Petition for Writ of Certiorari — Southern Bell Telephone & Telegraph Co. v. Federal Communications Commission

OCTOBER TERM, 1988

SOUTHERN BELL TELEPHONE & TELEGRAPH COMPANY,

SOUTH CENTRAL BELL TELEPHONE COMPANY, PACIFIC

BELL, NEVADA BELL, THE CHESAPEAKE & POTOMAC

TELEPHONE COMPANY, THE CHESAPEAKE & POTOMAC

TELEPHONE COMPANY OF MARYLAND, THE CHESAPEAKE

& POTOMAC TELEPHONE COMPANY OF VIRGINIA, THE

CHESAPEAKE & POTOMAC TELEPHONE COMPANY OF

WEST VIRGINIA, THE BELL TELEPHONE COMPANY OF

PENNSYLVANIA, NEW JERSEY BELL TELEPHONE COM-

PANY, THE DIAMOND STATE TELEPHONE COMPANY,

AND SOUTHWESTERN BELL TELEPHONE COMPANY,

‘ Petitioners,

FEDERAL COMMUNICATIONS COMMISSION AND THE

UNITED STATES OF AMERICA,

Respondents.

PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Of Counsel: RAYMOND F. SCULLY *

WALTER H. ALFORD ALAN B. STERNSTEIN

WILLIAM B. BARFIELD BASKIN, FLAHERTY, ELLIOTT,

R. FROST BRANON MANNINO, GORDON &

BELLSOUTH TELEPHONE SCULLY, P.C.

COMPANIES 1275 K Street, N.W.

Suite 1000

Ricmsn W. Coane Washington, D.C. 20005

JAMES P. TUTHILL

MARGARET DEB. BROWN

STANLEY J. MOORE

PACIFIC TELESIS TELEPHONE * Counsel of Record

COMPANIES

(202) 842-1600

Counsel for Petitioners

[ Additional Counsel on Inside Cover]

January 30, 1989

WILSON - EPES PRINTING Co., INC. - 789-0096 - WASHINGTON, D.C. 20001

—

MARK J. MATHIS

THOMAS L. WELCH

Davip K. HALL

BELL ATLANTIC TELEPHONE

COMPANIES

JAMES E. TAYLOR

WILLIAM C. SULLIVAN

MELANIE S. FANNIN

MICHAEL A. MEYER

SOUTHWESTERN BELL

TELEPHONE COMPANY

QUESTION PRESENTED

In early 1976, the Federal Communications Commis-

sion prescribed a 9.5 percent rate of return for the Bell

System’s interstate services, plus another .5 percent as

an efficiency incentive. This required AT&T to design

rates for the Bell System that, based on AT&T’s best

estimates of future costs and market conditions, would

most likely produce actual future returns within the

FCC’s prescription. AT&T filed rates in 1976 that then

produced actual returns of 9.25 and 9.59 percent in 1976

and 1977, respectively, and 10.22 percent in 1978.

Six years later, in 1984, the FCC determined that the

1978 earnings were excessive and required AT&T and

telephone companies then recently divested from AT&T

to refund the 1978 overage retroactively. The refund

was to be effected by requiring the carriers to reduce

their current rates below levels that were otherwise

authorized by the FCC. The FCC refused to allow the

carriers to be made whole for the shortfall in 1976.

After arguments by petitioners here that the pertinent

provisions of the Communications Act are designed to

preclude retroactive rate adjustments and that numerous

cases in this Court and the Courts of Appeals reject such

adjustments under parallel federal regulatory statutes,

the District of Columbia Circuit, in a split decision,

affirmed the FCC’s action as within its statutory power.

Against this background, the question presented is:

Whether the FCC’s 1984 order to reduce current

rates to effect a refund of 1978 earnings constitutes

retroactive ratemaking in violation of the specific

provisions of the Communications Act of 1934.

(i)

ii

RULE 28.1 LISTING

Southern Bell Telephone and Telegraph Company,

South Central Bell Telephone Company and BellSouth

Capital Funding Corporation are who!ly owned subsid-

iaries of BellSouth Corporation which have outstanding

publicly owned securities. BellSouth Corporation par-

tially owns Air Call Communications Ltd., which is also

partially owned by Air Call PLC, a company whose

securities are publicly traded in the United Kingdom.

BellSouth is in the process of acquiring Mobile Com-

munications Company of America, a company which has

outstanding publicly owned securities.

The parent company of Pacific Bell and Nevada Bell

is Pacific Telesis Group. PacTel Products and Athens

Cellular, Ine. are the only non-wholly owned subsidiaries

or affiliates of those corporations.

The Bell Telephone Company of Pennsylvania, The

Chesapeake and Potomac Telephone Company, The Ches-

apeake and Potomac Telephone Company of Maryland,

The Chesapeake and Potomac Telephone Company of

Virginia, The Chesapeake and Potomac Telephone Com-

pany of West Virginia, Diamond State Telephone Com-

pany and New Jersey Bell Telephone Company are sub-

sidiaries of Bell Atlantic Corporation. Bell Atlantic does

not have a parent company. Its subsidiaries and affiliates

(other than wholly owned subsidiaries) are Bell Atlantic

Directory Graphics, Inc., and two partnerships: the Ches-

apeake Directory Sales Company and Bell Atlantic Ve-

hicular Leasing. In addition, Bell Atlantic Mobile Sys-

tems, Inc., Bell Atlantic’s cellular subsidiary, partici-

pates in several limited partnerships which provide

cellular service in various metropolitan areas. Bell At-

lantic Properties, Inc., Bell Atlantic’s real estate sub-

sidiary, is also involved in several real estate develop-

ment partnerships. None of these partnerships has se-

curities outstanding to the general public.

iii

The parent company of Southwestern Bell Telephone

Company is Southwestern Bell Corporation. Gulf Print-

ing Company is also a subsidiary of the parent and is the

only non-wholly owned subsidiary or affiliate of either

corporation.*

* Additional parties to the proceeding below not joining in this

Petition were American Telephone & Telegraph Co., Ameritech

Operating Companies, GTE Service Corp., MCI (formerly Satellite

Business Systems), Mountain States Telephone & Telegraph Co.,

National Telephone Cooperative Association, New England Tele-

phone & Telegraph Co., New York Telephone Co., Northwestern

Bell Telephone Co., Organization for the Protection and Advance-

ment of Small Telephone Companies, Pacific Northwest Bell Tele- ~

phone Co., Telecommunications Research & Action Center, and

United States Telephone Association.

