Ad Hoc Telecommunications Users Committee v. Federal Communications Commission

Opinion for the Court filed by Circuit Judge GINSBURG. Opinion concurring in the result filed by Circuit Judge MacKINNON. GINSBURG, Circuit Judge: Petitioners and intervenors in this case provide, use or are otherwise interested in the availability of long distance telephone services known as Outward WATS and Inward WATS. They challenge a Federal Communications Commission (FCC or Commission) decision that each of these WATS services is “like” ordinary long distance telephone service for purposes of 47 U.S.C. § 202(a), which prohibits unjust or unreasonable discrimination in charges “for or in connection with like communication service.”1 The Commission emphasizes that its determination does not mandate elimination or alteration of WATS services. Rather, the FCC explains, if its decision is affirmed, “any rate discrimination or preference between [WATS and ordinary long distance service] must be clearly shown to be justified in accordance with applicable Commission rules and orders, and if not, the discrimination or preference must be elimi — 244 — nated.”2 Petitioners and intervenors contend that, in making the “likeness” determination at issue, and adhering to it on reconsideration, the Commission failed to apply any ascertainable standard. They further assert that, in face of overwhelming record evidence to .the contrary, the FCC’s decision characterizing WATS and ordinary long distance as “like service[s]” was arbitrary and capricious. The Commission purported to apply its judicially-approved “functional equivalency” test in arriving at the “likeness” determination before us for review. But the Commission’s explanation slips from the grasp and, in the shape presented to us, does not satisfy the demands of cogent decisionmaking. Because the “functional equivalency” test is an important, still-evolving Commission approach, we do not believe it appropriate to cut off at this juncture the FCC’s opportunity to define comprehensibly the path it is taking. Accordingly, we vacate the Commission’s orders and remand for a more precise determination of the “likeness” vel non of the services at issue. I. . The American Telephone and Telegraph Company (AT&T) operates a nationwide telecommunications system and offers several forms of long distance communication including ordinary long distance service and two distinct WATS services. Long Distance Message Telecommunications Service (MTS) is the familiar nationwide long distance service. It has two-way capability (placing and receiving calls) and may be accessed from almost any telephone at any time. It provides virtually world-wide service. Operator assistance is available for special service features, including collect, credit card, conference, person-to-person, and third-party-billed calls. Subscribers are provided a detailed bill which itemizes the charges for each call period. Wide Area Telecommunications Service (WATS), on the other hand, is a one-way-only calling or receiving service covering specified geographical areas. The WATS services in question are of two kinds: Outward WATS and Inward WATS (the latter commonly called “800” Service). Outward WATS, first introduced in 1961, permits high-volume users to place direct-dialed calls anywhere within a designated service area at a fixed monthly rate. Outward WATS calls proceed over a unidirectional access line from the subscriber’s phone to a specifically equipped WATS central office. At this location the calls are switched onto the interstate long distance telephone network, known as the public switched network, the same network over which regular long distance calls travel. At the WATS central office a screening and blocking function occurs which accepts only calls to the designated geographic area covered by the subscription. Outward WATS customers subscribe to coverage selected from among five service areas within the United States, none of which includes the subscriber’s home state.3 These areas may be viewed as five concentric circles of increasing size. The larger the size of the service area selected, the higher the rate charged. Inward WATS (800 Service), first introduced in 1967, operates in a manner essentially the reverse of Outward WATS. It permits the subscriber to receive direct-dialed calls, originating from within the selected service area, on a collect basis at a fixed monthly rate. Inward WATS calls first traverse the public switched network and then are blocked and screened at the terminating WATS office serving the subscriber. Inward WATS also requires the use of separate access lines to carry the calls from the central office to the subscriber. The special WATS access lines cannot be used for placing or receiving any other type of calls. — 245 — The fixed monthly fees for both WATS services are prepaid. If WATS services of either character are used in excess of the time periods paid for, additional charges are billed. The itemized billing statement characteristic of MTS is not a feature of either WATS service. On