New York State Dept. of Law v. F.C.C., s. 91-1362

Decision Date09 February 1993
Docket Number91-1367 and 91-1368,Nos. 91-1362,s. 91-1362
Parties, 140 P.U.R.4th 459 NEW YORK STATE DEPARTMENT OF LAW and The New York State Consumer Protection Board, Petitioners, v. FEDERAL COMMUNICATIONS COMMISSION and United States of America, Respondents, New York Telephone Company and New England Telephone and Telegraph Company, Intervenors. ALLNET COMMUNICATION SERVICES, INC., Petitioner, v. FEDERAL COMMUNICATIONS COMMISSION and United States of America, Respondents, New York Telephone Company and New England Telephone and Telegraph Company, Intervenors. Scott J. RAFFERTY, Petitioner, v. FEDERAL COMMUNICATIONS COMMISSION and United States of America, Respondents, New York Telephone Company and New England Telephone and Telegraph Company, Intervenors.
CourtU.S. Court of Appeals — District of Columbia Circuit

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

John E. Ingle, Deputy Associate General, F.C.C., with whom Robert L. Pettit, General Counsel, and Laurence N. Bourne, Counsel, F.C.C., Catherine G. O'Sullivan and Andrea Limmer, Attys., Dept. of Justice, Washington, DC, were on the brief, for respondents.

E. Edward Bruce, Washington, DC, with whom Saul Fisher, White Plains, NY, were on the brief, for intervenors New York Telephone Co. and New England Telephone and Telegraph Co. Donald W. Boecke, Washington, DC, entered an appearance, for intervenors.

Before WALD, D.H. GINSBURG and HENDERSON, Circuit Judges.

Opinion for the Court filed by Circuit Judge WALD.

WALD, Circuit Judge:

In 1990, the Federal Communications Commission ("FCC" or "Commission") brought an enforcement action against two wholly owned, regulated affiliates of the NYNEX Corporation ("NYNEX"). The FCC alleged that these two affiliates, the New England Telephone and Telegraph Company ("NET") and the New York Telephone Company ("NYT"), violated FCC rules and policies designed to prevent regulated affiliates from overpaying nonregulated affiliates and passing those overcharges on to the ratepayers. Eight months after issuing an Order to Show Cause against these two affiliates, collectively the NYNEX Telephone Companies ("NTCs"), but without any public notice, the FCC and the affiliates entered into a Consent Decree under which the NTCs agreed to virtually all of the terms of the Order to Show Cause, and the FCC agreed to terminate all proceedings arising from that Order and not to institute any new proceedings based on the conduct that gave rise to the Order. The petitioners in this case, the New York State Department of Law ("New York petitioners"), Allnet Communications Services ("Allnet"), and Scott Rafferty, filed petitions for reconsideration with the FCC, asking it to repudiate the Consent Decree and reopen the show cause proceedings. The FCC's denial of those petitions is the subject of this appeal. Because we conclude that the FCC's decisions about the initial scope of the enforcement action and its decision to enter into the Consent Decree are committed to the agency's nonreviewable discretion, and because we find that the FCC did not violate the Administrative Procedure Act ("APA") or its own rules prohibiting ex parte contacts, we deny the petitions for review.

I. FACTUAL AND PROCEDURAL BACKGROUND
A. General Background

The FCC has recognized that an environment in which regulated and nonregulated affiliates engage in extensive transactions with one another presents dangers of cross-subsidization, that is, sales by the nonregulated affiliates at excessive prices to the regulated affiliates, which pass these excess costs along to the ratepayers. To guard against this danger, the FCC has adopted measures to scrutinize such affiliate transactions and to limit nonregulated affiliates' prices and profits on them by reference to the regulated entities' prescribed rates of return.

The transactions at issue in this case, which occurred between 1984 and 1988, come under two separate regulatory regimes. The reasonableness of affiliate transactions occurring from 1984 until April 1987 is determined subject to the requirement that affiliates record "just and reasonable" rates, 47 C.F.R. § 31.01-2(c) (1987), and to the basic principles established in AT & T, Charges for Interstate Telephone Service, Docket 19129 (Phase II), 64 F.C.C.2d 1 (1977) ("Docket 19129"). Under Docket 19129, the Commission first applies a rate of return or earnings comparison test, designating a price excessive if an unregulated affiliate's rate of return on an inter-corporation sale exceeds that permitted the regulated company. The Commission then applies a market comparison test, designating a price excessive if it exceeds "competitive benchmarks," that is, if the unregulated affiliate exceeds what others in the market charge. The Docket 19129 order indicates that these are independent tests providing two separate grounds for recovery. See id. paras. 208-09. Transactions occurring since April 1987 are analyzed according to the FCC's affiliate transaction rules, under which regulated corporations must meet the earnings comparison test for services purchased from nonregulated affiliates, and the market comparison test for assets purchased from them. 47 C.F.R. § 32.27(b) & (d). 1

