STATE OF FLORIDA

DIVISION OF ADMINISTRATIVE HEARINGS

INDIANTOWN TELEPHONE SYSTEM, INC., ) NORTH FLORIDA TELEPHONE COMPANY, ) NORTHEAST FLORIDA TELEPHONE COMPANY ) INC., and ST. JOSEPH TELEPHONE AND ) TELEGRAPH COMPANY, )

)

Petitioner, )

)

vs. ) CASE NO. 82-1549RP

) FLORIDA PUBLIC SERVICE COMMISSION, )

)

Respondent. )

and )

)

SOUTHERN BELL TELEPHONE AND )

TELEGRAPH COMPANY, )

)

Intervenor. )

) GULF TELEPHONE COMPANY, )

)

Petitioner, )

)

vs. ) CASE NO. 82-1550RP

) FLORIDA PUBLIC SERVICE COMMISSION, )

)

Respondent, )

and )

)

SOUTHERN BELL TELEPHONE AND )

TELEGRAPH COMPANY, )

)

Intervenor. )

)

FINAL ORDER

Pursuant to notice the Division of Administrative Hearings, by its duly designated Hearing Officer, William E. Williams, held a public hearing in this cause on July 2, 1982, in Tallahassee, Florida. The issue for determination in these two consolidated proceedings is whether Respondent, Florida Public Service Commission's "Notice of Proposed Agency Action" in Order No. 10813, Docket No.

820195-TP, constitutes a "rule" and, if so, whether it is invalid for failure to comply with the rulemaking provisions of Section 120.54, Florida Statutes.

and

Lewis W. Petteway, Esquire

1020 East Lafayette Street, Suite 102

Tallahassee, Florida 32301

For Intervenor: William B. Barfield, Esquire Southern Bell Lloyd Nault, Esquire

Telephone and 666 Northwest 79th Avenue, Room 680 Telegraph Company Miami, Florida 33126

For Respondent: Patrick K. Wiggins, Esquire Public Service Deputy General Counsel Commission 101 East Gaines Street

Tallahassee, Florida 32301

On May 27, 1982, Petitioners, Indiantown Telephone System, Inc., North Florida Telephone Company, Northeast Florida Telephone Company, Inc., and St. Joseph Telephone and Telegraph Company (hereinafter collectively referred to as "Petitioners"), filed with the Division of Administrative Hearings a petition pursuant to Section 120.54, Florida Statutes, seeking an administrative determination of the invalidity of Public Service Commission Order No. 10813, Docket No. 820195-TP, contending that the contents of that order constituted an invalidly adopted rule. This proceeding was assigned Division of Administrative Hearings' Case No. 82-1549RP.

Subsequently, on May 28, 1982, Gulf Telephone Company filed a petition pursuant to Section 120.54, Florida Statutes, seeking the same relief, which petition was assigned Division of Administrative Hearings' Case No. 82-1550R.

Southern Bell Telephone and Telegraph Company ("Southern Bell") moved to intervene in both cases, which motions were granted by orders dated June 11, 1982.

The two cases were consolidated for purposes of final hearing and for entry of this Final Order. Final hearing was scheduled for July 2, 1982, by Notice of Hearing dated June 8, 1982. At the final hearing, Petitioners called Harold W. Shaffer, D. R. Gibson, Robert Post, D. K. Brock and A. E. Ludescher as their witnesses. In addition, Petitioners offered Petitioners' Exhibits 1 through 6, which were received into evidence, and the parties stipulated exhibits marked Hearing Officer's Exhibits 1, 2 and 3, into the record. The Public Service Commission called no witnesses and offered no exhibits.

Counsel for each of the parties in this proceeding have submitted proposed findings of fact for consideration by the Hearing Officer. To the extent that those proposed findings are not contained in this order, they have been specifically rejected as being either irrelevant to the issues involved in this proceeding, or as not having been supported by evidence of record.

The issue presented for decision in this case is whether Respondent's Order No. 10813 constitutes a "rule" within the meaning of Section 120.52(14), Florida Statutes. Petitioners contend that the order is a proposed rule applicable to all telephone companies in Florida and that, as such, constitutes an invalid exercise of delegated legislative authority. Conversely, Respondent contends that the order does not constitute a rule, but instead is a procedural device designed to define a controversy under Section 120.57, Florida Statutes, so that Respondent may reach a determination of whether particular intrastate toll settlement agreements between Petitioners and Intervenor, Southern Bell Telephone and Telegraph Company, are detrimental to the public interest.

