Attorney General's Opinion

Attorney General Richard Blumenthal

May 3, 1996

Commissioner Reginald J. Smith
Chairperson
Department of Public Utility Control
10 Franklin Square
New Britain, CT 06051

Dear Chairman Smith:

As Chairman of the Department of Public Utility Control ("Department"), you request our advice regarding the application of Section 251(d)(3) of the Telecommunications Act of 1996, 1996 Pub. L. 104-104 ("Telecommunications Act"). The Telecommunications Act requires state commissions to set wholesale rates for any telecommunication service offered by the local exchange company, in this case the Southern New England Telephone Company ("SNET'), on the basis of retail rates, less avoided costs such as marketing and billing costs. These wholesale services will be purchased by rival telecommunication companies competing against SNET in the local exchange markets.

In the Telecommunications Act, Congress apparently intended to prevent local regulators from adopting pricing schemes that disadvantage these competitors. It is suggested in your letter that some of SNET's retail rates, particularly for some services offered to residential customers, may be presently set at a level below SNET's cost of providing the service. You are concerned that if SNET is required to offer these services at rates below cost to wholesale subscribers, then it may not fully recover the costs associated with providing the service, resulting in a constitutional claim of confiscation of SNET's property.

You have asked what the Department must do to be in compliance with the federal law while avoiding any constitutional issues of confiscation. Our response is that, in cases like this, where federal preemption is clearly expressed, the Department must follow the federal act and establish wholesale telecommunications rates in accordance with the provisions of that act. However, for the reasons discussed below, we conclude that it is premature to address the constitutional issues you have raised.

The critical task "[i]n deciding whether a federal law preempts a state statute... is to ascertain Congress' intent in enacting the federal statute at issue." Shaw v. Delta Air Lines, Inc., 463 U.S. 85, 95 (1983); see Louisiana Public Service Comm'n v. FCC, 476 U.S. 355, 369 (1986). Preemption may be either expressed or implied. Congress may, by explicit statutory language, declare the extent to which it intends to preempt certain state laws. California Federal Savings & Loan Ass'n v. Guerra, 479 U.S. 272, 280-81 (1987). Alternatively, in the absence of explicit congressional guidance, courts will

Northwest Central Pipeline Corp. v. Kansas Corporation Comm'n, 109 S.Ct. 1262, 1273 (1989).

In this case preemption is clearly expressed as Congress has provided specific direction to state commissions on the setting of wholesale rates in Section 251(d)(3) of the Telecommunications Act, (Endnote 1) and the State is compelled to follow the federal law.

It is our opinion, however, that it is premature to take any unilateral action to adjust SNET's retail rates because SNET is now subject to an alternate regulation plan. Alternative regulation departs from cost based rate regulation and allows SNET to flexibly price many of its services. The overall financial impact of this change in regulation on SNET is unknown. Therefore it is too early to assess what, if any, action is required by the Department to avoid any confiscatory effect of setting wholesale rates, in accordance with the Act, based on rates charged by SNET pursuant to its alternate regulation plan.

By electing to be regulated in an alternate form, pursuant to Conn. Gen. Stat. § 16-247k(b), SNET is no longer subject to the traditional ratemaking guidelines found in Conn. Gen. Stat. § 16-19 (Endnote 2) and Conn. Gen. Stat. § 16-19e. (Endnote 3). These statutory guidelines have the benefit of judicial interpretation. Alternate regulation will have to be judged without the benefits of these well understood directives.

Under traditional ratemaking, if a utility experiences a change in circumstances seriously impairing earnings, it seeks rate relief. The Department's decision on the company's rates would then have to meet the constitutional standard adopted in Federal Power Commission v. Hope Natural Gas, 320 U.S. 591 (1943). Connecticut Light and Power Company v. Department of Public Utility Control, 219 Conn. 51, 55 (1991). Hope teaches that rates must balance the consumers' and investors' interest but, in doing so, it looks at the results reached (emphasis added), not the methodology used by the agency to judge the rate decision. Id. at 603. "If the total effect of the rate order cannot be said to be unjust and unreasonable, judicial inquiry under the Act is at an end." Id. at 602.

Under alternate regulation, SNET is given broad discretion to vary its rates on many of its services, but the plan's rates for non-competitive services offered to consumers and competitors must still be "just and reasonable," under state law, Conn. Gen. Stat. § 16-247k(b)(I) (Endnote 4), and the constitutional standards articulated in Hope. Therefore, while alternate regulate of abandons most of the rate guidelines of traditional rate regulation, a remnant of the just and reasonable standard remains. Rates in order to be just and reasonable must balance ratepayers and investors interests. Federal Power Commission v. Hope Natural Gas, 320 U.S. at 603. In this case, the balance is between SNET and customers of non-competitive services. In making such an analysis courts will look at the end result of the total rate scheme to determine if confiscation has occurred. Id. Accordingly, it is our opinion that you must still look at the total effect of the alternate regulation plan; that is, you should not look at the impact of one rate class, but at the total earnings SNET is able to achieve under the comprehensive plan. At this point we do not know what impact the Telecommunications Act will have on the total earnings of SNET, in light of its alternate regulation plan, making it impossible to evaluate the Telecommunications Act's total effect.

In the final analysis, it is up to SNET to decide whether to seek rate relief from the Department. Conn. Gen. Stat. § 16-247k(e) allows an alternate regulation plan to be modified for previously unforeseen circumstances. It is premature to presume that the alternate regulation plan that SNET asked for will result in confiscation if used as a basis for the setting of wholesale rates pursuant to the Telecommunications Act, since SNET's revenues will be subject to its ability to flexibly price many of its services and capture the benefits of its marketing skills.

Very truly yours,

JANE S. SCHOLL
ASSOCIATE ATTORNEY GENERAL

Robert S. Golden, Jr.
Assistant Attorney General