Would Tennessee's 2011 proposed Uniform Access, Competition and Consumer Fairness Act, which would force intrastate phone switched-access rates down to interstate levels, amount to an unconstitutional confiscatory taking of telecom company property?

Plain-English summary

Senator Beavers asked whether SB 598/HB 574, a 2011 proposal to phase intrastate telephone switched-access charges down to the level of interstate switched-access charges over five years, would amount to an unconstitutional regulatory taking under the Fifth Amendment or the Tennessee Constitution. The bill targeted the fees telecom companies charge each other when one carrier originates or terminates an intrastate long-distance call carried by another.

The AG said no, at least not on its face. The U.S. Supreme Court has long held that rate regulation of utilities is constitutionally permissible if the rates are not confiscatory (FCC v. Florida Power Corp., 480 U.S. 245, 253 (1987); Duquesne Light Co. v. Barasch, 488 U.S. 299, 307 (1989)). The bill ties intrastate access rates to interstate access rates that the same carriers already accept in the federal sphere, so it is hard to argue on the face of the statute that the rates are confiscatory. The bill also has a built-in revenue-recovery mechanism: proposed § 65-5-302(e) would let affected carriers raise retail rates annually to make up lost intrastate access revenue, with no Tennessee Regulatory Authority review of those retail rate increases.

A confiscation claim is generally fact-intensive, requiring proof that the rates do not allow a carrier to recover its costs and earn a reasonable return given its specific transmission lines, equipment, and overhead. The AG declined to perform that as-applied analysis for any specific carrier, instead limiting the opinion to facial review.

Currency note

This opinion was issued in 2011. Subsequent statutory amendments, court decisions, or later AG opinions may have changed the analysis. Treat this page as historical context, not current legal advice. Verify current law before relying on any specific rule, deadline, or remedy mentioned here.

Common questions

What are intrastate switched-access charges?
They are wholesale fees that one telecommunications carrier pays another for routing calls. When a long-distance call begins or ends on a local phone company's network, the long-distance carrier pays the local carrier a switched-access fee. Intrastate access (calls within Tennessee) was at the time of this opinion typically priced higher than the corresponding interstate access (calls crossing state lines), which the FCC capped at a lower level.

What did the bill do?
The proposed Uniform Access, Competition and Consumer Fairness Act would have required carriers, over a five-year phase-in, to charge no more for intrastate switched access than they were allowed to charge for interstate switched access. It also let affected carriers raise retail rates each year without TRA review to recover the lost access revenue.

Does the Fifth Amendment forbid utility rate regulation?
No. The Supreme Court has consistently said rate regulation of utilities is permitted; the constitutional question is only whether the resulting rates are so low they are confiscatory, meaning the regulated entity cannot recover its costs and earn a fair return. Duquesne Light Co. v. Barasch sets the modern framework: the end result of rate regulation, not the particular methodology, drives the constitutional analysis.

Why did the AG decline to give a yes-or-no answer for individual carriers?
Because confiscation is a fact question. Each carrier has different transmission infrastructure, customer mix, and cost structure. Determining whether the new rate cap leaves a particular carrier whole requires a financial analysis of that carrier. The AG can issue facial-validity opinions but does not adjudicate as-applied financial fact patterns.

What does the retail-rate-recovery mechanism do constitutionally?
It strengthens the bill's facial defense. By giving carriers a path to raise retail rates outside TRA review to recover lost access revenue, the bill provides a way for carriers to remain whole. Whether that path actually leaves a particular carrier whole is again an as-applied question, but the existence of the mechanism on the face of the statute helps rebut a takings challenge.

Background and statutory framework

Tennessee delegates utility regulation to the Tennessee Regulatory Authority (TRA) under Tenn. Code Ann. §§ 65-4-101 et seq. Ratemaking authority sits at Tenn. Code Ann. §§ 65-5-101 et seq., with the rate-setting standard at § 65-5-101(a) (just and reasonable rates). Telecommunications utilities can operate under the traditional contested-case ratemaking at § 65-5-109(a)-(k), or, post-deregulation, under market regulation at § 65-5-109(l)-(t). SB 598/HB 574 would have layered a legislative price ceiling on top of that framework for one specific service, intrastate switched access.