B. This Action
1. The Order to Show Cause

A routine audit by the FCC's Common Carrier Bureau of the transactions among NYNEX affiliates from 1984 through 1988 disclosed that the Material Enterprises Company ("MECO"), a wholly owned and nonregulated affiliate of NYNEX that does virtually all of its business with the NTCs, had overcharged them for products and services, and that the NTCs, in turn, had improperly passed on these inflated costs to their ratepayers. The audit further revealed that MECO's return on investment for these five years had far exceeded the allowable rate of return for regulated affiliates.

After examining the Common Carrier Bureau's facts, findings and recommendations, the FCC concluded that the NTCs "appear[ed] to have violated [the FCC's] affiliate transaction rules and policies over several years and that the audit report provide[d] a basis for initiating ... enforcement proceedings against NYNEX's regulated telephone companies." Order to Show Cause, In the Matter of New York Tel. Co. & New England Tel. & Tel. Co., 5 F.C.C.Rcd. 866, 869 (1990) ("Order to Show Cause"). On February 6, 1990, the Commission ordered the NTCs to show cause why they should not be required to undertake four steps: (1) reduce capital account balances by $32.6 million to correct the artificially inflated capital and equipment carried on their books; (2) make a one-time reduction of $35.5 million to their interstate revenue requirements; (3) adjust certain annual forms for 1989 to correct inaccurate information from previous years; and (4) pay forfeitures of $1,419,000 for failing to account for their transactions with MECO as required by FCC rules.

The NTCs mounted an aggressive challenge to the FCC's action, claiming, among other things, that their transactions with MECO had violated no FCC rules and that, therefore, no forfeitures were justified; that the FCC could not predicate liability on the "just and reasonable" recording requirement in the absence of a knowing and willful padding of accounts; that the initial codification of the transaction rules had been voluntary and nonbinding; and finally, that the FCC was without authority to order refunds to ratepayers. Response of the NYNEX Telephone Companies, filed March 12, 1990.

2. The Consent Decree

On October 3, 1990, the FCC entered into a Consent Decree under which the NTCs agreed to all of the above terms, except that they were to make voluntary contributions to the U.S. Treasury in lieu of forfeitures. Consent Decree, In the Matter of New York Tel. Co. & New England Tel. & Tel. Co., 5 F.C.C.Rcd. 5892 (1990) ("Consent Decree"). In exchange, the FCC agreed to terminate all proceedings arising from the Order to Show Cause and not to institute any new proceedings based on the conduct that gave rise to the Order. The Consent Decree stated that the FCC and the NTCs "agree[d] that the expeditious resolution of this proceeding in accordance with the terms of the Consent Decree is in the best interests of the public and the NTCs' ratepayers." Id. at 5893.

3. Petitions for Reconsideration

In November 1990, the petitioners filed with the FCC petitions for reconsideration, demanding that the agency repudiate the Consent Decree and reopen the show cause proceedings. The New York petitioners claimed to have recently obtained evidence showing that the FCC's earnings comparison test underestimated MECO's excessive pricing. They also complained that the FCC did not state an adequate reason for settling and that the settlement was not consistent with the FCC's statutory duty to enforce the Communications Act. Petitioner Rafferty challenged the FCC's actions "for the reasons stated" by the New York petitioners and on the additional ground that the agency addressed only past violations, not prospective relief. Finally, petitioner Allnet objected that the settlement negotiations between the FCC and the NTCs violated the Commission's ex parte communications rules and the APA's notice-and-comment requirements, and that the FCC had arbitrarily cut off its rights to seek relief against the NTCs through the complaint process.

In its June 4, 1991 order denying the petitions for reconsideration [J.A. 223], the Commission "stated in more detail [its] reasons for entering into the consent decree." Memorandum Opinion and Order, In the Matter of New York Tel. Co. & New England Tel. & Tel. Co., 6 F.C.C.Rcd. 3303 (1991) ("Reconsideration Order"). It cited the "certainty of relief for consumers"; the obtaining of "immediate benefits for consumers while avoiding the delay, expense, and uncertainty that attends protracted litigation"; the fact that "the...

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