ALVIN B. RUBIN, Circuit Judge:
A utility company to whose poles a cable television company attached its lines challenges the charge for that service fixed by the Federal Communications Commission. The Commission's action is to be judged on the basis of the reasonableness of the method it used to compute the pole attachment rate; we do not look merely to whether the ultimate result fell within the range allowed by statute. In denying the utility company the right to include deferred taxes in its tax base, and thus to normalize its taxes, we find the Commission acted arbitrarily and therefore reverse that determination. We also hold that the utility company is entitled to include a component of its investment in private rights-of-way in its calculation of pole attachment rates and that such component need not be proved on a community-wide per-pole basis, which the Commission arbitrarily required, but may be established by system-wide data. We affirm on this issue, however, because we find that the utility company did not demonstrate the compensable portion of its rights-of-way investment, that is, the amount of its investment in rights-of-way pertaining to its acquisition of rights to erect and maintain poles, in contrast to its acquisition of rights to string and maintain power lines from pole to pole.
Companies furnishing cable television service lease space on existing distribution poles owned by electric utilities and telephone companies in order that they may attach their coaxial cables and related equipment to the poles. As a congressional committee reported, "Use is made of existing poles rather than newly placed poles due to the reluctance of most communities, based on environmental considerations, to allow an additional, duplicate set of poles to be placed."
In 1978, Congress enacted the Pole Attachment Act,
Group W Cable, Inc. operates a cable television system serving three Texas towns: Commerce, Palestine, and Grapevine. In accordance with industry practice and pursuant to a contract with Texas Power & Light Company, Group W attached its distribution lines to approximately 5,645 poles owned by Texas Power. The contract provides for an annual rental of $2.25 per pole for attachments made before October 1, 1974, and $3.50 per pole for attachments made after that date. The contract also provides that Texas Power assumes
Group W filed a complaint with the Commission in August 1979, which alleged that the rate fixed by the contract exceeded the maximum rate allowable under the Act. In accordance with Commission practice, the action was referred to the Commission's Common Carrier Bureau. After Texas Power responded, the case languished for more than a year. Group W then amended its complaint, and, on July 14, 1981, the Bureau issued an order granting Group W's complaint and establishing an annual rental rate of $2.50 for all poles. Texas Power filed a timely application for review with the full Commission. Texas Power asserts in its brief that the FCC staff refused to process its application "as it had refused to process many other such applications." The Commission does not deny this, but explains that the delay was occasioned by the pressure of trying to handle the new and great volume of work that followed enactment of the 1978 Act. Whatever the reason, no action was taken on Texas Power's administrative appeal for more than three years. Finally, Texas Power petitioned the District of Columbia Circuit for mandamus. In September 1984, that court ordered the Commission to answer, and the Commission released its decision on December 14, 1984.
In its decision, the Commission affirmed the Common Carrier Bureau's imposition of the $2.50 per pole rate. Although Group W had indicated its willingness to pay for the power company's investment in rights-of-way (subject to objections to its method of computation), the Commission continued to exclude that factor and also summarily rejected Texas Power's argument on the tax normalization issue. Texas Power sought judicial review.
Texas Power first contends that the Commission's calculation of the power company's income tax expense was too low because it was based on actual tax paid, after accelerated depreciation, instead of what the tax would have been if "normalized,"
The Commission's decision must be accepted unless it is "arbitrary and capricious, an abuse of discretion, or otherwise not in accordance with law," a standard fixed by section 10(e) of the Administrative Procedure Act.
The Commission argues at the outset that any error committed by it in fixing the rate is presumptively harmless because (1) the statute requires only that pole attachment rates fall within a zone of reasonableness, and (2) the total rate fixed in this case has not been shown to be outside that zone, that is, to be either unjust or unreasonable. The same argument was made to the District of Columbia Circuit and was rejected in Alabama Power Company v. Federal Communications Commission.
"The grounds upon which an administrative order must be judged," the Supreme Court has said, "are those upon which the record discloses that its action was based."
Congress and the Commission, acting pursuant to its mandate, recognize that tax expenses are a legitimate and necessary part of the cost of providing pole attachments and that such expenses should be taken into account in determining the rates for attaching cable television cables to utility poles. The Commission sought to implement this requirement by including in its rate formula a component representing taxes, including income taxes. In calculating Texas Power's income tax expense, however, the Commission excluded those taxes (known as deferred taxes) that are attributable to the accelerated depreciation provisions of the Internal Revenue code.
