oversight

Establishing a Proper Fee Schedule Under the Independent Offices Appropriation Act, 1952

Published by the Government Accountability Office on 1977-05-06.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

     REPORT OF THE                                                   ~~~~~~~~
     COMPTROLLER GENERAL
7    OF THE UNITED STATES’
                                                                 ~~ll~illllclilliiliillldlll~l~
i4                                                                    LM102135




     Establishing  A Proper Fee Schedule
     Under The Independent    Offices
     Appropriation  Act, 1952
     Federal       Communications                  Commission

     GAO believes that sufficient      guidance is con-
     tained    in recent United       States Court     of
     Appeals decisions from which a proper fee
     schedule can be established for services pro-
     vided by Government         agencies. As a result,
     contrary     to the Federal      Communications
     Commission’s      position,   GAO     believes the
     Commission     can make a good-faith effort to
.    recalculate its fee schedules and refund only
     the excess portion of the $164 million         col-
     lected in fees from 1970 through 1976.




     CED-77-70
                                                                MAY 6, 1977
                        COMPTROLLER     GENERAL     OF      THE       UNITED   STATES
                                      WASHINGTON.    D.C.         20548




    B-145252



    The Honorable Ernest F. Hollings
    Chairman, Subcommittee on
.
      Communications
    Committee on Commerce, Science
      and Transportation
    United States Senate
    The Honorable Lionel Van Deerlin
    Chairman, Subcommittee on
      Communications
    Committee on Interstate  and
      Foreign Commerce
    House of Representatives
            Pursuant to your joint          request of Piarch 2, 1977, we
    reviewed the Federal Communications              Commission's   actions
    since the U.S. Court of Appeals for the District                of
    Columbia Circuit         ordered the Commission on December 16,
    1976, to recalculate          its 1970 and 1975 fee schedules.
    The fee schedules were established              under standards    of the
    Independent       Offices    Appropriation     Act, 1952.    The court
    further     ordered the Commission to refund money which it
    collected      that exceeded the permissible         standard.
            As agreed with your office,    we are specifically
    reporting     on (1) actions   the Commission has taken since
    the December 1976 court rulings       and (2) guidance contained
    in the court cases from which the Commission can attempt
c
    to recalculate      and refund fees.   Although the court deci-
    sions had direct      impact only on the Commission's       fee
    schedule,     we have also provided   our observations      on the
    possible     impact on other Government entities       which
    collect    fees pursuant    to the 1952 act.
           As your office    requested,   we have not obtained                          formal
    agency comments.      However, we discussed    the matters
    presented   with agency officials      and have considered                          their
    comments in the report.        As you know, section    236 of                         the
    Legislative    Reorganization     Act of 1970 requires   the                        head of
B-145252



a Federal      agency to submit       a written      statement     on actions
taken on our recommendations            to the House Committee            on
Government      Operations      and the Senate Committee           on Govern-
mental Affairs        not later    than 60 days after           the date of
the report      and to the House and Senate Committees                 on
Appropriations        with the agency’s        first    request    for appro-
priations      made more than 60 days after             the date of the
report.       We will    be in touch with your off ices in the near
future     to arrange     for release     of the report         to set in
motion     the requirements       of section       236.




                                        Comptroller   General
                                        of the United   States




                                        2
ESTABLISHING A PROPER FEE SCHEDULE UNDER THE
INDEPENDENT OFFICES APPROPRIATION ACT, 1952
FEDERAL COMMUNICATIONS COMMISSION

          Report         to Chairmen,           Senate       Subcommittee             on Communications,               Committee

on Commerce,              Science         and Transportation                 and House Subcommittee                   on Commun-

ications,          Committee             on Interstate
                                                  and Foreign Commerce pursuant   to their
                                                    I
joint       request.          The report concerns-the   Federal Communications   Commission's
                                                  h
actions       since        the U.S. Court of Appeals for the District     of Columbia Cir-

cuit      ordered         the Commission              on December 16, 1976,                   to recalculate              its        1970

and 1975 fee schedules.                         The fee schedules                 were established                under     the

standards          of the         Independent            Offices         Appropriation          Act,      1952.       The court

further       ordered         the Commission               to refund          money which          it     collected         that

exceeded        the       permissible           standard.

          We reported             that      sufficient        guidance            is contained           in recent        U.S.

Court       of Appeals            decisions          from which            a proper      fee schedule             can be es-

tablished          and that          the     Commission            could     make a good-faith               effort        to re-

calculate          its     fee schedule              and refund            only    the excess           portion       of the

$164 million              in fees         collected         from     1970 through             1976.

          We noted         that      the     court       decisions          are    relevant       to other         regulatory

agencies        which        collect         fees     under        the     Independent        Offices        Appropriation

Act,      1952.

          We also         suggested          that     possible           Congressional          action        could       take       the

 form     of revamping             the      Independent            Offices        Appropriation            Act,    1952,        or

 enacting         new legislation                in lieu       of the act.
REGULATORYACTIVITIES

   4A   proper     fee schedule        under    the  Independent          Offices
                                                                 --.___._
       Appropriation          Act, 1952 can be establish&d.
                _--.-.
   i I ..---=-'        --*                            r----
                                                   j-------^---j
                         ‘"-,    -.___ - __/-----'
     I


     I
     I                                                        ESTABLISHING A PROPER FEE
     I   REPORT OF THE COMPTROLLER
     I   GENERAL OF THE UNITED STATES                         SCHEDULE UNDER THE
     I                                                        INDEPENDENT OFFICES
     I
                                                              APPROPRIATION ACT, 1952
                                                              Federal   Communications
     I                                                        Commission
     I
     I
         DIGEST
         -----a
     I
.s


     I
                        GAO believes         that sufficient       guidance      is
     I


     I
                        contained      in recent     United     States     Court of
     I
                        Appeals     decisions     from which a proper            fee
                        schedule     can be established.            As a result,
I.
     I




                        contrary     to the Federal          Communications        Com-
                        mission's      position,     GAO believes        the Com-
                        mission     can make a good faith           effort     to
                        recalculate        its fee schedules         and refund
                        only the excess portion              of the $164 million
                        in fees collected         from 1970 through          1976.
                        In March 1964, the Commission           established
                        its first      schedule   of filing   fees,     under
                        standards      set by the Independent       Offices
                        Appropriation       Act, 1952, for applicants
                        seeking     the authority    to operate     radio
                        stations,      for example.
                        In response     to congressional        and executive
                        branch urging       to adopt higher      fees,     the
                        Commission    in August 1970 amended its fee
                        schedule   to recover       its total    operating
                        costs.    The Commission         again revised       its
                        fee schedule      in March 1975 after          the U.S.
                        Supreme Court in 1974 imposed certain                  limi-
                        tations   on fee collections;           Later,     the fee
                        schedules    were again challenged;            and, on
                        December 16, 1976, the U.S. Court of Appeals
                        for the District        of Columbia     Circuit      ordered
                        the Commission        to recalculate     the 1970 and
                        1975 fee schedules         and refund    the excess
                        money which the Commission            had collected.
                        (See p. 2.)
                         The Commission     interpreted   the court      deci-
                         sions   to require     that fees not only be based
                         on costs   but also on the "value        conferred"    upon
                         the people or organizations        paying    the fees.




     I
     I   Jear Sheet     Upon removal,   the report
         cover date’should   be noted   hereon.                                           CED-77-70
     I
     I
     I
            The Commission      stated    that,  in any fee
            proceeding,      it has not been able to de-
            termine     the value    that the Commission's
            actions     have conferred      upon these people.
            (See p. 6.)
            The Commission,         therefore,       on December 22,
            1976, notified         both House and Senate-leg-
            islative      and appropriations          committees     that
-   I
            it was issuing         an order     suspending     all fee
            collections,       effective       January    1, 1977.      In
            addition,      the Commission         formed a fee refund
.   i       task force       to develop      plans covering       options
        _   on refunding       of fees collected          from 1970
            through      December 31, 1976.           (See p. 7.)
            GAO does not believe           that the Court of
            Appeals      requires     the Commission        to measure
            separately       the "value      conferred"       upon the
            people paying         the fee.      Instead,      based upon
            interpretation          of the court      decisions,     the
            Commission       can establish        a proper     fee schedule
            based solely         upon cost.       (See p. 9.)
            Accordingly,        the Commission  should  implement
            a new fee      schedule   and, using the methods
            developed      to implement    the new fee schedule,
            recalculate       the 1970 and 1975 fee schedules
            and refund       any excess fees collected.
            POSSIBLE IMPACT ON
            OTHER AGENCIES -
                                                   ,
            Although    the Court of Appeals'            decisions
            only immediately         and directly      affect     the
            Commission's      collection        of fees,    the de-
I
    I       cisions   are revelant        to other     regulatory
            agencies    which collect         fees under the Inde-
            pendent   Offices      Appropriation       Act, 1952.
            Because of time constraints,          GAO did not eval-
            uate actions    taken by other      Federal   agencies,
            but GAO believes       that the Commission's      experi-
            ences clearly     indicate    that user charges      are
            susceptible   to challenge       in the courts.      (See
    I       p. 16.)




                                          ii
    I

    I




                     POSSIBLE CONGRESSIONAL
                                         -
                     ACTION
    I

    I                Rather than allowing              the extent         of cost re-
                     covery     under the Independent                Offices       Appro-
                     priation     Act, 1952 be resolved                 through
                     repeated      litigation,         the Congress may wish
                     to provide         additional       legislative         guidance.
                     If action        is taken in this direction,                   how-
                     ever,    it should         not be pursued          at the exclu-
                     sion of the Commission's                 making a good-faith
                     attempt     to comply with the orders                   of the
.   I                Court of Appeals.             Congressional            action     could
                     take the form of revamping                   the Independent
                     Offices     Appropriation           Act, 1952, or enacting
                     new legislation            in lieu-of        the act.l/
    I

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r

    I                &/If     the Congress     desires    to revamp the
    I
    I
                         Independent     Offices     Appropriation          Act, 1952,
    I                    or enact new legislation           in lieu       of the act,
    I                    then it should       be mindful      that a distinction
    I
    I                    exists    between enacting       legislation          assess-
    I                    ing a tax and legislation            imposing       a fee.
    I
    I                    The Supreme Court in National               Cable Television
                         Association     v. United     States,       indicated
    1
    I
                         that the Congress        has the Constitutional              au-
    I                    thority     to enact legislation          that assesses
    I
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                         both a tax and a fee.
    I
    I
    I   Tear Sheet
    I                                                  iii
    I
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                          Contents    --
                                                          Page
                                                          --
DIGEST                                                      i

