At & T Corp. v. F.C.C.
| Decision Date | 26 May 2006 |
| Docket Number | No. 05-1171.,05-1171. |
| Parties | AT & T CORPORATION, Petitioner v. FEDERAL COMMUNICATIONS COMMISSION and United States of America, Respondents BellSouth Corporation, et al., Intervenors. |
| Court | U.S. Court of Appeals — District of Columbia Circuit |
David W. Carpenter argued the cause for petitioner. With him on the briefs were David L. Lawson, James P. Young, Christopher T. Shenk, and Judy Sello.
Joel Marcus, Counsel, Federal Communications Commission, argued the cause for respondents. With him on the brief were Thomas O. Barnett, Acting Assistant Attorney General, U.S. Department of Justice, Robert B. Nicholson and Robert J. Wiggers, Attorneys, Samuel L. Feder, General Counsel, Federal Communications Commission, Richard K. Welch, Associate General Counsel, and John E. Ingle, Deputy Associate General Counsel. Laurel R. Bergold, Counsel, entered an appearance.
Scott H. Angstreich argued the cause for intervenors. With him on the brief were Michael K. Kellogg, Mark L. Evans, Sean A. Lev, Michael E. Glover, Edward H. Shakin, and Bennett L. Ross.
Before: SENTELLE, ROGERS and GRIFFITH, Circuit Judges.
Opinion for the Court filed by Circuit Judge ROGERS.
This case involves the proper ratemaking treatment of "OPEBs," post-retirement benefits other than pensions, including health and life insurance for retirees, following a change in the method of accounting for them. AT & T Corporation petitions for review of an order of the Federal Communications Commission allowing Verizon exogenous treatment of OPEB costs by treating those costs as beyond Verizon's control even though Verizon implemented the accounting change before the compliance deadline, and allowing local exchange carriers ("LECs"), like intervenors Verizon and Bellsouth, to use their 1996 tariffs to rectify the consequences of an erroneous staff order that OPEB liabilities be deducted from their rate bases. Because the Commission's interpretation of its control test is consistent with precedent and because the Commission's approval of the 1996 tariffs placed the LECs in the position they would have been in had the staff not erred, we conclude that AT & T has failed to show that the Commission's rulings were arbitrary and capricious. Accordingly, we deny the petition.
Before 1990, the Commission set interstate access charges under a rate-of-return regime. LECs reported their costs to establish a rate base and the Commission set prices that allowed LECs to earn a formulated rate of return on their investor-supplied capital. See Nat'l Rural Telecom. Ass'n v. FCC, 988 F.2d 174, 177-78 (D.C.Cir.1993). In 1990, the Commission adopted a price cap regime. See Second Report and Order, Policy and Rules Concerning Rates for Dominant Carriers, 5 F.C.C.R. 6786 (1990) ("1990 Price Cap Order"). Carriers' services are grouped into various "baskets" for which a maximum price, the price cap index ("PCI"), is determined. From the initial price cap, rates are adjusted annually based on inflation and expected productivity advances. Unlike the rate-of-return system, costs do not generally affect the prices LECs may charge. Thus, if carriers reduce costs, they earn greater profits than the set rate of return under the former system. See Bell Atlantic Tel. Cos. v. FCC, 79 F.3d 1195, 1198 (D.C.Cir.1996).
Two exceptions by which costs affect the PCI are relevant to this appeal. First, the "exogenous costs" rule allows carriers to adjust price caps to account for "costs that are triggered by administrative, legislative or judicial action beyond the control of the carriers." 1990 Price Cap Order, 5 F.C.C.R. at 6807. Changes in generally accepted accounting principles ("GAAP") ordered by the Financial Accounting Standards Board ("FASB") can be treated exogenously if the Commission determines the changes are "compatible with [its] regulatory accounting needs." Id. Second, the sharing rules (repealed in 1997, see Price Cap Performance Review, 12 F.C.C.R. 16,642, 16,699-703 (1997)) require a carrier whose rate of return on its rate base is abnormally high to share a portion of the excess with ratepayers, like AT & T, by reducing its PCI for the following year, a cost-based check harkening back to the rate-of-return regime. See Bell Atlantic, 79 F.3d at 1199.
In December 1990, the FASB adopted "SFAS-106," which requires carriers to account for OPEB obligations in the year in which they accrue rather than when they are paid. See FINANCIAL ACCOUNTING STANDARDS BOARD, STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 106, EMPLOYERS' ACCOUNTING FOR POSTRETIREMENT BENEFITS OTHER THAN PENSIONS (Dec.1990). The transition from cash to accrual accounting applied to "ongoing amounts," i.e., the annual expense that a firm recognizes when its current employees earn retirement benefits to be paid in the future, and to the "transitional benefit obligation," i.e., the unfunded OPEBs owed at the time of adopting SFAS-106. In 1991, the Common Carrier Bureau required LECs to implement SFAS-106 because the change in GAAP was consistent with the Commission's regulatory objectives and stated that "[t]he effective date of SFAS-106 is for fiscal years beginning after December 15, 1992, although earlier implementation is encouraged by the FASB." Order, Notification of Intent to Adopt SFAS No. 106, 6 F.C.C.R. 7560 (1991).
