MCI Telecommunications Corp. v. F. C. C.
| Decision Date | 13 April 1982 |
| Court | U.S. Court of Appeals — District of Columbia Circuit |
John L. Bartlett, with whom Howard D. Polsky, James E. Landry and John C. Smith, Washington, D. C., were on the brief for Aeronautical Radio, Inc., et al., and Joseph M. Kittner, Edward P. Taptich, Norman P. Leventhal and Randolph J. May for ABC, et al., Joseph DeFranco for CBS, Inc. and Howard Monderer, Washington, D. C., for NBC, Inc., petitioners/intervenors in Nos. 81-1052, 81-1272, 81-1273 and 81-1554.
William J. Byrnes, with whom Michael H. Bader, Kenneth A. Cox, John M. Pelkey, Joel Rothstein Wolfson, Washington, D. C., Philip S. Nyborg, Arlington, Va., and Ruth S. Baker-Battist, Washington, D. C., were on the brief, for MCI Telecommunications Corp., petitioner in No. 81-1052 and intervenor in Nos. 81-1272 and 81-1273.
John E. Ingle, Counsel, F. C. C., with whom Stephen A. Sharp, Gen. Counsel, Daniel M. Armstrong, Associate Gen. Counsel, and Carl D. Lawson, Counsel, F. C. C., Washington, D. C., were on the brief, for respondents. Jane E. Mago, Counsel, F. C. C., Robert B. Nicholson, Nancy C. Garrison, and James H. Laskey, Attys., Dept. of Justice, Washington, D. C., also entered appearances for respondents.
Jules M. Perlberg, Chicago, Ill., with whom David J. Lewis, Washington, D. C., Alfred A. Green, New York City and Saul Fisher, Bedminster, N. J., were on the brief, for American Telephone and Telegraph Co., intervenor in Nos. 81-1052, 81-1272, 81-1273 and 81-1554.
Daniel A. Huber, Washington, D. C., entered an appearance for Southern Pacific Communications Co., intervenor in Nos. 81-1052, 81-1272 and 81-1273.
Herbert E. Marks and Laurel R. Bergold, Washington, D. C., entered appearances for Independent Data Communications Manufacturers Ass'n, Inc., intervenor in Nos. 81-1052, 81-1272 and 81-1273.
F. Thomas Tuttle, Harold David Cohen and Jack N. Goodman, Washington, D. C., entered appearances for Satellite Business Systems, intervenor in No. 81-1052.
Randall B. Lowe, Washington, D. C., entered an appearance for United States Transmission Systems, Inc., intervenor in Nos. 81-1052, 81-1272 and 81-1273.
Before TAMM and WILKEY, Circuit Judges, and GERHARD A. GESELL, * United States District Judge.
Opinion for the Court filed by Circuit Judge WILKEY.
Petitioners challenge a Federal Communications Commission (FCC) decision prescribing an interim cost allocation methodology for use in setting rates for interstate services provided by American Telephone and Telegraph Company (AT& T). They charge that the FCC failed to explain its reversal of a previous cost allocation decision and violated the "arbitrary and capricious" provision of the Administrative Procedure Act (APA). 1 We reject these contentions and affirm the agency's action.
The FCC regulates AT&T rates for interstate services, which are generally categorized as MTS (Message Telecommunications Service, or regular long distance service), WATS (Wide Area Telecommunications Service, or bulk rate long distance service), and private line services. A basic principle used to ensure that rates are "just and reasonable" 2 is that rates are determined on the basis of cost. AT&T is permitted to charge rates allowing it to earn a reasonable rate of return on the cost of its services. 3
Since AT&T offers different services, this regulatory scheme requires that the cost of each service be calculated. This is difficult because many telecommunications costs are common costs, which are necessarily incurred to produce all services. Common facilities and management are examples. The problem is exacerbated when the services offered vary in the degree of competition faced. The FCC has long been concerned that AT&T might "cross-subsidize" its more competitive services by allocating excessive costs to the monopoly services and thereby increasing monopoly rates.
Two basic cost allocation methods have been proposed. One method would calculate the cost of all competitive services on the basis of their long-run incremental costs (LRIC)-the additional costs resulting from adding the service to the existing service network. Under LRIC the common costs would be borne by the initial basic monopoly services; this method thus avoids the problem of determining how much of the common costs should be allocated to individual services. The other method allocates common costs to each individual service on a fully distributed cost (FDC) basis. Each item of common cost is divided among the individual services on some basis indicating each service's contributing share of that cost. In making such allocations, several different methods are possible.
In Docket 18128 the Commission investigated the lawfulness of AT&T's proposed private line rates and, more generally, the proper method of assessing costs for ratemaking purposes. The Commission decided to adopt FDC over LRIC as the ratemaking standard, largely because it feared that LRIC would permit cross-subsidization at the expense of consumers of monopoly services. 4
The Commission then turned to the question of which FDC method to use. Seven methods had been developed, two of which are relevant here: FDC Method 1 (FDC-1) and FDC Method 7 (FDC-7). 5 FDC-1 is a "relative use" method. The costs of a common facility are assigned to services in proportion to their relative use of the facility. As the relative use changes over time, the cost allocation changes as well. FDC-7 is an "historical cost causation" method. The initial costs of a facility, including the cost of temporary excess capacity, are allocated to those services for which the facility was constructed. Operating expenses are attributed to individual services as accurately as possible. The basic difference between the two methods, then, is that one looks to current use while the other looks to projected future use. 6
The Recommended Decision of the Common Carrier Bureau Chief chose FDC-1 as the optimal method, primarily because it "has fewer problems relating to judgmental uncertainty since it is based generally upon the accepted and understood methods of the Separations Manual and the process of analysis is considerably simpler than in the other method." 7 The Commission, however, found "that FDC Methods based on historical cost causation are attractive for ratemaking and especially for 'tracking' purposes." 8 The relative use method embodied in FDC-1 was determined to be less useful for these purposes because it would result in current users paying for facilities built for other services' future needs. 9
The Commission's September 1976 decision did not, however, find FDC-7 acceptable: "Based on the evidence before us, ... we find that, at best, Method 7's procedures must be made more consistent with a true historical causation allocative base, must be less susceptible to managerial interpretation and manipulation, and generally must be clarified and delineated to the Commission's satisfaction." 10 The Common Carrier Bureau was ordered to revise FDC-7 and FDC-1 in accordance with the opinion's guidelines. 11 Methods 1 and 7 would be used to establish a "zone of reasonableness" for ratemaking until acceptable FDC-7 data could be provided. 12
The Bureau set up a Cost Analysis Task Force, which in conjunction with AT&T produced and then revised a proposed cost manual. The FCC accepted this revised manual conditionally in November 1977. The manual could be used, but it was not approved because problems remained. The Commission announced that it expected to conduct a rulemaking proceeding on adoption of an FDC manual. 13
In Docket 20814 the issue was the lawfulness of AT&T's Multi-Schedule Private Line (MPL) tariff. The Commission had rejected several tariff filings as inconsistent with the 18128 guidelines, 14 and in March 1978 it ordered the Administrative Law Judge (ALJ) hearing the MPL case to expedite his resolution of the question of AT&T's implementation of the 18128 decision. 15
In March 1979 the ALJ found that AT&T had willfully violated 18128 by continuing to employ a "basic service" philosophy and failing to develop FDC cost procedures. He prepared a suggested...
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