TABLE OF CONTENTS

Page

QUESTION PRESENTED i

eI ices csiceccneseaereiesatipilenmctiececeeatines ii

TARLS OF AUTHORITING vi

os a eels 2 ‘

a caleeenbaaen 2

STATUTORY PROVISIONS ..u000.....-.:cccsccescoeecseecsesseeeseeee aie

STATEMENT OF THE CASE. 2

REASONS FOR GRANTING THE WRIT....................- 9

I. The Court Below Decided a Novel Question Fun-

damental to Rate Regulation Under the Com-

munications Act in a Manner Contrary to the

MT ici licecicne siesspladinitln linia a ie i i, 9

II. The Decision of the Court Below Is in Conflict

with the Decisions of this Court and Other Deci-

sions of the Courts of Appeals ............................- 13

COT Rh pcik sith ccionsinnsdhniaiinaathasbbosiataia damacleabnstdaniiaae 18

(v)

vi

TABLE OF AUTHORITIES

CASES: Page

American Public Gas Ass’n v. FPC, 567 F.2d 1016

(D.C. Cir. 1977), cert. denied, 435 U.S. 907

CITI nccenncucecncnsresucocnsctntbannsecipiiapnsniduiiaditineiaaiiiiiaens 9

American Telephone & Telegraph Co. v. FCC, 836

pe B Zi toe Sp | aRRomcnn ene 7,8

American Telephone & Telegraph Co. v. FCC, 487

ie § 8: fe See 11, 13, 16

Arizona Grocery Co. v. Atchison, Topeka & Santa

Fe Bey., B46 UB. STO (RGGB icacnncvcsnksrecetceneticinsvionns 4

Arkansas Louisiana Gas Co. v. Hall, 453 U.S. 571

TI orcas cceccnsonvnsscnsiacsccstiptiinsiindatiatslinalpiaadniaaaamiiis 13, 15

Ashland Coal & Ice Co. v. United States, 61 F.

Supp. 708 (E.D. Va.), aff'd per curiam, 325 U.S.

BEE SEIIIPIIITD ccviciinsncecirnnsocicqitaenteatassebiaeatabananeiaaiiaaadilinns 5

Atlantic Refining Co. v. Public Service Comm’n,

ik S| esate Reka Bele RRS 14

Board of Public Utility Comm’rs v. New York Tele-

heed Ca. TUE Ta. GD CD ncncescncieceerpertnciesene 10

Board of Trade v. United States, 314 U.S. 534

ERIE sccsih-sn-ciicin-saiosicisssnesistensbaliocidseibicanasienadiamatildadianidetaii 5

Boston Edison Co. v. FERC, 856 F.2d 361 (ist Cir.

DI seein ceneenvncsninssisscasesnnientnbanienesnesintaiiasanmsimndnammaiin 15

Colorado Interstate Gas Co. v. FERC, 791 F.2d 803

; Rs Eeea enor reno ner mreee Le rere 14

Distrigas Corp. v. FERC, 737 F.2d 1208, vacated,

. @f ) 2 2: ) } __ Se 5

Distrigas Corp. v. FERC, 751 F.2d 20 (1st Cir.

EAE enon as eee rrr meee tn. Bis Mees 5, 10

Dorchester Gas Producing Co. v. FERC, 848 F.2d

Noes RoE IRIE RC a 14

Electrical District No. 1 v. FERC, 774 F.2d 490

EI, “Hs © BID cicscehaceoncarssdcaseatenieacgiaicaentanedpmamnaiaaiacaaneeh 16

FPC v. Sierra Pacific Power Co., 350 U.S. 348

ERNIE. <.-ssisnkissnsineds/itntscnceainischeciacaelhdeieamtiie sai alent een 15

Gulf States Utilities Co. v. Alabama Power Co., 824

F.2d 1465, 1471, modified, 831 F.2d 557 (5th Cir.

ITT ccc cisrececcccthecsisteaacai iedccateaplei aed soa aa aad 15

ICC v. American Trucking Ass’ns, 467 U.S. 354

SUITED sc ssosdnsosnicomstnieiet-acimaiehthtidbcesbdietddindastaekaiae annealed 16

ee

vii

TABLE OF AUTHORITIES—Continued

Page

Las Cruces TV Cable v. FCC, 645 F.2d 1041 (D.C.

TR REET RES Rec S SEAR Sensei aa AR 13

Massachusetts v. United States, 729 F.2d 886 (1st

Ris IEE citicishic ca enced hendat piaidabshiata tala tinsadeiatindlaanidbesace 15

Nader v. FCC, 520 F.2d 182 (D.C. Cir. 1975) hee 5, 10

Sea Robin Pipeline Co. v. FERC, 795 F.2d 182

8 RE REE AE e a a 15

Transcontinental & Western Air, Inc. v. CAB, 336

ED FE Aes aR Mir ae 10

United States v. SCRAP, 412 U.S. 669 (1973) _....... 11

ADMINISTRATIVE DECISIONS:

Report and Order, Amendment of Part 65, CC

Docket No. 86-127, FCC 86-514 (released Dec. 3,

REE AU pecan eeree ne ete eae ARES Re Oe 17

American Telephone & Telegraph Co., 58 F.C.C.2d

IR eR tern on an 6

American Telephone & Telegraph Co., 73 F.C.C.2d

RRR NT NS Ee IK SS NK RR 11

American Telephone & Telegraph Co., 78 F.C.C.2d

ee RST erent Rae eee lan SR 11

American Telephone & Telegraph Co., 86 F.C.C.2d

221 (1981), aff’d, United States v. FCC, 707 F.2d

gg | pS eee ee 11

Decision, AT&T Earnings on Interstate and For-

eign Services During 1978, CC Docket No. 79-

187, FCC 84-567, 102 F.C.C. 2d 52 (1984) -......... 6, 7, 16

Memorandum Opinion and Order, Annual 1988

Access Tariff Filings, CC Docket No. 88-1, Phase

Ree fie Gf: RRR ee 8

Memorandum Opinion and Order, Annual 1988

Access Tariff Filings, FCC Docket No. 88-1,

Phase II, FCC 88-420 (released Dec. 27, 1988) .... 8

AT&T Charges for Interstate Telephone Service,

Docket No. 20376, 57 F.C.C.2d 960 (1976)............ 4,5

Vili

TABLE OF AUTHORITIES—Continued

STATUTES & REGULATIONS: Page

Communications Act of 1934

Oe I idedih iicecisindscepndeceritntncnnanincaniacll 6, 8, 16, 17

SEE SE A Aan Nene He = AP 3, 13, 16

Pg” ESSERE ARIA merase Somer passim

I i anucihsniiceiicnicntpsteiiiienenstananiinminalgl passim

Natural Gas Act

FE OE sisinivistnncinttnninbincinensiitiiananinciites 13

Federal Power Act

ae RO 13

Interstate Commerce Act

Nd oo sccatslaahabencnpimenahagilie 16

ss ccnnasnicenidihenbannedinccacnsacihn 16

RS A A Sn 16

Po AIEEE I aa OO ee 12

CTT AN TT RT TET 12

MISCELLANEOUS:

Comments of Américan Telephone & Telegraph

Company in Response to Notice of Inquiry,

AT&T Earnings on Interstate and Foreign Serv-

ices During 1978, CC Docket No. 79-187 (filed

Bs PTET cnrciccsinti ols sicteibatnnteinanimmnatbinsnaniobeninaiets 6

Brief of FCC, New England Telephone & Tele-

graph Co. v. FCC, No. 85-1087 (D.C. Cir. filed

RR eR Garren ce ee 17

H.R. Rep. No. 1850, 73d Cong., 2d Sess. (1934) .... 12

H.R. Conf. Rep. No. 213, 73d Cong., 1st Sess.

(SARS ih lo SR SoS Renee 12

E. Nichols & F. Welch, Ruling Principles of Utility

I a detataiaceniee 10

A. Priest, Principles of Public Utility Regulation

a asesaniee 10

S. Rep. No. 781, 73d Cong., 2d Sess. (1934)............ 12

eee

IN THE

Supreme Court of the United States

OCTOBER TERM, 1988

No.

SOUTHERN BELL TELEPHONE & TELEGRAPH COMPANY,

SOUTH CENTRAL BELL TELEPHONE COMPANY, PACIFIC

BELL, NEVADA BELL, THE CHESAPEAKE & POTOMAC

TELEPHONE COMPANY, THE CHESAPEAKE & POTOMAC

TELEPHONE COMPANY OF MARYLAND, THE CHESAPEAKE

& POTOMAC TELEPHONE COMPANY OF VIRGINIA, THE

CHESAPEAKE & POTOMAC TELEPHONE COMPANY OF

WEST VIRGINIA, THE BELL TELEPHONE COMPANY OF

PENNSYLVANIA, NEW JERSEY BELL TELEPHONE COoM-

PANY, THE DIAMOND STATE TELEPHONE COMPANY,

AND SOUTHWESTERN BELL TELEPHONE COMPANY,

Petitioners,

V. -

FEDERAL COMMUNICATIONS COMMISSION AND THE

UNITED STATES OF AMERICA,

Respondents.

PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Petitioners, several telephone companies divested by

AT&T in 1984, respectfully pray that a writ of cer-

tiorari issue to review the judgment and opinion of the

United States Court of Appeals for the District of Co-

2

lumbia Circuit entered on August 21, 1987. Petitions

for rehearing and suggestions for rehearing en banc of

the decision of the Court of Appeals -were denied on

November 2, 1988.

OPINIONS BELOW -

The decision of the Court of Appeals for which review

is sought here is reported at 826 F.2d 1101 and is re-

produced in Appendix A, accompanying this Petition.

The orders of the Court of Appeals denying petitions for

rehearing and suggestions for rehearing en banc, to-

gether with accompanying statements, are unreported and

are reproduced in Appendix B. The order and reconsid-

eration order of the Federal Communications Commission

affirmed by the Court of Appeals are reproduced in Ap-

pendices C and D. The FCC’s initial order is reported

at 102 F.C.C.2d 52 (1984). Its order on reconsideration

is unreported.

JURISDICTION

The decision of the Court of Appeals for which review

is sought was entered on August 21, 1987. The court’s

orders denying petitions for rehearing and suggestions

for rehearing en banc were entered on November 2, 1988.

This petition has been filed within 90 days of that date,

as required by 28 U.S.C. § 2101(c). The jurisdiction of

this Court is invoked pursuant to 28 U.S.C. § 1254/1).

STATUTORY PROVISIONS

The statutory provisions involved in this case are Sec-

tions-4(i) and 203 to 205 of the Communications Act of

1934, 47 U.S.C. §§ 154(i), 203-205. They are repro-

duced in Appendix E.

STATEMENT OF THE CASE

This case involves a fundamental dispute over the rate

regulation powers of the Federal Communications Com-

mission (“FCC”). A panel majority of the court below,

3

consisting of Circuit Judge Mikva and District Judge

Parsons,’ upheld agency action that was taken without

any explicit statutory authority whatsoever and, more-

over, was in plain conflict with the Communications Act

and long settled regulatory law involving parallel fed-

eral regulatory acts. A sharply divided Court of Appeals

denied suggestions for rehearing en bane, and in response,

several dissenting judges made it clear why this case

should be reviewed:

“The fundamental issue presented ... is of mani-

fest importance. Not only are the economic stakes

staggeringly high, but the FCC has . . . purported

to exercise a power which Congress never conferred

upon it. . . . In the process, the Commission’s rate-

making revolution flies in the teeth of . . . virtues

... that rate regulatory regimes are designed to

foster.

