Appendix — Southern Bell Telephone & Telegraph Co. v. Federal Communications Commission

XS ie I & és 4, > U (Y Supreme Court, U.S.

W] FILED

' JAN 30 1989

No. 88———

lai

IN THE p Seneca

Supreme Court of the United States

OCTOBER TERM, 1988

NEW ENGLAND TELEPHONE AND

TELEGRAPH COMPANY, et al.,

Petitioners,

V.

FEDERAL COMMUNICATIONS COMMISSION, et al.,

Respondents.

APPENDIX TO

PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS

FOR THE DISTRICT OF COLUMBIA CIRCUIT

E. EDWARD BRUCE *

ELLIOTT SCHULDER

COVINGTON & BURLING

1201 Pennsylvania Avenue, N.W.

P.O. Box 7566

Washington, D.C. 20044

(202) 662-6000

Attorneys for Petitioners

* Counsel of Record

(Of Counsel Listed Inside Cover)

a

Of Counsel:

SAUL FISHER

CAMPBELL L. AYLING

120 Bloomingdale Road

White Plains, NY 10605

(914) 683-3064

MARTIN J. SILVERMAN

1828 L Street, N.W.

Washington, D.C. 20036

(202) 955-1170

Attorneys for New England

Telephone & Telegraph Co.,

and New York Telephone Co.

DANA A. RASMUSSEN

ROBERT B. MCKENNA, JR.

1020 19th Street, N.W.

Washington, D.C. 20036 %

(202) 429-0303

Attorneys for

Mountain States Telephone

and Telegraph Co.,

Northwestern Bell

Telephone Co., and

Pacific Northwest Bell

Telephone Co.

MARTIN T. MCCUE

900 19th Street, N.W.

Washington, D.C. 20006

(202) 835-3100

Attorney for United States

Telephone Association

FLOYD S. KEENE

JOANNE G. BLOOM

30 South Wacker Drive

Chicago, IL 60606

(312) 750-5255

Attorneus for Illinois Bell

Telephone Co., Indiana Bell

Telephone Co., Inc.,

Michigan Bell Telephone Co.,

The Ohio Bell Telephone Co.,

and Wisconsin Bell, Inc.

WILLIAM R. MALONE

MURPHY & MALONE

1901 L Street, N.W.

Washington, D.C. 20036-3506

(202) 223-5062

RICHARD MCKENNA

One Stamford Forum

Stamford, CT 06904-9500

(203) 965-3078

Attorneys for GTE Service

Corporation and the GTE

Domestic Telephone Operating

Companies

TABLE OF CONTENTS

Appendix A —New England Telephone and Telegraph

Company, et al. v. Federal Communica-

tions Commission, 826 F.2d 1101 (D.C.

8 RN em nD

Appendix B —Orders In the Matter of AT&T Earnings

on Interstate and Foreign Services Dur-

ing 1978, 102 F.C.C. 2d 52 (1984)..........

Appendix C —Orders In the Matter of AT&T Earnings

on Interstate and Foreign Services Dur-

ing 1978, FCC 85-284 (May 30, 1985)...

Appendix D —Orders In the Matter of AT&T Earnings

on Interstate and Foreign Services Dur-

ing 1978, FCC 85-572 (October 30,

NE oneetas anita ta cicada cbicis acieoeasss

Appendix E —Judgment in New England Telephone

and Telegraph Company, et al. v. Fed-

eral Communications Commission, No.

85-1087 (D.C. Cir. Aug. 21, 1987)............

Appendix F —Orders on Rehearing in New England

Telephone and Telegraph Company, et al.

v. Federal Communications Commission,

No. 85-1087 (D.C. Cir. Nov. 2, 1988)......

Appendix G —American Telephone and Telegraph Com-

pany v. Federal Communications Com-

mission, 836 F.2d 1386 (D.C. Cir. 1988) ..

Appendix H —Order on Rehearing in American Tele-

phone and Telegraph Company v. Fed-

eral Communications Commission, No.

85-1778 (D.C. Cir. Nov. 2, 1988) .............

Appendix I —Statement Pursuant to Sup. Ct. Rule

ety: Risa atantdatsnacala dice clicdstsnaadiotencsacusicnoe

Page

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APPENDIX A

UNITED STATES COURT OF APPEALS

DISTRICT OF COLUMBIA CIRCUIT

Nos. 85-1087, 85-1457, 85-1471, 85-1472

NEW ENGLAND TELEPHONE AND

TELEGRAPH COMPANY, et al.,

- Petitioners,

FEDERAL COMMUNICATIONS COMMISSION and the

UNITED STATES OF AMERICA,

Respondents,

GTE SERVICE CorP., et al., NATIONAL TELEPHONE Co-

OPERATIVE ASSOCIATION, et al., AMERICAN TELEPHONE

& TELEGRAPH Co., AMERITECH OPERATING Co., MOouUN-

TAIN STATES TELEPHONE & TELEGRAPH Co., et al.,

SATELLITE BUSINESS SYSTEMS, U.S. TELEPHONE AS-

SOCIATION, TELECOMMUNICATION RESEARCH & ACTION

CENTER, SOUTH CENTRAL BELL TELEPHONE Co., SOUTH-

WESTERN BELL TELEPHONE Co.,,

Intervenors.

AMERICAN TELEPHONE AND TELEGRAPH COMPANY,

- . Petitioner,

FEDERAL COMMUNICATIONS COMMISSION and the

UNITED STATES OF AMERICA,

Respondents,

U.S. TELEPHONE ASSOCIATION, GTE SERVICE CorpP., et al.,

MOUNTAIN STATES TELEPHONE & TELEGRAPH Co., et al.,

BELL OPERATING COMPANIES, SOUTHWESTERN BELL

TELEPHONE Co., Intervenors.

2a

THE MOUNTAIN STATES TELEPHONE AND

TELEGRAPH COMPANY, et al.,

Petitioners,

\-

FEDERAL COMMUNICATIONS COMMISSION and the

UNITED STATES OF AMERICA,

Respondents,

GTE SERVICE CorpP., et al., AMERITECH OPERATING Co.,

AMERICAN TELEPHONE & TELEGRAPH Co., BELL OP-

ERATING COMPANIES, SOUTHWESTERN BELL TELEPHONE

Co., Intervenors.

PACIFIC BELL, et al.,

F Petitioners,

FEDERAL COMMUNICATIONS COMMISSION and the

UNITED STATES OF AMERICA,

Respondents,

GTE SERVICE CorpP., et al., MOUNTAIN STATES TELEPHONE

& TELEGRAPH Co., et al., AMERITECH OPERATING Co.,

AMERICAN TELEPHONE & TELEGRAPH Co., BELL OP-

ERATING COMPANIES, SOUTHWESTERN BELL TELEPHONE

Co.,

Intervenors.

Petitions for Review of Orders of the

Federal Communications Commission

Argued Oct. 30, 1986

Decided Aug. 21, 1987

3a

Before MIKVA and BUCKLEY, Circuit Judges, and

PARSONS,* Senior District Judge.

Opinion for the Court filed by Circuit Judge MIKVA.

Dissenting opinion filed by Circuit Judge BUCKLEY.

MIKVA, Circuit Judge:

Petitioners American Telephone and Telegraph Com-

pany (“AT & T’) and numerous former Bell operating

telephone companies (“BOCs”) seek review of orders of

the Federal Communications Commission (‘the Commis-

sion”) requiring them to grant rate reductions. The

reductions are designed to reimburse consumers for earn-

ings enjoyed by AT & T and the BOCs in 1978 which

were over and above a rate-of-return ceiling previously

prescribed by the Commission. Petitioners challenge the

orders on a number of grounds, the most substantial of

which is that the Commission had no authority under the

Communications Act to impose such a remedy. We con-

clude that the Commission had ample authority to order

reductions to enforce its prior rate-of-return prescription,

and we deny the petitions for review.

I. BACKGROUND

A. Regulatory Structure

The Communications Act of 1934, ch. 652, 48 Stat.

1064 (codified as amended at 47 U.S.C.) (the “Act’’),

provides the regulatory ratemaking scheme within which

these petitions arise. Section 203 of the Act places pri-

mary responsibility for initiating rate revisions upon the

carrier. 47 U.S.C. § 203. Once a carrier initiates a re-

vision, the Commission is empowered under section 204

of the Act to suspend implementation of the proposed

tariff for up to five months while it investigates the

* Of the United States District Court for the Northern District

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

4a

lawfulness of the proposed rates. 47 U.S.C. § 204. If

the Commission’s investigation is not completed within

that time, the proposed tariff automatically goes into

effect. In such a case, however, section 204 empowers the

Commission to make the increases subject to an account-

ing and refund order: if the Commission later deter-

mines that the revisions are excessive, it may order the

carrier to refund the unjustified amount to those cus-

tomers who have been overcharged. Id.; see Nader v.

FCC, 520 F.2d 182, 198 (D.C.Cir.1975).

Section 205 of the Act, which is of particular rele-

vance to this dispute, governs the Commission’s author-

ity to regulate existing rates. Under section 205, the

Commission can initiate an investigation into any car-

rier rate or practice. If the Commission determines that

a carrier rate is or will be unlawful under the Act, it

may prescribe the “just and reasonable charge . . . to be

thereafter observed.” 47 U.S.C. § 205._ This power of

prescription is a potent tool: once the Commission issues

a prescription order under section 205, the carrier must

“cease and desist from such violation . . . and shall not

thereafter publish, demand, or collect any charge other

than the charge so prescribed, or in excess of the maxi-

mum... so prescribed.” Id.

The Commission in this case also relied on section

4(i) of the Act. That section authorizes the Commis-

sion to “perform any and all acts, make such rules and

regulations, and issue such orders, not inconsistent with

this Act, as may be necessary in the execution of its

functions.” 47 U.S.C. §154(i). As we detail below,

section 4(i) previously has been held to justify the use

of rate-of-return prescriptions, as opposed to prescrip-

tions of actual rates.

B. Regulatory History

Although it had recommended appropriate return levels

as early as 1967, the Commission first began to use its

ee

5a

section 205 powers to prescribe a rate of return, as op-

posed to a prescription of actual rates for the AT & T

system in 1972. The Commission decided to undertake

a rate-of-return prescription because AT & T had become

so huge and diverse that individual rate determinations

for each service were impractical. The 1972 order fixed

a rate of return of 8.5% and rejected proposed AT & T

tariffs that would have provided the company with a

higher return. AT & T’s challenge to that order called

on this court to determine whether the Commission’s sec-

tion 205 powers permitted the agency to prescribe rates

of return as well as rates. See Nader v. FCC, 520 F.2d

182, 199-205 (D.C-Cir.1975). In Nader, we determined,

as a threshold matter, that the Commission’s order fixing

a rate of return was indeed a prescription. We con-

cluded that “[w]e would be shirking reality if we did

not recognize that the practical effect of the Commis-

sion’s . . . order was to limit prospectively AT & T’s

rate of return to 8.5%, and thus [the order] was a pre-

scription under section 205.” Id. at 201; see also id. at

202 (the Commission’s order was intended “to have the

prospective effect of a prescription, thus, limiting the

utility to that return.’’).