CHAPTER
   1       INTRODUCTION                                     1
               Authorizing    legislation    and early
                  fee schedules
                Supreme Court cases of      1974
               U.S. Court of Appeals
               Scope
   2       FCC'S REACTION TO THE COURT OF APPEALS
             DECISIONS                                      5
                Position  adopted in joint
                  memorandum                                5
                FCC's task force  for fee refunds           7
                Appeal to the Supreme Court                 8

           CRITERIA PROVIDED TO FCC BY THE
             U.S. COURT OF APPEALS FOR THE
             DISTRICT OF COLUMBIA CIRCUIT                   9
                Recipient     classes                      10
                Cost basis                                 10
                Apportionment       of costs               11
   4       CONCLUSIONS                                     14
               Possible  impa.ct on other    agencies--
                 our observations                          16
               Recommendation     to the Chairman,
                 Federal   Communications    Commission    17
               Possible  congressional    action           17

APPENDIX
       I   Analysis    of four December 16,    1976,
             Court    of Appeals decisions                 18
  II       Letter  dated March 2, 1977, from
              the Chairmen of the Senate and
              House Subcommittees on Communications        35
                             ABBREVIATIONS
FCC    Federal    Communications            Commission
GAO    General    Accounting       Office
IOAA   Independent      Offices      Appropriation           Act,   1952
NCTA   National      Cable    Television       Association
NRC    Nuclear    Regulatory       Commission
                                         CHAPTER 1
                                      INTRODUCTION

        The Communications         Act of 1934 established          the Federal'
Communications      Commission        (FCC) as an independent          agency.
FCC regulates     interstate         and foreign     communications      to make
available    a rapid,     efficient,       nationwide    and worldwide
wire and radio-communications              service.
       FCC activities          are    divided        into   four    major    fields:
       1.    Broadcast:        television,          standard        radio   broadcast,
             frequency      modulation          broadcast,         and related     aux-
             iliary     services
       2.     Common carrier:               telephone,  telegraph,     and sub-
              marine   cable--       both      wire and radio    and interstate
              and foreign
       3.     Safety   and special    services:               marine,       aeronauti-
              cal,   public safety,    amateur,              disaster,       industrial,
              and land transportation
        4.    Cable     television
        In carrying       out the activities              in each of these fields
FCC (1)      licenses      radio,      television,        and related         services,
(2) licenses        safety      and special         radio     services,       (3) perrorms
inspections        of radio       stations,        and (4) administers             radio     op-
erator    examinations.            Also,      for   the   common      carrier      services,
FCC regulates         the rates         and practices         of telephone,          tele-
graph,     and cable companies              and approves         or disapproves
proposed       mergers, and acquisitions                of properties         and exten-
sions and reductions              in service.           In March 1964 FCC estab-
lished     its first        schedule       of filing       fees for applicants
 seeking     operating       authorities          or approvals        of other       proposed
actions.
         The fee schedule     was revised    in August   1970 and again
 in March 1975 after       the Supreme Court in 1974 imposed cer-
 tain limitations       on fee collections.       Subsequently,    the fee
 schedules     were again challenged;       and on December 16, 1976,
 the U.S. Court of Appeals         for the District     of Columbia
 Circuit    ordered   the FCC to recalculate        the 1970 and 1975
 fee schedules      and refund   any excess fees.       On January    1,
 1977, FCC suspended       the collection      of all fees.




                                                 1
    AUTHORIZING LEGISLATION              AND
    EARLY FEE SCHEDULES
            The Independent           Offices    Appropriation         Act,   1952,
    (IOAA) (31 U.S.C.            483a) provides        FCC and other        Federal
    agencies      with the       authority      to prescribe       a fee, charge,       or
    price     for services        the agency provides            to or for any person
    (including         groups,    associations,        organizations,         partner-
    ships,      corporations,         or businesses)        in which the fee is de-
.   termined       to be fair       and equitable        taking     into consideration
    direct      and indirect        cost to the Government,             value    to the
    recipient,         public    policy     or interest       served,     and other
    pertinent        facts.
              In 1959 the Bureau of the Budget l/ formulated                       Circu-
    lar A-25 which described                 general      policTes    for the executive
    branch concerning               the charges      to be made against       recipients
    of certain         Government        services      and property.       The circular
    states       that a reasonable            charge should be made to each
     identifiable           recipient     for a measurable         unit   or amount of
    Government         service        or property      from which he derives         a
    special        benefit.
             FCC first     established       fee schedules      pursuant      to the
    IOAA in 1964.          These schedules          set nominal     charges     for
    filing     with FCC that produced             revenue   equivalent      to
    approximately        25 percent        of its annual appropriation.              In
    1970, in response           to congressional         and executive      branch urg-
    ing to adopt higher             fees to make FCC more self-sustaining,
    FCC amended its fee schedule                to recoup its total         operating
    costs.      For the first          time this     fee schedule      imposed filing
    fees and an annual            fee of 30 cents per subscriber              on cable
    television       operators.
    SUPREME COURT CASES OF 1974
            The annual   fee assessed       against    members of the cable
    industry    was struck     down by the United        States  Supreme Court
    on March 4, 1974, in National            Cable Television     Association
    v. United    States    (NCTA v. U.S.)       415 U.S. 336 (1974).        That
    case and a companioncase           decided      the same day, Federal     Power
    Commission    v. New England Power Co. (New England Power) 415
    U.S. 345 (1974),       established      standards    which agencies     must
    meet to charge fees under the IOAA.




    A/ On July 1, 1970, the Bureau of the Budget                       became     part      of
       the Office of Management and Budget.

                                                 2
             In NCTA v. U.S. the Court found that FCC assessment
    of 30 cents per subscriber              was calculated          to reimburse        the
    total      cost (direct     and indirect)          of regulating        the cable
    television        industry,    regardless       of whether        each individual
    operator       had received      any "special        benefit"       from that regu-
    lation.        The Court held that          IOAA intended         fees to be based
    on "value       to the recipient"         and not on "public            policy  or
    interest       served or other       pertinent       facts;"      therefore,     it
    determined        that FCC's failure         to use this measure made the
    30 cent assessment          a tax, which the agency had no power to
    levy.       The Court sent the case back to FCC to reappraise                          the
    annual      fee imposed on the cable             industry     to make the fee
    consistent        with the Court's        decision.
            In the New England Power case, the Court further                  de-
    clared    that the "special         benefit"     concept   requires  some
    "nexus"     or link    between the agency and the person assessed
    a fee other      than the fact        that the agency regulates        the
    industry     or the agency adopts            some practice    that generally
    benefits      the entire    industry.         The Court held that:
           "no charge should        be made for services   rendered,
           'when the identification        of the ultimate    benefi-
           ciary     is obscure   and the service    can be primarily
           considered      as benefitting    broadly  the general
           public."'
    The cases constitute   the only Supreme Court interpretations
    of the IOAA, and taken together   with the statute    they set
    the standard  to measure the FCC fees.
          After   the Supreme Court invalidated               the 1970 annual       fee
    assessed    against     members of the cable television               industry,
    FCC suspended       annual  fee collections         for cable television
    systems stating       that  the appropriate        annual      fee for calendar
    year 1973 would be published           after    further      proceedings.       FCC
.   also ordered      that all cable television            annual     fees ($4.2 mil-
    lion)   which had been collected          pursuant      to the 1970 schedule
    be refunded.        On January  15, 1975, FCC adopted               a revised   fee
    schedule    which became effective           on March 1, 1975.
    U.S.    COURT OF APPEALS
            The 1970 fee schedule        and the 1975 schedule                were chal-
    lenged,     and on December 16, 1976, the U.S. Court                      of Appeals
    for the District        of Columbia    Circuit       ordered   FCC        to recalcu-
    late    the 1970 and 1975 fee schedules              and to refund           any ex-
    cess fees.        The Court of Appeals        directed      FCC to        (1) clarify
    the justification         for all of its fees,          (2) explain          the basis
     for the fees,       (3) recalculate    the fees accordingly,                  and


                                                  3
    (4) refund    any excessive      amounts collected          under the 1970
    and 1975 fee schedules.          In this     regard,     the court       noted
    specifically     that FCC should      retain     the maximum portion           of
    the fees collected       that would be permissible             under the
    principles    announced     in the NCTA ;. U.S. and --         New England
    Power cases and under the statute.               Shortly     thereafter,
    FCC announced      it was suspending       the collection        of all fees
    effective    January   1, 1977.
.   SCOPE
             We made our review        at FCC headquarters     in Washington,
    D.C.       We reviewed   pertinent       legislation,   FCC documents    and
    reports,      and applicable       court    decisions  and interviewed    FCC
    officials.
            Because of time constraints,        we did not evalutate
    actions     taken by other   Federal    agencies    which assess fees
    under the IOAA.       We have,   however,    provided    our observa-
    tions    on the possible    impact   the court     and FCC actions    may
    have on these agencies.




                                               4
                                            CHAPTER- 2

                                       FCC'S REACTION
                         TO THE COURT OF APPEALS DECISIONS

             On December 20, 1976, 4 days after                   the Court of
    Appeals       for the District       of Columbia         Circuit        ordered     FCC
    to recalculate         its fees,     FCC's General          Counsel        and Execu-
    tive     Director    in a joint      memorandum to the FCC Commis-
    sioners       noted that   it would be extremely                difficult       for
    FCC to comply with the court                order.       The memorandum fur-
    ther noted that FCC should              stop collecting              fees and should
    refund      those fees collected          from 1970 through               1976.     The
    total     fees collected       during     this     period    was about $164
    million.         The total   collected       by each FCC bureau or office
    is shown in the schedule             below.
                                                  .
                      Bureau/office                             Fee collections
                                                                   (millions)
             Safety    and Special     Radio
                Services     Bureau                                   $ 70.6
             Broadcast     Bureau                                        47.5
             Common Carrier       Bureau                                 31.9
             Field    Operations    Bureau                                9.4
             Office    of Chief Engineer                                  4.4
             Cable Television       Bureau                             --A 3
                                                                      $164.1


.
            In response     to the joint      memorandum the FCC Chairman,               on
    December 22, 1976, established              a task force     to develop        plans
    covering     options    on refunding      fees collected       since     1970.
.   The task force members, however,              appear to have been uncer-
    tain as to the purpose          and direction      of their      effort.       In our
    opinion,     the task force      was little      more than an informal
    structure      to assess the administrative           problems      of refunding
    the fees collected.          The task force made no concerted                attempt
    to recalculate       fees based on the court’s           decisions.
    POSITION ADOPTED IN
    JOINT MEMORANDUM
          In responding          to the court’s  decisions,       the           joint       mem-
    orandum noted that           FCC faces an extremely     difficult                   task in