September 26, 1977, the Commission released a Notice of Inquiry in which it solicited comments on the question whether Outward WATS or Inward WATS constitutes service “like” MTS within the meaning of section 202(a). American Telephone & Telegraph Co. (WATS), 66 F.C.C.2d 224, 226 (1977) (Notice of Inquiry). The Commission also solicited comments on the specific standards or criteria it should rely upon in making “likeness” determinations. Id. After evaluating the numerous responses received, the Commission discarded differences in service it deemed “irrelevant” and concluded that both WATS services are “like” MTS for section 202(a) purposes. American Telephone & Telegraph Co. (WATS), 70 F.C.C.2d 593 (1978) (Like Services Decision). The Commission stated that, in reaching its decision, it employed the “functional equivalency” test, which focuses on whether the services under consideration differ in any material functional respect. Id. at 604. The FCC concluded here that “no difference exists between the services in terms of [the] communication functions performed for the subscriber.” Id. at 605. The Commission asserted that it arrived at this conclusion after examining, through review of comments submitted by subscribers, customer perception of the various services, which the FCC “believefs] to be a major test of functional equivalency.” Id. at 609 (footnote omitted).4 The Commission also pointed to the undisputed fact that the transmission of MTS and WATS calls from end-to-end within the public switched network is essentially identical. Id. at 605. Based on its “like service” finding, the FCC ordered AT&T either to demonstrate the lawfulness of its discriminatory charges or to eliminate them. Id. at 614-15. On July 15, 1980, the Commission released a Memorandum Opinion and Order in American Telephone & Telegraph Co. (WATS), 79 F.C.C.2d 10 (1980) (Like Services Reconsideration), denying petitions for reconsideration of the Like Services Decision. The Commission reaffirmed its position that both WATS services are functionally equivalent to MTS service because they use the same interstate network and “offer the same telephone calling capability from the standpoint of the customer.” Id. at 12.5 The Commission also responded to the charge that its “likeness” finding with re — 246 — spect to WATS and MTS conflicted with its earlier determination in American Telephone & Telegraph Co., 59 F.C.C.2d 671 (1976), recon., 64 F.C.C.2d 538 (1977), that Inward and Outward WATS were not like services. The two inquiries were discrete, the FCC maintains. The earlier ruling occurred in the context of a section 201(b) just and reasonable rate determination.6 There, the Commission made no section ■202(a) “like service” determination. It did not compare WATS and MTS; it found only that “Inward and Outward WATS, as offered by AT&T, were different service classifications” which must be cost-justified and priced independently. 79 F.C.C.2d at 13. II. Court opinions have consistently recognized that the “functional equivalency” test is an appropriate method for determining “likeness” within the meaning of section 202(a).7 American Broadcasting Cos. v. FCC, 663 F.2d 133, 138 (D.C.Cir.1980); Western Union International, Inc. v. FCC, 568 F.2d 1012, 1018 & n.11 (2d Cir. 1977), cert. denied, 436 U.S. 944, 98 S.Ct. 2845, 56 L.Ed.2d 785 (1978); American Trucking Associations v. FCC, 377 F.2d 121, 127, 129 (D.C.Cir.1966), cert. denied, 386 U.S. 943, 87 S.Ct. 973, 17 L.Ed.2d 874 (1967). This test, initially stated and developed by the Commission,8 focuses on whether the services in question are “different in any material functional respect.” American Broadcasting Cos., 663 F.2d at 138; American Trucking Associations, 377 F.2d at 127. “The test looks to the nature of the services offered to determine likeness; the perspective of the customer faced with differing services is often considered a significant factor.” American Broadcasting Cos., 663 F.2d at 139.9 The Commission here, purporting to apply the functional equivalency test, determined that both Outward WATS and Inward WATS are services “like” MTS. In reaching this conclusion, the FCC relied dominantly on its view of customer perception of the three services10 and on transmis — 247 — sion technology.11 The Commission did not separately apply the functional equivalency test to compare Outward WATS and MTS on the one hand, and Inward WATS and MTS on the other. Rather, the FCC, in this proceeding, essentially lumped together Outward and Inward WATS and swiftly declared WATS and MTS functional equivalents. But the failure to attempt distinct comparisons of each WATS service with MTS is not easily reconciled with the Commission’s prior determination that Inward and Outward WATS “are functionally different and ... serve different subscriber communication needs.” American Telephone & Telegraph Co., 59 F.C.C.2d at 685; see supra note 4. And it is far from apparent that users’ perceptions support the FCC’s blending of the two distinct WATS services.12 It may be that the Commission settled for blurred