We then found that the Commission’s prescription of

a rate of return was consonant with the agency’s statu-

tory authority under the Act. Id. at 203-05. Even though

section 205 refers only to the Commission’s power to pre-

scribe “charges, classifications, regulations and practices,”

we found that prescription of a rate of return was proper

under section 4(i), which gives the Commission the

power to issue such orders “as may be necessary in the

execution of its functions.” Jd. at 203. In holding that

“the Commission lawfully prescribed a rate of return

for AT & T,” id. at 204, we noted that “the effect of the

prescription is to protect AT & T from the possibility of

refunds on the ground that an 8.5% rate of return was

——————_—_eorS

6a

too high, [although] the Commission retains full latitude

to order refunds on all other grounds.” Id. at 205 n. 25.

With the issue of its power to prescribe rates of return

thus settled, the Commission proceeded in 1976 to set a

rate of return of 9.5% for the AT & T system. See

American Tel. & Tel. Co., 57 F.C.C.2d 960 (1976). The

Commission added to the 9.5% figure a buffer of .5%

“in order to provide an incentive to increase productivity

and efficiency.” Id. at 973. In effect, while the Commis-

sion prescribed a 9.5% rate, it lett AT & T know in ad-

vance that it would tolerate “a level or range of inter-

state earnings not to exceed 10% before it took remedial

action. Jd. —

AT & T responded to the Commission’s prescription by

filing a tariff structure designed to produce no more than

a 10% rate of return. Without making a specific finding

that they were just and reasonable, the Commission per-

mitted these rates to go into effect on March 1, 1976. In

1976 and 1977, the rates produced a rate of return under

10%. However, the same rates in 1978 resulted in a rate

of return which all parties agree exceeded the prescribed

10% ceiling.

Although it took a great deal of time to do so, see

Telecommunications Research & Action Center v. FCC,

750 F.2d 70 (D.C. Cir.1984), the Commission eventually

responded to AT & T’s excessive rate of return in De-

cember of 1984, when it ordered the company to reduce

its rates to refund the excess earnings to consumers.

See J.A. 23-33. In its order, the Commission rejected

AT & T’s argument that the 1976 prescription was meant

to be not a ceiling on AT & T’s rate of return but only

a target for setting rate levels; the Commission observed

that the plain language in the prescription order re-

stricted AT & T to a return of not more than 10%. J.A.

27. The Commission cited to sections 205 and 4(i) of the

Ta

Act, as well as our decision in Nader, in justifying its

authority to enforce its prescription by ordering refunds.

J.A. 28. The Commission also rejected AT & T’s argu-

ment that. changing economic conditions had rendered the

10% rate of return unlawfully low and therefore pre-

cluded the Commission’s enforcement of the rate. The

Commission explained that under the Act the carrier

bears primary responsibility for initiating changes in

existing prescriptions; since AT & T had initiated no

such revision, the 1976 prescription remained in effect in

1978. J.A. 27.

_ The Commission determined that AT & T had enjoyed a

10.22% rate of return in 1978. The Commission derived

the 10.22% figure from AT & T’s own Interstate Monthly

Report (“IMR”), which AT & T had filed with the Com-

mission in January 1979. AT & T subsequently had sub-

mitted an “FDC Report” in which the company main-

tained that its rate of return for 1978 had been 10.09%.

In the proceeding leading up to the orders under review,

AT & T urged the Commission to compute the rate re-

ductions based on the 10.09% figure. AT & T insisted

that the 10.22% figure did not adequately account for

certain services and facilities provided to other common

carriers, and that integrating the relatively slight earn-

ings of those services and facilities into the computation

resulted in a net rate of return of 10.09%. The Com-

mission, however, chose to rely on the IMR, as it had for

the previous 28 years in computing AT & T’s rate of

return. The 10.22% reflected excessive 1978 earnings

for AT & T in the amount of one hundred million dol-

lars. The Commission ordered AT & T and its former

operating companies (AT & T had by this time been

divested) to lower its rates by an amount sufficient to

reimburse ratepayers for that amount plus interest. J.A.

26.

In two reconsideration orders, the Commission sub-

stantially reaffirmed its December 1984 order, imposing

8a

only slight alterations not at issue here. See J.A. 43-80.

Specifically, the Commission again concluded that it had

the statutory authority to impose the refunds on AT & T

and the BOCs, that its decision did not represent a re-

versal of longstanding policy not to impose refunds for

violations of prescriptions, and that AT & T had earned

a 10.22% rate of return in 1978. AT & T and ten BOCs

responded with these consolidated petitions for review.

The petitioners’ efforts to overturn the Commission’s or-

ders are championed in whole or in part in intervenors’

briefs filed by the Ameritech Operation Companies, the

United States Telephone Association, and GTE, and an

amicus curiae brief filed by the Communications Satellite

Corporation.

II. DISCUSSION

Petitioners make three basic challenges to the Commis-

sion’s orders. The first, and most important, of their con-

tentions is that the Commission has no authority under

the Communications Act to impose refunds for earnings

in excess of a prescribed rate of return. A second and

related argument is that even if the order did violate

the Act, it departed from prior policy without adequate

explanation and with unfairly retroactive effect. Third,

petitioners allege various infirmities in the Commission’s

methods of calculating the amount of the refund liability.

We address each of these contentions in turn.

A. Statutory Authority

Petitioners’ challenge to the Commission’s authority to

issue the orders under review reveals two points of funda-

mental opposition to the agency’s view of its regulatory

authority. First, petitioners differ with the Commission

as to the effect of the 1976 prescription. They contend

that the nature of their obligation was merely to try in

good faith to formulate rates that would not produce an

excessive retuin. In the Commission’s view, by contrast,

~—

9a

the prescription imposed a maximum return that the car-

riers could not exceed, however innocently. Petitioners

also argue that in any event the Commission has no power

to impose refunds to remedy a violation of rate-of-return

prescriptions. This argument as to remedy is linked to

the first contention: if the prescription obliged the car-

riers only to design responsive rates, the Commission

would be overreaching in adopting a remedy that in effect

retroactively adjusts rates that appeared reasonable when

implemented. We consider first the nature of the Com-

mission’s power to prescribe rates of return and then

take up the related issue of the Commission’s remedial

reach.

Petitioners acknowledge that once the Commission pre-

scribes a rate of return, they are required to submit rates

designed to achieve no more than that rate. Under peti-

tioners’ view of the regulatory scheme, however, that is

all they are required to do; if they err, and rates designed

to achieve a lawful return turn out to generate an excess,

the prescription has not been violated. Petitioners’ argu-

ment, in short, is that the Commission may prescribe

constraints only on carriers’ subjective efforts, not on

future events. We see no reason to adopt this narrow

reading of “prescription,” especially when it is opposed

by a more reasonable interpretation by the Commission.

See Chevron U.S.A. Inc. v. Natural Resources Defense

Council, 467 U.S. 837, 848, 104 S.Ct. 2778, 2782, 81

L.Ed.2d 694 (1984). The Commission’s chief concern in

issuing prescriptions is protecting just and reasonable

rates, not policing carriers’ states of mind. The idea of

a prescription under section 205 is that the agency has

proclaimed that a certain situation—here a return in

excess of 10%—=is unlawful and shall not occur. Cer-

tainly carriers cannot intentionally try to violate an out-

standing prescription, but that does not mean that they

may achieve through inadvertence what they are for-

bidden from doing by design.

10a

A central defect in petitioners’ argument is a failure

to recognize the import of our prior decision in Nader

approving the Commission’s authority to prescribe rates

of return. Nader established that the Commission may

determine what rate of return must be thereafter ob-

served in the same“way it may set a just and reasonable

rate to be thereafter observed. We expressly recognize

as much-when we wrote that the Commission’s order had

“the prospective effect of a prescription, thus limiting

the utility to that return.” Nader, supra, 520 F.2d at

202 (emphasis added). Here, the Commission has exer-

cised its legal prerogative to prescribe a rate of return,

rather than a rate. The teaching of Nader is that such

a prescription is no less binding. If the order setting the

maximum rate of return was a valid section 205 prescrip-

tion, as it clearly was after Nader, it had “the force of a

statute. . . . The carrier . . . is bound to conform.”

Arizona Grocery v. Atchison Ry., 284 U.S. 370, 52 S.Ct.

183, 76 L.Ed. 348 (1931). See also American Telephone

& Telegraph Co. v. FCC, 487 F.2d 865, 874 (2d Cir.

1973) (carriers are compelled to adhere to prescriptions

by Commission).

Having established that the Commission reasonably de-

termined that AT & T’s 1978 earnings violated the out-

standing prescription, we turn to the question of remedy.

Petitioners insist that no section of the Act empowers

the Commission to grant refunds for a violation of a

prescription. Petitioners point out that section 204 is

the only provision in the Act to expressly mention “re-

funds,” and it applies only to Commission action follow-

ing suspension of new or revised rates; the order under

review corrected rates that already had been in effect

for two years. Section 205, petitioners observe, is for-

ward-looking: the Commission uses it to prescribe charges

and practices “to be thereafter observed.” In petitioners’

view, by contrast, the Commission’s order was a classic

example of retroactive ratemaking, which is forbidden

lla

under a plethora of case law interpreting sections 204

and 205 and similar provisions in analogous regulatory

schemes. Finally, petitioners argue that the Commission

cannot cure its lack of authority by reliance on section

4(i), beeause that provision authorizes only such orders

as are “not inconsistent with this Act,” and retroactive

refunds are inconsistent with the Act.

The petitioners buttress their textual arguments with

an observation that the prohibition against retroactive

ratemaking is designed to achieve an overall regulatory

balance between the interests of consumers, who need

protection from unreasonably high rates, and those of

carriers, who need assurance of a reasonable rate of re-

turn. Under a prospective ratemaking scheme, carriers

are precluded from recouping shortfalls during lean years,

but they are compensated by being permitted to retain

excess earnings from unexpectedly profitable years. This

balance, petitioners argue, is destroyed if the Commission

can order refunds to enforce a ceiling on a carriers’

return without also guaranteeing the carriers some mini-

mum reasonable return.

In addressing petitioners’ concerns, we note at the out-

set that although petitioners and the Commission both

refer to the rate reductions as a “refund,” the order does

not impose a refund in the classic sense of restitution to

an overcharged party. Here the reductions will accrue

to the benefit of a different customer base from the base

that contributed to AT & T’s excessive earnings. The

Commission’s order therefore is more precisely considered

a prospective rate adjustment to compensate for past sur-

pluses. See J.A. 26. This case does not, however, turn

on the arguably overfine semantic distinction between a

refund and a prospective adjustment: even allowing for

argument’s sake that the Commission imposed a refund,

the order was well within the agency’s statutory au-

thority.