This issue was recently presented to the District of Columbia Circuit Court of Appeals in Alabama Power Company v. Federal Communications Commission.
Two methods have been used by rate-fixing agencies for treating deferred taxes in calculating utility rates. One approach permits the recognition of the debt that the utility has incurred for deferred taxes even though these taxes are not currently paid. Because this method matches the utility's tax expense with the underlying events that gave rise to the tax liability, it is referred to as normalization. Another method, known as flow-through, permits inclusion in the cost base of only taxes actually paid. The result of the flow-through method is to pass all the benefits of accelerated depreciation through to current year ratepayers, while shifting the burden of the underlying tax liability to future years' ratepayers. Flow-through proponents assert that it "serves to ensure that rates reflect only those expenses actually borne by the utility, while opponents argue that only through normalization can expenses be matched to the customer that receives the related services."
Because Congress had not explicitly forbidden use of the flow-through treatment for all purposes, this circuit held in 1966 that the Federal Power Commission had discretion to use that method in setting
The Tax Reform Act of 1969 contained an exception to its normalization provision, however. Under 26 U.S.C. § 167(l)(2)(C), the continued use of flow-through for property of the same kind as property with respect to which flow-through was used before 1969 was permitted. Because during the 1970's a significant amount of utility property fell within this category, a number of state regulatory commissions continued to require flow-through of federal tax benefits despite Congress' expression of contrary federal policy. Congress eliminated this exception in 1981, however, when it enacted the Economic Recovery Tax Act of 1981 ("ERTA"),
The Commission refused to allow Texas Power to normalize its tax expenses in establishing cable attachment rates, arguing that neither the Tax Reform Act of 1969 nor ERTA affects its policy. It asserts that this is not a common carrier tariff proceeding but a complaint proceeding designed to bring the pole attachment rate within the statutory limits. The Commission, therefore, continued its use of the flow-through method of accounting to calculate the power company's costs. Texas Power challenges this policy, and contends that the normalization of tax benefits does not render an otherwise acceptable rate unjust and unreasonable.
As noted previously, this tax-method issue was also presented to the District of Columbia Circuit in Alabama Power. Because the Commission had taken contradictory positions on the question,
Other considerations support this determination. Congress has expressly provided that regulatory commissions may not exclude deferred taxes in setting rates for regulated utilities. And Congress found that to permit such a practice would frustrate the very purpose of the tax code in permitting utilities to take advantage of accelerated depreciation, and therefore prohibited the practice.
Even though this is not a common carrier proceeding, the objective of the proceeding
Furthermore, the tax component is inconsistent with the depreciation component under the Commission's rate formula. The depreciation component is based upon the straight line depreciation method. The tax component, however, assumes that accelerated depreciation has been taken (but refuses to permit its recovery in either the tax or depreciation component). The result is that the Commission's formula uses inconsistent and arbitrary rate elements.
Group W protests that Texas Power will receive a fair return from utility ratepayers even if it is not permitted to normalize taxes because the burden will be borne by its ratepayers, as if that somehow justifies passing on an increased rate to utility users so that cable television companies can benefit. Texas Power is indeed performing its responsibility to its utility users by minimizing their rates to the extent that other enterprises benefit from the use of property that is in effect paid for by utility users. The question is not, as Group W puts it, how much cable should subsidize Texas Power but how much cable and cable subscribers may benefit from the use of Texas Power's property without reimbursing that company.
The Commission's approach is also inconsistent with the intent of Congress in enacting the Pole Attachment Act. Congress directed the Commission to set pole attachment rates based upon simple and expeditious procedures, and in order to do so to deter to the cost determinations made by a utility's state regulatory commissions. The state regulatory commission to which Texas Power is subject permits the recovery of deferred taxes, and the adjustment that must be made for those rates following a different practice is relatively simple. Finally, that the Commission's treatment of utility taxes in pole attachment cases has always been the same proves only formal consistency not the correctness of the method or the consistency of the logic by which the conclusion was reached.
