could act as conduits, delivering programming provided by others. In so doing, the FCC reasoned, LECs would simply be performing their traditional common carrier role.(note 241)
The Video Dialtone Second Report and Order(note 242) considered the division of authority between the FCC and the states regarding video dialtone. The FCC initially concluded that video dialtone was a purely interstate service. In reaching this decision, the Commission analogized video dialtone to early cable systems, in which physically intrastate telephone company "channel service" was used to deliver broadcast signals-which are subject to exclusive federal regulation(note 243)-to end-users. Like channel service, the FCC declared, an LEC's video dialtone facility is an "`integral component in an indivisible dissemination system which forms an interstate channel of communication'" and, therefore, is subject to exclusive federal regulation.(note 244)
The states promptly responded, correctly observing that video dialtone is not simply channel service: the content is not limited to retransmitted broadcast signals, and, moreover, some of the video content originates and terminates exclusively within a single state.(note 245) Recognizing its error, the FCC pulled back. "[W]e have exclusive jurisdiction," the Commission announced on remand, "over all [interstate] video dialtone services . . . . [S]tates have jurisdiction over the delivery by wire of video programming . . . within the same state . . . ."(note 246)
The devil, as always, is in the details. In its Video Dialtone Reconsideration Order, the FCC concluded that the states' jurisdiction over intrastate video dialtone service is limited to situations-such as the operation of a "video library"-in which video program originates at one location within a state and is delivered, by wire, to another point within the same state.(note 247) Any transmission involving radio, the Commission insisted, remains subject to exclusive federal regulation. While the Reconsideration Order is a step in the right direction, it may not go far enough. In the FM Subcarrier Case, the D.C. Circuit held that the states have jurisdiction over the common carrier aspects of intrastate radio.(note 248) Video dialtone service, by definition, is the common carriage of video signals. The FCC's decision to assert jurisdiction over the common carriage by radio of intrastate video dialtone programming is hard to square with the D.C. Circuit's ruling.
The relationship between the FCC and the states in this area is likely to become more complex. In the last year, courts in five circuits have struck down the cable-telco cross-ownership restriction as unconstitutional.(note 249) As a result, most LECs have obtained the right to package their own programming and deliver it directly to subscribers. Arguably, this will allow the LECs to act as cable systems operators, rather than common carriers.
The provision of cable service is governed by Title VI of the Communications Act.(note 250) The jurisdictional division of authority is significantly different in Title VI than it is in Title II. In essence, Title VI gives the states the right to franchise cable systems, but requires them to regulate cable service pursuant to specific federal directives governing the prices, terms, and conditions of service. The net result is that-if LEC-provided video programming is regulated as cable service-states may loose authority to adopt regulations governing even purely intrastate LEC-provided video programming.(note 251) The fact that an LEC may provide such programming over the same facilities that it uses to provide basic intrastate telephone service further complicates matters.
D. Jurisdiction Over Non-Carrier Communications
Facilities and Services
As a result of the growth of competition during the last decade, many
functions-such as the provision of CPE, inside wiring, and enhanced
services-that once were performed exclusively by telephone companies are
now also performed by entities whose main business is not the provision of
basic telephony.(note 252) The ability of
the FCC and the states to exercise regulatory authority over these
"non-carriers" has yet to be explored by the courts.
Non-carriers, by definition, are not common carriers. Therefore, they are not subject to federal regulation under Title II of the Communications Act. Any authority that the FCC has in this area must be grounded in Title I, which authorizes the FCC to regulate interstate "wire and radio communication."(note 253) The extent to which non-carrier-provided services and equipment can be classified as "communications," however, is unsettled.(note 254)
The FCC has avoided the difficult problem of determining the extent of its Title I jurisdiction over non-carriers by deregulating all enhanced services, CPE, and inside wiring at the federal level.(note 255) The states, too, generally have not sought to subject non-carrier-provided equipment and services to regulation. However, some states have suggested that they might be interested in asserting regulatory authority over the intrastate activities of non-carriers in certain instances-especially in the enhanced services area.(note 256) This raises the question of whether, if a state were to adopt such a policy, the FCC could exercise its preemptive authority.
The ability of the FCC to displace inconsistent state regulations is, of course, circumscribed by Section 2(b)(1). However, the Ninth Circuit's statement, in California I, that Section 2(b)(1) "applies to communications services provided by common carriers . . . as distinguished from communications services provided by non-carriers"(note 257) suggests that the provision does not limit FCC jurisdiction over non-carriers. Where Section 2(b)(1) does not apply, the Supreme Court has recognized that the FCC has plenary power to "pre-empt any state or local law that conflicts with [valid federal] regulations or frustrates the purposes thereof."(note 258) A strong argument can be made, therefore, that the FCC could preempt all state regulation of non-carrier-provided communications equipment and services.(note 259)
This interpretation does lead to a somewhat anomalous result: the FCC's ability to preempt state regulation of carrier-provided communications equipment and services (over which the FCC has clear authority) is limited, while its ability to preempt state regulation of non-carrier-provided communications equipment and services (where its authority is more uncertain) is plenary. The fact that this result is anomalous does not, of course, mean that it is incorrect.