12a

As petitioners observe, section 204 is the only provi-

sion of the Act explicitly to mention refunds, and it does

not apply to the circumstances of this case. The Com-

mission, however, relied on another section of the Act—

section 4(i)—to impose rate reduction in the amount

of AT & T’s excessive 1978 earnings. That provision

empowers the agency to perform any act “not incon-

sistent with this Act, as may be necessary in the execu-

tion of its functions.” We find this wide-ranging source

of authority adequately supports the Commission’s re-

medial action. In a strictly technical sense, the Commis-

sion’s choice of remedy was absolutely necessary; without

the reductions, the carriers in fact would not be limited

to a return of 10% and the prescription would be vio-

lated. More generally, the Commission enjoys significant

discretion to choose among a range of reasonable reme-

dies, including refunds. See Las Cruces TV Cable v.

FCC, 645 F.2d 1041, 1047 (D.D. Cir. 1981). The Com-

mission does not have to show that it selected the only

conceivably appropriate remedy in order to invoke its

4(i) powers. See North American Telecommunications

Ass’n v. FCC, 772 F.2d 1282, 1292 (7th Cir.1985) (sec-

tion 4(i) is a “necessary and proper clause” empowering

the Commission to “deal with the unforeseen . . . to the

extent necessary to regulate effectively those matters al-

ready within the boundaries”). Although, as petitioners

point out, there are other corrective measures the Com-

mission might have chosen, the measure it adopted in this

case was appropriate and reasonable. As we said recently

in another case approving of an agency’s refund order,

“(t]he question eventually reduces to one of judgment,

informed by the policy of the statute that Congress has

seen fit to enact. We find the agency’s judgment... to

be fully consistent with the Commission’s broad mandate

from the Article I branch to assure that all rates are

just and reasonable.” Southern California Edison Co. v.

FERC, 805 F.2d 1068, 1072 (D.C.Cir.1986).

13a

Petitioners nevertheless insist that a refund remedy

is inconsistent with the Act, and therefore an inappro-

priate exercise of power under section 4(i), because it

amounts to retroactive ratemaking. This argument again

overlooks the force of our decision in Nader and the

Commission’s subsequent 1976 rate-of-return prescrip-

tion. There was not retroactive ratemaking here, because

the carriers’ obligations were set prospectively in 1976,

when the Commission forbade AT & T from earning

more than 10%. The 1984 order under review merely

recognized that the prior prescription had been violated

and imposed a remedy for that violation. As the Com-

mission explained, the refund order is a “dispassionate

remedy for a violation in fact of an earnings ceiling.

The carriers are being required merely to give up what

they never should have collected in light of the rate of

return prescription.” FCC Br. 25 n. 31. This case is

thus no different from one in which the Commission pre-

scribed actual rates and the carrier, either intentionally

or inadvertently, collected higher charges. Although no

carrier has yet been so brazen, there can be little doubt

under such circumstances but that the Commission would

be well within its authority in forcing the carrier to

disgorge the unlawful excess. Cf. United States v. Cor-

rick, 298 U.S. 435, 56 S.Ct. 829, 80 L.Ed. 1263 (1936)

(Commission can reject rate filings in excess of pre-

scribed rates). The Commission has no more engaged in

retroactive ratemaking here just because it is acting to

enforce a rate-of-return prescription rather than a rate

prescription.

Nor does the Commission order foster an impermissible

imbalance between the interests of carriers and those of

consumers. First, the Commission’s 1976 prescription

did provide a measure of protection for the carriers. As

we noted in Nader, “the effect of the prescription is to

protect AT & T from the possibility of refunds on the

ground that an 8.5% rate of return was too high.”

14a

520 F.2d at 205 n. 25. Thus, had the cost of—capital

plunged in 1977, so that AT & T’s return in that year

of 9.59% was far above the reasonable minimum neces-

sary to attract continued investment, the Commission

nevertheless would not have been able to order a refund;

rather, it would have had to initiate a new Section 205

proceeding and issue a new rate-of-return prescription,

which would have had prospective force only.

It is true that the current regulatory scheme is asym-

metric on another level. Since the Commission has so

far declined to set minimum guaranteed rates of return —

for the carriers (although it has not foreclosed the pos-

sibility of doing so in the future), carriers must refund

excess earnings, but they are not compensated for short-

falls. The carriers, however, have no statutory entitle-

ment to a perfectly balanced regulatory scheme; rather,

they are entitled only to earn an overall reasonable

return. The Commission has concluded that a guaranteed

minimum annual return is not essential to protect that

right. That conclusion is a reasonable one. Under the

Act, the carriers have the opportunity and responsibility

to file rates that provide an adequate return. In this

sense they are unlike consumers, who rely predominantly

on the Commission to protect their right to just and

reasonable rates. Moreover, the Commission supplements

its rate-of-return prescriptions with a buffer, in this case

amounting to .5%. This added increment makes it easier

for the carriers to design charges that provide a rate

of return in the vicinity of the prescribed ceiling. This

scheme, in fact, more than adequately protected the car-

riers’ interests in relation to the 1976 rate-of-return pre-

scription at issue. During the five-year period in which

the prescription was in effect, AT & T earned less than

the prescribed ceiling of 9.5% in only one year, 1976,

when it earned 9.25%. Overall, its average earnings dur-

ing that period were 9.69%, well above the prescribed

limit. In three of the five years, the carrier’s rates were

ternal

15a

designed precisely enough to produce a return above the

ceiling but not so far above as to trigger a Commission

remedy. Finally, the carriers can always initiate a re-

quest to increase their rates when the current tariff

appears likely to result in a shortfall. Thus, the current

system appears to provide ample protection for the car-

riers’ interests without any guaranteed minimum rate of

return. Should this state of affairs not hold in the

future, the Commission and the courts can address the

situation at that time.

In sum, the Commission was justified in finding that

AT & T’s excessive earnings in 1978 violated the agency’s

outstanding rate-of-return prescription. Having made

that finding, the Commission properly exercised its au-

thority under section 4(i) to remedy the violation by

ordering rate reductions in the amount of AT & T’s ex-

cessive earnings in 1978.

B. Retroactive Application of a Newly-Announced Policy

Several petitioners argue that even if the Commission’s

order did not violate the Act, it represented an abrupt

reversal of prior Commission policy which could not

lawfully be applied to parties who relied on the previous

state of affairs. As AT & T sees it, for example, the

Commission previously had followed a “target/trigger”

policy, under which rate-of-return prescriptions served

as targets for carrier tariffs, and excessive earnings

triggered prospective relief in the form of rate adjust-

ments. AT & T argues that it is being unfairly sub-

jected to newly-adopted regulatory standards to which it

has not had an opportunity to conform its behavior.

In large part, this claim relies on the same premise

as the argument that the prescription obliged the carriers

only to design rates not to exceed the Commission’s ceil-

ing. To the extent it does, we reject it for the same

reasons. Once the Commission prescribed a maximum

16a

rate of return of 9.5% with a .5% buffer, it was not

reasonable for the carriers to think that the agency had

an affirmative policy of permitting carriers who earned

above 10% to retain the unlawful excess. It is true that

the Commission had not put the carriers on specific

notice that it would respond to unlawfully high returns

by ordering refunds. Importantly, however, the Commis-

sion had not had occasion to do so;-never before had a

carrier exceeded a rate-of-return prescription.

The dissent contends that carriers twice before—in

1967 and 1968—exceeded the prescribed rate of return.

Dissent at 4, 9-10. This contention is a cornerstone of

the dissent’s argument that the enforcement scheme

adopted in this case represented a radical change in

policy. The dissent overlooks the vital point that the

Commission first prescribed a rate of return in 1972.

Although it incorporated a rate-of-return recommenda-

tion, the 1967 order was not a rate-of-return prescrip-

tion, and thus the portion of that order the dissent cites,

see dissent at 4, is immaterial. The whole point behind

our decision today, and our previous holding in Nader,

is that the ratemaking regime changed in 1972 when the

Commission began to use its section 205 powers to pre-

scribe rates of return. That action represented a new

approach to rate regulation, and its legitimacy was pre-

cisely what the fight was about in Nader.

Given that no carrier had ever exceeded a prescribed

rate of return and that the Commission had never fore-

closed the remedy it imposed in this case, the most peti-

tioners can claim is that the order under review insti-

tuted a new policy for a new situation. This action is

something very different from a departure from a clear

prior policy. We recently recognized the distinction in

rejecting a very similar claim that an agency refund

order was a departure from prior precedent. Petitioner

in that case contended that the Federal Energy Regula-

tory Commission retroactively applied a new policy when

17a

it ordered a refund of excessive earnings. See Southern

California Edison Co. v. FERC, 805 F.2d 1068 (D.C.

Cir.1986). The court noted, “no agency precedent ex-

pressly addresses this precise issue. ... We are in new

territory here.” Jd. at 1071. Confronted with a novel

set of circumstances, as we are in this case, the court

rejected petitioner’s claim that the Commission had de-

parted from prior policy.

Finally, even if the enforcement order instituted a

departure from a previous clearly articulated policy,

petitioners would have no right to have the “new” policy

not apply to them. Generally speaking, an agency may

be prevented from applying a new policy for one of two

reasons (in addition to the standard constraints that

apply to any agency decision). First, a departure from

prior policy cannot stand when the agency fails to ex-

plain the reason for the change. See Greater Boston

Television Corp. v. FCC, 444 F.2d 841, 852 (D.C.Cir.

1970), cert. denied, 403 U.S. 923, 91 S.Ct. 2229, 29 L.Ed.

2d 701 (1971). Second, under certain circumstances an

agency may be prevented from applying a new policy

retroactively to parties who detrimentally relied on the

previous policy. See RKO General v. FCC, 670 F.2d 215,

223 (D.C.Cir.1981), cert. denied, 456 U.S. 927, 102 S.Ct.

1974, 72 L.Ed.2d 442 (1982). Petitioners can avail

themselves of neither of these doctrines. As we detailed

above, the Commission amply explained the source and

need for its authority to remedy violations of its pre

scriptions by imposing refunds. This explanation ful-

filled the Commission’s responsibilities under Greater

Boston. As for the retroactivity claim, petitioners have

made no showing whatsoever of detrimental reliance.

Indeed, it is difficult to imagine how they might make

such a showing. Petitioners have insisted, as they must,

that they made every effort to comply with the prescrip-

tion by designing rates that would produce earnings of

less than 10%. Presumably they would have behaved no

differently had they clearly understood that excessive

18a

earnings might trigger a refund order. Thus, there is no

evidence that petitioners relied to their detriment on

their understanding of the Commission’s prior policy.