analysis because it was reaching for more than a clearly focused “like service” determination would permit it to achieve. In remanding this proceeding to the Commission, we affirm our prior declarations that the functional equivalency test, with customer perception as a linchpin,13 is an appropriate standard for determining section 202(a) “likeness.” Recognizing that it is the Commission’s responsibility to elaborate the functional equivalency test, we state these few guides for sharpened analysis. First, the Commission should not blend discrete services in its application of the test. Second, the perceptions of users of each service under examination should be evaluated. Finally, alleged differences in the services compared should be considered. The Commission may well conclude, after consideration, that particular differences do not bear on “functional equivalency,” but it should state comprehensively the reasoning upon which it relies to discard a difference as “irrelevant.”14 — 248 — III. Without attempting further suggestion of the inquiry and analysis the Commission might pursue on remand, we note some problematic facets of the opinion concurring in the result. That opinion initially embraces the functional equivalency test, then proceeds to define it virtually out of existence. Despite faint qualifications here and there, the opinion concurring in the result maintains that two services are not “like” unless they are, for all practical purposes, “identical.” We are told, with the aid of Webster’s,' that there will be no “equivalency” unless “two things are ‘identical.’” Concurring op. at 801. But'emphasis on equivalence in derogation of function misses the mark. The focus of the test should be practical, oriented to customers: what function or need do customers perceive to be satisfied by the services under examination? If customers perceive that two services perform the same function, price will govern choice. Sensibly, the functional equivalency test should be allowed to yield a determination that these services are “like,” whether or not they are “identical,”15 and we so hold. In elaborating its notion of the “functional equivalency” test, the opinion concurring in the result tenders a subset analysis as a central element. It suggests that if one service is only a subset of the other, the two are not readily classified as “functionally equivalent,” or “like.” For, “in order to be functionally equivalent, the two services must possess virtually all the same qualities of (and be capable of being employed for the same uses as) the other while neither possesses significant qualities (or uses) the other lacks.” Concurring op. at 804. Applying this analysis to the instant case, the opinion concurring in the result indicates that because WATS service cannot do everything MTS is able to do, neither WATS service can be “like” MTS. Id. at 804-805. The proffered subset analysis turns sharply away from our Circuit’s most recent precedent in point. In American Broadcasting Cos., this court, approving the FCC’s functional equivalency determination, upheld a Commission decision that AT&T’s full- and part-time television broadcast service categories were “like communication service” under section 202(a). Plainly, part-time video transmission service is a subset of full-time service, and the opinion concurring in the result so acknowledges. Concurring op. at 805. Equally beyond debate, a full-time service user could not substitute part-time service and receive the same “package of benefits, rights, restrictions, duties, facilities and services . . . .” See id. at 804. Since the opinion concurring in the result would hold that the word “service” as it is used in section 202(a) means “entire package,”16 and nothing less, and generally describes subsets as unlike the larger package, we find the tendered analysis dissonant with American Broadcasting Cos.17 Our deci — 249 — sion, in contrast, like the one in American Broadcasting Cos., continues genuine approval of the Commission’s “functional equivalency” test and allows for further development and refinement of the Commission’s approach to “like service” determinations. CONCLUSION Because the Commission has not adequately explained why it determined that, in the context of 47 U.S.C. § 202(a), both Outward WATS and Inward WATS provide communication service “like” MTS and, particularly, has not clarified a critical concept it claims to employ — customer perception of functional equivalency — we vacate the orders on review and remand for such further proceedings, consistent with this opinion, as the Commission may wish to pursue. It is so ordered. Footnotes [1] Section 202(a) provides: It shall be unlawful for any common carrier to make any unjust or unreasonable discrimination in charges, practices, classifications, regulations, facilities, or services for or in connection with like communication service, directly or indirectly, by any means or device, or to make or give any undue or unreasonable preference or advantage to any particular person, class of persons, or locality, or