                                                  5
    revising      its fee      schedules.          Specifically,           it noted diffi-
    culty    in   applying      the court's         standards         in   two areas.
            11* * *First,         the allocation            of costs to the small-
           est practical            unit when read in conjunction                     with
           the statement            that     'we expect       this    unit will         be
           classes       of carriers          or applicants          or grantees          or
           services       which the Commission                has already         singled
           out for separate              treatment        for its 1975 schedule,'
c          would require            a comprehensive           cost accounting             sys-
            tem.     This system would,               presumably,        allow      us to
            single    out those classes               of licensees        for which
          'we propose          fees and build           up the expenses           of our
           programs        for these appropriate                classes      at the
            smallest       practical        unit of cost.           We do not have
    I       such a system today,                and we have no need to adopt
           one other         than for the purpose               of calculating               .
            fees.     Cost accounting              systems are obviously               wide-
            spread     in manufacturing             industries        where a complete
            accurate       cost total         of each product          must be known
            if a profitable            price     is to be established.                Out-
            side of the fee program,                  the Commission's            finan-
            cial    management program does not face this                           question.
            If the Commission              wished to adopt a cost accounting
            system it could probably                  implement       one, with the
            assistance         of several        cost accountants,             within      12
            to 24 months.,            The cost of implementation,                   how-
            ever,    would probably             be several        hundred      thousand
           dollars,        and the Commission's               annual accounting
            costs would thereafter                 be increased.          Moreover,
            even if we could establish                    a legal     schedule        for
            future     fees,      we do not have the necessary                    account-
            ing information            which would allow             us to go back and
            extract      cost accounting            data for past years.                  There-
            fore we are unable               to comply with the court's                   sug-
            gestion      that we recompute              the fees collected              under
.           the 1970 and 1975 schedules                     and refund       that portion
            not lawfully          collected."
           "* * *The second major difficulty               lies      in the con-
           cept that the fees must be calculated                   to return      not
           only the cost basis,              but also must reasonably         re-
           flect      the costs of the services         performed         and the
           value conferred           upon the payor.     We have nz           to
           this     point     in any fee proceeding,       been able to
           determine       the value that our actions            conferred       upon
           the payor.           Nor do we have any method of separat-
            ing out expenses           incurred   which benefit        an inde-
           pendent       public    interest     as the court     requires.
           We believe         that these are subjects        which can be
           litigated,         under these guidelines,         indefinitely."    .

                                                     6
       Thus, with this       as background,       action      was recommended
in the joint     memorandum which would minimize                  further        impact
on FCC's workload       and the chance for further                litigation.
To accomplish     this,    recommendations        were made to (1) end
the collection      of fees,     (2) refund     in full       the fees collected
under the 1970 and 1975 fee schedules,                 (3) consult            with all
FCC bureaus     and offices     to establish       guidelines           for a refund
program,     and (4) make no appeal.           Specifically,            it was noted
that if FCC is to continue           to collect      fees,      the Congress          will
have to pass a new statute          which either        sets forth            the spe-
cific    fees to be collected       or establishes           a method which will
not require     FCC to "unscramble        eggs."
FCC'S    TASK FORCE FOR FEE REFUNDS
        In response    to the recommendations         of the joint     memor-
andum, FCC's Chairman,        on December 22, 1976, notified             both
House and Senate legislative           and appropriations       committees
that FCC was issuing        an order    suspending      all fee collections,
effective     January    1, 1977.    In addition,      the Chairman      noted
that FCC had formed a fee refund            task force      to develop     plans
covering     FCC's options    on refunding      of fees collected        from
1970 through      December 31, 1976.
         The task force,    which consisted      of eight  members, was *
chaired      by the Chief   of the Financial      Management Division.
The members represented         each of FCC's bureaus      and several
offices.       The task force's     only meeting    was on December 22,
1976, when members were given copies            of the joint     memoran-
dum as policy      guidance    and directed    to provide    data on the
administrative       impact of the refund.
        We concluded        from our discussion            with task force
members,       that uncertainty        existed       as to the purpose          and
direction        of the task force's          efforts.        Some members felt
that the only charge given them was to determine                            the ad-
ministrative         problems     associated       with a complete          fee refund.
In this      regard,     a complete      refund      could    include     some dollar
cutoff     which would ease the administrative                     problems    of the
bureau or office.             Other members told           us that the bureaus
were welcome to comment on the possiblity                        of recalculating
fees based on the court's              decision.
      On February    2, 1977, the responses        from task force
members were incorporated        into a second joint        memorandum
from FCC's General     Counsel     and Executive     Director    to the
FCC Commissioners.      It was noted that no purpose           would be
served by attempting      to modify     the schedule     of fees to com-
ply with the court     decisions      and that FCC should      refund    all
fees of more than $5 collected          since August 1, 1970.         This
course of action    was cited      not only because it would be


                                             7
substantially         simpler   from an administrative       standpoint      but
also because FCC did not have adequate                data to recalculate
partial      refunds.       However, according    to task force      members,
no concerted        attempt    was made to recalculate       partial    refunds.
        One task force     member, however,      made an attempt       to re-
calculate       the costs  for his bureau and apply these costs             to
the 1970 and 1975 fee schedules.            Officials       of that bureau
informed      us that although    the calculations         were rough,   they
could be refined        and that portions     of the 1970 and all but
one of the 1975 fees could be lawfully               retained    under the
court     decisions.
       Other task force    members told         us that although    no
attempt    was made to recalculate        their      fees, by making assump-
tions   and reconstructing     procedures        in effect   in 1970 through
1976 they could possibly       recalculate         the 1970 and 1975 fee
schedules.
APPEAL TO THE SUPREME COURT
       After    the Court of Appeals      rendered     its decisions      on
December 16, 1976,        the Federal    Government      had until   March     16,
1977, to appeal       the decisions    to the Supreme Court.           To  al-
low more time to consider          the decisions,      the Government,
through      the Department   of Justice     requested     an extension      of
this   date.
      On March 8, 1977, the Supreme Court granted              the
Government    an extension    through   May 15, 1977.       On April    14,
1977, FCC notified       the Department   of Justice     that Supreme
Court review    is in all likelihood      unobtainable      primarily
because the Government       would not be able to demonstrate
legal  error.     As of May 3, 1977, the'Department          of Justice
had not decided     whether   to appeal   the decisions.
                                         CHAPTER 3
                              CRITERIA     PROVIDED TO FCC
                           BY THE U.S.        COURT OF APPEALS
                    FOR THE DISTRICT          OF COLUMBIA CIRCUIT

         In its four decisions          dated December 16, 1976, the
Court of Appeals         did not attempt         to delineate       how FCC, in
reviewing       its 1970 and 1975 fee schedules,               must act to com-
ply with the requirements              of the Independent          Offices    Appro-
priation      Act,    1952, as interpreted          by the Supreme Court           in
1974.      The reason cited         for the general        rather      than specific
comments was that the Government                 presented      insufficient
records      to the court       making it impossible          to determine      the
dollar     or precise      percentage      range for a proper            fee.  Accord-
in91yI     the court      attempted      to allow FCC as much latitude               as
it felt      permissible      in complying       with its instructions.
          We believe      a reasonable    interpretation          of   the   court's
rulings      is that      it intends   that FCC:
          --Separate    regulatees      into    "recipient       classes,"      that     is,
             the smallest     practical      unit.
          --Calculate         the cost basis        for each fee to be assessed
             against       each recipient        class by particularizing
             (identifying)           its costs,      including      all "necessary"
             expenses       and excluding        any expenses         it incurred   to
             serve an independent            public       interest,      and making a
             public     explanation        of the criteria          used to include
             or exclude         particular      costs.
          --Apportion,      with    respect        to each fee, the identified
             necessary     costs    against        the members of each
             recipient     class.
        We believe    also that the court          provided     sufficent       guid-
ance for FCC to separate           regulatees      into recipient         classes
and to calculate        the cost basis       for each fee assessed..             With
respect    to apportioning       the identified         necessary      costs
against    members of each recipient            class    for each particular
fee, we are aware that the court               could not be specific            as to
how this might be accomplished.               The court,      however,       provides
FCC with sufficient        guidance      to make a good faith           effort     to
develop    a permissible      method of apportioning            these costs
among each recipient        class.




                                               9
               A detailed         analysis     of   the    Court   of Appeals'   decisions
        is   provided       in   appendix    I.
        RECIPIENT       CLASSES
                To promulgate    a fee schedule     that will       comply with the
        court's    remand orders,     FCC first    must separate       regulatees
        who pay fees into      the smallest     practical     unit.      In doing so,
        the court     noted that
.
               II* * *in most cases,        we expect     this   unit will     be
               classes    of carriers      or applicants       or grantees     or
               services    which the Commission          has already     singled
               out for separate       treatment     in its 1975 fee
               schedule."
        The court     said that the solution           is not to group dissimilar
        entities    together      and indicated,       for example,      that FCC may
        permissibly      separate     classes    among carriers.         Those car-
        riers    who apply to FCC for a permit.to              extend    lines    under
        47 U.S.C.     S 214 (1970) may properly            be placed     in two sepa-
        rate classes       that do not overlap         thereby    avoiding      duplica-
        tion of charges.          The first    class would be for all
        applicants     seeking     extension     of lines;     the second for those
        applicants     who may require        hearings.       The first      class would
        be expected      to reimburse       FCC for handling        the application
        papers.     The second class would be expected                 to reimburse
        FCC for administrative           law judges      and certain     hearing
        expenses.
                 No fee should      be charged  to a private     party    when the
        identification         of the ultimate    beneficiary    is obscure    and
        the service         can be primarily   considered     as benefiting    the
        general       public.
        COST BASIS
    .
                In calculating      a cost basis        for each fee assessed
        against     the members of each recipient             class, FCC must iden-
        tify    each service     that    it provides.       In doing so, FCC must
        exclude     expenses   it incurs      to serve an independent,       rather
        than an incidental,         public    interest.
               The court    did not define       the independent     public      in-
        terest   that must      be excluded    from the cost basis of a fee.
        Instead,    the court      specified   those expenses which clearly
        could be included        in the cost basis for a particular              fee.
        It noted that FCC could charge for those public                 interest
        expenses    necessarily       incurred   to provide   services      to its



                                                      10
    .
        regulatees.             Expenses    necessarily            incurred        by FCC are those
        that     assist       regulatees      in complying             with     statutory         re-
        quirements.             For example,       tariff      filings,           equipment         certif     i-
        cation,       acceptance,        approval,        and hearings              that    are an
        integral        part     of the application            for       an operating          license,
        extension        of lines,       or discontinuance                 of service         are each re-
        quired      by statute.          The court        held       that    FCC may fully              recoup
        the necessary             costs  it incurs        to assist           regulatees          to comply
        with     these      statutes.