In sum, even had petitioners demonstrated, which they

have not, that the Commission’s order departed from

prior policy, they would have no equitable claim to shield

them from application of the order to them.

The dissent posits that AT & T relied on an enforce-

ment scheme that precluded refunds by not filing for

rate increases and by not having an opportunity in 1978

to convince the agency that its earnings were reasonable

under then-prevailing economic conditions. Dissent at

13-15. But AT & T had every incentive and opportunity

to file for an increase if it believed that the outstanding

rate-of-return prescription was inadequate. It is irra-

tional to surmise that the carrier would have declined to

try to maximize its allowable profits in 1979 because it

believed it would be able to retain its windfall of 1978.

As for its opportunity to protest the decisions, AT & T

has offered a fierce challenge now, so no remedy has been

assessed without the carrier’s having had a full oppor-

tunity to air all its claims. We thus can perceive no

possibility of detrimental reliance in this case.

C. Computation of the Refund

Three final arguments address the Commission’s actual

computation of petitioners’ liability. First, petitioners

claim that the Commission should have calculated the

carriers’ rate of return over the entire period during

which the rates at issue were in effect, rather than iso-

lating AT & T’s excessive earnings for 1978. The rates

were in effect from 1976 to 1980, during which they

produced an overall rate of return of 9.69%. The Com-

mission admittedly gave only a cursory explanation for

its decision to enforce the prescription on an annualized

basis. It reasoned in a footnote that it adopted a

a

19a

calendar-year measure because carriers’ revenues, ex-

penses, and income tax liabilities are typically evaluated

on a fiscal year basis, and AT & T’s own fiscal year

coincided with the calendar year. J.A. 25-26 n. 12. This

explanation, while brief, is sensible enough, especially

since the Commission was enforcing a prescription of an

annual rate of return. Moreover, prescriptions usually

remain in effect for an indefinite period. Under petition-

ers’ preferred scheme, the Commission would never be

able to find and remedy a violation until it opted to issue

a new prescription, because the agency would not know

until then over what period the prior prescription was in

force. In short, while the Commission perhaps might

have opted for a different interval of measurement, cf.

Authorized Rates of Return, 50 Fed.Reg. 41350 (October

10, 1985) (two-year interval), its choice of the tradi-

tional calendar year certainly was not unreasoned.

Petitioners also urge that the FCC failed to meet its

burden of adducing substantial evidence for its deter-

mining that AT & T earned a 10.22% return in 1978.

The Commission, however, amply supported its decision

to rely on the 10.22% figure in the IMR that AT & T

filed in January 1979 rather than the 10.09% figure in

the subsequent FDC Report. First, the Commission

pointed out that the agency and the industry had relied

on the IMR return figures for 28 years, whereas the

FDC Reports first had been submitted in 1977. J.A. 25.

Second, certain of the computations in AT & T’s FDC

Report relied on extrapolations from the month of June

1978, even though, in the Commission’s opinion, AT & T

had not shown that the June figures were perfectly rep-

resentative of the year’s earnings. Jd. Thus, the Com-

mission adduced substantial evidence for both its con-

fidence in the traditional IMR and its lack of confidence

in the FDC Report that AT & T urged the Commission

to employ. We therefore have no cause to doubt the

reasonableness of the Commission’s reliance on the

10.22% figure. ~

20a

Finally, intervenor United States Telephone Associa-

tion argues that the Commission should not be able to

require petitioners to pay interest on the excess earnings

for the entire period between January 1, 1979, and the

date on which carriers file tariffs to implement the re-

fund. USTA believes the Commission abused its discre-

tion in ordering full interest payments in light of the

Commission’s own prolonged delay in responding to the

violation. While this court does not condone the Commis-

sion’s delinquency in resolving ‘this matter, see Tele-

communications Research & Action Center v. FCC, 750

F.2d 70 (D.C.Cir.1984), we perceive no inequity in re-

quiring petitioners to pay full interest on earnings they

had no right to retain in the first place.

III. CONCLUSION

The order under review was a straightforward and

legitimate means for the Commission to enforce its 1976

rate-of-return prescription. In ordering a rate reduction

in the amount of petitioners’ excessive earnings, the

Commission acted within its authority under the Com-

municatiens Act and did not depart from prior policy.

Finally, the Commission’s method of computing the ex-

cess was reasonable and supported by substantial evi-

dence. For these reasons, the petitions for review are

denied.

It is so ordered.

BUCKLEY, Circuit Judge, dissenting:

Section 4(i) of the Communications Act is sufficiently

broad and the principles of deference to agency decision-

making sufficiently strong that, in the judgment of the

majority, the FCC has statutory authority to enforce a

prescribed maximum rate of return. Correct or not, the

majority overstates the case. For more than fifty years,

the Communications Act has been understood to establish

——_o

2la

a precise, express statutory scheme governing refunds

and the setting of rates. Never before has section 4(i)

been held to authorize refunds. While there is always

a time for firsts, I think it must be admitted that, even

if lawful, the FCC here operates at the feather edge of

its statutory authority.

This is not the occasion to decide the statutory issue.

Without notice, the FCC altered its fundamental policy

basing rates of return exclusively on current market -

conditions, and instead ordered a reduction in future

rates based on past surplus. The Refund Order should

be set aside because it contradicts the system of rate-

making previously articulated and applied by the FCC.

I. RETROACTIVITY DOCTRINE

In this circuit, as we have so recently confirmed, the

test presented in Retail, Wholesale & Dep’t Union v.

NLRB, 466 F.2d 380, 390 (D.C.Cir.1972), “provides the

framework for evaluating retroactive application of rules

announced in agency adjudications.” Clark-Cowlitz Joint

Operating Agency v. FERC, 826 F.2d 1074 at 1081

(D.C.Cir. 1987) (en banc). Five “non-exhaustive” fac-

tors are set forth therein to distinguish between legiti-

mate retroactive application of policy and those instances

when an agency must proceed prospectively:

(1) whether the particular case is one of first

impression, (2) whether the new rule represents an

abrupt departure from well established practice or

merely attempts to fill a void in an unsettled area

of law, (3) the extent to which the party against

whom the new rule is applied relied on the former

rule, (4) the degree of the burden which a retro-

active order imposes on a party, and (5) the statu-

tory interest in applying a new rule despite the

reliance of a party on the old standard.

Retail, Wholesale, 466 F.2d at 390.

22a

Taking the test in reverse order, I summarize my

objection to the 1984 Refund Order: (1) Unlike the

typical case in which an agency announces a rule through

an adjudication, the FCC has formally and expressly

admitted that the 1984 refund order “was not intended

to establish a rule for all future proceedings. .. .” Re-

turn Interstate Services of AT & T Communications and

Exchange Telephone Carriers, 50 Fed. Reg. 33,786,

33,788 (1985) (proposed Aug. 21, 1985). Instead, the

FCC subsequently engaged in formal rulemaking to an-

nounce a policy of automatic refunds under specified

circumstances. Authorized Rates of Return for Inter-

state Services of AT & T and Exchange Telephone Car-

riers, 50 Fed. Reg. 41,350 (1985) (final rule) ; Return

Interstate Services of AT & T Communications and

Exchange Telephone Carriers, 51 Fed.Reg. 1,795 (1986)

(to be codified at 47 C.F.R. Part 65). Hence the retro-

active application of the policy in the present case ad-

vances no statutory purpose; (2) The Refund Order im-

poses a $101 million penalty on AT & T plus interest

for rates filed in 1976 and never changed until 1980.

This is a burden by any standard. See NLRB v. Bell

Aerospace Co., 416 U.S. 267, 295, 94 S.Ct. 1757, 1772,

40 L.Ed.2d 134 (1974) (prospective application favored

when “fines or damages” are assessed and agency im-

poses new liability “for past actions which were taken in

good-faith reliance on [agency] pronouncements.”’) ; (3)

AT & T relied on the settled statutory scheme, confirmed

in countless cases, that refunds, to be lawful, can only

arise by operation of section 204 of the Communications

Act. Furthermore, this court finds that were it not for

section 4(i), the FCC order would be conclusively and

without question unlawful. See Maj. at 1107, 1109; see

also MCI Telecommunications Corp. v. FCC, 765 F.2d

1186, 1195 (D.C.Cir.1985) (“In enacting Sections 203-

05 of the Communications Act, Congress intended a spe-

cifie scheme for carrier initiated rate revisions. A bal-

ance was achieved after careful compromise. The

23a

Commission is not free to circumvent or ignore that

balance. Nor may the Commission in effect rewrite this

statutory scheme on the basis of its own conception of

the equities of a particular situation.”) (quoting Amer-

ican Telephone and {elegraph Co. v. FCC, 487 F.2d

865, 880 (2d Cir.1973)); Sea Robin Pipeline Co. v.

FERC, 795: F.2d 182, 189 n. 7 (D.C. Cir. 1986) (The

Commission “may not order a retroactive refund based

on a post hoe determination of the illegality of a filed

rate’s prescription.”) ; (4) The FCC cannot and doés not

cite a single sentence from among hundreds of pages of

its regulatory decisions detailing the policy upheld today.

Rarely are departures from established policy as abrupt;

(5) The majority states that “the Commission first

prescribed a rate of return in 1972. Although it incor-

porated a rate-of-return recommendation, the 1967 order

was not a rate-of-return prescription, and thus the por-

tions of that order the dissent cites . . . are immaterial.”

Maj. at 1109 (emphasis added). Yet the FCC in its own’

rulemaking expressly hold to the contrary:

This Commission established a prescribed rate of

return for the interstate telecommunications services

of [AT & T in 1967]. That prescription was re-

vised in 1972, 1976, and 1981.

50 Fed.Reg. at 33,786 (1985) (footnotes omitted); see

also 57 F.C.C.2d 960, 960 (1976) (“This proceeding rep-

resents the third time [1967, 1972 & 1976] the Commis-

sion has considered the fair rate of return of [AT & T].

. 2’). As a matter of logic, it is untenable to argue

that remedying an excess rate of return represents a

case of “first impression.” This is a core function of

any rate regulator. As a matter of fact, the FCC twice

before was confronted by AT & T rates in excess of the

prsescribed return. See infra at 1115-16.