FINDINGS OF FACT

1. Each of the Petitioners and the Intervenor in these consolidated cases are duly certificated telephone companies operating in the State of Florida subject to the jurisdiction of the Florida Public Service Commission under Chapter 364, Florida Statutes. These telephone companies, and others operating in the State of Florida, provide for the division of intrastate toll revenues through bilateral written agreements ("toll settlement agreements") between each of these companies and Southern Bell. There are apparently 16 of these separate bilateral toll settlement agreements between Southern Bell and other telephone companies operating in the State of Florida. Each of these agreements is on file with the Public Service Commission as required by law.

   
   

2. Under these agreements each of the small telephone companies periodically report to Southern Bell their costs an revenues associated with intrastate long distance calls. Southern Bell then determines each company's share of the revenue pool generated pursuant to the intrastate toll settlement agreements, and effects the distribution of funds by sending a check to some companies and a bill to others. The amount credited or charged to individual telephone companies by Southern Bell is based at least in part on the "rate of return" language contained in each company's agreement with Southern Bell. Each toll settlement agreement contained in the record in this proceeding contains the following identical "rite of return" provision:

   
   

   Rate of Return--the rate of return to be applied to the intrastate average investment base will be the intrastate rate of return achieved by the Bell Company for the study period calculated in a manner consistent with the investment and cost items included in [the individual telephone company's] cost study.

   
   

3. On May 21, 1982, the Public Service Commission issued its Order No. 10813 entitled "Notice of Proposed Agency Action" which, in part, recited the aforementioned faces and, further, under the heading "Policy Determination" set, forth the following:

   
   

   Upon review of these agreements, the Commission concludes that the Basis of Settlement renders these agreements to the

   public interest because it creates an inequitable system of cross-subsidization among local subscribers of the telephone companies.

   
   

   Rates are set prospectively for telephone companies based on expenses and revenues experienced during an approved test year. Sufficient revenues must be generated from services to allow the utility to achieve on its investment the rate of return authorized in the rate case. However, the settlement agreement distributes the tolls on the basis of a rate of return other than the company's authorized rate of return, i.e. on Southern Bell's achieved rate of return. As a result a company automatically will be either overearning or underearning with respect

   to toll revenues, depending on whether its authorized rate of return is lesser or greater than Southern Bell's achieved rate of return.

   
   

   If the company is overearning on the toll revenues, then revenues generated by local services will be reduced a corresponding amount. But if the company is underearning on the toll revenues, then revenues generated by local service will have to be increased to make up the difference. Because the toll revenues being distributed to the local companies are from a common pool, ratepayers of these 'underearning' companies are

   subsidizing the ratepayers of the 'overearning' companies. This is inequitable and contrary to the basic thrust of ratesetting as embodied in Chapter 364. Therefore we conclude that the current basis of distributing toll revenues renders the agreements detrimental to the public interest.

   
   

   Thus, the Commission hereby gives notice of its proposal to disapprove all settlement agreements as detrimental to the public interest that they provide for

   cross-subsidization among ratepayers. To not be detrimental to the public interest, toll settlement agreements must provide for settlements that do not create such

   cross-subsidization among the local ratepayers of the various companies.

   To avoid such cross-subsidization, the toll settlement agreements must compensate each company for its cost of providing intrastate toll service. This cost of service includes the cost of capital, as well as operating expenses, taxes, and investments. With respect to the equity component of the cost

   of capital, the return on equity must recognize the financial leverage of the company.

   
   

   If this proposed agency action is not protested as provided for in Chapter 25-22, F.A.C., and as explained below, the Commission will issue an order constituting final agency action disapproving all toll settlement agreements effective 30 days from the date

   of the order. This order will in addition direct the companies to modify the agreements and to submit the modified agreements to the Commission for review within that 30 days.

   
   

   The modification of the settlement agreement will result in the loss of revenues to some companies, and the gain of revenues to financial impact of this redistribution to ensure that companies do not overearn or underearn as a result of this action.

   
   

   This proposed agency action addresses only the detrimental effect of using the Bell Company's achieved rate of return, and no other aspects of the settlement agreements. (Emphasis added.)

   
   

4. On May 28, 1982, the Public Service Commission caused to be published in the Florida Administrative Weekly the following notice:

   
   

   NOTICE is hereby given that pursuant to Section 364.07, Florida Statutes, the Public Service Commission has issued proposed agency action to disapprove all existing agreements for the division of intrastate toll revenues, on the ground that they are detrimental to the public interest because they provide for

   cross-subsidization among ratepayers. If by June 11, 1982, the Commission does not receive from an affected person a petition on proposed agency action, as provided in Chapter 25-22, FAC, then the proposed agency action will become final agency action. A copy of the proposed agency action may be obtained from the Commission Clerk, 101 East Gaines Street, Tallahassee, Florida 32301.

