Southwestern Bell Telephone Co. v. F.C.C., 93-1202

• Decision Date: 17 December 1993
• Docket Number: No. 93-1202,93-1202
• Citation: 10 F.3d 892
• Parties: SOUTHWESTERN BELL TELEPHONE COMPANY, Petitioner, v. FEDERAL COMMUNICATIONS COMMISSION; United States of America, Respondents, MCI Telecommunications Corporation; American Telephone and Telegraph Company, Intervenors.
• Court: U.S. Court of Appeals — District of Columbia Circuit

Page 892

10 F.3d 892

304 U.S.App.D.C. 117

SOUTHWESTERN BELL TELEPHONE COMPANY, Petitioner, v. FEDERAL COMMUNICATIONS COMMISSION; United States of

America, Respondents,

MCI Telecommunications Corporation; American Telephone and

Telegraph Company, Intervenors.

No. 93-1202.

United States Court of Appeals, District of Columbia Circuit.

Argued Nov. 9, 1993.

Decided Dec. 17, 1993.

Petition for Review of an Order of the Federal Communications Commission.

John I. Stewart, Jr., Washington, DC, argued the cause for petitioner. With him on the briefs were Jennifer N. Waters, Washington, DC, Martin E. Grambow, James E. Taylor, Richard C. Hartgrove and Thomas A. Pajda, St. Louis, MO.

John E. Ingle, Deputy Associate Gen. Counsel, F.C.C., Washington, DC, argued the cause for respondents. With him on the brief were Renee Licht, Acting Gen. Counsel, F.C.C., Daniel M. Armstrong, Associate Gen. Counsel, F.C.C., and James M. Carr, Counsel, F.C.C., Anne K. Bingaman, Asst. Atty. Gen., U.S. Dept. of Justice, Catherine G. O'Sullivan and Robert J. Wiggers, Attys., U.S. Dept. of Justice, Washington, DC.

Frank W. Krogh and Donald J. Elardo, Washington, DC, entered appearances for intervenor MCI Telecommunications Corp.

Marc E. Manly, Washington, DC, entered an appearance for intervenor American Telephone and Telegraph Co.

Before MIKVA, Chief Judge, WALD and GINSBURG, Circuit Judges.

Opinion for the Court filed by Circuit Judge WALD.

WALD, Circuit Judge:

On October 4, 1990, the Federal Communications Commission ("FCC" or "Commission") released its LEC Price Cap Order, 5 F.C.C. Rcd. 6786, which ushered in a new era in the regulation of major local exchange telephone carriers ("LECs"). Unlike the prior rate-of-return scheme, under which LECs were allowed to recover costs plus a designated rate of return, the price cap system, which took effect on January 1, 1991, set a rate ceiling for "baskets" of LEC services based on July 1, 1990 historical rates in order to encourage greater efficiency and to provide LECs incentives to cut costs. Southwestern Bell Telephone Company ("Southwestern"), an LEC subject to the new order, submitted a mid-course correction filing ¹ to the FCC on December 4, 1990 to adjust its July 1, 1990 rate upward to account for actual costs experienced between July and November. After a lengthy process below involving two opinions and a voluntary remand order, the FCC rejected Southwestern's mid-course correction filing on the grounds that the mid-course mechanism that had prevailed under rate-of-return regulation had been supplanted by three different mechanisms for raising prices under the price cap rules, and that Southwestern had not met the particular procedural hurdles required by any of the three. The FCC also noted that, even if the former type of mid-course corrections were permissible under the new order, such filings would be reviewed under much more stringent criteria than had obtained under rate-of-return regulation--a level of review that Southwestern had also failed to satisfy in this instance.

Southwestern petitioned this court for relief, contending that the price cap order provided insufficient notice that mid-course corrections to adjust the July 1, 1990 starting points would be analyzed pursuant to a higher standard or barred altogether. We agree with Southwestern that the Commission has been less than a beacon of clarity. Nonetheless, we conclude that the price cap order, fairly read, provided sufficient notice to alert LECs that increases to the July 1, 1990 price cap that were to go into effect after January 1, 1991 could be accomplished only through the three mechanisms set forth in the order. Because we find that the order provided adequate notice of the Commission's principal contention below, we deny Southwestern's petition for review.

I. BACKGROUND

A. Regulatory Context

The Communications Act of 1934 requires the FCC to regulate the rates a carrier may charge for interstate telecommunications service. See 47 U.S.C. Secs. 201-205 (1988). Until 1991, the FCC employed rate-of-return regulation in setting rates for LECs. Under the rate-of-return scheme, carriers calculated rates so that projected revenues would cover projected operating expenses plus a designated return set by the FCC. The FCC required LECs to file annual tariff filings that included actual cost and revenue data for the preceding year, projections of costs and revenues for the upcoming year, and proposed rates that would attain but not exceed the authorized rate of return. See 47 C.F.R. Sec. 61.38 (1992). LECs bore the burden of proving proposed rates just and reasonable. See 47 U.S.C. Sec. 204(a)(1) (1988). In the event that an LEC's projections proved to be too high or too low during the course of the rate year, the FCC provided for mid-course corrections to make appropriate adjustments. See 47 C.F.R. Sec. 69.3(b) (1992). These mid-course filings were also evaluated according to the just and reasonable standard. See Virgin Islands Tele. Corp., 6 F.C.C.Rcd. 7350, 7351 (1991), rev'd on other grounds, Virgin Islands Tele. Corp. v. FCC, 989 F.2d 1231 (D.C.Cir.1993).