It ultimately took the FCC six years to reach the

conclusion that it (a) had the authority and (b) had

a

24a

given AT & T lawful notice that returns earned in

excess of the prescribed rate of return would be subject

to future disgorgement. The majority says this power

came into being in 1972. The FCC nowhere in its brief

or on the record makes this argument. Indeed, the alter-

ation in the FCC position is dazzling. In 1967, the FCC

said “the policies we are establishing on the basis of the

record of this proceeding require no drastic change in

any of the standards heretofore applied and represent

no new or essentially different approach by this Commis-

mission to the regulation of respondents’ interstate rates

and earnings.” 9 F.C.C.2d 30, 116 (1967). In its brief

in the instant case, the agency said “[t]he fundamental

flaw in the carrier parties’ arguments in this case is

that they either fail or refuse to recognize that the 1976

prescription order altered the normal pattern of carrier

initiated rates under the Communications Act.” Brief

for Respondents at 17. At oral argument, counsel with-

drew this statement. In 1987, the FCC states that it

first announced the refund policy in 1984, or perhaps as

early as 1979 when it issued a notice calling for com-

ments on the subject. Brief for Respondents at 47-48,

48 n. 62, American Telephone and Telegraph Co. v. FCC,

Nos. 85-1778, et al. (argued before D.C.Cir. May 21,

1987).

Fortunately, an administrative record exists to sort

out which of these various arguments were actually set

down on paper to guide the conduct of the industry the

FCC is charged with regulating.

II. THE RECORD

The FCC in 1984 ordered prospective rate reductions

to compensate consumers for revenues earned by AT & T

in 1978 based on tariff rates filed in 1976. The majority

correctly describes this remedy as a policy of “prospec-

tive rate adjustment to compensate for past surpluses.”

Maj. at 1107. The majority incorrectly describes the

25a

remedy as a new policy meeting a novel set of circum-

stances.

“FCC policy governing rate-of-return regulation is con-

tained in the administrative rulings pertaining to

changes in tariffs for AT & T in 1967, 1969, 1972, and

1976. 9 F.C.C.2d 30 (1967); 21 F.C.C.2d 654 (1969) ;

38 F.C.C.2d 2138 (1972); 57 F.C.C.2d 960 (1976). As

I read these decisions, the FCC policy to remedy exces-

sive tariffs consists of the exercise of agency authority

at three successive stages: (a) pre-filing establishment

of target revenues, (b) post-filing accounting pursuant

to section 204 of the Act, 47 U.S.C. § 204, and (c)

prospective rate adjustment, up or down, as demanded

by the current economic forces in the marketplace. 47

U.S.C. § 205. The coordinated exercise of the agency

authority in the first two stages in large measure elim-

inates the likelihood of overcharges. The option to reset

future rates based on then-current conditions provides

the vehicle to insure that rates continue to be appropriate

over time. As this schema assures adequate protection

against excessive charges, the FCC has not been faced by

a novel threat. Furthermore, FCC decisions amply

document these propositions.

In 1967, the FCC adopted a new method for regulating

telephone rates. Instead of working from a reconstruction

of each cost component incurred by AT & T, a technical

and time-consuming nightmare, the FCC settled on a top-

down approach based on rate of return. The required

rate of return, also known as the cost of capital, is that

rate “sufficient to assure confidence in the financial in-

tegrity of the enterprise, so as to maintain its credit and

to attract capital,” balanced against the public interest

in just and reasonable rates. 9 F.C.C.2d at 53 (quoting

the Supreme Court’s “landmark” case, Federal Power

Comm’n v. Hope Natural Gas Co., 320 U.S. 591, 603, 64

S.Ct. 281, 288, 88 L.Ed.2d 333 (1944) ).

26a

Conceptually, the cost of capital is divided into two

components: the cost of debt, which is the interest rate

enterprises must offer to attract secured funds; and the

cost of equity, which is the rate of return investors must

be offered to compensate them for the risk of investing in

a company’s stock. Because investors have numerous

alternative investment prospects, the cost of capital ap-

proach to ratemaking necessarily focuses on the prospec-

tive return demanded by investors for investments of

comparable risk. Thus, AT & T’s cost of capital will

change as necessary to reflect marketplace reassessments

of these alternatives. If the rate of return earned by

AT & T is set too low, it will not be able to attract either

the debt or equity capital necessary to serve current con-

sumers and meet future increases in demand. If set too

high, the public interest suffers. See, e.g., 9 F.C.C.2d

at 52.

Rate regulation thus shifted in 1967 to a two-step

process. The FCC would fix the target rate of return,

and the carrier would set tariff rates designed to earn

this rate of return. In either system, whether before or

after 1967, there is the risk of error. In the_ first,

historical costs can be misestimated and long delays and

expense incurred in gathering accurate data. In the

second, the FCC has recognized, and therefore so must

we, that there is an inherent imprecision to measuring

the prospective and changing rate of return demanded in

the marketplace and a further imprecision in then re-

quiring the carrier to set tariff rates that will produce

the exact level of revenues which, after expenses have been

deducted and the rate base fixed, will produce the antici-

pated return. See. e.g., 9 F.C.C.2d at 51-88; 38 F.C.C.2d

at 248-51. The so-called “novel circumstance” of a sur-

plus rate of return is in fact a central feature of rate-of-

return regulation.

Notwithstanding these differences in the approach to

setting tariff rates, only the means of regulation changed

on ni i lll

27a

in 1967, not the basic policy. As noted, the FCC put this

point beyond doubt:

[T]he policies we are establishing on the basis of

the record of this proceeding require no drastic

change in any of the standards heretofore applied

and represent no new or essentially different ap-

proach by this Commission to the regulation of re-

spondents’ interstate rates and earnings. On the

contrary, the record and our decision confirm the

regulatory standards we have generally applied over

the years. Thus, prior to 1964, we permitted the

respondents to maintain a level of interstate earnings

within the range of 7 to 7.5 percent. When the level

of earnings tended to exceed this range, we were

successful, under our program of continuing sur-

veillance, in negotiating corrective rate adjustments.

9 F.C.C.2d at 116.

The decision also affirmed that “corrective rate adjust-

ments” would continue to be the mechanism employed to

adjust for prior year excesses:

As, and when, the going level of respondents’ inter-

state earnings approaches either the upper or lower

limits of this [7 to 7.5 percent] range, we will

promptly consider what further action may be re-

quired in light of then current conditions. This is

not to be construed to mean that any future level of

earnings which exceeds 7.5 percent or falls below 7

percent will warrant immediate action looking toward

rate adjustments. Whether or not remedial action

will be required will depend upon all the relevant

circumstances obtaining at the time.

Id. (emphases added).

When read in context, and in light of subsequent de-

cisions, it is evident that “remedial action” contemplated

the filing of revised tariff schedules designed to reduce or

28a

increase future rates in accordance with the rate of re-

turn appropriate to circumstances at that time. The cost

of capital approach can make no sense otherwise. In-

vestors lending funds or buying equity always focus on

present alternative investments, not prior circumstances.

In 1970, AT & T filed a proposal to increase interstate

charges on message telephone service by “some $760 mil-

lion.” 88 F.C.C.2d at 215. AT & T estimated the new .

charges would yield a rate of return approximating 9.5

percent, the rate required by current conditions according

to AT & T. In the 1972 proceedings, the FCC specified

“a range of 8.5-9.0% as the range of reasonableness for

the earnings of Bell on its interstate operations at the

tariff rates that we are allowing Bell to file herein.’>

Id. at 245. This is the prospective rate adjustment sys-

tem in action. Only after evaluating operating results

and revenue requirements did the FCC translate the

increase in rate of return into a permissible tariff rate

increase designed to produce $145 million in incremental

revenue. Id. at 248-51. In the decision, the FCC reiterates

that adjustments in the system come through prospective

adjustments in tariff filings. See id. at 226-27.

Last, we reach the 1976 round of increases at issue

in this case. AT & T, as usual, initiated the process in

1975 with a proposed—$717 million rate increase. The

FCC, exercising its prospective powers to control rates,

determined the increase would exceed the rate of return

then in place, and denied the proposal. 51 F.C.C.2d 619,

626-27 (1975). In other words, the policy functioned in

1976 exactly as designed—it prevented an increase in

rates the FCC concluded to be unwarranted by then cur-

rent conditions as measured by the rate of return.

The filing, however, prompted the FCC to investigate

and update the rate of return applicable in 1976 from

8.5-9.0 percent to 9.5 percent, plus .5 percent as an effi-

ciency incentive. 57 F.C.C.2d 960, 972-73 (1976). Once

—_--

nates Cad citer

29a

again, in accordance with its established practice, the

FCC ordered a prospective adjustment in the target in-

crease for revenues. Moreover, by suspending the 1976

tariff filing for one day, the FCC triggered its statutory

authority to control rates retroactively pursuant to sec-

tion 204 of the Act, which states in pertinent part:

[U]pon completion of the hearing and decision [the

FCC] may by further orders require the interested

carrier or carriers to refund, with interest, to the

persons in whose benefit such amounts were paid,

such portion of such charge for a new service or

increased charges as by its decision shall be found

not justified.

47 U.S.C. § 204(a} (1982). Although the agency did not

see fit to pursue the section 204 remedy in this case,

the essential point in terms of the regulatory regime is

that the agency is empowered by the statute to conduct

an accounting of actual results and, after a hearing, order

a refund if necessary to reimburse consumers who had

paid excessive charges.

III. APPLICATION TO RETROACTIVITY

This survey of the relevant FCC decisions compels the

conclusion that the FCC’s 1984 refund order abruptly

reversed its prior policy by basing prospective tariff rates

on prior returns in excess of the target levels, instead

of on market conditions. Until 1984, the FCC’s regula-

tion of AT & T’s rates was based exclusively on a for-

ward-looking asessment of economic conditions. After

1984, the FCC order holds that rates may be reduced to

compensate for past experience. The majority neatly en-

capsulates this abrupt switch by describing the new re-

fund policy as a “prospective rate adjustment to com-

pensate for past surpluses.” Maj. at 1107 (emphasis

added).

80a

A. Novel Circumstance

The majority seeks to justify the refund policy as a

licit response to novel circumstances. In the first instance,

this premise of novelty stretches the facts. In 1967, the

FCC established a rate of return in the range of 7

to 7.5 percent. Based on this rate, the FCC calculated

that AT & T’s rates then in place were excessive. The

remedy ordered was to reduce future rates to produce a

$120 million reduction in revenues. At the new rate

level, AT & T would earn the rate of return required by

then current conditions. It was never suggested that the

return should be lowered by $120 million to reflect cur-

rent conditions, and then further reduced to collect the

past overage. See 9 F.C.C.2d at 116.

Likewise, the agency in 1969 determined that actual

charges in 1967 exceeded the allowed rate of return. 21

F.C.C.2d at 655. Again, the FCC neither ordered nor

contemplated refunds. Rather, it expressed the familiar

policy that “when there were departures from this range,

[it would] consider the matter in light of conditions ob-

taining at that time.” Jd. The FCC thereupon reviewed

the excess earnings on the basis of “changes which have

taken place since 1967 in the economic, financial, and

other conditions that affect AT & T’s revenue require-

ments and its ability to attract new capital’; and con-

cluded that earnings exceeding the 1967 rate of return

“lwere] not unreasonable.” Jd. (emphasis added). AT &

T was not required to reduce its filed tariffs.