The federal-takings framework for utility rate regulation has been remarkably stable since Duquesne Light Co. v. Barasch, 488 U.S. 299 (1989). The state may pick any reasonable ratemaking methodology so long as the bottom line is not confiscatory. FCC v. Florida Power Corp., 480 U.S. 245 (1987), addressed the analogous question of mandatory pole-attachment rates: the Court held that compelled access was not a per se taking and that the rates were not confiscatory on the record. The Tennessee Takings Clause at Art. I, § 21 has historically been read in parallel with the federal Takings Clause for ratemaking analysis.

Citations

• Tenn. Code Ann. §§ 65-4-101, et seq. (TRA jurisdiction)
• Tenn. Code Ann. §§ 65-5-101, et seq. (ratemaking)
• Tenn. Code Ann. § 65-5-109 (telecommunications price regulation)
• U.S. Const. amend. V (Takings Clause)
• Tenn. Const. art. I, § 21 (Tennessee Takings Clause)
• FCC v. Florida Power Corp., 480 U.S. 245 (1987)
• Duquesne Light Co. v. Barasch, 488 U.S. 299 (1989)

Source

• Landing page: https://www.tn.gov/attorneygeneral/opinions.html
• Original PDF: https://www.tn.gov/content/dam/tn/attorneygeneral/documents/ops/2011/op11-030.pdf

Original opinion text

Constitutionality of limitation of intrastate telephone switched access charges

QUESTION

Does the proposed "Uniform Access, Competition and Consumer Fairness Act of 2011," filed as Senate Bill 598/House Bill 574, violate the provisions of the state or federal constitutions as an unlawful regulatory taking of property by the state without just compensation?

OPINION

Based on a facial review of Senate Bill 598/House Bill 574, as amended, nothing in the bill leads to the conclusion that the bill is an unconstitutional confiscatory regulation of private utilities. Any "as-applied" determination of the effect that the legislation will have on any covered entity would necessarily entail a factual analysis for each affected entity and is beyond the scope of this opinion.

ANALYSIS

Your request for an Opinion from this Office was accompanied by the text of proposed SB 598/HB574, as amended, and your question will be analyzed in that context. SB 598/HB574, which is titled as the "Uniform Access, Competition and Consumer Fairness Act of 2011," introduces a new regulatory scheme for the fees that telecommunication utilities may charge for access to switching and related services for the origination or termination of intrastate toll telephone calls and related services generated by other telecommunication utility service providers. The bill as currently amended proposes to phase-in over a period of five years the requirement that entities offering switched access service in Tennessee charge no more for intrastate calls and services than they currently are allowed to charge for interstate calls and services.

A brief overview of the basis for Tennessee's regulation of public utilities is helpful in placing the new regulation proposed by SB 598/HB574 in context. The regulation of public utilities in Tennessee, including telephone utilities, is delegated to the Tennessee Regulatory Authority ("TRA") by statute at Tenn. Code Ann. § 65-4-101, et seq. The powers of the TRA extend only to public utilities that furnish their product within the state. See Tenn. Code Ann. § 64-4-103. The power of the TRA to set rates for public utilities within its jurisdiction and the procedures it must follow are found at Tenn. Code Ann. § 65-5-101, et seq. The TRA has the power to fix just and reasonable rates. See Tenn. Code Ann. § 65-5-101(a). Specifically, the price regulation plan for telecommunication utilities is found at Tenn. Code Ann. § 65-5-109.

The more traditional price regulation plan, found at Tenn. Code Ann. § 65-5-109(a)-(k) provides the process for covered telecommunication utilities to file with the TRA proposed rates and for the TRA to evaluate those proposed rates and convene a contested case hearing to evaluate evidence on the justness and reasonableness of the proposed rates. With the advent of more competition in the telecommunications industry, a second method for price regulation of telecommunication companies was added. Tenn. Code Ann. § 65-5-109(l)-(t) provides the mechanism for telecommunication utilities to opt to operate under market regulation with the forces of the market driving their costs, prices and returns. SB 598/HB574 proposes to place a legislative limit on one aspect of the services for which telecommunication utilities may charge, namely the switched access service charges for intrastate telephone calls and services.