“The errors complained of are, in short, profound.” ?

Ultimately, the resolution of this dispute has major con-

sequences for all of the carriers and ratepayers subject

to the Communications Act and, indeed, consequences for

those subject to parallel federal regulatory schemes.

Sections 203 to 205 of the Communications Act erect

a statutory scheme that balances the interests of rate-

payers and carriers by providing stable and predictable

charges for both. Under Section 203 of that scheme, a-

carrier may itself initiate rates, subject to public com-

ment and FCC review. If these rates prove to be too

low, the carrier’s recourse is to file new rates, but these

rates may not seek to make the carrier whole for the

inadequate earnings under the first set of rates. On the

other hand, if the first rates are determined to be too

1United States District Judge for the Northern District of

Illinois sitting by designation pursuant to 28 U.S.C. § 294(d).

* App. at 44a (Starr, J., joined by Buckley and Williams, J.J.,

dissenting).

elec

4

high, charges collected under those rates are not subject

to later refund, unless the FCC, acting under Section

204, had first suspended the rates and then allowed them

to go into effect subject to an accounting order pending

an investigation into their lawfulness.*

Under Section 205 of the Act, the FCC itself is au-

thorized to prescribe, after investigation, “what will be

the just and reasonable charge . . . to be thereafter ob-

served.” Charges so imposed by the FCC are not subject

to subsequent challenge by ratepayers, the FCC or car-

riers as too high or too low and, therefore, are not sub-

ject to retroactive adjustment either. See Arizona Gro-

cery Co. v. Atchison, Topeka & Santa Fe Ry., 284 U.S.

370, 389-90 (1982).

In short, until this case, whether rates were carrier-

initiated or FCC-prescribed, ratepayers and carriers

knew with certainty the level of their charges, and the

Communications Act codified an important balance in

protecting this interest. That is, ratepayers were pro-

tected from later attempts to boost charges retroactively,

whether by collecting additional charges or artificially

increasing current rates. Likewise, carriers were pro-

tected from later attempts to lower charges retroactively,

whether by refunds effected through decreases in current

rates or otherwise.

In 1976, however, instead of prescribing specific rates

to be charged by AT&T, the FCC prescribed a rate of

return of 9.5 percent, plus an additional .5 percent as

an incentive to productivity and efficiency.* By prescrib-

3 An accounting order requires a carrier “to keep accurate ac-

count of all amounts received by reason of [a] charge for a new

service or increased charge, specifying by whom and in whose be-

half such amounts are paid.” 47 U.S.C. § 204.

4 Decision, AT&T Charges for Interstate Telephone Service,

Docket No. 20376, 57 F.C.C.2d 960, 973 (1976). The FCC’s prac-

tice of prescribing a rate of return instead of rates had been

5

ing a rate of return, the FCC required AT&T to file

rates which, based on AT&T’s best estimates of future

demand for service and the costs of that service, would

most likely produce an actual return of 9.5 percent.

AT&T couid not guarantee that its rates would precisely

achieve the prescribed return, for the process of setting

future rates is inherently one of economic prediction,

not an exact science.° The FCC’s rate of return pre-

scription could be enforced, however, by requiring that

the initial rates be targeted to the prescribed return, and

if actual returns began to exceed the prescribed return,

those rates could be reduced to come thereafter within

the prescribed return. Indeed, the FCC stated in its 1976

prescription order that if AT&T’s returns exceeded 10

percent, it would merely “require [a] downward adjust-

ment of AT&T’s overall interstate rates.’ °

No one, including the FCC, has ever disputed that the

rates AT&T filed in 1976 were targeted to achieve the

prescribed return of 9.5 percent. In particular, the FCC

did not commence an investigation or impose any ac-

counting order under Section 204 related to whether

recently upheld in Nader v. FCC, 520 F.2d 182 (D.C. Cir. 1975),

but that decision did not address in what ways the FCC could

enforce such a prescription consistently with the Communications

Act.

5 See Board of Trade v. United States, 314 U.S. 534, 546 (1942)

(“The process of rate making is essentially empiric. The stuff of

the process is fluid and changing—the resultant of factors that

must be valued as well as weighed”); Ashland Coal & Ice Co. v.

United States, 61 F. Supp. 708, 713 (E.D. Va.), aff’d per curiam,

325 U.S. 840 (1945) (“The process of rate making cannot be

solved by the rigid application of algebraic formulae or reduced

to the monotonous regularities of mechanical instrumentalities’’).

For a detailed discussion of the ratemaking process, see Distrigas

Corp. v. FERC, 737 F.2d 1208, 1211, vacated, 751 F.2d 20 (1st Cir.

1984).

6 57 F.C.C.2d at 973.

6

AT&T’s rates were appropriately calculated to achieve

no more than the prescribed return.” In fact, AT&T’s

rates produced actual returns of 9.25 and 9.59 percent

in 1976 and 1977, respectively, amounting to a $100 mil-

lion shortfall in 1976.8 In 1978, however, the same rates

produced a return of 10.22 percent, or $101 million

above the 10 percent maximum allowed by the FCC.

For the entire three-year period, these rates produced

a return of 9.69 percent, well within the FCC’s limit.

Six years later, in 1984, the FCC determined that

AT&T’s rates were too high in 1978. The FCC ordered

AT&T and its former telephone operating companies to

refund the- 1978 overage by reducing their current

charges to make up for the charges that were too high

in 1978.° It claimed authority to take this action under

Sections 205 and 4(i) of the Act, the latter of which

permits the agency to take any action “necessary” to

executing its functions, provided the action is “not in-

consistent with” the Act. No allowance, however, was

made for the shortfall in 1976. Because there was no

relevant accounting order, the FCC’s refund order could

7™The FCC did suspend the rates for one day and impose an

accounting order on other issues. American Tel. & Tel. Co., 58

F.C.C.2d 1 (1976). That order, however, because it did not make

rate of return an issue, is not relevant here, and the FCC has

never contended otherwise. Indeed, in allowing the 1976 rates to

go into effect the FCC stated: “we cannot find the economic ma-

terial filed in support ef the tariff revisions inadequate or errone-

ous.” Id. at 3.