Conclusion
This Article has proposed principles governing relations between the FCC
and the states. These principles recognize the right of the Federal
Communications Commision and the states to pursue divergent policies,
provided that the two sovereigns remain within their respective
juris-dictions. They also recognize that, in cases in which divergent
federal and state regulations cannot practically coexist, state regulation
must give way-but only to the extent necessary to avoid encroaching on the
federal domain. By adopting these principles, the FCC and the states can
put an end to their internecine conflict. The time has come to give peace
a chance.
services, offered over common carrier transmission facilities used in interstate communications, which employ computer processing applications that act on the format, content, code, protocol or similar aspects of the subscriber's transmitted information; provide the subscriber additional, different, or restructured information; or involve subscriber interaction with stored information.
47 C.F.R. 64.702(a) (1994).
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One case decided during this period, McDonnell Douglas Corp. v. General Tel. Co., 594 F.2d 720 (9th Cir.), cert. denied, 444 U.S. 839 (1979), is sometimes said to have reached a contrary result. That case concerned jurisdiction over a basic communications service, Centrex, that General Telephone provided to its customer, McDonnell Douglas, using facilities entirely within the California. Centrex is a network-based service which allows a multi-line customer to make intra-office calls as if it had a premises-based switch.
In an often-quoted passage, the Ninth Circuit observed that the service provided to McDonnell Douglas was not subject to FCC jurisdiction merely "because of the capacity it possesses to be patched into interstate telecommunications nets." Id. at 724 n.3. Read in isolation, this language could be interpreted to mean that physically intrastate equipment is not subject to FCC jurisdiction even if used in connection with interstate calls. Such a construction, however, is inconsistent with the dispositive fact in the case: McDonnell Douglas used its Centrex service exclusively for intrastate calls. See id. There was, therefore, no basis for federal jurisdiction in that case. Had McDonnell Douglas used its Centrex service in connection with interstate calls, a different case would have been presented: the service would have been subject to FCC regulation "to the extent of [its] interstate use." California II, 4 F.3d 1505, 1515 (9th Cir. 1993) ("[T]he service that General Telephone . . . provided to McDonnell Douglas . . . was solely intrastate."); see Naruc II, 746 F.2d at 1498; see also Illinois Bell Tel. Co. v. FCC, 883 F.2d 104, 113 (D.C. Cir. 1989) (quoting Furnishing of Customer Premises Equip. by the Bell Operating Tel. Cos. and the Indep. Tel. Cos., Report and Order, 2 FCC Rcd. 143, para. 123 (1987)) (finding Centrex service to be jurisdictionally mixed because it usually is used to "support[] both interstate and intrastate communications").
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If an entity provides a service on a common carrier basis, that service is subject to regulation under Title II of the Communications Act. Title II imposes a number of obligations. For example, an interstate common carrier must: (1) provide service on reasonable request, 47 U.S.C. 201(a) (1988); (2) charge rates that are just and reasonable, 47 U.S.C. 201(b) (1988); (3) not discriminate among customers, 47 U.S.C. 202 (1988); (4) file and comply with public tariffs governing the terms and conditions on which it provides service, 47 U.S.C. 203(a) (1988); and (5) obtain FCC approval before constructing new facilities or discontinuing existing services, 47 U.S.C. 214(a) (1988).
An entity can act as a common carrier for some purposes but not for others. For example, a telephone company is acting as a common carrier when it provides interstate basic transmission service; it is not acting as a common carrier when it provides enhanced services. See CCIA, 693 F.2d at 210. Non-common carrier services-such as the provision of CPE, inside wiring, and enhanced services-also can be provided by entities other than traditional telephone companies. For a discussion of the FCC's jurisdiction over non-carrier-provided services, see infra part III.D.
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Because some telephone company plant is used to provide both regulated basic telephone service and non-regulated service (such as enhanced services), it is first necessary to allocate costs between the carrier's regulated and non-regulated accounts. This process is governed by the FCC's Joint Cost Order. See In re Separation of Costs of Regulated Telephone Service From Costs of Nonregulated Activities, Report and Order, 2 FCC Rcd. 1298, reconsidered, 2 FCC Rcd. 6283 (1987), further reconsideration, 3 FCC Rcd. 6701 (1988). Under FCC rules, those costs related to telephone company plant subject to Title II regulation are then subject to the jurisdictiona