The Fifth Amendment to the United States Constitution ("...nor shall private property be taken for public use, without just compensation.") and Article I, § 21 of the Tennessee Constitution ("[t]hat no man's particular services shall be demanded, or property taken, or applied to public use, without the consent of his representatives, or without just compensation being made therefore.") provide protections against the government taking property rights of its citizens for a public use without providing just compensation in return.

These principles have been applied to the context of regulation of public utilities and the United States Supreme Court has determined the "regulation of rates chargeable from the employment of private property devoted to public uses is constitutionally permissible." Federal Communication Commission v. Florida Power Corporation, 480 U.S. 245, 253 (1987). As long as the rates charged are not so unjust as to be confiscatory, the Fifth Amendment does not bar their imposition. Duquesne Light Company v. Barasch, 488 U.S. 299, 307 (1989).

An examination of SB 598/HB574 to determine if the proposed limitation of the charges for intrastate switched access is confiscatory necessarily begins with an examination of whether a facial reading of the proposed statute leads to the conclusion that it would be unconstitutional. Such a review reveals nothing on the face of SB 598/HB574 that would necessarily lead to the conclusion that the rates it allows are confiscatory and that it is unconstitutional. Specifically, it ties the rates for intrastate switched access to the same rate currently allowed for interstate switched access. The interstate rate, which is not under the jurisdiction of the TRA, cannot be confiscatory on its face as it is the rate that affected telecommunication utilities currently charge for interstate switched access. Whether it is confiscatory in practice requires the specific company analysis discussed below.

Additionally, the legislation in its proposed Section 65-5-302(e) provides a mechanism for affected utilities to recoup any revenue lost because of the imposition of the limit on intrastate switched access charges. It allows any entity that must transition its rates as called for in the legislation to unilaterally raise its retail rates each year to recover any revenue lost resulting from the revision of the intrastate switched access rates. This changing of retail rates is not subject to any review or regulation by the TRA. Thus, the proposed bill provides a way for affected entities to have the opportunity to be made whole. Again, whether it will actually provide relief from the limitation of rates required by the legislation requires a specific company analysis.

SB 598/HB574 sets the intrastate switched access rate at the same level as that currently allowed for interstate switched access. It also provides a mechanism for affected telecommunication utilities to recoup any revenue lost as a result of the phasing in of those restrictions. Accordingly, nothing on the face of SB 598/HB574 leads to the conclusion that its implementation will impose an unconstitutional confiscatory setting of utility rates.

Any further analysis of the constitutionality of SB 598/HB574 requires a review of the actual effect the proposed legislation would have on the utilities covered by the bill. This would entail determining the costs each utility incurs in providing intrastate switched access services and whether the terms of the legislation allow each utility to recover those costs. Because each telecommunication utility that provides intrastate switched access services is unique and has its own transmission lines, equipment, overhead and other costs associated with those services, any such analysis of the effect of the implementation of SB 598/HB574 would necessarily entail a case by case review of each affected utility. Because the ultimate outcome of any such challenge would depend on the facts of each individual review, this Office cannot give an opinion on the outcome of any such challenges to the constitutionality of SB 598/HB574.

In summary, regulation of public utilities by government is constitutionally allowable as long as the rates imposed are not confiscatory. Nothing on the face of SB 598/HB574 as amended leads to the conclusion that it is an unconstitutional confiscatory regulation of private utilities. Any determination of the actual effect that the legislation will have on any covered entity will necessarily entail a factual analysis for each affected entity.

ROBERT E. COOPER, JR.
Attorney General and Reporter

CHARLES L. LEWIS
Deputy Attorney General

C. SCOTT JACKSON
Senior Counsel

Requested by:
The Honorable Mae Beavers
State Senator
7 Legislative Plaza
Nashville, TN 37243-0223