8 Comments of American Telephone & Telegraph Co. in Response

to Notice of Inquiry, at 30, AT&T Earnings on Interstate and

Foreign Services During 1978, CC Docket No. 79-187 (filed Nov. 13,

1979) (set forth in Joint Appendix before Court of Appeals at 188).

® Decision, AT&T Earnings on Interstate and Foreign Services

During 1978, CC Docket No. 79-187, FCC 84-567, 102 F.C.C.2d 52

(1984) (App. C).

7

not and did not rely on Section 204, the only provision

in the Act that allows for refunds.”°

The FCC thus imposed a completely new form of rate

regulation that created and placed risks of regulatory

uncertainty entirely on carriers, and it did this after

1978, depriving AT&T of the opportunity to take pro-

tective action, such as seeking a higher rate of return

authorization for 1978. By ordering retroactive rate ad-

justments, the FCC destroyed stability in the regulation

of rates. Carriers were also disproportionately burdened

because they were required to refund an unforeseeable

excess but, at the same time, denied the opportunity to

recover a similarly unforeseeable shortfall from a return

determined by the FCC itself to be fair.

The FCC’s assertion of its new found power has not

ended with AT&T’s 1978 earnings. Since 1984, the

agency has sought to apply this power in other instances.

For example, it has unsuccessfully attempted to imple-

ment rules that generally required carriers to refund

excess returns but did not allow carriers retroactively

to recoup earnings shortfalls, a scheme characterized as

“turn[{ing] the regulatory world upside down” when it

was invalidated on appeal." More recently, the FCC has

10 Jd. at 65 (App. at 66a-67a). The court below also found that

Section 204 “does not apply to the circumstances of this case.”

826 F.2d at 1107.

11 The D.C. Circuit invalidated the FCC’s rules as arbitrary and

unreasonable in American Tel. & Tel. Co. v. FCC, 836 F.2d 1386

(D.C. Cir. 1988), but did not reach the statutory power issue

presented here and in the decision below. See id. at 1389. The

case was decided while the decision below was pending petitions

for rehearing. Jd. at 1392 n.6. Judge Starr, however, did not see

any reason to sidestep the statutory power question and issued a

lengthy concurrence rejecting the FCC’s “innovations of late [as]

without statutory foundation.” Jd. at 1393. Judge Starr went di-

rectly to the root of the matter, finding that under the FCC’s

program, “carriers are no longer able to rely on filed rates; instead,

they go about their business in constant jeopardy of being forced

8

ordered refunds for allegedly excess rates,’ even though

it expressly declined to impose an accounting order prior

to allowing the rates to go into effect.**

Several parties, including the former AT&T operating

companies, petitioned the court below to review the

FCC’s 1978 refund order. In a split decision rendered

August 21, 1987, the Court of Appeals upheld the

agency’s action, noting, however, that the case involved

“fundamental opposition to the agency’s view of its regu-

-latory authority.” (App. at 10a.) Judge Mikva, writ-

ing for himself and Judge Parsons, held that Sections

205 and 4(i) authorized the FCC’s action and that the

Communications Act did not preclude the retroactive

ratemaking effected by that action. Judge Buckley dis-

sented, noting that “[f]or more than 50 years, the Com-

munications Act has been understood to establish a pre-

cise, express statutory scheme governing refunds” and

that “[nJever before has [the Act] been held to author-

ize refunds” in the manner that the FCC asserted.

(App. at 22a.)

Upon another split vote, the Court of Appeals denied

petitions for rehearing and suggestions for rehearing

en bane on November 2, 1988. Judge Starr filed a dis-

senting statement joined by Judges Buckley and Wil-

liams. Judge Starr’s dissent pointedly noted that the

Commission’s “clawback approach” to rate regulation

to refund enormous sums of money .... The Commission has

turned the regulatory world upside down. The Act, which is purely

prospective in design, manifestly does not contemplate this un-

settling state of affairs.” Jd. at 1394.

12 Memorandum Opinion and Order, Annual 1988 Access Tariff

Filings, CC Docket No. 88-1, Phase II, FCC 88-420 (released Dec.

27, 1988).

18 Memorandum Opinion and Order, Annual 1988 Access Tariff

Filings, CC Docket No. 88-1, Phase I, 3 F.C.C. Red 2043, 2044

(1988).

9

did “violence to well-settled, salutary doctrines” and that

“the Commission’s ratemaking revolution flies in the

teeth of the twin virtues of stability and predictability

which rate regulatory regimes are designed to foster.”

(App. at 44a.) Judge Sentelle filed a separate statement

noting the importance of the statutory power question

but voted to deny rehearing because of multiple recusals

by Judges R. B. Ginsburg, Silberman and D. H. Gins-

burg. (App. at 45a.) Consequently, as Judge Starr also

noted, the law “on a pivotal statutory issue cutting

across agency lines” was left “distressingly unsettled.”

(App. at 44a.) This Petition, to have the matter defini-

tively and correctly decided, followed.

REASONS FOR GRANTING THE WRIT

I. The Court Below Decided a Novel Question Funda-

mental to Rate Regulation Under the Communications

Act in a Manner Contrary to the Act.

The Supreme Court should hear this case because the

decision below upholds FCC action that is flatly contrary

to the Communications Act and long settled rate regula-

tion law. That law recognizes that the process of set-

ting rates is intrinsically predictive in nature. Inevi-

tably, there will be under or overearnings as expected

costs and demand exceed or fall short of actual costs and

demand. Permitting retroactive ratemaking, however, to

eorrect for such shortfalls or overages would give rise

to continuous revision of past charges.