                 The necessary          expenses       noted    above     include        both      direct
        and indirect         costs      that    FCC incurs        in providing           specific
        services        to each regulatee            in a particular            class.         In-
        direct      costs    include       overhead       expenses      incurred          in maintain-
        ing a competent           staff      to perform       the essential             service        even
        though      the payor       may make little           use of that           service.           Di-
        rect     contact     with     FCC is not necessary              in order          for    a person
        to be charged          so long       as FCC can identify              the recipient
        as being        among a particular             class    that    benefits          from     special
        services        or agency       expenditures         which    protect         their
        operations.

                 The court         made clear        that   when establishing              a cost
        basis     FCC should           consider      the costs      of necessary           hearings,
        even though           the hearings          may not prove        to be beneficial             to
        an applicant            seeking       a license     or permit.         Because        of the
        court’s       belief       that     the FCC trial       staff       in many hearings
        presumably          represents          an independent        public     interest,         some
        or all      of their         expenses       might   be excluded        from     the per-
        missible       basis       of the hearing         fees,     depending        on the nature
        of the hearings.

                 Further      , it is only     necessary        for    FCC to measure             the
        cost     basis      for   each fee assessed;          it need not separately
        measure        “value     conferred    upon the payor.”             We believe
        that     the court        uses the term value           conferred         to interpret
        the value         to the recipient         standard       established          by the
        Supreme       Court.       The court     intends      that     value      derived,       which
        is a measure            of a tax,    be distinguished            from     value     conferred.
.
        By basing          a fee on costs,       the tour t avoids            requiring         FCC to
        establish         a fee schedule       that     impermissibly           taxes      payors.

        APPORTIONMENT            OF COSTS-

              The court  only              requires        that    the     fee     assessed         against
        members  of a particular                  class      reasonably          reflect      the      costs




                                                           11
    the agency        incurred       to provide          necessary       services.         The court
    emphasized:
            "It should    also be stated           that we are not requir-
            ing exact calculations,            just    reasonable       approxi-
            mations.    The ability        to recoup both 'direct              and
            indirect   costs   to the Government'             [language      of
            the IOAA which remains           valid     after    NCTA v. U.S.
            along with the value         to the recipient           standard]
.           does allow    for some range and latitude                 in effect-
            ing a reasonable      attribution          of costs."
.            In one instance              the court       criticized        FCC's methods of
    formulating           the 1975 annual authorization                     fee.      FCC began
    with     its total          budget and eliminated                whole offices         or ac-
    tivities        which it found to be too far removed from the di-
    rect regulatory              function.           Then, for example,            it assessed
    cable      television           operators        for the total        cost of operating
    FCC's Cable Television                    Bureau plus a pro-rata               share of cer-
    tain general            support       activities.           This total       was multiplied
    by 44.6 percent              which represented              the percentage          of each
    activity        that was devoted               to application         processing        for
    which a fee could be recovered.                           The court       indicated        that
    the method used to arrive                      at the 44.6 percent             must be ex-
    plained,        suggesting          that a "time          cost study"        would be use-
    ful.       The court          then concluded          that FCC had gone at its task
    backwards,          starting        with totals         then eliminating            items.       The
    court      stated       that FCC should have selected                     expenses      directly
    or indirectly             related       to the particular            service      thus justify-
    ing the assessment                of a fee and then added up such items.
            The    court    specifically      noted that this    is not to say
    that FCC       must calculate        the exact cost of servicing      each
    individual.           Any computation      must necessarily    be based on
    numerous       approximations        and can only be expected      to be
    accurate       within    reasonable     limits.    The court   held that:
            "It   is sufficient       for FCC to identify         the spe-
            cific    items of direct       or indirect     costs     incurred
            in providing        each service    or benefit      for which
            it seeks to assess a fee, and then to divide                    that
            cost among the members of the recipient                  class    in
            such a way as to assess a fee which is roughly
            proportional        to the 'value'     which that member
            has thereby      received."
           The court  stressed    that    if a fee is                   calculated    in a
    proper   manner,  it should     be a reasonable                     approximation    of
    the particular    costs which FCC identifies                         as being ex-
    pended to benefit      the recipient.


                                                    12
            Because     of the “bare       record”      before     the court,        it was
    only    able    to give    FCC general        guidance      regarding        permissible
    methods      of apportioning        costs     among the members            of a recipi-
    ent class       for   each particular         fee.     Never theless,         the tour t
    did offer      a few thoughts         concerning       appropriate         ways to
    apportion      costs     among members        of a recipient          class.

           --The      most extreme          method      of apportioning               costs,     in
               terms     of expense         and time        involved,           would     be to cal-
.
               culate      the exact        cost     incurred         by FCC to service
              each individual             class     of recipients.                 The court,         in-
               stead,      noted     that     FCC may probably                reason.ably      justify
               a minimum        fee for       small     stations,           and may well         be
               able    to demonstrate            increases          in the cost           of regulat-
               ing cable        systems       as the number             of subscribers           grows.
               The court        does,     however,        observe         that     if an annual
               fee is established               on a per subscriber                  basis,    then
               economies        of scale       might      result,         making      the per sub-
               scriber       cost    of regulation            less      for     a larger     system
               even though         the total         amount       of fees        assessed      for
               that    system      might      be greater.

           --FCC      may use a fee base with              inherent        ability        to
              pay features         if such base also             reasonably         reflected
              varying     cost    factors       that    benefited        individual           re-
              cipients.        The court        cautions,        though,       that     ability
               to pay is frequently             used as a justification                   for
              levying     a tax but        is of very        limited       value.     in assess-
               ing a fee,which          is supposedly          related      as closely            as
               reasonably      possible       to the cost          of servicing           each
               individual      recipient.

             Concerning       how FCC might         be able       to devise      a fee sched-
    ule comprised          of fees     that    consider       economies      of scale       for
    larger     regulatees,        minimum      fees     for   smaller     regulatees,         and
    inherent      ability       to pay features           for   impecunious       regulatees,
    the court        suggests     that     for   each category         of service,        FCC
    may wish       to develop       a sliding       scale     using    the cost       of work
    performed        as a proper       measure.




                                                      13
                                            CHAPTER 4
                                           CONCLUSIONS

           While neither        the issues       nor the solutions             are clear
    cut, we believe        that the decisions           handed down on
    December 16, 1976, by the United                 States     Court of Appeals             for
    the District      of Columbia        Circuit    , provide       sufficient         guidance
    from which FCC can make a good-faith                   effort      to devise        a new
    fee schedule      based on the "value            to the recipient"              standard.
    Further,     by taking      such action,        FCC will      be in a more posi-
    tive position       from which it can reassess                its 1970 and 1975
    fee schedules.         Mindful     of the court's         statement         than "any
    computation      such as these must necessarily                   be based on nu-
    merous approximations            and can only be expected               to be accurate
    within    reasonable      limits",      FCC, using the methods developed
    to implement      a new fee schedule,            can.then       proceed       to recal-
    culate    the 1970 and 1975 fee schedules                 and refund          any
    excess fees.
              FCC makes three basic arguments                 for rejecting          any fur-
    ther attempt         to recalculate          a fee schedule.           First,     major
    difficulty       lies     in the concept         that the fees must be calcu-
    lated      to return     not only the cost basis but also must reason-
    ably reflect         the costs of the services                performed       and the
    value conferred          upon the payor.            Second,      a comprehensive           cost
    accounting       system would be needed to single                    out the classes
    of licensees         for which FCC proposed             fees--thus        allowing       FCC to
    build      up the expenses         of its programs          for those appropriate
    classes.at       the smallest         practical      unit     of cost.        Third,     any
    method developed            to exclude       expenses     incurred      which benefit
    an independent          public     interest      as the court        required        could
    be litigated         indefinitely.
            It is true that the fees must be calculated                   to reflect
    the costs of the services          performed.        However,      we do not
    believe    that the court      requires    FCC to measure separately
    by some other means the value conferred                 upon the payor.
.   We believe     that the court      uses the term "value            conferred"
    to interpret      the value    to the recipient         standard      established
    by the Supreme Court.          The court     intends      that value derived,
    which is a measure of a tax, be distinguished                    from value
    conferred.       By basing   a fee on costs,         the court      avoids
    requiring     FCC to establish       a fee schedule         that   impermissibly
    taxes payors.         -
          It is also true that some additional                       cost data would
    be needed to comply with the court     orders.                      There is,
    however,   little doubt, as even FCC pointed                      out,   that a



                                                .14
    system to accumulate            such data can be implemented.                Specif-
    ically,     GAO's Policy        and Procedures          Manual for Guidance        of
    Federal     Agencies,     Title      2, Section      16, addresses      the subject
    of cost accounting          for Federal         agencies.       Section   16.4 states
    that accounting        for costs        is required        where reimbursement         for
    services     performed      is to be at cost or when sales prices                    are
    primarily     based on cost.           Adequate      cost accounting       is also
    required     when full      recovery        of costs     from customers      or users
    of services       is a statutory          requirement.        We see no reason
    why the court       would not be willing              to wait a reasonable
    length     of time for FCC to implement                 such a system.       Once the
    system is implemented,             FCC will      be in a stronger       position       to
.   recalculate       and refund       fees.
            We recognize    that action       FCC takes to recalculate
    fees and refund      certain    amounts may be the subject          of fur-
    ther litigation.        Such action       could take the form of
    (1) a challenge      in the Supreme Court to the rulings              of the
    Court of Appeals,        (2) a challenge       to the manner in which FCC
    seeks to comply with the Court of Appeals'               orders,    and (3) a
    challenge      at any Federal    judicial      level against     any attempt
    by FCC to establish         in 1977 fee schedules      which apply
    retroactively.
            The court      has, however,         stated     that.it     is not requiring
    FCC to engage in retroactive                 rulemaking.          There is always
    the possibility          of litigation         relating      to any regulatory       au-
    thority    that establishes            rules     and regulations        based on broad       '
    enabling     legislation.           This possibility,           however,    should   not
    impede FCC's good-faith              efforts       to implement       a fee schedule
    consonant      with the Court of Appeals'                 orders.
           In our opinion,        to determine       if (1) FCC should       implement
    a new fee schedule        and recalculate          and refund     fees under the
    IOAA as interpreted        by the courts,          or (2) as proposed        by FCC,
    it should    reject   totally      the concept       of collecting     fees under
    the IOAA and wait for the Congress                 to enact specific       legisla-
    tion establishing       fees for FCC, certain            basic questions        must
    be considered.      Which is least          costly     to the Government?
    which is most likely          to provide      for fee assessments        in a
    timely   manner?    Which is likely           to allow    for maximum flexi-
    bility   when cost or other          circumstances       change?

            Given these basic questions        and the existing       circum-
    stances,     we conclude      that FCC should   proceed    to establish
    a new fee schedule         based on guidance    provided     by the IOAA as
    interpreted     by the courts.       This conclusion     is based on the
    following     considerations.            .




