Southwestern Bell Telephone Co. v. F.C.C., s. 93-1168
| Decision Date | 12 July 1994 |
| Docket Number | 93-1185,93-1218,Nos. 93-1168,s. 93-1168 |
| Citation | 28 F.3d 165 |
| Parties | SOUTHWESTERN BELL TELEPHONE COMPANY, et al., Petitioners, v. FEDERAL COMMUNICATIONS COMMISSION and United States of America, Respondents, United States Telephone Association, et al., Intervenors. |
| Court | U.S. Court of Appeals — District of Columbia Circuit |
Appeal from an Order of the Federal Communications Commission.
John Gibson Mullan, Washington, DC, argued the cause for petitioners. With him on the briefs of petitioners and supporting intervenors were Robert M. Lynch, San Antonio, TX, Richard C. Hargrove, Thomas A. Pajda, Richardson, TX, M. Robert Sutherland, Atlanta, GA, Lawrence W. Katz, Washington, DC, Mary McDermott, White Plains, NY, Richard McKenna, Irving, TX, Robert B. McKenna, Denver, CO, Michael J. Shortley, III, Washington, DC, John W. Bogy, San Francisco, CA, Kathleen A. Carrigan, Hartford, CT, and Linda L. Kent, Washington, DC.
Laurel R. Bergold, Counsel, F.C.C., Washington, DC, argued the cause for respondents. With her on the brief were William E. Kennard, General Counsel, Daniel M. Armstrong, Associate General Counsel, John E. Ingle, Deputy Associate General Counsel, C. Grey Pash, Jr., Counsel, F.C.C., Anne K. Bingaman, Asst. Atty. Gen., Robert B. Nicholson and Robert J. Wiggers, Attys., U.S. Dept. of Justice, Washington, DC.
On the brief for intervenors were John M. Glynn, Robert L. Duston, and Gary L. Lieber for Maryland People's Counsel, Brian R Moir for International Communications Ass'n, and Frank W. Krogh and Donald J. Elardo, Washington, DC, for MCI Telecommunications Corp.
Alfred W. Whittaker, Washington, DC, entered an appearance for petitioner Southwestern Bell Telephone Co. William B. Barfield, Atlanta, GA, entered an appearance for petitioner BellSouth Corp. Michael D. Lowe, Washington, DC, entered an appearance for petitioner Bell Atlantic Telephone Companies. Saul Fisher, White Plains, NY, entered an appearance for petitioner New York Telephone Co.
James L. Wurtz, Washington, DC, Margaret deB. Brown and James P. Tuthill, San Francisco, CA, entered an appearance for intervenor Pacific Bell. Marc E. Manly, Washington, DC, and Robert E. McKee, Basking Ridge, NJ, entered an appearance for intervenor American Telephone and Telegraph Co. Durward D. Dupre, St. Louis, MO, entered an appearance for intervenor Southwestern Bell Telephone Co.
Before: BUCKLEY, WILLIAMS, ROGERS, Circuit Judges.
Opinion for the Court filed by Circuit Judge STEPHEN F. WILLIAMS.
Certain local exchange carriers ("LECs") challenge an order of the Federal Communications Commission on the ground that the Commission arbitrarily and capriciously disregarded its own rule when it denied "exogenous cost" treatment for cost increases that the LECs experienced as a result of mandated changes in their accounting for certain post-retirement worker benefits. Treatment of Local Exchange Carrier Tariffs Implementing Statement of Financial Accounting Standards, "Employers Accounting for Postretirement Benefits Other than Pensions ", 8 FCC Rcd 1024 (1993) ("OPEB Order"). We reverse and remand.
The concept of "exogenous costs" is an outgrowth (at least for regulatory purposes) of the Commission's decision to shift from conventional rate-of-return methods to the use of price caps for some of the firms subject to its rate regulation. Among the hopes for price caps is that they will improve incentives for innovation on the part of the regulated firms. Under rate-of-return regulation the Commission projects future costs on the basis of immediate past history, and sets rates calculated to recover such costs, with the result that a firm's only benefit from a cost-saving innovation is the advantage gained in the period before new rates become applicable--i.e., the firm enjoys additional profits only during the "regulatory lag". National Rural Telecom Ass'n v. FCC, 988 F.2d 174, 178 (D.C.Cir.1993). With price caps, the initial base rates (here, the rates prevailing on July 1, 1990) are for the most part adjusted solely for reasons independent of the regulated firm's actual behavior, notably (1) an annual adjustment for general price inflation, measured by the Gross National Product Price Index ("GNP-PI") see Policy and Rules Concerning Rates for Dominant Carriers, 5 FCC Rcd 6786, 6792-93 pp 47-54 (1990)("LEC Price Cap Order"), modified on recon., 6 FCC Rcd 2637 ("LEC Price Cap Reconsideration"), further recon. dism'd, 6 FCC Rcd 7482 (1991), and (2) an automatic annual downward adjustment for expected improvements in firm productivity, see LEC Price Cap Order, 5 FCC at 6793-6801 pp 55-119. The Commission also provided, however, for adjusting the price caps on the basis of "exogenous costs", which it described as "in general those costs that are triggered by administrative, legislative or judicial action beyond the control of the carriers." Id. at 6807 p 166. Because of the carriers' lack of control, adjustments for such changes presumably do not undermine the price caps' incentive structure.