Because of the indeterminacy of figures used in rate projections, carriers "virtually never" earned precisely their authorized rate of return under rate-of-return regulation. AT & T v. FCC, 836 F.2d 1386, 1388 (D.C.Cir.1988); accord Virgin Islands Tele. Corp., 989 F.2d at 1233. Nonetheless, the FCC's mid-course correction mechanism provided a safeguard that alleviated some of the unavoidable imprecision. See id. By allowing upward adjustments in rates to account for actual costs, the FCC ensured that LEC rates would not dip far below that level necessary to achieve the authorized rate of return. Thus, we recognized in AT & T that "the gap between the actual return and the projected return may more often than not be relatively small." 836 F.2d at 1388.

On October 4, 1990, after years of debate and revision, the FCC released its LEC Price Cap Order, which fundamentally altered the system of regulating the eight major LECs. See 5 F.C.C.Rcd. 6786. Slated to go into effect on January 1, 1991, the Order replaced rate-of-return regulation with an incentive-based price cap regime designed to simulate market competition. The FCC devised the price cap order to rectify the perceived failing of rate-of-return regulation, which provided no incentive for LECs to become more efficient and productive. To set into motion the appropriate incentives, the price cap order "basketized" LEC services and limited the amount LECs could charge for these services to a fixed historical rate. The FCC reasoned that setting a price cap would exert a downward pressure on costs, catalyzing LECs to develop technological and administrative innovations in an effort to secure a more favorable rate of return. Recognizing that LECs would have every incentive to exaggerate costs to boost their initial price caps if the price cap were set prospectively, the FCC adopted a historical rate that, while concededly not perfect, represented "the best that rate of return regulation can produce." 5 F.C.C.Rcd. at 6814 (p 232). Accordingly, the FCC mandated that the starting point for price cap regulation would be those rates that the FCC had approved on July 1, 1990, subject to a minor downward adjustment in the allowable rate of return mandated in a companion order.

Under the price cap regime, the FCC accords a presumption of lawfulness to interstate rates falling at or below a price cap and within specified pricing bands for baskets of services. ² The rules authorize three separate mechanisms by which LECs can obtain an upward adjustment of the price cap. The first, a low-end adjustment mechanism, results in an automatic increase to the price cap should an LEC's earnings drop below a 10.25% rate of return. See 5 F.C.C.Rcd. at 6788 (p 10); 47 C.F.R. Sec. 61.45(d)(1)(vii). The second, an exogenous cost mechanism, allows adjustments to the price cap for certain enumerated costs that are beyond the control of carriers--for example, costs incurred by changes in the accounting methods mandated by the FCC. See 5 F.C.C.Rcd. at 6807-10 (pp 166-190); 47 C.F.R. Sec. 61.45(d)(1). The third, an above-cap filing, allows LECs to set rates higher than the price caps if they submit extensive support materials demonstrating that, despite the low-end adjustment mechanism and opportunities to increase efficiency, their particular price cap nonetheless renders them unable to attract capital and to continue to operate. See 5 F.C.C.Rcd. at 6823-24 (pp 300-304); 47 C.F.R. Sec. 61.49(e).

B. Procedural History

In accordance with then-prevailing rate-of-return regulations, Southwestern made a rate filing in April 1990 based on projected data for the tariff period between July 1990 and June 1991. The Common Carrier Bureau of the FCC ("CCB") permitted the LEC's proposed rates to go into effect on July 1, 1990, subject to disallowance of certain forecasted costs. On October 4, 1990, the FCC issued the LEC Price Cap Order, which required initial price cap tariff filings to be made on November 1, 1990. Southwestern complied, proposing rates that fell within its July 1, 1990 price cap.

On November 26, 1990, Southwestern determined to submit a mid-course correction filing to the FCC in order to increase its July 1, 1990 starting point to account for actual costs and revenues experienced between July and November. Southwestern applied for and received a waiver of Sec. 61.38(b)(1) of the Commission's regulations, which specifies the supporting information that must accompany a filing. The CCB emphasized that the waiver did not constitute approval of the underlying filing or prejudice any subsequent action that the Commission might undertake. See Letter from John Cimko, Chief of FCC's Tariff Division, to William A. Blase, Jr., Southwestern, Nov. 29, 1990, reprinted in Joint Appendix ("J.A.") at 4. The Commission declined to waive...