                                                15
           --The Court of Appeals'      decisions      of December 16, 1976,
              provide   guidance  from which FCC can make a good-faith
              effort  to devise   a new fee schedule       based on the
              "value  to the recipient"      standard.
           --FCC has noted that the cost to implement                         a system
              from which it can obtain              necessary        accounting      data
              would be several          hundred     thousand        dollars.       A refund,
              however., excluding           some dollar        value cutoff        as pro-
.             posed by FCC, could result                in the return         of as much
              as $164 million         in addition         to-the     administrative
              cost of implementing              the refund       program.      We recog-
              nize that a recalculation               of fees based on the court's
              decision    will     result       in some fee refunds.              However,   we
              believe   that a recalculated               schedule       of fees,    based on
              sound accounting          principles,         will    provide     (1) a basis
              from which to assess the court's                     remand order,       and
               (2) the flexibility            to deal with problems             of changing
              costs.
           --Certain       factors     such   as personnel    differences  and or-
              ganizational         changes    could be used as a basis     for re-
              lating    current       costs   with costs   for 1970 through    1976.
           --The benefits        generated    by a cost accounting       system,
              properly    designed      and implemented    by FCC for estab-
              lishing    and justifying       rates  and for effectively        using
              resources,     will    outweigh    the cost of implementing        and
              operating    the system.
    POSSIBLE IMPACT ON OTHER
    AGENCIE%-OUR OBSERVATIONS
            Although       the Court of Appeals'           decisions     only have an
    immediate        and direct       impact on FCC's collection             of fees,      we
    believe       the court's       decisions       are relevant      to other     regula-
    tory agencies          which collect         fees under the IOAA.            We are
    aware,      for example,        that     in fiscal    year 1976 nine regulatory
    agencies,        including      FCC, collected        approximately        $63 million
    in user charges;             Also,     since the 1974 decision,            three of
    these agencies,           excluding        FCC, refunded      $8.9 million       in fees.
             Specifically,         shortly      after       the Court of Appeals'        de-
    cisions,       11 public       utilities        filed      a suit    against    the Nuclear
    Regulatory         Commission         (NRC) requesting          a recalculation      of
    its fees.          Although      the case was dismissed               because of juris-
    dictional        reasons,     NRC decided           to revise      its fee schedule
    and anticipates           issuing        the revised        schedule     by August 1977.
    Legal representatives                 for the 11 utilities            have advised     NRC
    that this        revised     schedule       will      also be challenged.


                                                16
         Because of time constraints         we did not evaluate           actions
taken by other      Federal    agencies.       We do believe,        however,
that FCC's and NRC's experiences             clearly     indicate       the sus-
ceptibility      of user charges      to challenge       in the courts.
Without     an attempt   by FCC to establish          a method to proceed
using the criteria       established       by the courts,         the validity
of its or any regulatory          agency's     assessing      fees under the
IOAA as interpreted        by the Court of Appeals            will    remain
unresolved.
RECOMMENDATION TO THE CHAIRMAN,
FEDERAL COMMUNICATIONS COMMISSION
       We recommend that the Chairman,       FCC establish    a new fee
schedule    based on the guidance   provided    by the IOAA as inter-,
preted    by the courts   and that he use the methods developed        to
implement    the new fee schedule   to recalculate       the 1970 and
1975 fee schedules      and refund any excess fees.
POSSIBLE CONGRESSIONAL ACTION
        Rather than allowing         the extent          of cost recovery             under
the IOAA be resolved        through       repeated          litigation,         the
Congress     may wish to provide         additional              legislative       guidance.
If action     is taken in this direction,                   however,         it should    not
be pursued      at the exclusion        of FCC's         making a good-faith
attempt     to comply with the orders             of      the Court of Appeals.
Congressional      action   could take the             form.of          revamping     the
IOAA or enacting        new legislation         in     lieu        of the IOAA.L/




&/If     the Congress   desires    to revamp the IOAA or enact new
    legislation    in lieu    of the IOAA, then it should       be mind-
    ful that a distinction       exists   between enacting    legislation
    assessing   a tax and legislation        imposing  a fee.    The
    Supreme Court,     in NCTA v. U.S.,      indicated  that Congress


                                            17
    APPENDIX I                                                                                APPENDIX I




                                               ANALYSIS OF

                                     FOUR DECEilBER 16, 1976,
                                   C3lJRT 3F APPEALS DECISI3NS
.
    I.    The. Independent-Offices                  Appropriation             Act,    1952
          (KM).
           The IOAA, Act of August        31. 1951. ch. 376, title       V. 5501.
    65 Stat.    290. as codified,      31 U.S.C.    S483a (1970),   provides
    the Federal      Communications    Commission    (FCC).  and other    Federal
    agencies,     the authority     to assess   fees for services     and bene-
    fits   rendered.     The IOAA provides:

                        “It    is the sense of the Congress                           that     any
                 work,       service.          publication,            report,        docu-
                 ment, benefit.                privilege,           authority,          use,
                 franchise,            license,          permit.       certificate,
                 registration.               or similar           thing      of value         or
                 utility          performed,           furnished.         provided,
                 granted,          prepared,           or issued         by any Federal
                 agency (including                   wholly       owned Government
                 corporations               as defined          in the Government
                 Corporation              Control       Act of 1945) to or for
                 any person             (including          groups,       associations,
                 organizations,                partnerships,             corporations,
                 or businesses),                 except       those engaged in the
                 transaction              of official           business         of the
                 Government,              shall      be   self-sustaining               to the
                 full       extent        possible,         and the head of each
                 Federal          agency is authorized                   by regulation
                  (which.         in the case of agencies                      in the
                 executive           branch,         shall      be as uniform             as
.
                 practicable              and subject           to such policies
                 as the President                  may prescribe)              to pre-
                 scribe         therefor         such fee. charge.                 or
                 price,         if any, as he shall                   determine,          in
                 case none exists,                   or redetermine.               in case
                 of an existing                one, to be fair               and equit-
                 able taking              into     consideration             direct       and
                  indirect          cost to the Government.                      value      to
                 the recipient.                 public      Dolicy       or interest
                  served.         and other          pertinent         facts,        and




                                                       18
 APPENDIX
        I                                                           APPENDIXI




             any amount so determined    or redetermined
             shall be collected   and paid into the
             Treasury as miscellaneous    receipts   * * *."
 II.   History-of-FCC-Compliance'With           IOAA:
        The FCC first    established     fee schedules pursuant       to the
 IOAA in 1963, 34 F.C.C. 811 (1963). initially             making only
 nominal charges for filings         with the agency that produced
 revenue eguivalent      to approximately      25 percent of its annual
 appropriation.       See 21 F.C.C. 2d 502, 503 (1970).          In 1970,
 in response to congressional         and executive    branch pressures
 to adopt higher fees which would make the FCC more self-
 sustaining,     the agency amended its fee schedule,          23 F.C.C.
 2d 880 (1970) and for the first           time imposed filing     fees and
 an annual fee of 30 cents per subscriber            upon cable tele-
 vision    operators.
         The annual fees assessed against members of the community
  antenna' television     (CATV) system were struck down bv the United
. States Supreme Court on March 4, 1974. in National.Cable-Tele-
  vision'Assn;     v. United-States      (NCTA v. U;S.), 415 U.S. 336
  (1974). That case and a companioncase           decided the same day.
  Federal-Power-Commission        v.- New-England-Power-Co;     (FPC), 415
  U.S. 345 (1974). established         standards   that agenciesmust
  meet in order to charge fees under the IOAA. -
        In NCTA v. U;S.. the court found that the FCC assessment
 of 30 centsper        subscriber      was calculated      to reimburse the
 total    cost (direct     and indirect)       to the Commission of regulat-
 ing the cable television           industry,    regardless     of whether or
 not each individual         operator    had received      any "special   bene-
 fit"   from that regulation.          Holding in effect       that it was the
 intent    of the IOAA to require          fees to be based on "value to
 the recipient"      and not upon "public          policy    or interest  served
  [or] other pertinent        facts,"    415 U.S. at 341, 342-343, the
 court found that the FCC's failure              to use this measure made
 the 30 cent assessment a tax which the agency had no power
 to levy.      In effect.     the court eliminated         from the IOAA the
 words "public      policy    or interest      served."      As a result,  the
 statute    authorizes     the head of each agency by regulation             to
 prescribe     fees taking into consideration             "* * * direct   and
 indirect     cost to the Government and value to the recipient."




                                        79
APPENDIX
       I                                                            APPENDIX I




        In the New.England-Power        case, decided the same day as
NCTA v. U;S;. the Court further           declared    that the "special
benefit"-    concept requires     some nexus between the agency and
the person assessed other than the mere fact of regulation
or the adoption       of some practice      of general benefit        to the
industry     as a whole. Quoting with approval           a Bureau of the
Budget Circular       which interprets      the IOAA, (Budget Circular
No. A-25 (J. App. 129-34).         issued Sept. 23, 1959) the court
held that "no charge should be made for services                  rendered,
 'when the identification        of the ultimate      beneficiary       is
obscure and the service         can be primarily      considered      as
benefitting      broadly the general public."'           415 U.S. at 350.
These cases constitute        the only Supreme Court interpreta-
tions of the IOAA, and taken together             with the statute         they
set the standard against which the Court of Appeals for the
District     of Columbia Circuit       subsequently    measured the FCC
fees at issue in the cases decided December 16. 1976.
        After the 1970 fee schedule had been invalidated          by the
Supreme Court, the FCC suspended collection            of the annual
fee for cable television        systems, 46 F.C.C. 2d 12 (1974).
stating     that the appropriate     annual fees for calendar year
1973 would be published       after   further  proceedings.    The FCC
also ordered refund of all cable television            annual fees
collected      pursuant to the 1970 schedule.       49 F.C.C. 2d 1089
 (1974). On January 15, 1975, the FCC adopted a revised            fee
schedule to be effective        March 1, 1975. 50 F.C.C. 2d 906. 924
 (1975).
       On December 16. 1976. the United States Court of Apoeals .
for the District         of Columbia Circuit,        Judge MacKinnon writing
for the court,        issued four related        decisions      remanding to
the FCC several of its orders involving                 the collection      of
fees from FCC regulatees.              They are:     (1) National-Cable-Tele-
vision-Association;-Inc:;*et-al.,              v. Federal-Communications
Commission,      (NCTA), No. 75-1053 (D.C. Cir.,               December 16, 1976);
 (2) National-sciation-of-Broadcasters;-et-al.                       v. Federal
Commnnications.Commission            (NAB), Nos. 75-1087. et al. (D.C.
Cir. December 16. 1976); (3)apital-Cities-ComZinYZations;
Inc;;   et-al.    v. Federal-Commanications.Commission                 (CCC).
Nos. 75-1503, et al. (D.C. Cir. December 16, 1976);xd
 (4) Electronics.I'iianstries-Association;              et-al.     v. Federal
Communications-Commission-and.United-States                    (EIA). Nos.
75-1120, --  et al. (D.C. Cir. December 16, 1976),-



                                       20
APPENDIX I                                                                       APPENDIX I
  - --



       The Court          of Appeals       directed       the FCC to establish     a
proper     justification          for its       fees,     to explain   the basis   for
the fees,         to recalculate         the fees accordingly.           and to refund
any excessive           amounts     collected         under the 197G and 1975 fee
schedules.          Shortly    thereafter.          the FCC announced       it was sus-
pending      the collection          of all       fees effective     January    1. 1977.

