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Local Phone Rate Formula Debated Before Supreme Court

January 13, 1986

WASHINGTON (AP) _ Several state rate-making agencies asked the Supreme Court Monday to stop the federal government from deciding how quickly customers must be charged for equipment like telephone poles, lines and switches.

Lawrence G. Malone, assistant counsel of the New York Public Service Commission, argued that state regulators are in a better position than the Federal Communications Commission to say, for example, how long a telephone pole will last in a particular climate.

Regulators in Louisiana, California, Ohio and Florida, backed by two dozen other state agencies, sought permission to spread the cost of equipment over many years, rather than the shorter period ordered by the FCC.

Bookkeepers use depreciation schedules to charge telephone customers for equipment through the years it will take for that equipment to wear out or become obsolete.

In an order pre-empting the states’ authority to set depreciation schedules, the FCC set a faster capital equipment depreciation rate, which has the effect of raising local phone bills.

The FCC said in a series of decisions that phone companies need the money to continually update their equipment.

Without modern equipment, phone companies fear that big business customers will leave the basic phone network, deprive the local phone companies of substantial income and, in turn, make residential rates even higher.

In ruling in favor of the FCC last year, one of the lower court judges, whose decision is being appealed, said the new depreciation method ″apparently means that consumers will have to pay more in the near future, but less in the distant future.

The two sides in the case used different approaches to explain how the court’s decision, which is expected sometime before July, might affect individual telephone bill payers.

Malone, in his oral argument before the justices, said that leaving the faster depreciation scheme in place would lead to ″very substantial telephone rate increases ... with no assurances that the money will go to plant revitalization.″

He estimated that the rate increases could total $1 billion, $120 million of that in New York State alone.

But Charles Fried, the Justice Department’s chief courtroom lawyer arguing for the FCC, said he understood that in Maryland for example, the increase would amount to a penny a day per customer.

Fried said he knows of no finding that shows phone rates would increase by $1 billion.

If the FCC depreciation order is overturned, the cost per customer would differ from state to state based on the specific depreciation schedule set by each state’s regulators.

And if the high court rules against the federal government, some phone companies may have to give refunds to their customers. Cincinnati Bell, for example, estimates it would have to return $20 million to its 460,000 Ohio customers.

The Justice Department argued that federal law gives the FCC authority to pre-empt local depreciation decisions but that states retain their control over local rates with their authority to determine how much profit the phone companies can make and which expenses are legitimate.

″If the FCC is allowed to pre-empt deeply rooted police powers ... then where do we draw the line?″ Malone asked the justices.

Michael Boudin, arguing for American Telephone & Telegraph Co., said the FCC should prevail because Congress considered whether the state or federal governments should determine depreciation rates and decided against the states.

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