The accounting change presented both rate base and exogenous treatment issues. The Bureau issued "RAO Letter 20" to LEC accounting officers, explaining that because OPEBs "are similar to pension expenses" they should be "given the same rate base treatment," such that "the interstate portion of unfunded accrued [OPEBs] should be deducted from the rate base." RAO Letter 20, Re: Uniform Accounting for Postretirement Benefits Other than Pensions in Part 32, 7 F.C.C.R. 2872 (1992) ("RAO Letter 20"). In 1996, the Commission rescinded the rate base portion of RAO Letter 20 on the ground that the Bureau had exceeded its authority by adding an exclusion not provided for in the Commission's rate base rules. See Order, RAO Letter 20, 11 F.C.C.R. 2957, 2961 (1996); 47 C.F.R. § 65.830 (1992). The following year, the Commission, upon determining that the Bureau had come to the right policy conclusion, amended its regulations to require that OPEBs be deducted from the rate base in future years. See Report and Order, RAO Letter 20, 12 F.C.C.R. 2321, 2327 (1997).
Through the exogenous cost feature of the ratemaking regime, several LECs sought in 1992 to increase their PCIs to reflect the new costs booked as a result of SFAS-106. The Commission rejected the rate increases on the ground that "LECs can exercise substantial control over the level and timing of OPEB expenses," such that the costs were not beyond the carriers' control in a way that would justify exogenous treatment under Commission rules. Order, Treatment of LEC Tariffs Implementing SFAS, 8 F.C.C.R. 1024, 1033 (1993). In Southwestern Bell Telephone Co. v. FCC, 28 F.3d 165 (D.C.Cir. 1994), the court concluded that the Commission's rejection was arbitrary and capricious because earlier orders showed that "the Commission meant for the `control' test to be satisfied simply by the fact of exogenous imposition of the accounting rule, without concern for the underlying costs covered by the rule." Id. at 170. The court held that a "FASB change adopted by the Commission is not a change under control of the carrier, and, once mandated by the Commission, the change satisfies the control criterion [of the exogenous cost rule]." Id.
Thereafter, the LECs renewed their requests for exogenous treatment for OPEB adjustments in their 1994 tariffs. Verizon, which had implemented SFAS-106 in 1991 and 1992 — after it was approved by the Commission but before the deadline for compliance — sought exogenous PCI increases to recover OPEB costs from those earlier years. See Order, Bell Atlantic Tel. Cos. Tariff FCC No. 1, 10 F.C.C.R. 1594, 1597-98 (1994). The Common Carrier Bureau suspended the Verizon tariffs for one day, imposed an accounting order, and began an investigation. Id. at 1598. While that investigation was pending, the Commission adopted a rule that prohibited exogenous treatment of OPEBs in the future because they do not have cash-flow or actual economic impact. See Order, Price Cap Performance Review, 10 F.C.C.R. 8961, 9089-95 (1995) ("1995 Price Cap Order").
After the Commission rescinded RAO Letter 20, the LECs restated their rate bases for the years during which the letter had wrongly instructed them to deduct OPEBs from their rate bases. Because they had incurred greater sharing obligations as a result of the exclusion of OPEBs during those years, the LECs sought in their 1996 tariffs a one-time increase in their PCIs as an "exogenous cost" to recoup the amount they lost as a result of complying with RAO Letter 20. See Order, 1996 Annual Access Tariff Filings, 11 F.C.C.R. 7564, 7568 (1996). The Common Carrier Bureau suspended the tariffs for one day, imposed an accounting order, and began an investigation. See id. at 7605.
The Commission resolved these investigations in March 2005. See Order Terminating Investigation, 1993 Annual Access Tariff Filings Phase 1, 20 F.C.C.R. 7672 (2005) ("Order"). It approved Verizon's request for exogenous treatment of OPEB costs incurred before January 1, 1993. The Commission stated that it would apply the price cap rules in effect when the tariffs were filed, see id. at 7680-81, whereby an accounting change proposed by the FASB was considered "outside the control of carriers" (requiring exogenous treatment) once it had been "actually approved" by the FASB and the Commission had not objected within ninety days to a carrier's notification that it would implement the change, see id. at 7681. The Commission concluded that "Verizon has justified exogenous...
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