        By letter       dated December         22, 1976,      to the Honorable             John
M. Slack,        Chairman,      Subcommittee        on State,      Justice,       Commerce
and Judiciarv,          House Committee         on Appropriations,             FCC Chairman
Richard       E. Riley     explained      that    it would be extremely              difficult
for    the FCC to formulate            a fee schedule         under the new standards
imposed       by the Court,        He said that       the Commission           had estab-
lished       a task force       to develop      plans    for making         refunds       to regu-
latees       as required      by the Court        of Appeals.        in a memorandum
to the Commission           dated February          2, 1977,     the General         Counsel
and the Executive           Director      of the FCC recommended               refundinc        all
those      fees in excess         of $5 collected        since     1971. The amount
potentially        refundable        on this    basis    would be $127 million.

       In response         to Chairman        Wiley's      expressed        intention       to
refund     the fees concerned,             Senator      Ernest     F. Hollinas         and
Representative         Lionel      Van Deerlin.         by letter       dated >!arch 2,
1977,    to Chairman        Wiley,     strongly       urged     the FCC not to initiate
a refund      program      before     (1) reviewing         the prospects           for an
appeal     to the Supreme Court,              and (2) allowing           the GAO the oppor-
tunity     to examine        the FCC’s accounting              system     to determine
independently        the possibility            of compliance         with      the Court      of
Appeals      order.    The Senator         and Congressman           wrote      the Comptroller
General,      by letters        dated March 2. 1977, and requested                       that    GAO
review     the FCC fee schedules.               its   accounting        system.       and signi-
ficant     changes,      if any, made by the FCC in its                     system     following
the NCTA Supreme Court              decision.




                                               21
    APPENDIX
           I                                                                   APPENDIX
                                                                                      I



    III.      Questions      and-Answers
          QUESTION 1: What are the criteria    that the FCC must meet
    in order to promulgate   a fee schedule that will comply with
    the remand orders of the United States Court of Appeals for
    the District  of Columbia Circuit?
           ANSWER: We believe           the court      intends     that   the FCC do the
    following:
          First,  the FCC must separate               regulatees who pay fees into
    "the smallest    practical unit,"                 , slip op. p. 17. The court
    stated that,
                       I’*   in most cases, we expect this unit
                             *   *

    .             will be classes of carriers    or applicants
                  or grantees or services   which the Commission
                  has already singled out for separate      treat-
                  ment in its 1975 fee schedule."
    The court said that Ir* * * the solution                     is not to group dis-
    similar      entities     together."         The court further       indicated      that,
    if it is feasible,            the FCC may permissibly            separate classes
    among, for example, carriers,                   services    and activities.        With
    respect to activities,               the court noted that one permissible
    classification         would be for n* * * those individuals                   whose
    applications         and acts require           hearings."      For example, a regu-
    latee who applies           to the FCC for a permit to extend lines
    under 47 U.S.C. 5214 (1970) may properly                       be placed in two
    separate      classes that do not overlap and, therefore                      avoid
    duplication         of charges.         NCTA, slip op. p. 13. The first              class
    would be for all those applicants                     seeking extension       of lines.
    The second class would be for all those applicants                           who require
    hearings.         The first       class would be expected to pay the FCC
    fees that reimburse             the agency for, inter alia,              '* * * the
    mechanical        handling      of the paper * * *' incident               to the appli-
.   cation for extension              of lines,      EIA, slip op. p. 18, n. 17.
    The second class wculd be expected                     to reimburse      the agency
    for "X * * a substantial                portion     of the expenses of the admin-
    istrative       law judges and certain              hearing expenses. * * *'I
    EIA, slip op. p. 18.
               Caution should be exercised    to insure that the payor of
        a fee is "identifiable,"     EIA, slip op. p. 12. To state this
        requirement    another way, "7 * * no fee should be charged to




                                               22
    APPENDIX   I                                                        APPENDIX   I



    a private   party 'when the identification     of the ultimate
    beneficiary    is obscure and the service    can be primarily     con-
    sidered as benefitting    broadly   the general public."'      Id.,
                                                                   -      p.
    12.

            Second, the FCC must calculate          the cost basis for the
    services    provided   to each class of regulatees.          The FCC must
    identify     "* * * the activity       that justifies    each particular
    fee it assesses,"      NCTA, slip op. p. 12. To accomplish             this,
.   the FCC must examineits          internal    necessary   expenses and, with
    respect to each class of regulatees             serviced  "* * * set forth
    the maximum particularization            of costs it can conveniently
    make * * * " EIA, slip op. p. 17. In this regard,                the court
    stated tha;        -
                        '* * * the FCC can include    in the cost
                   basis of its fees only those expenses which
                   the agency incurs to confer value on the
                   payor: In-National-Cable,     [the court]
                   explained    that the 'value conferred'     measure
                   of-a valid fee means that the fee assessed
                   cannot exceed the cost of service       rendered.
                   *  *   *‘I EIA, slip op. p. 13.
           Included      among necessary expenses are those which the
    FCC incurs in order to assist persons to complv with their
    statutory      duties such as the "mechanical           handling    of the
    paper."     EIA,   slip    op.  p.  18. n.   17. Also   see   NCTA,   slip op.
    p. 20. TFnecessary             expenses may include bothirect              and
    indirect     * * *" costs that the FCC incurs in providing                 spe-
    cific    services      to each regulatee      in a particular      class.
    Indirect     costs may include        overhead expenses "* * * incurred
    in maintaining         a competent staff      to perform the essential
    service when it is furnished             [even though the payor] may make
    little    use of that service,"         EIA, slip op. pp. 18-19. Direct
    contact with the FCC is not necessary               in order for a person
    to be charged so long as the recipient                can be identified       by
c




    the FCC as being among a particular              class that benefits        "* * *
    from specific        services     or agency expenditures       which protect
    their operations."           NCTA, slip op. pp. 15, 18.
          Examples provided   by the court of improper standards    to
    measure direct  and indirect    costs include but are not limited
    to: (1) the convenience    of not facing competing applicants,




                                           23
APPENDIX I                                                                       APPENDIX I




since     this     measure      is not related         to the costs         of services
furnished        by the FCC.          CCC. slip       op. pp. 7, 8. If anything.                the
court     observes,        the absence       of competing         applicants         would
keep FCC costs           at a minimum and tend to reduce                    the cost basis
of a particular            fee;    (2) the consideration              for the sale or
transfer        of a license,         since    that    results      in a tax that          is
based on        “value     derived”       by the    recipient.        CCC,    slip    op.    p. 8;
 (3) the values          created      by licensees         out of their         licenses,
NAB. slip         op. p. 44, n. 28, because                that   results       in a tax
that,     again,       is based on “value           derived”     by the recipient;
and (4) probably             the number of subscribers,                viewers,       or lis-
 teners     of a regulatee,           or the gross         revenues      of a regulatee
because       that may result           in a tax. NCTA. slip             op. p. 30.
        The FCC must be sure to exclude               from its calculati    ons
expenses     it incurs       to serve an independent         rather  than an
incidental       public    interest.        By only charging     for neces sary
services,      the FCC should        easily     be able to satisfy     this
requirement.        In EIA slip      op. p. 19, n. 17, however,          the court
did indicate        thathe       expenses     of the FCC’s trial     staff   might
be subject       to exclusion.
       The FCC must make a public              explanation        of the afore-
mentioned      specific    direct     and indirect        expenses     included   in
the fee it intends          to assess against          each class      of payor.
The agency must explain            the criteria        used to include        or
exclude     particular      terms so that,        if the fees are challenged.
the court      can determine       if the FCC acted properly.               NCTA,
slip    op. pp.     22, 23.    The   court   indicated       that           -
                      I’* * * the FCC is required            to show the
                particular       costs which they are assessing
                against      the recipients        [payors     of an
                ‘individual        fee I ] so as to assure        them
                that     they are paying       only for the specific
                expenses       which are incurred          in connection
                with     the services       of granting      them their
                operating       authority,”     NCTA, slip       op. p. 22.
        Third.     with respect  to each particular       fee.   the FCC must
apportion       the remaining   particularized      necessary    costs  against
the members of the class         to be assessed      that   fee.    The costs
assessed       against  the members of each class




                                               24
    APPENDIX I                                                                    APPENDIX I




                       ‘I*   *
                                may include
                                 *
                                                 a pro-rata        share of
                  any expenses      for regulatory       activities        which
                  are necessary       in order    to grant       [in this
                  instance,     a certificate       of compliance         under
                  47 C.F.R.     S76.11(a)     (1957)],     but cannot
                  include    those expenses       independently         required
.
                  to protect     the public.”       NCTA, slip       op. P. 14.
    In the two summaries          provided       to assist    the FCC in establish-
.   ing a valid     fee schedule,          EIA, slip      op. p. 17 and NAB, slip
    op. p. 53, the court          requires       that   the FCC set a feefor          each
    class    which  “reasonably        reflects”      the cost of services         per-
    formed or value       conferred        upon the regulatees         of each class.
    Again,    in EIA at slip        op. p. 13, snpra.         the court     stated
    that   the “value     conferred”        measure of a valid          fee means that
    the fee assessed       cannot      exceed the costs         incurred    by the FCC
    in rendering      necessary      services       to the members of the class
    concerned.
            The court     only requires   that the fee to be assessed
    against    the members of a particular        class reasonably   reflect     *
    the costs     incurred     by the agency to provide    necessary   services.
    The court     emphasized:
                         “It    should    also be stated          that   we are
                   not requiring          exact    calculations,         just
                   reasonable         approximations.            The ability
                   to recoup both ‘direct               and indirect
                   costs      to the Government’            [language       of
                   the IOAA which remains               valid     after    NCTA
                   along with         the value      to the recipient
                   standard]         does allow     for some range and
                   latitude        in effecting        a reasonable
                   attribution          of costs.”      NAB, slip       op.
                   P=    46,    n.   28.
             In NCTA at sliP          op. p. 23, the court         criticized        the
    FCC’s me-            of formulating          the 1975 annual       authorization        fee.
    The FCC began with its               total     budget and eliminated          whole
    offices      or activities         which     it found to be too far removed
    from the direct           regulatory       function.    Cable television            opera-
    tors were assessed            the total        cost of operating        the Cable Tele-
    vision      Bureau plus a Pro-rata              share of certain        general     support
    activities,        all multiplied          by an unexplained         44.6 percentage.
    The court       indicated       that    the 44.6 percentage          must be exPlained,