The Act requires, as we have noted, that the maximum rate for a pole attachment shall include a component of the "actual capital costs of the utility attributable to the entire pole ... or right-of-way."
Although Texas Power generally tries to construct its poles within public rights-of-way, it cannot always do so. Access to a public right-of-way may be blocked by a large tree or other impediment, or there may be no public right-of-way for the required route. Public rights-of-way are not available for approximately one-fifth of all of the poles in the state-wide Texas Power System and, in these instances, Texas Power typically buys a right-of-way from the owner of the property before installing its poles. Although the record is not clear, and counsel were not able at oral argument to explain fully, it appears likely the rights-of-way acquired by Texas Power from private landowners include not only the right to erect and maintain poles, but also the right to string and maintain power lines from pole to pole. Counsel for Texas Power airily dismisses the line-maintenance component as "air rights;" but, however designated, the right-of-way charge presumably includes consideration for this "air right."
Under the contract between the parties, Group W is required to obtain its own independent right-of-way from landowners: Texas Power assumes "no responsibility for securing any ... rights-of-way ... or easements for the making and maintaining of [cable] attachment[s] over, across, or along ... privately or publicly-owned property." Counsel for Texas Power and Group W both stated in oral argument, however, that the cable company does not, in actual practice, obtain its own rights-of-way from landowners to string and maintain its cable lines. Both agree that, should land owners become aware of their rights, they might demand payment from the cable company for use of these "air rights."
The Commission and Group W argue simply that, because the cable company is required by the contract to obtain, at its own expense, its own rights-of-way, the utility's investment in rights-of-way should not be included in the computation of the pole attachment rate. Essentially, the argument is that because the cable company is, theoretically, not allowed to "use" the utility's rights-of-way, they do not benefit from the utility's acquisition of the right. We do not agree. But for the power company's purchase of these rights-of-way, the poles upon which the cable company attaches its lines would not be standing.
Texas Power notes, and Group W does not refute, that Group W did not object in the Commission proceedings to the argument that the cost of rights-of-way, at least for poles, is a necessary cost of constructing poles, and that a ratable share of these costs should be included in the determination
In requiring such a showing, the Commission relied upon Williamsburg Cablevision v. Carolina Power & Light,
Group W argues that Texas Power's rights-of-way investment account is precluded from inclusion in FERC Account 364, the account showing the gross investment in pole plant, because the utility company has not shown that the rights-of-way account is "properly" or "closely related to the particular pole attachments involved." While Texas Power has not proffered data with respect to the particular pole attachments involved in the three communities at issue here, we do not perceive the rationale behind the Commission's refusal to permit system-wide average cost data to be used. In many cases in which utilities have attempted to submit data concerning their costs on a community basis, the Commission has refused to consider it, and has instead required system-wide data.
The Commission rejects the use of system-wide data to establish rights-of-way costs because "it makes no sense" — "there is no discernible nexus between those expenses and the provision of the pole attachment service." With respect to the computation of the cost of bare poles, however, the Commission allows use of system-wide average cost data because it "makes sense and is fair to the cable operator and utility alike because the average cost of a bare pole must first be determined before the cable operator's ratable share of the cost of using that pole can be ascertained." Moreover, the use of system-wide average cost data, the Commission states, "offers an easy and reliable way of determining this essential figure."
If the acquisition of private rights-of-way by Texas Power were a rare or isolated occurrence, the Commission's distinction might make more "sense," to use its own words. But Texas Power must obtain rights-of-way for its poles approximately one-fifth of the time; it has purchased approximately 175,000 rights-of-way for its 849,000 poles. In the communities in question here, Group W has attached its distribution lines to approximately 5,645 poles owned by Texas Power, and the utility company alleges in its brief that about 3,000 unauthorized attachments by Group W exist. If Texas Power were required to submit
The per-pole standard suggested by the Commission is inconsistent, arbitrary and essentially unworkable. The Commission should permit Texas Power to recover its investment in rights-of-way by allocating the cost of rights-of-way on a system-wide average cost basis just as it allocates other costs found to be sufficiently related to its acquisition of poles.
Counsel for Texas Power has called to our attention the Eleventh Circuit decision in Florida Power Corporation v. FCC,
For these reasons, we VACATE the Commission's order and REMAND to the Commission for further proceedings consistent with this opinion.