The practice, therefore, of adjusting current charges

to recoup deficient, or to refund excess, past earnings

has been prohibited. “The common law of public utility

regulation pragmatically accepts the futility of embroil-

ing current and future rate regulation with a function

of making correctives for excess or insufficiencies of

rates charged in the past.” American Public Gas Ass’n

v. FPC, 567 F.2d 1016, 1057 (D.C. Cir. 1977), cert.

10

denied, 435 U.S. 907 (1978). The courts have repeatedly

emphasized this prohibition.”

It is evident from an examination of the operation of

the Communications Act’s provisions themselves that the

Act incorporates the same prohibition. The Act’s scheme

permits carriers to file new rates in order to increase

earnings when the return from existing rates becomes

too low. Further, the FCC may initiate an investigation

into existing rates and prescribe new rates “to be there-

after observed” if the agency believes the existing rates

have become unreasonable. Plainly, the basic thrust of

these complementary provisions is to provide for prospec-

tive correction of existing rates according to procedures

that balance ratepayer and carrier interests. Nothing in

the Act permits the adjustment of current rates to recoup

past deficient earnings, or to refund past excess earnings.

14 See, e.g., Transcontinental & Western Air, Inc. v. CAB, 336

U.S. 601, 605 (1949) (declining to construe a statute in a manner

that would “mark a departure from the customary pattern of fixing

rates prospectively” and “break with . . . traditions of ratemak-

ing”); Board of Pub. Util. Comm’rs v. New York Tel. Co., 271 U.S.

23, 31-32 (1926) (“[p]ast losses cannot be used . . . to support

a claim that rates for the future are confiscatory .... And the law

does not require the company to give up for the benefit of future

subscribers any part of its accumulations from past operations” ) ;

Distrigas Corp. v. FERC, 751 F.2d 20, 23 (1st Cir. 1984) (“tradi-

tional rate-making principles . . . typically limit the regulator’s

rate-setting power to prospective changes”) (emphasis in original) ;

Nader v. FCC, 520 F.2d at 202 “[i]t is a cardinal principle of rate-

making that a utility may not set rates to recoup past losses, nor

may the Commission prescribe rates on that principle”). See also

1 A. Priest, Principles of Public Utility Regulation 75 (1969) (“It

has long been established that past deficits may not be made the

predicate for striking down rates which are otherwise compensatory,

‘any more than past profits can be used to sustain confiscatory rates

for the future’”); E. Nichols & F. Welch, Ruling Principles of

Utility Regulation 315 (1964) (Supp. A) (“Past losses of a utility

cannot be recovered from consumers, nor can consumers claim a

return of profits and earnings which may appear excessive’”’).

a

11

Here, however, the court below upheld FCC action

ordering that current rates be reduced below levels that

were otherwise authorized in order retroactively to cor-

rect past rates and the overearnings they produced, but

not underearnings.” Not only, therefore, was the agency

action upheld below unlawfully retroactive but also it

unfairly disadvantaged carrier interests. Although AT&T

incurred a shortfall for 1976, the FCC made no allowance

for this shortfall when it ordered reduced rates to make

up for the 1978 overage. Instead, it announced a regu-

latory regime under which carriers will be at risk for

refunds if their charges, however, carefully calculated,

turn out too high, yet there is no correlative impact on

ratepayers if those charges turn out too low. The Com-

munications Act, however, is a member of a generation

of regulatory enactments containing “precise procedures

and limitations” designed to achieve “a careful accom-

modation of interests” subject to those enactments.’* The

power upheld here fundamentally disregards the Commu-

nications Act’s carefully balanced plan.

The legislative history underscores the absence of retro-

active rate regulation authority in the Communications

15 Under the statutory scheme, the FCC’s remedy was to order

that the rates on file be retargeted to the prescribed return. The

FCC made no such order, however, because it was quite apparent

that AT&T’s costs were actually increasing as inflation spiralled

out of control in the latter half of the Seventies. Indeed, the FCC

authorized AT&T in 1979 to earn above the 10 percent maximum

return allowed in 1976, suggesting, as the carriers have always

maintained, that there was nothing unreasonable about the 1978

return, even if it was in excess of the 1976 prescription. See

American Tel. & Tel. Co., 73 F.C.C.2d 689, 694-95 (1979). Even-

tually, the FCC authorized a specific return of 10.50 percent in

1980, American Tel. & Tel. Co., 78 F.C.C.2d 661, 668-70 (1980), and

a return of 12.75 percent in 1981. American Tel. & Tel. Co., 86

F.C.C.2d 221, 251 (1981), aff'd, United States v. FCC, 707 F.2d

610 (D.C. Cir. 1983).

16 American Tel. & Tel. Co. v. FCC, 487 F.2d 865, 873 (2d Cir.

1973). Accord United States v. SCRAP, 412 U.S. 669, 697 (1973).

ee

12

Act. The Communications Act was patterned after the

Interstate Commerce Act.’? Prior to the enactment of the

Communications Act, the Commerce Act was amended to

authorize retroactive rate regulation which would recap-

ture excess railroad earnings.’* The provision for retro-

active rate regulation, however, was repealed in 1933

because it was unworkable and had a destabilizing effect

on carrier revenues.’® Nothing like it, therefore, became

part of the 1934 Communications Act. The FCC’s bald

attempt to reintroduce retroactive ratemaking by the

order upheld below thus represents not only a departure

from_the plain statutory scheme established in the lan-

guage of the Communications Act, but also a repudiation

of the clear intent of Congress.

The FCC has employed a device that cannot be found

anywhere within the Communications Act’s statutory

scheme and, in so doing, has replaced the Act’s objectives

of predictability and stability with unnecessary risk.

Gone as well with the FCC’s adventure and the decree of

the court below that “carriers ... have no statutory

entitlement to a perfectly balanced regulatory scheme”

(App. at 15a) is the Act’s balanced accommodation of

carrier and ratepayer interests. Now, carriers are vul-

nerable to refunds for overearnings and are without re-

course for shortages from underearnings. Because the

decision below upholds agency action that fundamentally

conflicts with basic ratemaking precepts and the Commu-

nications Act’s rate regulation scheme, this Court, which

has never previously considered that scheme, should grant

this Petition to decide the important question presented.