   
   

5. It is undisputed that the Public Service Commission did not prepare an economic impact statement in conjunction with the issuance of its "Notice of Proposed Agency Action", the Commission otherwise follow the procedural requirements contained in Section 120.54, Florida Statutes, concerning the adoption of a "rule."

   
   

6. By Final Order dated April 22, 1982, in Division of Administrative Hearings' Case Nos. 81-2201R and 81-2202R, Diane D. Tremor, Hearing Officer with the Division of Administrative Hearings, declared a rule proposed by the Public

   Service Commission pursuant to Section 364.07, Florida Statutes, invalid on the grounds that it failed to contain any finding that toll settlement agreements were detrimental to the public interest, and further, that the proposed rule invalidly attempted to prescribe the mechanics to be followed by telephone companies in dividing monies contained in the intrastate toll revenue pool.

   
   

   CONCLUSIONS OF LAW

   
   

7. The Division of Administrative Hearings has jurisdiction over the parties to and the subject matter of this proceeding. Section 120.54, Florida Statutes.

8. Section 120.52(14), Florida Statutes, defines the term "rule" as: ". . . each agency statement of general

   applicability that implements, interprets, or prescribes law or policy or describes the organization, procedure, or practice requirements of an agency . . ."

   
   

9. As pointed out by the court in McDonald v. Department of Banking and Finance, 346 So.2d 569, 580 (Fla. 1st DCA 1977):

   
   

   . . . The APA does not in terms require agencies to make rules of their policy statements of general applicability, nor does it explicitly invalidate action taken to effectuate policy statements of that character which have not been legitimated by the rulemaking process. But that is the

   necessary effect of the APA if the prescribed rulemaking procedures are not to be atrophied by nonuse.

   
   

10. Therefore, according to the McDonald court, ". . . [t]he APA thus impels agencies to 'confine their own discretion' by 'moving from vague standards to definite standards to broad principles to rules.'" Although the McDonald court went on to indicate that it was permissible for agencies to develop "incipient policy" through the adjudication of individual cases, the Court pointed out that " . . . Section 120.54 rulemaking procedures are imposed

    . . . on policy statements of general applicability, i.e., those statements which are intended by their own effect to create rights or to require compliance, or otherwise to have the direct and consistent effect of law." Id. at 581 (original emphasis). The McDonald count, in a footnote to its decision, quoted with approval the following language from NLRB v. Wyman-Gordon Co., 394 U.S. 759, 764, 89 S.Ct. 1426, 1429, 22 L.Ed.2d 709, 714 (1969) as follows:

    
    

    The rulemaking provisions of . . . [the] Act, which the Board would avoid, were designed to assure fairness and mature consideration of rules of general application. . . They may not be avoided by the process of making rules in the course of adjudicatory proceedings. There is no warrant in law for the Board to replace the statutory scheme with a rulemaking procedure of its own invention. (Emphasis added.)

11. In Department of Commerce v. Matthews Corporation,

    358 So.2d 256, 258 (Fla. 1st DCA 1978), the Court held that certain wage determinations which by their own terms were applicable only to a particular public building or other public work were not "rules." In so holding, the Court pointed out that:

    
    

    . . . The determination thus has temporal as well as geographical limitations. The determinations have no prospective applications to any other contract only the specific project involved in the particular

    location. Nor do they set wage standards for affected persons extending some indefinite time into the future. The wage determinations may be considered informal 'order' which can be subjected to Section 120.57 proceedings.

    The temporal distinction between a rule and an order was explicated by Justice Holmes 70 years ago as follows:

    
    

    'A judicial inquiry investigates, declares, and enforces liabilities as they stand on present or past facts and under laws supposed already to exist. That is its purpose and end. Legislation, on the other hand, looks to the future and changes existing conditions

    by making a new rule, to be applied thereafter to all or some part of those subject to its power.'

    
    

12. Section 364.07, Florida Statutes, which is cited by Respondent as authority for issuance of its "Notice of Proposed Agency Action," provides as follows:

    
    

    1. Every telephone company shall file with the commission, as and when required by it, a copy of any contract, agreement, or arrangement in writing with any other telephone company,

       or with any other corporation, association, or person relating in any way to the construction, maintenance, or use of a telephone line or service by, or rates and

       charges over and upon any such telephone lines.

    2. The commission is authorized to review intrastate toll settlement agreements and disapprove any such agreement if such agreement is detrimental to the public interest. The commission may also require the filing of all necessary reports and information pertinent to intrastate toll revenue settlements. The commission is also authorized to adjudicate disputes among telephone companies regarding intrastate

       telecommunication settlements. (Emphasis added).