The rate-of-return method of regulation was new in

1967, and, according to the majority, the rate-of-return

prescription did not fix a maximum cap on the allowable

return until 1972. This claim of a major sea-change in

the 1972 proceeding is contradicted in the record, see

supra at 1114-15, disavowed by the FCC, Brief for Re-

pondents at 19 (“The [1976] .ate of return prescription

enforced in this case, like every other such prescription

3la

the FCC has made, was implemented . . . with prospec-

tive, binding effect.” (footnote omitted)), and unsup-

ported by the Nader decision. See 50 Fed. Reg. at 33,786

n.1 (“The Nader opinion interpreted prior FCC decisions

[back to 1967] as prescribing a rate of return for AT &

T. ...”. In any event, in terms of the assertion of

novelty, these are distinctions without a difference. The

FCC even in the pre-1967 regime used rates of return

to evaluate the revenues allowed after costs. Moreover,

the regime between 1967 and 1972 prescribed rates and

hence presented the precise issue whether the increment

over the targeted rate of return should be retained. Pur-

suant to the majority’s logic, the FCC had the authority

to order prospective rate adjustments as the enforcement

remedy. The fundamental fact is that the agency twice

before explicitly faced the problem of actual charges in

excess of the announced range.

Second, common sense rebuts the majority’s conten-

tion. It cannot be argued that the FCC simply failed to

anticipate the essential issue of rate regulation, namely,

what steps the agency should take to ensure compliance

with its rate-of-return orders. In a system of carrier-

initiated rates, it is unreasonable to suppose that the

agency established the rate-of-return framework without

giving a single thought to the prospect of what would

happen if the filed tariffs produce a return in excess of

the allowed minimum.

Finally, the FCC concedes, as it must, that not a single

sentence in any report suggested that prospective rate

adjustments might be ordered to compensate for past

surplus. The omission would be almost inexplicable in a

system of rate regulation that inherently can produce

errors resulting in overshooting or undershooting the

targeted rate of return. The FCC’s three coordinate

powers, as summarized below, explain the silence that the

majority inaccurately construes to be evidence of a novel

circumstance.

~ ~~ as

32a

As part of the process setting the rate of return, the

FCC approves or disapproves specific requests for target

increases in tariff revenues. The revenues analysis is

conducted to confirm that AT & T’s probable earnings

will fall within the range of the targeted rate of re-

turn. The agency’s advance control over tariff rates

minimizes the risk that AT & T will generate unau-

thorized revenues. The power to call for an accounting

and order a refund allows the agency to remedy exces-

sive returns that occur after the fact. Finally, if, as

here, rates already approved subsequently produce higher

than anticipated returns, the FCC can respond by ana-

lyzing present conditions to determine if the higher re-

turn is appropriate. If not, the Commission can order

the carrier to file reduced tariffs targeted to meet the

lower rate of return required by current circumstances.

Thus, in the present case, the FCC observed that the

tariffs produced a return of 9.25 percent in 1976, con-

firming that the target limitation on increased revenues

operated as anticipated. Hence there was no need to

continue the section 204 process. In 1977, the tariffs

produced a 9.59 percent return. Only in 1978 did the

unchanged tariffs produce the .22 percent surplus.

It has taken the agency six years to come to the con-

clusion that its policy necessarily allows it to reduce

future rates to remedy the situation. Based on the policy

in effect when AT & T filed its tariffs, however, the FCC

should have determined whether the conditions in 1978

and thereafter warranted a prospective reduction in

rates. The relevant circumstances for analysis would have

included the fact that (1) in an inherently imperfect

regime, the excess amounted to less than one-fourth of

one percent; (2) the 1976 tariff rates produced a re-

turn below 10 percent in every year other than 1978;

(3) the rate of return for the entire period 1976 to

1980 averaged 9.69 percent; (4) the governing rate of

return was implemented in 1976 based on economic con-

33a

ditions obtaining in 1975; and (5) the relevant period

for analyzing prospective rates, if the FCC had acted

in timely fashion, would have been in 1979 or soon there-

after.

Whatever the outcome of this analysis, the funda-

mental point is clear. The FCC would have asked whether

the overage signaled a need to reset tariff rates based on

current conditions. The 1984 order confirms at a mini-

mum that the rate of return established in 1976 con-

tinued to apply in 1978. Therefore, had AT & T in fact

lowered rates in 1979 in response to the .22 percent ex-

cess in 1978, they would have realized a shortfall below

even the allowed 10 percent rate of return (i.e., at the

unchanged rates, the 1979 annual rate of return was

9.90 percent).

In sum, the FCC cannot cite a single passage in its

regulatory decisions forecasting the refund policy an-

nounced in 1984. See Brief for Respondents at 22-26.

The record documents two prior instances in which ac-

tual rates exceeded the target rate of return. Most im-

portant, the 1984 order—reducing future rates based on

past surplus—contradicts the central premise of the

FCC’s state-of-return regulation and a forward-looking

assessment of capital needs, instead of an historically

based estimation of actual costs. In these circumstances,

the FCC violated the well-established prohibition against

retroactive application of a newly announced policy. See

Boston Edison Co. v. FPC, 557 F.2d 845, 849 (D.C.Cir.),

cert. denied sub nom. Town of Norwood, Mass. v. Boston

Edison Co., 434 U.S. 956, 98 S.Ct. 482, 54 L.Ed.2d 314

(1977); FERC v. Triton Oil and Gas os 750 F.2d

113, 116 (D.D.Cir.1984).

B. Reliance

The prohibition applies with special force when, as

here, the party subject to the change has relied to its

34a

detriment on the prior policy. Whereas the majority is

unable to find any such reliance, I believe the reliance

is self-evident. Prior to today’s ruling, AT & T had

every reason to believe that section 204 provided the

only statutory mechanism for ordering a retroactive re-

fund. The FCC concedes that this section does not apply

here. Therefore, the only other provision that could ar-

guably provide such authority, section 4(i) aside,’ is the

section 205 authority to set “just and reasonable [rates]

... to be thereafter observed,” 47 U.S.C. § 205(a) (em-

phasis added); cf. the regulatory analog in section 206

of the Federal Power Act, 16 U.S.C. § 824e(a), and sec-

tion 5 of the Natural Gas Act, 15 U.S.C. § 717d(a).

By long-established principle, these three parallel stat-

utory provisions “bar[] utility refunds for past excessive

rates, or the Commission’s retroactive substitution of an

unreasonably high or low rate with a just and reasonable

rate.” City of Piqua, Ohio v. FERC, 610 F.2d 950, 954

(D.C.Cir.1979) ; Arkansas Louisiana Gas Co. v. Hall, 453

U.S. 571, 578, 101 S.Ct. 2925, 2931, 69 L.Ed.2d 856

(1981); Indiana & Michigan Elec. Co. v. FPC, 502 F.2d

336, 345 (D.C.Cir.1974), cert. denied, 420 U.S. 946, 95

S.Ct. 1326, 43 L.Ed.2d 424 (1975). While the majority

finds that section 4(i) could support the particular remedy

ordered here in the future, it is evident that prior to this

ruling AT & T could reasonably have believed that sec-

tions 204 and 205, and the analogs in the electric and

gas industry, contained the relevant statutory framework.

As the FCC concedes, see AT & T Earnings on Interstate

and Foreign Services During 1978, 48 Fed.Reg. 49,502,

49,507 (1984), and the panel holds, maj. at 14, this

framework provides no authority for the 1984 refund

order.

1“The Commission may perform any and all acts, make such

rules and regulations, and issue such orders, not inconsistent with

this chapter, as may be necessary in the execution of its functions.”

47 U.S.C. § 154(i) (1982).

EE ————eEeEeeeonwrl

35a

The majority believes AT & T should have foreseen the

true novelty here, namely, the location of refund power

in the section 4(i) authorization to perform such acts

“as may be necessary in the execution of its function.”

47 U.S.C. § 154(i). This first use of section 4(i) to

authorize the 1984 refund does not void the FCC’s con-

struction of the statute. Bankamerica Corp. v. United

States, 462 U.S. 122, 131, 103 S.Ct. 2266, 2272, 76 L.Ed.

2d 456 (1983) (“[a]uthority actually granted by Con-

gress ... cannot evaporate through lack of administra-

tive exercise.” (quoting FTC v. Bunte Bros., Inc., 312

U.S. 349, 352, 61 S.Ct. 580, 582, 85 L.Ed. 881 (1941))).

It does mean, however, that persons subject to enforce-

ment proceedings can reasonably rely “on what was uni-

versally perceived as plain statutory language,” id. at

133, 103 S.Ct. at 22738, or, as here, the plain statutory

scheme. See National Classification Comm. v. United

States, 746 F.2d 886 (D.C.Cir.1984) (agency cannot

retroactively expose carriers to antitrust liability for rea-

sonable reliance on a settled prior construction of an

agreement.

Other factors independent demonstrate AT & T’s re-

liance. Absent notice of the refund policy, the carrier

went five years without a change in its tariff even though

it could have increased its revenues in every year except

1978 without exceeding the 10 percent rate of return

limit. The increased revenues would have more than off-

set the $101 million rate reduction ordered here. More-

over, although the agency in 1984 held that conditions in

1978 fell “within the correlative range of economic and

financial market conditions,” considered in 1976, 49 Fed.

Reg. at 49,506 n.34, a quick perusal of the FCC opinions

fixing the appropriate rate of return in a given period

indicates the subject admits to less than scientific cer-

tainty. For example, the decisions document the multiple

assumptions used to compile this deceptively simple rate-

of-return figure and the multiple underlying debates

VX

36a

among economists over the proper measurement of the

cost of debt and equity. See, e.g., 9 F.C.C.2d at 72-86;

38 F.C.C.2d at 226-46; 57 F.C.C.2d at 962-72.

In this context, the FCC’s post-hoc determination in

1984 that 1976 economic conditions still prevailed in 1978

does not mean the agency would have necessarily re-

jected a .22 percent increase in the allowable rate of

return if vigorously pressed and documented at the time

by AT & T. With such large sums of money at stake, I

believe the majority is unduly formalistic when it asserts

as fact that AT & T would not have behaved differently

even with explicit knowledge that a .22 percent overshoot

in its calculated rate of return would produce a $101

million refund order. Z

C. Inherent Remedy

A final justification relied upon by the FCC, see Brief

for Respondents at 23, and the majority, maj. at 1109,

is that the rate-of-return prescription inherently encom-

passes the remedy of setting a rate of return appropriate

to say 1985, but then reducing that rate by a fixed sum

(here $101 million plus $77 million in interest) to adjust

for past surplus. FCC practice has been otherwise. FCC

decisions describe a contrary system. No other regulators

have seen fit to allow this system. Indeed, the FCC only

began using the word “prescription” in 1973, in a dis-

cussion to which it attached no special Significance, six

years after adopting a policy that “represent[s] no new

or essentially different approach to rate regulation. 9

F.C.C.2d at 116. See 42 F.C.C.2d 293, 300 (1973); 51

F.C.C.2d at 625 n. 12. To the extent the word has appli-

cation here, it is to signify that the rate of return pre-

scribes the allowable rate of return. This court said no

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

Now the FCC claims long after the fact that a prescrip-

tive rate-setting regime silently conveys the additional

prospec. of an enforcement policy reducing prospective

teem

37a

rates to remedy past surplus. In these circumstances and

in light of the FCC’s insistence that rates relate ex--

clusively to current conditions, I believe the Supreme

Court has pronounced decisively The 1984 enforcement

scheme “is too unprecedented a departure from the con-

ventions of ratemaking to rest on mere inference.” Trans-

continental & Western Air, Inc. v. CAB, 336 U.S. 601,

607, 69 S.Ct. 756, 759, 93 L.Ed. 911 (1949).