                                                25
APPENDIX I                                                                             APPENDIX I




suggesting      that   a “* x * time cost study                explanation         * * *I’
would be useful        in explaining          ‘I* * * why 44.6 percent               was
chosen to represent           that portion         of the previously           calculated
total    costs which could           be recovered        through      a fee.       Perhaps,
most importantly.         there      was no explanation           of the criteria
used in eliminating           certain      costs     and retaining        others.      ” The
court    then concluded         that   the Commission          had gone at its
task backwards.        starting       with    totals     and eliminating           items,
rather     than selecting         expenses      directly      or indirectly          related
in a significant         degree      to the particular           service     justifying
assessment      of the fee, and then adding                 up such items.
                     “This-is-not-to-sap-that-the-Commission
               must-calculate-the-exact-cost-of.servzcing
               each-individual               [emphasis      added]:       that
               would be an all              but impossible          task.       [A
               footnote         refers      to Aeronautical-Radio;-Inc.
               v. United- States,              335 F.2d 304 (7th Cir.
               1964) cert.            denied,      379 U.S. 966 (1965)
               and Colorado-Interstate-Gas-Co.                        v. FPC,
               324 U.S. 581. 589 (1945).                    The SeventhCir-
               cuit,       in Aeronautical           stated      that     ‘I* * *
               Allocation           of costs       is not a matter            for
               the slide          rule.     It involves        judgment         on a
               myriad        of facts.          It has no claim           to an
               exact       science.“]         Any computation           such as
               those must necessarily                   be based on numer-
               ous approximations                 and can only be expected
               to be accurate             within      reasonable        limits.
               It-is-sufficient-for-the*Commission-to
               identify-the-specific-items-of-direct-or
               indirect-costs-incurred-In-providing-each.
               service-or-benefit-for-which-it-seeks-to
               assess-a-fee;*and-then-to’divlde-that-cost
               among-the-members-of-the-recipient-class
                (here,       Cable      operators)       in- such- a-way- as
               to-assess-each-a-fee-which-is-ronqhlv-pro-
               portional-to-the-‘value’-which-that-member
               has-thereby-received.                  * * * ” NCTA. slip
               op. pp. 23-24.                (Emphasis      added.)
         The court    stressed     that   I’* * * If a fee is calculated          in
a proper     manner,      it should     be a reasonable      approximation      of the
attributable       costs    which the Commission        identifies       as being
expended     to benefit      the recipient.*      * * ” NCTA. slip         op. p. 25.




                                               26
APPENDIX I                                                                      APPENDIX I




       Because of the “bare          record”  ETA. slip      op. p. 17. NCTA.
slip   op. p. 22, before         the court,  Judge MacKinnon         was ableto
give the FCC I’* * * only the most general                guidance     regarding
permissible     methods     of apportioninc       costs   among the members
of a recipient      class     for each particular       fee .‘I Nevertheless,
the court    did offer     a few thoughts      concerning       appropriate
ways to apportion        costs     among members of a recipient            class.

        The most extreme           method of apportioning              costs,     in
terms of expense             and time involved,         would be to calculate
the exact         cost incurred      by the FCC to service              each individual
class     of recipients.          The court,      instead,       notes    that    the FCC
wi    fl*  *    *  probably     reasonably      justify      a   minimum      fee   for
small     stations,       and may well       be able to demonstrate               increases
in the cost of regulating               cable     systems      as the number of
subscribers          grows.”    The court     does.     however,       observe      that
if an annual          fee is established          on a per-subscriber             basis,
then “* * * economies              of scale     might     result.      making     the per-
subscriber         cost of regulation         less for a larger             system      (even
though      the total        fee for that     system might be greater)                .* * *I’
NCTA. slip         op. p. 31.
      The FCC may use a ‘I* * * fee base with            inherent                 ability
to pay features     if such base also reasonably           reflected                 varying
cost factors    that benefitted    individual     recipients.*                    * *” NCTA.
slip  op. p. 31.      The court cautions,     though,      that
                    ‘I* * * Ability     to pay is frequently
               used as a justification           for levying    a
               tax but is of very limited            value   in
               assessing     a fee which       is supposedly
               related    as closely      as reasonably
               possible    to the the cost of servicing
               each individual       recipient     .* * *”
               NCTA. slip     op. p. 31.

        Vii&h zespect        to how the FCC might             be able to devise       a
fee schedule         comprised      of fees that         reflect     consideration
of economies         of scale     for larger       regulatees,        minimum fees for
smaller      regulatees.       and inherent        ability       to pay features      for
impecunious        regulatees,        the court      suggests      that     for each cate-
gory of service,           the FCC may wish to develop                a “* * * sliding
scale     using    a proper     measure--i.e..           the cost of work per-
formed * * *. ‘I The court               hesiT:aTes.       though,    stating:      “Whether




                                              27
APPENDIX
       I                                                               APPENDIX I




it is feasible      to separate the Cornmission's-activities      into
various    classes based on increasing      costs and complexity,
we do not know.        If the agency can do so, such a fee. schedule
would be valid under the statute."         (Emphasis added.)     EIA.
slip op. p. 17. It would appear that only the FCC, working
with the assistance       of accountants   and other individuals
trained    in the vagaries     of cost accounting   methods, can
ultimately     determine whether such a sliding      scale might be
feasible.
     QUESTION 2: Assuming that there are sufficient        criteria
for the FCC to establish  a valid    fee schedule, what,guidance
does the Court of Appeals provide to determine     how to exclude
from the cost basis for each fee assessed any expenses incurred
to serve an independent  public   interest?
       ANSWER: The Court of Appeals provided                 no concrete      rule
on this point.        However, it appears from the decisions               that
FCC need not attempt to determine             quantitatively       exactly
how to measure an independent           public   interest.      Instead.      it
is sufficient       for the FCC to charge for necessary services.
That is. the FCC may assess fees to reimburse the agency
for costs incurred         in assisting   persons to comply with their
statutory     duties.    In so doing, the FCC. we believe,             will
remain well within        the scope of a permissible           cost basis
for a fee.
       Justice   Douglas. writing          for the majority    in the Supreme
Court's    NCTA v. U;S. decision,           focused attention     on distin-
guishingmweenafee              and a tax. He held that taxation             is
a legislative       function   that may be based solely on ability
to pay without        regard to "benefits        bestowed" by the Government.
A fee, however, is incident            to a voluntary     act on the part
of the payor; and the public             agency performing     those services
normally     may exact a fee for a grant which "bestows a benefit
on the applicant.         not shared by other members of society."
NeTA v. U;S; pp. 340-41.            Justice     Douglas cautioned    that it
md      bezermissible          to assess a fee against members of
an industry     to recoup the FCC's costs for its oversight                 in
safeguarding      the public     interest.      NCTA v. U;S;. p. 341.
       Judge MacKinnon, writing     for the majority     in EIA. was con-
fronted    with a record containing     "insufficient    data." Conse-
quently,    he could provide only some "general       guidelines"  for
the FCC. EIA. slip op. p. 11.




                                         28
APPENDIX
       I                                                              APPENDIXI



         First.   he stated that the private        payor must be "identi-
fiable."        No fee should be charged to a private           party "'when
the identification         of the ultimate     beneficiary    is obscure and
the service       can be primarily     considered     as benefiting   broadly
the general public."'         Cf. FPC, pp. 350-51.
       Second, a fee can only charge "* * * for those expenses
which are necessary        to service       the applicant     or grantee.
Expenses incurred       to serve some independent           public    interest
cannot,    under NCTA be included           in the cost basis for a fee,
althonqh-the-Commission-is-not-prohibited-from-charging-
an applicant-or-grantee-the‘full-cost-of'servlces                   rendered
to an applicant      which also result           in some incidental      public
benefits."     (Emphasis added.) ETA, slip op. p. 14.
        Judge MacKinnon then provided       a hypothetical    example
in which he explained         that a fee can be assessed for tariff
filings     and for equipment testing      since both activities
are "* * * required         by statute.  and the FCC is entitled     to
charge for services         which assist a person in complying with
his statutory      duties.*     * * It   , Slip Op. p. 15.
                  “Tariff    filings    are required    by 47
             U.S.C. §203(a) (1970). * * * Similarly,
             equipment certification.           acceptance.    and
             approval      is required     by 47 U.S.C. S302a
             (1970) and 47 C.F.R. S2.803 (1975) * * *
             Other commission fees * * * can be justi-
             fied by the statutory          requirement     of a
             permit for construction           of new or extended
             lines or the discontinuance            of service   by
             a common carrier,         47 U.S.C. 5214 (1970).
             and by the requirement          of an operating
             license      and station    construction     permit
             under 47 U.S.C. 5§301, 319 (1970).*              * *rr
             EIA. slip op. pp. 15-16.
       Jn NCTA slip op, p. 14, Judge MacKinnon stated that the
"* * * issuance of a certificate          of compliance under 47 C.F.R.
576.11(a)    is a service    rendered by the FCC to the cable opera-
tors.   and the agency is fully      justified   in seeking reimburse-
ment of any expenses incurred        in performing     that service.*  * *'
This statement     indicates    that necessary expenses may also
include   those that the FCC incurs in complying with duties




                                       29
    APPENDIX
           I                                                           APPENDIX
                                                                              I



    required     by regulations       set by the FCC not specifically
    required     by statute.    Further.     the court in NCTA. at slip op.
    z). 29, stated that the FCC could include              in its cost basis
    for each fee assessed O* * * those attributable                 direct   and
    indirect     costs which the agency actually           incurs in regulating
     (servicing)     the industry.*      * *I* Again. there is no mention
s
    of the need for the FCC to restrict             itself    only to seeking
    reimbursement       for expenses it incurs to assist a person in
    complying with his statutory           duties.    Accordingly.     a reason-
    able interpretation        of the court's      holding    is that the FCC
    may seek reimbursement          for expenses it incurs to assist          a
    person in complying with his statutory               and regulatory    duties.
            The Court of Appeals did state that the FCC 'I* * * is not
    limited    to charging   for activities    that are beneficial to an
    applicant.    but can include     in its fee the cost of any service
    that is necessarily      rendered to him.* * *"     EIA. slip op. p. 18,
    n. 17.     (Emphasis   added.)
           Judge MacKinnon indicated          that there might be cne limi-
    tation    to the inclusion      of the cost of all hearings        (held,
    e.g.,   in connection     with the aforementioned        statutes)    in the
    Fast basis of the fees for each bureau.               The holding of
    Alpeska-Fipeline-Service-Co.          v. Wilderness-Society,       421 U,S.
    240 (1955) precludes        charging    the expenses of the FCC's trial
    staff   to opposing litigants.          Further,   the court indicated
    that '* * * the trial        staff   presumably represents       an indepen-
    dent public     interest,    and some or all of their expenses
    misht therefore       be excluded from the basis of the fees * * *.I'
    EIA, slip op. p. 19, n. 17.
           QUESTION 3: Must the FCC, after categorizing       regulatees
    into the smallest    practical classes of service   recipients     and
    establishing   a cost basis for each necessary service provided
    by the agency,   proceed separately   to measure the value con-
    ferred upon the gayor?
.
          ANSWER: We do not believe    that the Court of Appeals
    intended  that the FCC measure the value conferred      upon the
    payor as a condition  precedent  to establishing    a permissible
    cost basis for fees.   Instead,  we believe    it is sufficient   to
    measure only the costs incurred.