13. Prior to the passage of Section 364.07, Florida Statutes, in its present form by the 1980 Legislature, Respondent had no statutory authority to regulate the contractual division of long distance toll revenues between telephone companies. See, Florida Telephone Corporation v. Mayo, 350 So.2d 775 (Fla. 1977). Thus, the contents of Respondent's "Notice of Proposed Agency Action" does not amount to a change in the Commission's policies so much as an announcement of a new policy which, by its own terms, applies to the entire telephone industry in the State of Florida. In addition, the Commission's new "policy" also purports to establish criteria which all future toll settlements must meet; in order to avoid being determined to be "detrimental to the public interest". Further, the Commission recognizes that its diction . . . will result in the loss of revenues to some companies, and the gain of revenues to the others the full effect of which is apparently unknown, due, at least in part, to the Commission's failure to prepare an economic impact statement.

    
    

14. It is, therefore, concluded as a matter of law, that Respondent's "Notice of Proposed Agency Action" constitutes a "rule" as defined in Section 120.52(14), Florida Statutes, in that it is an " . . . agency statement of general applicability that implements, interprets, or prescribes law or policy .

    . ." The Commission's statement contains no temporal or geographic limitations, does not arise from a set of facts involved in the adjudication of an individual case and, by its own terms, will have future application to all toll settlement agreements.

    
    

15. The Commission argues that its "Notice of Proposed Agency Action" constitutes the development of "incipient agency policy" through the adjudication of individual cases, and, as authority for this position, has cited the cases of Florida Cities Water Company v. Florida Public Service Commission,

384 So.2d 1280 (Fla. 1980), and McDonald v. Department of Banking and Finance,

346 So.2d 569 (Fla. 1st DCA 1977). It is, however, concluded that the clear and unambiguous definition of the term "rule" contained in Section 120.52(14), Florida Statutes, includes the type of agency action attempted here by the Commission. In light of this clear language, the judicially-create exception which allows the formulation of agency "policy" in adjudicatory proceedings conducted pursuant to Section 120.57(1), Florida Statutes, should be strictly construed. In this regard, both McDonald and Florida Cities Water Company involved individual adjudicated cases in which agency policy was developed as an adjunct to other issues presented in the decision-making process. Here, the only apparent purpose for issuance of the Commission's "Notice of Proposed Agency Action" was the announcement of its policy position, which policy, unlike those in the McDonald and Florida Cities Water Company cases, is applicable industry-wide. This is precisely the type of agency action which the legislature sought to prohibit, and which even the McDonald court recognized as unwise . . . if the prescribed rulemaking procedures are not to be atrophied by non-use." 346 So.2d.at 580.

FINAL ORDER

Based upon the foregoing Findings of Fact and Conclusions of Law, it is ORDERED that:

The Public Service Commission Order No. 10813 and Docket No. 820195-TP, constitutes a "rule" within the meaning of Section 120.52(14), Florida Statutes, and therefore constitutes an invalid exercise of delegated legislative authority for Respondent's failure to comply with rulemaking requirements of Section 120.54, Florida Statutes.

DONE and ORDERED this 20th day of July, 1982, in Tallahassee, Florida.

WILLIAM E. WILLIAMS

Hearing Officer

Division of Administrative Hearings The Oakland Building

2009 Apalachee Parkway

Tallahassee, Florida 32301

(904) 488-9675

Filed with the Clerk of the Division of Administrative Hearings this 20th day of July, 1982.

COPIES FURNISHED:

Edwin L. Mason and

David B. Erwin, Esquires 1020 East Lafayette Street Suite 202

Tallahassee, Florida 32301

William B. Barfield and Lloyd Nault, Esquires

666 Northwest 79th Avenue Room 680

Miami, Florida 33126

Edwin B. Browning, Jr., Esquire Post Office Drawer 652

Madison, Florida 32340

Lewis W. Petteway, Esquire 1020 East Lafayette Street Suite 102

Tallahassee, Florida 32301

Patrick K. Wiggins, Esquire Deputy General Counsel Public Service Commission

101 East Gaines Street Tallahassee, Florida 32301

Steve Tribble, Clerk Public Service Commission

101 East Gaines Street Tallahassee, Florida 32301

Ms. Liz Cloud Department of State Room 1801, The Capitol

Tallahassee, Florida 32301

Mr. Carroll Webb Executive Director

Administrative Procedure Committee

120 Holland Building Tallahassee, Florida 32301

Docket for Case No: 82-001549RX

Orders for Case No: 82-001549RX