The Commission considered in advance quite a number of possible candidates for exogenous cost treatment, including, for example, changes in amounts paid or received under certain pooling arrangements, see LEC Price Cap Order, 5 FCC Rcd at 6807 pp 169-70, and, most pertinently here, changes in accounting rules. For accounting changes, it specified automatic exogenous cost treatment for changes made by the Commission itself in its Uniform System of Accounts ("USOA"), explaining that "such changes are imposed by this Commission and are outside the control of carriers." Id. p 168; see also47 CFR Sec. 61.45(d)(1). It said, however, that changes in generally accepted accounting principles ("GAAP") ordered by the Financial Accounting Standards Board ("FASB"), were not to be the basis of automatic price cap adjustments, explaining:
As explained in the Second Further Notice, certain GAAP changes may require amendment to the USOA while others may not. Carriers must notify us of their intention to apply a change in GAAP and we will allow such change if we find it to be compatible with our regulatory accounting needs. No carrier may adjust its price caps to reflect a change in GAAP until we have approved the carrier's proposed change. Furthermore, we wish to clarify that no GAAP change can be given exogenous treatment until the Financial Accounting Standards Board has actually approved the change and it has become effective. The cap mechanism is intended to reflect changes in costs that have occurred, not anticipated cost changes.
LEC Price Cap Order, 5 FCC Rcd at 6807 p 168 (footnotes omitted). 1 The treatment of GAAP changes thus appeared to differ from that of USOA changes only in that GAAP changes would originate in the FASB and would become mandatory in the pertinent sense only after the Commission found them, under its standard procedure, consistent with the agency's regulatory objectives. See 47 CFR Sec. 32.16. For both types of accounting changes, the Commission's mandate brings about the change and demonstrates that the carriers lacked control. See also LEC Price Cap Reconsideration, 6 FCC Rcd at 2664-65 p 63 ().
In a parallel proceeding relating to AT & T the Commission set forth a second criterion that a GAAP change would have to satisfy--a demonstration that the change "will not be double counted in the Price Cap Index, once in the GNP-PI and once as an exogenous cost." Memorandum Opinion and Order on Reconsideration, 6 FCC Rcd 665, 674 p 75 (1991). And on reconsideration of the price order for LECs the Commission made clear that this second criterion also applied to them. See LEC Price Cap Reconsideration, 6 FCC Rcd at 2665 p 63. Thus it appeared that changes in GAAP were to receive exogenous cost treatment if they were mandated by the Commission (the "control" test) and were shown not to involve double counting with the GNP-PI adjustment.
In December 1990 the FASB adopted Statement of Financial Accounting Standards--106 ("SFAS-106"), altering the way in which companies adhering to GAAP account for "other postemployment benefits" for fiscal years beginning after December 15, 1992. The "other", which explains the "O" in the OPEB acronym, is intended to exclude pension benefits; what is left generally consists of retirees' life insurance and medical and dental care benefits. Before SFAS-106, firms accounted for these benefits on a "pay as you go" or cash basis, recognizing them when the costs were paid rather than when the firm received the services for which the benefits were compensation. SFAS-106 adopts an accrual method, requiring recognition of OPEB costs as they are earned by current employees. See OPEB Order, 8 FCC Rcd at 1025 p 3.
Besides requiring accrual treatment for ongoing OPEBs, SFAS-106 required businesses to recognize a transition benefits obligation, i.e., a reflection of the accumulated obligation accrued for work done in the past. Firms were to recognize this expense either all at once or to spread it out--either by using the average remaining service period of active plan participants or, if the average remaining service period were less than 20 years, by using a 20-year period. Id. at p 4.
On application by Southwestern Bell, the Commission found SFAS-106 consistent with Commission objectives and authorized the LECs to adopt it on or before January 1, 1993. Southwestern Bell, 6 FCC Rcd 7560 (1991). Noting that the effect of recognizing the transition obligation immediately "would be so large as to seriously distort the carriers' operating results," the Commission directed the companies to amortize that obligation. Id. at p 4.
In 1992 Bell Atlantic, US West, and Pacific Bell each filed tariff revisions which hiked their Price Cap Index ("PCI") levels...
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