17 See generally S. Rep. No. 781, 73d Cong., 2d Sess. (1934);

H.R. Rep. No. 1850, 73d Cong., 2d Sess. (1934).

18 41 Stat. 456, 488-91 (1920).

1948 Stat. 220 (1933). See also H.R. Conf. Rep. No. 213, 73d

Cong., lst Sess. 29 (1933).

(13

II. The Decision of the Court Below Is in Conflict with the

Decisions of this Court and Other Decisions of the

Courts of Appeals.

The ratemaking provisions of the Natural Gas Act and

the Federal Power Act parallel the ratemaking provisions

of the Communications Act.*° In each of these ratemak-

ing regimes, the carrier has the authority to initiate

new rates. The regulatory commission may suspend and

investigate new carrier-initiated rates. It may prescribe

lower rates if it finds that the carrier-initiated rates are

too high. If it is unable to complete its investigation

within the suspension period, it may issue an accounting

order requiring the carrier to keep records of the reve-

nues it collected under the new rates so that refunds can

be made if the rates are ultimately found to be too high.

The commission may also initiate its own investigation

and prescribe rates to be charged in the future if it finds

existing rates to be unreasonable.”

Numerous decisions of this Court and the Courts of

Appeals construe the provisions of these regulatory

statutes that are essentially identical to the Communi-

cations Act to prohibit the kind of retroactive ratemak-

ing upheld below. Therefore, left standing, the decision

20Compare 47 U.S.C. §§ 203-05 (Communications Act) with 15

U.S.C. §§ 717c-717d (Natural Gas Act) and with 16 U.S.C. §§ 824d-

824e (Federal Power Act).

21 The essential similarity among the rate regulation schemes

of the Communications Act, Federal Power Act and Natural Gas

Act has often been recognized. See, e.g., Arkansas Louisiana Gas

Co. v. Hall, 453 U.S. 571, 577 n.7 (1981) (“relevant provisions of

the [Federal Power Act and Natural Gas Act] ‘are in all material

respects substantially identical’”); Las Cruces TV Cable v. FCC,

645 F.2d 1041, 1047 (D.C. Cir. 1981); American Tel. & Tel. Co. v.

FCC, 487 F.2d at 877 n.21 (“Section 4(e) of the Gas Act gives the

FPC a suspension power similar to that of Section 204 of the Com-

munications Act ... . The prescription authority created by

Section 5(a) of the Gas Act is substantially the same as that of

Section 205 of the Communications Act’’).

14

of the court below will infect the future application of

federal regulatory acts that are like the Communications

Act. This Court should review the decision below to cor-

rect the unsettled state of affairs that has been created.”

For example, construing provisions of the Natural Gas

Act, this Court has ruled that:

“The gas operator...may... file new rate

schedules with the Commission. This rate becomes

effective upon its filing, subject to the 5-month sus-

pension provision under §4.... [Section] 5 of

the Act ... authorizes the Commission .. . to in-

stitute an investigation into existing rates and

charges . . .. Under this section, however, the rate

found by the Commission to be just and reasonable

becomes effective prospectively only. Gas purchasers,

therefore, have no protection from excessive charges

collected during the pendency of a § 5 proceeding.”

Atlantic Refining Co. v. Public Service Commission, 360

U.S. 378, 389 (1959). Similarly, the Tenth Circuit has

noted that “the Commission may order [a] retroactive

refund only where a company’s rates have been sus-

pended pending a § 4 review.” Colorado Interstate Gas

Co. v. FERC, 791 F.2d 803, 808 (10th Cir. 1986).** But

for the different section numbering, these could just as

easily be statements about Sections 204 and 205 of the

Communications Act.

- The requirement of prospective relief, as the D.C. Cir-

cuit itself explained in a decision construing the Natural

Gas Act,

“is apparent from the language of the Act. Section

5 refers to FERC’s power to determine the just and

22 The decision below is all the more threatening because it was

rendered by the D.C. Circuit, the Court of Appeals that most often

reviews the actions of federal regulatory agencies.

23 See also Dorchester Gas Producing Co. v. FERC, 848 F.2d

634, 637 (5th Cir. 1988).

———

15

reasonable rate . . . to be thereafter observed ....

Section 5 . . . conspicuously lacks the explicit pro-

vision for refunds and associated accounting re-

quirements found in section 4.”

Sea Robin Pipeline Co. v. FERC, 795 F.2d 182, 184 n.1

(D.C. Cir. 1986). Section 205 of the Communications

Act, the only substantive provision on which the FCC

based its claimed retroactive ratemaking power, contains,

of course, the same “thereafter” language.

The decisions of this Court and the Courts of Appeals

construing ‘the Federal Power Act reach the same result.

For example, this Court stated in FPC v. Sierra Pacific

Power Co., 350 U.S. 348, 353 (1956), that the FPC’s

power under the analogue to Section 205 of the Commu-

nications Act was limited to prescriptions “ ‘to be there-

after observed’ and thus can effect no change prior to the

date of the order.” Thus, as the Court more recently

stated in Arkansas Louisiana Gas Co. v. Hall, 453 U.S.

571, 578 (1981), “the Commission itself has no power to

alter a rate retroactively. When the Commission finds a

rate unreasonable, it ‘shall determine the just and rea-

sonable rate . . . to be thereafter observed and in force.’

This rule bars ‘the Commission’s retroactive substitution

of an unreasonably high or low rate with a just and rea-

sonable rate.’”” (Emphasis in original.)

The First Circuit has stated that under the Federal

Power Act, a “utility has no obligation to give customer

refunds, even if the rates are found unreasonably high.”