                                          30
        APPENDIX   I                                                              APPENDIX   I



               The source of the confusion         whether the FCC is required
        to measure not only the cost basis for each fee but also the
        value conferred     stems from the court's        speaking in one decision
        (EIA, slip op. pp. 19-20) of I'* * * the cost of the services
        performed   and.value     conferred   upon the payor * * *I' and in
        others (NATslip        op. p. 53, NCTA, slip op. pp. 28-29) of
        the "* *Xcost       of services     performed -or value* * *" trans-
        ferred to the payor.
               We think it is reasonable         to assume that "the cost of the
.       service performed"         and "the value conferred     upon the payor"
    c   are opposite      sides of the same coin.       We are reasonably       satis-
        fied that the Court of Appeals, by referring               to both "cost
        of the service       performed"    and "value conferred      upon the payor."
        was simply trying        to give some additional     perspective      as to
        how the agency might better           be able to establish      a permissible
        rate. The concern of the court was that the FCC might properly
        establish     a permissible      cost basis only to fall,       impermissibly,
        into the realm of a tax by establishing            a fee that was not
        reasonably     related     to the costs necessarily      incurred    by the
        FCC. See, generally,          NCTA, slip op. p. 29. In an attempt to
        make the distinction         between a permissible     fee and an imper-
        missible    tax, Judge MacKinnon stated:
                            "In order to assure this required
                       relationship        between the fee-rate        and
                       the services        rendered.      as we interpret
                       the Supreme Court opinion,             the agency
                       must look not at the value which the
                       regulated     party may immediately          or
                       eventually      derive from the regulatory
                       scheme but at the value of the direct
                       and indirect        services     which the agency
                       confers.      This means, for example, that
                       a fee, in order not to be a tax cannot
                       be justified        by the revenues received
                       or the profits         which cable operators        have
                       made from     their     franchises,     but must be
                       reasonably      related      to those attributable
                       direct     and indirect        costs which the
                       agency actually         incurs in regulating
                        (servicing)      the industry.        Tangential
                       costs that bear no nexus to the service




                                                 31
    APPENDIX   I                                                        APPENDIX   I




                   rendered cannot be recovered        by citing    the
                   benefits    derived by the beneficiaries       from
                   their    operation  of their  licenses.     * * *'
                   (Emphasis in original.)      NCTA, slip op. p.
                   29..
t          Hence, the phrase "value conferred"       is to be distinguished
    from "value derived"       just as a fee is to be distinguished
    from a tax.     Having drawn this distinction,       however, the court
    leaves specifically       unanswered how one might measure "value
    conferred."   Instead,     Judge MacKinnon indicates      that a proper
    rate is one that reasonably        reflects a proportion      of costs
    necessarily   incurred     by the FCC. He explains,     in responding
    to a concurring     opinion:
                        "The concurrence    also states that it does
                   not read NCTA as requiring         'the proportion-
                   of-cost   bx'      as the only acceptable
                   method of determining       a fee.     That may well
                   be so.    It may be possible       that a proper
                   fee may be fashioned       on other lines.      * * *
                   The fee must bear some reasonable           relation
                   to the cost or it ceases to be a fee and
                   NCTA does indicate      that it cannot go beyond
                   being a 'fee.'
                              *       *         *    7k     *



                       "AS to whether     it    is possible    under
                   NCTA to promulgate       'value to the recipient'
                   feeschedules    not    initially     related    to
                   costs, we express      no opinion."      NAB, slip
                   op. PP. 44-45, n.      28.
          While it may be possible       to establish       a fee calculated
    to return by some means other than reference               to a.permissible
    cost basis the "value conferred        upon the payor,"        we think it
    unnecessary   for the FCC to'risk      judicial      disapproval    by
    attempting  to create such a scheme. Instead,              we recommend
    that the fees be calculated       at rates that,        as best as is
    reasonably  possible,   reflect    the necessary costs incurred
    by the FCC in assisting      an individual       regulatee    to comply
    with its statutory    and regulatory       duties.




                                               32
    APPENDIX   I                                                      APPENDIX I




          QUESTION 4: Assuming that the FCC is able to establish
    a fee schedule that is approved by the United States Court of
    Appeals for the District       of Columbia Circuit,   can the FCC law-
    fully   retain    any portion  of the money collected   under the
    agency's     1970' and 1975 fee schedules?
t         ANSWER: The Court of Appeals intends that the FCC "* * *
    should retain  the maximum portion  of the fees collected    [under
    the 1970 fee schedule]   that would be permissible   under the prin-
    ciple announced in NCTA. New-Enqland.$ower.     and the [IOAA]."    * *"
    NAB, slip op. pp. 52-53.
           The court,  further. intends that the FCC review its 1975
    fee schedule to determine what portion    of the fees collected
    under that schedule were permissible.      The court noted "* * *
    However, it remains to be seen whether the Commission can justify
    charging   fees in the amount it has attempted   to do in the 1975
    fee schedule.*    * *" EIA. slip op. p. 16.
            The court provided       a summary to the FCC instructing          how
    to recalculate        the 1970 fee schedule in NAE slip op. p. 53
    and noted at note 41. slip op. p. 53. thatthe                  summary should
    be applied      to all four of the companion cases in computing
    a valid fee under the IOAA. After indicating                 that its
    directions,       with respect to recalculating         the 1970 fee sched-
    ule. should apply equally          to recalculating       the 1975 fee
    schedule,     the court then expressly        states.     "* * * In taking
    this action,       we are not asking the FCC to engage in 'retroac-
    tive rulemaking.'        * * * The procedures        on remand are intended
    to produce no new rule which would impose new obligations                   or
    involve     additional    parties;   they will merely calculate         the
    amount of the refund which will effectuate                the statutory
    intent    of the IOAA.* * *" NAB. slip.           op. p. 54 n. 42.
            In NCTA, slip op. p. 3, the court was asked to rule
    whether theFCC could promulgate          in 1975 a schedule of annual
    fees to to be collected     from all television     operators   that
    would have retroactive     effect    back to lYarch 29, 1974, when
    collections    under the 1970 fee schedule were suspended. The
    court deferred    answering this narrow question       that involved
    only one type of fee until        the FCC devised a valid fee
    schedule.




                                          33         '
    APPENDIX I                                                                      APPENDIX I




             To summarize,           the FCC’s 1970 and 1975 fee schedules,
     according       to the Court           of Appeals.      may be valid        to some extent.
     The amounts to be retained                  by the FCC hinge          on the agency’s
     recomputing         a fee that         the court    considers        permissible,        in the
     event     the question          is litigated.         By so ruling.         the court       does
     not intend        that      the FCC promulgate          a new fee schedule            having    a
     retroactive         effect:       rather,     the  court     intends     that     the  FCC
     recalculate         the 1970 and 1975 fee schedules                   and refund       only
     amounts      that were impermissibly               collected.
c




                                                   34
    APPENDIX     II                                                                   APPENDIX   II




                                        QCsngree’8’of tfje EhtitPb &nte$
                                             Raue'e     of Xieptcrsentatibes
                                              i3ubromm~ner on Communtrattons
                                                            of tie
                                        bommtttee on Bnteretate anb Oorugn ~ommetce
                                              EIarifiington,    P.C.    20515

                                                >:arch         2, 1977


           Elmer B. Staats
           Comptroller   General
           General Accounting    Office
           441 G Street,   Nli
           l”ashington,  DC    20548
               Dear Mr.    Staats   :
                       On December 16, 1976, the United States              Court of
               Appeals for the District            of Columbia,   in a series     of four
               related    decisions,     ruled that current       Federal Communications
               Commission fee schedules were inadeauate               under standards
               promulgated      by the Supreme Court in’Nationa1            Cable
               Television     Association,       Inc. v. United States,       415 U.S.
               336 (1974).       The Court of Anneals directed           the Commission
               to clarify     the justification’for         its fees, to explain       the
               basis for the fees, to recalculate              the fees accordingly,
               and to refund any excessive            amounts collected      under the
               old fee schedules.
                        Shortly     after  these decisions,      the FCC announced
               that it h’as suspending          the collection      of all fees, effective
               January 1, 1977.           The Commission has takenhesition
               that it is incapable           of complying     to the full    extent of
               the Court’s         order.    The FCC has stated       that its cost
               accounting        system is inadequate       to enable it to meet the
               criteria       articulated     by the Court and that it has no
               alternative         but to refund    all fees above $5 -- a total        of
               $127 million.
,
                       We request      that your office         (1) review the FCC fee
               schedules       (giving    consideration       to the standards    set by
               the Independent         Offices    Appropriation       Act of 1951, 31
               U.S.C.      §483(a),    and to the concerns         raised by the courts)     ;
               (2) review the FCC’s accounting                system and evaluate     its
               adequacy ; and (3) determine             whether the FCC made any
               significant        changes in its system following           the Supreme




                                                        35
    APPENDIX     II                                                                   APPENDIX   II



          Page Two
          Elmer B. Staats
      -   March 2, 1977

          Court’s     decision  in National   Cable Television            Association,
          Inc. v.     United States,   415 U.S. 336 (1974).
                 In addition     to this review       we would appreciate   it
          if you would recommend (1) specific            changes which you
          feel are necessary         in the FCC’s accounting     system; and
c
           (2) alternatives      to the FCC’s fee schedule which meet
          the criteria      established    by statute    and by the courts.
                We have asked our staffs   to cooperate            with      you in
          developing  your review more fully.
                 Thank you for    your   cooperation.
                                         Sincerely,



                                                            ionel Van Deerlin,     bI.C.
          Chairman,  Senate Subcommittee                   Chairman, House Subcommittee
                on Communications                                on Communications

          /hsk




                                                      36
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