D. The Rulemaking Order

The posture of this case would be substantially altered

if the FCC were arguing its right to engage in rule-

making in an adjudicatory setting. Yet here we have the

anomalous circumstance that the refund order directed at

AT & T was expressly a single party adjudication. See

supra at 1112. The subsequent decision to engage in

prospective rulemaking conclusively establishes that the

FCC has no statutory interest in the outcome of this

particular case. Cf. Triton Oil, 750 F.2d at 116 (‘The

Commission may not abuse its discretion by arbitrarily

choosing to disregard its own established rules and pro-

cedures in a single, specific case.”). In the context of

Retail, Wholesale, the substantive rationale for allowing

retroactive rulemaking is sharply diminished.

Moreover, pursuant to the actual rules adopted, AT &

T would most likely not be liable for a “refund” in the

instant case. Specifically, the Commission, in its prelimi-

nary rulemaking, recognized the “inability of carriers ‘to

target their earnings with precision’ as a result of ‘un-

predictable factors.’ The Commission recognized that

‘disallowing any earnings ‘peaks,’ while ignoring the

‘valleys,’ would tend to induce a systematic bias that

would cause a carrier to fall short of its targeted rate

of return over the long run.’” Brief for Respondents,

Nos. 85-1778, et al. at 11 (citations to record omitted)

(emphasis added).

38a

The final rules establish several specific provisions to

deal with the inherent fluctuation in return, i.e., the pre-

cise issue of this case. See id. at 31-24. Significantly, the

measuring period for the return is two years, not one.

AT & T earned 9.59 percent in 1977 and 10.22 in 1978,

which produces a two-year average return of 9.91 per-

cent. Moreover, the two-year provision allows for “mid-

course corrections, thereby lessening the possibility that

the enforcement mechanism would have to be invoked.”

Id at 13 (citations to record omitted). AT & T, of course,

was given no such opportunity to make corrections in the

present case. Indeed, it is startling that under the new

rules, AT & T is expressly allowed to file increases if

actual earnings are below the prescribed return during

the first year. Jd. at 33. Had AT & T been allowed the

benefit of this procedure, it could have raised rates in

1976 (9.25 percent actual), 1977 (9.59 percent), 1979

(9.90 percent), ayd1980 (9.90 percent) and still been

below the allowable ten percent ceiling. With perfect

targeting, AT & T would have earned an additional 1.36

percent, less the .22 percent surplus in 1978 for a net

gain of 1.16 percent. If a .22 percent overcharge resulted

in a $101 million refund order, AT & T actually could

have charged approximately an additional half-billion

dollars during this period without violating the estab-

lished, lawful rate of return.

IV. CONCLUSION

The FCC has the statutory authority to insure that

actual rates filed are likely to fall within the required

range (by targeting the allowable revenue increment pur-

suant to section 205), and that the rates in fact do fall

wthin the range (via a section 204 accounting). Over

time the FCC can force prospective adjustment in rates

by lowering or raising the allowed rate of return, as

required by current economic conditions. Notwithstand-

ing this comprehensive program, the majority credits the

39a

FCC with a policy that cannot be found in the record.

The opinion further ignores the carrier’s reliance upon

the statutory refund scheme as it existed in 1978, and

rejects outright the prospect that hundred million dollar

refund orders would sharpen the carrier’s interest to

earn all revenues to which it was entitled. Finally, the

majority ignores the implications of the FCC’s subse-

quent decision to engage in formal rulemaking. Appli-

cation of well-established retroactivity doctrine requires

that the 1984 Refund Order be set aside. I respectfully

dissent.

40a

APPENDIX B

FCC 84-567

BEFORE THE

FEDERAL COMMUNICATIONS COMMISSION

WASHINGTON, D.C. 20554

CC Docket No. 79-187

IN THE MATTER OF

AT&T EARNINGS ON INTERSTATE AND

FOREIGN SERVICES DURING 1978

DECISION

Adopted: November 21, 1984;

Released: December 11, 1984

BY THE COMMISSION:

1. This proceeding was initiated as a result of infor-

mation that indicated that tariffs incorporating compen-

sation to local exchange carriers, interexchange carriers,

and AT&T, would result in an earned rate of return for

1978 that would exceed the level authorized by the Com-

mission. At issue is whether the authorized rate of re-

1 During 1978 AT&T filed monthly reports of interstate earnings

that showed earnings ratios in excess of those that had been pre-

scribed in Docket No. 20376, 57 FCC 2d 960 (1976). On December

20, 1978, the General Services Administration wrote to the Acting

Chief of the Common Carriere Bureau with respect to AT&T’s

interstate earnings. On July 20, 1979, the National Citizens Com-

mittee for Broadcasting, the Consumer Federation of America, and

the Missouri Public Interest Research Group filed a “Petition for

Enforcement of Accounting Order” which raised questions con-

cerning AT&T’s 1978 interstate earnings. Our action in this pro-

ceeding also addresses that petition.

4la

turn for 1978 was exceeded, and if so, the remedial ac-

tion that the Commission should take. We conclude that

the level of interstate revenues that was received by

AT&T and the Bell System Companies (hereinafter col-

lectively referred to as “AT&T”, unless the context in-

dicates otherwise) during 1978 exceeded the authorized

level by $101,000,000. We also establish a remedy by

providing for reductions to prospective rates. In a forth-

coming order, we will address the 1978 compensation that

was received by non-AT&T/BOC carriers that was de-

rived from interstate tariffs that were filed by AT&T.

I. BACKGROUND

2. On January 19, 1976, the Commission voted to

prescribe 9.5 percent as the rate of return for AT&T’s

interstate and foreign services. The Commission also

stated that earnings equivalent to an additional 0.5 per-

cent return on AT&T’s interstate rate base would be

allowed as an incentive for increased productivity and

efficiency. A written decision to this effect was released

on February 5, 1976,’ that stated that the Commission

would “not require any downward adjustment of AT&T’s

overall interstate rates provided its overall rate of re-

turn does not exceed 10 percent.” AT&T filed tariff re-

visions on January 29, 1976 that were represented as

having been designed to produce the prescribed 9.5 per-

cent rate of return. The Commission suspended the re-

vised rates for one day and subjected those rates to an

accounting order.

3. With the increased rates in effect for only part of

the year, AT&T reported an overall interstate rate of

return of 9.25 percent for 1976. During 1977, AT&T’s

measurement of its earned rate of return increased to

2 See paras. 17, 19, and 25, infra.

3 AT&T Rate of Return, Docket No. 20376, 57 FCC 2d 960, 973

(1976).

42a

9.59 percent. AT&T’s Interstate Monthly Reports

(“IMR 1”) for the first nine months of 1978 showed a

cumulative annual rate of return of 10.42 percent. This

prompted the Common Carrier Bureau to initiate an

internal review of AT&T’s earnings. On December 20,

1978, the Acting Chief of the Common Carrier Bureau

formally requested information from AT&T.* In re-

sponse to the Bureau Chief’s letter, AT&T stated that its

1978 rate of return was 10.02 percent when calculated

in accordance with the accounting changes concerning

plant under construction that had been adopted in Phase

II of Docket No. 19129.° It also stated that changes in

economic conditions since the 1976 prescription justified

an increased earnings level.®

4, AT&T’s IMR 1 dated January 22, 1978 for calen-

dar year 1978 showed a 10.22 percent rate of return on

AT&T’s interstate and foreign services. The Acting

4 Letter to William R. Stump, American Telephone and Telegraph

Company, from the Acting Chief, Common Carrier Bureau, De-

cember 20, 1979.

5 Phase II Final Decision and Order in Docket No. 19129, 64 FCC

2d 1 (1977). See Memorandum Opinion and Order In the Matter

of American Telephone and Telegraph Co., 72 FCC 2d 1 (1979).

At the time of the Bureau Chief’s letter, AT&T had a petition before

the Commission that subsequently was approved at a public meeting

on December 21, 1978. The effect of granting AT&T’s request

was to increase the measurement of AT&T’s earned rate of return

to 10.22 percent. A more extensive discussion of. the treatment

of interest on plant during constrution, and its relationship to the

measurement of AT&T’s 1978 interstate earnings, is contained in

Appendix A.

6 Letter to Acting Chief, Common Carrier Bureau, from William

R. Stump, Assistant Vice President, AT&T, January 19, 1979.

7 The revenue required to produce an after tax rate of return of

10.0 percent for 1978 is $101.0 million less than the revenues

shown on the IMR 1. Letter to Glen DeChabert, Common Carrier

Bureau, from T.E. Lawrence, AT&T, October 26, 1979. AT&T

Comments at para. 64. This dollar measurement has not been con-

43a

Chief of the Common Carrier Bureau subsequently asked

AT&T to explain the difference between the 10.02 per-

cent figure cited in its letter of January 19, 1979 and

the 10.22 percent figure shown on the IMR 1 which was

dated January 22, 1979.2 AT&T stated that the 10.02

percent figure for 1978 had been calculated in accordance

with accounting rules for interest during construction

that actually were not scheduled to become effective until

January 1, 1979. AT&T further stated that it had used

this measure of rate of return because it appeared to

be a better indicator of future earnings levels than the

unadjusted figure due to the fact that those accounting

changes would tend to lower the measurement of the

earned rate of return somewhat in future years.®

5. On September 18, 1979, the Commission adopted a

Notice of Inquiry in this proceeding to examine the policy

and earnings measurement issues that had arisen from

AT&T’s 1978 interstate operations. We requested com-

ments on five issues: (1) Is review of AT&T’s earnings

on a calendar year basis appropriate in determining

whether AT&T has complied with a rate of return

prescription? (2) If a calendar year assessment is not

appropriate, what interval should be used? (3) What is

the correct measurement of AT&T’s earned rate of re-

“turn during 1978? (4) Has AT&T exceeded its pre-

scribed rate of return, and if so, by what dollar amount?