to subject any particular person, class of persons, or locality to any undue or unreasonable prejudice or disadvantage. (Emphasis added.) [2] American Tel. & Tel. Co. (WATS), 70 F.C. C.2d 593, 603 (1978) (Like Services Decision). [3] Intrastate WATS service is generally available for subscribers whose intrastate toll calling volumes warrant such subscription. See id. at 595 n.4. [4] After reciting the various service features and operational characteristics proffered by petitioners and intervenors as distinguishing MTS from WATS, the Commission declared that “none of these factors militate against the fact that one service is essentially identical to the other in terms of communications function performed for the subscriber.” Id. at 607 (emphasis added). The FCC therefore concluded that these factors were irrelevant to the 202(a) “likeness determination.” Among the factors the Commission deemed irrelevant were the screening and blocking functions, id. at 608; the unidirectional WATS.access lines, id.; the absence of operator assistance in placing Inward WATS calls, id. at 611; and other special service features of MTS including person-to-person, collect, credit card, third-party billing, and conference calls which an Outward WATS subscriber would continue to receive through regular telephone line service at MTS rates. Id. Although it regarded these features as controlled and arranged by AT&T to segment the telecommunications market for pricing purposes, id. at 605-06, the Commission acknowledged that such features would be relevant in the proper rate-making context. Id. at 604 n.14. See American Tel. & Tel. Co., 59 F.C. C.2d 671, 684-86 (1976), recon., 64 F.C.C.2d 538 (1977) (Commission determined, in context of 47 U.S.C. § 201(b)’s requirement that all charges for communication service be “just and reasonable,” see infra note 6, that Inward and Outward WATS must be priced separately because they provide different communication services, are functionally different, serve different subscriber communication needs, and use the public switched network in significantly different ways). [5] The FCC continued to deem irrelevant factors “totally under the control of AT&T,” which, in the Commission’s view, AT&T used to segment its market, but which did not “reflect fundamental differences in the functions [WATS and MTS] perform for their respective users . . .. ” Id. at 12. See supra note 4. [6] 47 U.S.C. § 201(b) provides in relevant part: All charges, practices, classifications, and regulations for and in connection with such communication service, shall be just and reasonable, and any such charge, practice, classification, or regulation that is unjust or unreasonable is declared to be unlawful: Provided, That communications by wire or radio subject to this chapter may be classified into day, night, repeated, unrepeated, letter, commercial, press, Government, and such other classes as the Commission may decide to be just and reasonable, and different charges may be made for the different classes of communications .... [7] As the opinion concurring in the result points out, the language of section 202(a) was adopted from various portions of the original Interstate Commerce Act, 24 Stat. 379, 379-80 (1887). Additionally, other regulatory statutes, which prohibit a shipper or carrier from unjustly discriminating, have been interpreted to forbid the shipper or carrier from charging different fares or rates for “like service.” See Aloha Airlines, Inc. v. CAB, 598 F.2d 250, 263 (D.C.Cir. 1979) (quoting Group Inclusive Tour-Basing Fares to Hawaii, 54 C.A.B. 434, 453 (1970)) (Federal Aviation Act); North Atlantic Mediterranean Freight Conference — Rates on Household Goods, 11 F.M.C. 202, 213 (1967) (Shipping Act). However, the parties have not cited, nor have we found, any agency or court decision interpreting the “like service” language of regulatory statutes other than the Communications Act in terms of a functional equivalency test. Because this agency-developed, court-approved test apparently has not evolved outside the Communications Act, the legislative history of, and the case law interpreting, other regulatory statutes is of limited value in elaborating the meaning of section 202(a)’s “like communication service” reference. [8] See American Tel. & Tel. Co. (TELPAK), 38 F.C.C. 370, 376 (1964), aff'd sub nom. American Trucking Ass’ns v. FCC, 377 F.2d 121 (D.C.Cir. 1966), cert. denied, 386 U.S. 943, 87 S.Ct. 973, 17 L.Ed.2d 874 (1967). See also American Tel. & Tel. Co. (Hi/Lo), 55 F.C.C.2d 224, 230 (1975), aff’d mem. sub nom. Commodity News Services, Inc. v. FCC, 561 F.2d 1021 (D.C.Cir. 1977). [9] In ■ support of this statement, American Broadcasting Cos. cites the FCC’s Like Services Decision, 70 F.C.C.2d at 609, 614. [10] See, e.g„ 79 F.C.C.2d at 11, 12-13; 70 F.C. C.2d at 609, 614. The FCC reported receiving “extensive comments” from large WATS users but no comments from MTS customers. See 79 F.C.C.2d at 12 n.6. The Commission acknowledged that customer perception is incompletely gauged without “participation of [the] vast body of telephone ratepayers.” Id. [11] See, e.g., 70 F.C.C.2d at 605, 614. It may be an overstatement to assert, as the opinion concurring in the result does, that the Commission’s “focus has been almost exclusively on transmission technology.” Concurring op. at 10 (emphasis in original). See, e.g., Like Services Decision, 70 F.C.C.2d at 609 (“we believe . . . customer perception ... to be a major test of functional equivalency”); Like Services Reconsideration, 79 F.C.C.2d at 12 (“an important indicator of functional equivalency is customer perception”). Indeed, the petitions for reconsideration of the Commission’s Like Services Decision charged that “the Commission erred in relying upon customer perception of functional equivalency as the ‘only’ test for ‘like’ services . . . .” See 79 F.C.C.2d at 11. [12] Underlying the Commission’s discussion of customer perception, it appears, is a notion of the cross-elasticity of demand between WATS services and MTS. But the FCC, in the decisions under review, never makes this explicit. In contrast, prior and subsequent statements of the Commission expressly indicate the importance the FCC attributes to examining cross-elasticity of demand in evaluating the “likeness” of two products or services. See, e.g., Regulatory Policies Concerning Resale and Shared Use of Common Carrier Domestic Public Switched Network Services, 83 F.C.C.2d 167, 175 n.22 (1980) (“By the same product, we are referring to the existence of significant cross-elasticities of demand....”); American Tel. & Tel. Co., Long Lines Department, 67 F.C.C.2d 1134, 1167 (1978) (cross-elasticity of demand is “a useful index of ... similarity”). We note the Commission’s repeated observation that the cross-elasticity between MTS and Outward WATS is “pronounced.” See American Tel. & Tel. Co., 84 F.C.C.2d 158, 179 n.46 (1980) (quoting American Tel. & Tel. Co., 66 F.C.C.2d 9, 31 (1977)); Like Services Decision, 70 F.C.C.2d at 596. Apparently no such determination has ever been made as to the cross-elasticity of Inward WATS and MTS. [13] Examination of cross-elasticity of demand may be a standard means for evaluating customer perception, a method with which the Commission is familiar. See supra note 12. There may be others. We leave to the Commission, in the first instance, the task of identifying the proper method for applying this critical concept, customer perception of functional equivalency. [14] The opinion concurring in the result cites Western Union Int’l Inc. v. FCC, 568 F.2d 1012 (2d Cir. 1977), cert. denied, 436 U.S. 944, 98 S.Ct. 2845, 56 L.Ed.2d 785 (1978), and American Trucking Ass’ns, Inc. v. FCC, 377 F.2d 121 (D.C.Cir.1966), cert. denied, 386 U.S. 943, 87 S.Ct. 973, 17 L.Ed.2d 874 (1967), as support for its position that in this case the Commission arbitrarily characterized as “irrelevant” features that distinguish WATS from MTS. See Concurring op. at 808-809. But only limited mileage can be gained by negative inferences from cases that affirmed the Commission’s determination that the services under examination were “like” within the meaning of section — 248 — 202(a). Neither decision is instructive as to which factor or combination of factors represents a material functional difference. Nor do these cases indicate the degree of functional variance the Commission or courts will countenance and yet pronounce the two services “like.” [15] Cf. American Broadcasting Cos., 663 F.2d at 139 & n. 13. As this court recognized, distinctions between “like” services may be reflected in the prices of those services. Id. at 139 & n. 13; see also supra pp. 4, 7-8 & n.4. However, section 202(a)’s prohibition against “unjust or unreasonable discrimination” requires that such price variations be justified by cost differentials or competitive necessity. American Broadcasting Cos., 663 F.2d at 139; Western Union, 568 F.2d at 1019 n.15. [16] Concurring op. at 804. [17] The opinion concurring in the result attempts to distinguish American Broadcasting Cos. on the ground that “the Commission neither found [the] particular time use restriction [in that case] nor [the] different dedicated facilities to constitute material functional differences.” Concurring op. at 805 (emphasis in original). Curiously, the opinion concurring in the result gives scant weight to the fact that the Commission did not find differences between WATS service and MTS service to be material functional differences. It is hardly apparent why the opinion concurring in the result accepts the time use restrictions in American Broadcasting Cos. as not material, but seems to regard the geographical restrictions in connection with WATS service as ma — 249 — terial. See Concurring op. at 804-805 n.12. Again relying on the FCC, the opinion concurring in the result reports that in American Broadcasting Cos. part- and full-time users “apparently received identical transmission service.” Concurring op. at 802. As this court noted, however, the two services at issue in American Broadcasting Cos. employed different physical facilities. 633 F.2d at 139 n.13.