Massachusetts v. United States, 729 F.2d 886, 887 (1st

Cir. 1984) .** Even the D.C. Circuit has ruled that under

the Federal Power Act:

“A customer cannot ... refuse to pay a rate cur-

rently in effect on the ground that it has become

24 Accord Boston Edison Co. v. FERC, 856 F.2d 361, 368-69 (1st

Cir. 1988); Gulf States Utils. Co. v. Alabama Power Co., 824 F.2d

1465, 1471, modified, 831 F.2d 557 (5th Cir. 1987).

———

16

unlawfully high and therefore void; nor after pay-

ment of such a rate, can the Commission order a re-

fund .... [T]he procedures that the statute es-

tablishes for adjusting unlawful rates ... are not

at all ambiguous: ‘Whenever the Commission .. .

shall find that any rate... is [unlawful], the

Commission shall determine the just and reasonable

rate ... to be thereafter observed... .’”

Electrical District No. 1 v. FERC, 774 F.2d 490, 492

(D.C. Cir. 1985) (emphasis in original) .*

In the face of these uniform rulings, the FCC and the

panel below sought refuge in Section 4(i) as well as

Section 205 of the Communications Act.*° Section 4 (i)

does provide that the Commission “may .~ . issue such

orders, not inconsistent with [the Act], as may be neces-

sary in the execution of its functions.” However, “in

exercising authority pursuant to Section [4(i)], the

Commission’s action must not be inconsistent with Sec-

tions 203-05.” ** And even if that action does not ex-

plicitly conflict with statutory provisions, it must not be

in “circumventicn of the statutorily prescribed procedures

with consequent frustration of the statutory purpose.’ **

*>The rate regulation schemes of the Communications Act,

Natural Gas Act and Federal Power Act parallel each other because

they have as their common template the Interstate Commerce Act.

Under the original rate regulation provisions of that Act too, 49

U.S.C. §§ 10704, 10708, 10762, this Court held in JCC v. American

Trucking Ass’ns, 467 U.S. 354, 361-64 (1984), that retroactive rate

action is prohibited.

26 Indeed, the FCC conceded below that “Section 205 does not

specifically provide for the enforcement of Commission prescriptions

through refund orders... .” Decision, AT&T Earnings on Inter-

state and Foreign Services During 1978, 102 F.C.C.2d at 65 (App.

at 67a).

27 American Tel. & Tel. Co. v. FCC, 487 F.2d at 877.

28 Jd. at 875.

17

There is no doubt that the FCC’s retroactive rate action

here was inconsistent with the Act’s regulatory scheme,

which requires prospective action. The FCC’s action also

substantially frustrated the Act’s objectives of predict-

ability and balanced interests. The FCC created insta-

bility where there was none, and ratepayers were given

new protection, while carriers were subjected to broader

refund liability than the Act explicitly allows and, more-

over, were not protected against underearnings.

In short, Section 4(i) affords no basis for inferring

the power asserted here. Indeed, the Natural Gas Act

and Federal Power Act contain provisions authorizing

agency action “necessary or appropriate” to carry out the

provisions of those acts. Yet retroactive ratemaking is

prohibited under those acts, even though their interstitial

power provisions do not contain the “not inconsistent

with” limitation found in Section 4(i) of the Communi-

cations Act.”®

Retroactive rate regulation poses a threat of ominous

proportions, particularly if it features the one-sided ap-

proach that characterized the agency action upheld below.

The FCC’s constant approach of forcing downward revi-

29 The power that the FCC would infer under Section 4(i) is also

unnecessary. The Act already provides a remedy where a return

prescription is eventually exceeded: the FCC may prescribe new

rates targeted to the prescribed return, and the agency requires

quarterly reports by carriers to enable it to determine when rates

have gotten out of line. See Report and Order, Amendment of Part

65, CC Docket No. 86-127, FCC 86-514 (released Dec. 3, 1986).

Intentional evasions of a return prescription may be intercepted

under Section 204 when the offending rates are filed. In addition,

Section 205(b) provides civil fines for knowing failure to file rates

designed to comply with an FCC prescription, authorizing sanc-

tions irrespective of when an intentional evasion is discovered,

and Section 501, 47 U.S.C. § 501, provides criminal sanctions for

willful violations. It should be noted, however, that no one has

even suggested, and the FCC, in fact, concedes, that the 1978

overage occurred in good faith. See Brief of FCC, New England

Tel. & Tel. Co. v. FCC at 26, No. 85-1087 (D.C. Cir. filed Mar. 4,

1986).

ee

18

sions to returns without regard to when returns are

deficient would assuredly impair investor confidence and

the ability of carriers to raise new capital, ultimately

adversely affecting the public interest. That approach

has been rejected by this Court and the Courts of Appeals

construing other regulatory acts. It is the antithesis of

what Congress sought in enacting a regulatory scheme

valuing stability, predictability, and balanced carrier and

ratepayer interests. Petitioners urge the Court to grant

their Petition and protect the legislative intent, resolving

the stark conflict in decisions that has been created and

making it clear that retroactive rate regulation is pro-

hibited under the Communications Act.

CONCLUSION

For the foregoing reasons, this Petition for a writ of

certiorari should be granted.

Respectfully submitted,

Of Counsel: RAYMOND F. SCULLY *

WALTER H. ALFORD ALAN B. STERNSTEIN

WILLIAM B. BARFIELD BASKIN, FLAHERTY, ELLIOTT,

R. FROST BRANON MANNINO, GORDON &

BELLSOUTH TELEPHONE SCULLY, P.C.

COMPANIES 1275 K Street, N.W.

Suite 1000

RICHARD W. ODGERS

JAMES P. TUTHILL

MARGARET DEB. BROWN

Washington, D.C. 20005

(202) 842-1600

STANLEY J. MOORE Counsel for Petitioners

PACIFIC TELESIS TELEPHONE * Counsel of Record

COMPANIES

MARK J. MATHIS

THOMAS L. WELCH

DAVID K. HALL

BELL ATLANTIC TELEPHONE

COMPANIES

JAMES E. TAYLOR

WILLIAM C. SULLIVAN

MELANIE S. FANNIN

MICHAEL A. MEYER

SOUTHWESTERN BELL

TELEPHONE COMPANY

January 30, 1989