(5) What remedial action should the Commission take if

AT&T’s earned rate of return has exceeded the pre-

scribed level?

tested by any of the parties to this proceding, and there is no ques-

tion of fact incident thereto.

8 Letter to William R. Stump, Assistant Vice President, AT&T,

from Chief, Common Carrier Bureau, April 20, 1979.

® Letter to Chief, Common Carrier Bureau, from William R.

Stump, Assistant Vice President, AT&T, May 3, 1979.

10 Common Carrier-Interstate and Foreign Earnings (CC Docket

No. 79-187), 75 FCC 2d 412 (1979).

44a

6. Comments in response to those issues were filed by

AT&T, the United States Independent Telephone Asso-

ciation (USITA), the United States Office of Consumer

Affairs (USOCA), the General Services Administration

(GSA), and the Massachusetts Public Interest Research

Group (Massachusetts PIRG). Joint Comments were

filed by the National Citizens Committee for Broadcast-

ing, the Consumer Federation of America, the Missouri

Public Interest Research Group, and the California De-

partment of Consumer Affairs, (hereinafter collectively

referred to as “NCCB”). AT&T opposed refunding any

revenues that resulted in earnings in excess of 10.0 per-

cent.

7. AT&T argued, inter alia, that the Commission did

not have authority to order refunds of 1978 revenues.

AT&T also contended that if the Commission had legal

authority to order refunds, refunds were not warranted

as a matter of discretion given AT&T’s earnings history

and then existing conditions in the financial markets.

In addition, AT&T stated that its 1978 rate of return

fer all interstate services was not the 10.22 percent

shown for 1978 on the IMR 1 but rather 10.09 percent

because the 1978 IMR 1 reflected only the revenues, ex-

penses, and investment that were associated with serv-

ices provided at uniform nation-wide rates.“ USITA also

opposed any refund of AT&T’s 1978 revenues, arguing

that the Commission only has authority to prescribe ac-

tual rates, not a rate of return. In addition, USITA

contended that the reasonableness of a given rate of

return varies with changing economic and financial

conditions.

11 A further reduction of 20 basis points (to 9.89 percent) was

viewed by AT&T as being preferable to the 10.09 percent figure

because the 9.89 percent measurement reflected “full implementation

of the Commission’s Phase II decision in Docket No. 19129.” AT&T

Comments at 41.

45a

8. GSA supported refunding those revenues that

caused AT&T’s 1978 earnings to exceed a 10.0 percent

rate of return. USOCA also supported refunds after

having noted that the Commission’s 1976 prescription

Decision had placed AT&T on notice that 10.0 percent

was the maximum allowable rate of return. Both GSA

and USOCA argued that 10.22 percent was the correct

figure for AT&T’s 1978 earned rate of return. NCCB

also supported refunds, but stated that the amount of

the overage should be determined through evidentiary

hearings. The Massachusetts PIRG filed a letter suggest-

ing that AT&T’s 1978 earnings in excess of 10.0 per-

cent be used to establish a consumer action group to

monitor AT&T. ;

9. AT&T, GSA, USOCA, and NCCB filed reply com-

ments. AT&T argued that GSA, USOCA, and NCCB

had falied to discuss the central issue in the case, er-

roneously assuming that the 10.0 percent figure consti-

tuted a ceiling for AT&T’s rate of return despite chang-

ing economic conditions. Responding to this contention,

GSA, USOCA, and NCCB argued that a rate of return

prescription remains binding until changed by the Com-

mission after a full hearing.”

12 AT&T also argued that a time period other than a calendar year

should be used for assessing compliance with a rate of return pre-

scription. In its opposition the USOCA referred to Federal Power

Commission v. Hope Natural Gas Co., 320 U.S. 591, a frequently

cited decision that refers to the annual return that the Hope Natural

Gas Co. was to achieve. Jd. at 605. USOCA also observed that to

use any measure other than the calendar year would ignore estab-

lished regulatory standards. USITA stated that the exact earned

(“ex post”) rate of return of a common carrier can only be ascer-

tained at the end of the carrier’s fiscal year because it is only “at

the end of the fiscal year [that] actual expenses can be subtracted

from actual revenue and the result divided by the actual rate base

for the year.” We agree with USITA to the extent that the fiscal

year of the carrier should control, as contrasted with the calendai

year. The revenues, expenses, and assets of common carriers are

typically subject to independent audit on a fiscal year basis, with

46a

aie II. DISCUSSION

A. Assessment of Measurements of AT&T’s 1978 In-

terstate Rate of Return

10. Including its comments in this proceeding, AT&T

has provided five earned rate of return figures for 1978.

The Interstate Monthly Report No. 1 (“IMR 1’), that

AT&T filed with this Commission as its statement of

earnings on interstate and foreign operations, reported

that AT&T’s earned rate of return for the calendar year

ending December 31, 1978, was 10.22 percent. On June

29, 1979, AT&T submitted a “1978 Annual FDC Report”

that stated that AT&T’s 1978 earned rate of return on

its interstate and foreign services was 10.1 percent. On

November 18, 1979, AT&T filed comments stating that

the 10.1 percent was really 10.09 percent.’* The 10.02

percent measurement was supplied by AT&T on Jan-

uary 19, 1979, in a letter from Mr. William R. Stump

to the then Acting Chief of the Common Carrier Bureau

which Mr. Stump further clarified by a letter to the

Chief of the Common Carrier Bureau dated May 3, 1979.

11. The five different figures that AT&T provided are

based upon three essentially separate concepts. The IMR

income tax liabilities (and filings) being based upon data that are

collected during each tax payer’s fiscal year. Further, the Securi-

ties and Exchange Commission’s annual corporate reporting re-

quirements (including annual reports to shareholders) are based

upon the fiscal year, with the consequence that the adoption of the

fiscal year for assessments of AT&T’s earned rate of return would

assist investors, the public, and governmental entities in reviewing

AT&T’s operating results on a consistent basis. Accordingly, since

AT&T’s 1978 fiscal year was coincident with the calendar year, we

conclude that we will confine our analysis to those issues that are

raised by earnings that were achieved during AT&T’s fiscal year

ending December 31, 1978.

13 In the second footnote on page 43 of AT&T’s comments, AT&T

stated: “[t]he 10.1 percent was a rounding of a 10.09 percent,

so that the excess is only 9 basis points.”

_47a

1 stated that the earned rate of return was 10.22 per-

cent. AT&T’s 1978 FDC 7 Report, which was based

upon data for the month of June, 1978, stated that the

earned rate of return was 10.09 percent (or 10.1 per-

cent). AT&T also contended that the preceding measure-

ments should be reduced by twenty basis points (0.20

percent) to reflect the Commission’s decisions in Phase

II of Docket No. 19129. We reject this later adjustmen*

of twenty basis points for reasons that have been ex-

pressed in our decisions in other proceedings."*

12. We thus turn to the adjustments that were made

to the 10.22 percent reported in the December, 1978,

IMR 1 to arrive at the 10.09 percent that AT&T sub-

mitted in its “1978 Annual FDC Report” as its earned

rate of return for 1978. By transmittal letter dated

June 29, 1979, AT&T filed a “1978 Annual FDC Re-

port.” That report, which relied upon data for the

month of June, 1978, purported to show the rate of re-

turn that AT&T had earned during the 1978 calendar

year on each of its interstate services. Volume 2 of that

report developed a “recast” of the IMR 1 that revised

AT&T’s December, 1978, IMR 1 to show an earned rate

of return of 10.09 percent on AT&T’s interstate serv-

ices. The “recast” contained interstate investment, ex-

penses, and revenues that had purportedly not been in-

cluded in the prior IMR 1 reports that AT&T had sup-

plied to this Commission. Specifically, AT&T stated that

the IMR 1 had not included investment, revenues, or ex-

penses that were incident to the provision of interstate

services at “non-uniform rates.” Several aspects of

14 At this point it is sufficient to note that we have already ruled

upon this matter. See Memorandum Opinion and Order In the

Matter of The American Telephone and Telegraph Company, 72

FCC 2d 1 (1979), and the discussion contained in Appendix A,

infra.

15TIn its “1978 Annual FDC Report”, AT&T described “services

provided at non-uniform rates” as being the use of its facilities

48a

AT&T’s approach require that we not accord to the

“1978 Annual FDC Report” adjustments the same weight

that we attach to the figures that were contained in the

December, 1978 IMR 1. For example, if “recasting”

were required, actual data for the 1978 calendar year

should have been employed for “recasting” rather than

data that were selected for the month of June.’* Second,

no data have been presented that credibly establish that

June, 1978, is a month that accurately represents the

investment and/or expenses that were associated with the

provision of facilities to the OCCs.’’ In this regard we

concur in USITA’s assessment that the measurement of

excess interstate revenues for the fiscal year of a car-

rier requires actual interstate investment, expenses, and

revenues for the entire fiscal year.

13. More important, however, is the fact that this

Commission has consistently relied upon the Interstate

pursuant to BSOC Tariffs Nos. 3 & 4, Western Union Contracts

Nos. 1 & 2, and the use of its facilities by other common carriers.

In its comments in this proceeding, AT&T stated that the 10.22

percent measurement contained in the December, 1978, IMR 1 has

“Te)|xcluded, for example, . . . revenues, expenses and investment

associated with interstate facilities provided to other common car-

riers, foreign exchange channels between contiguous exchanges and

less than fourteen miles in length, and link facilities for air-ground

and coastal harbor service, and CATV channel service.” (emphasis

added)

16 Presumably data for each of the twelve months in 1978 were

available to AT&T during the Spring of 1979, given the fact that

AT&T’s IMR 1 for the month of December, 1978, states that it was

issued on January 22, 1979.

17 Additional issues arise with respect to the treatment of the

adjustments that were made for facilities incident to the provi-

sion of services under BSOC Tariff Nos. 3 & 4 and Western Union

Contracts Nos. 1 & 2. The Western Union Contracts Nos. 1 & 2

terminated on September 30, 1978, which would suggest that ad-

justments would be necessary to reflect the fact that no further

activity under those contracts occurred during the months of

--October, November, and December, 1978.

|

49a

Monthly Report No. 1 in assessing AT&T’s interstate

earnings. AT&T has supplied the IMR 1 reports to this

Commission for approximately twenty-eight years as its

summary of its interstate and foreign services opera-

tions. On July 25, 1979, AT&T, in response to specific

questions as to measurement of AT&T’s earned rate of

return on interstate services for the calendar year 1978,

stated:

AT&T reports monthly to the Commission the inter-

state rate of return consistent with the Commis-

sion’s past decisions as to the appropriate elements

of revenues, expenses, taxes and net investment to

be used in the calculation of the rate of return. The

report on which the interstate rate of return is

shown is the interstate Monthly Report No. 1.

* * * *

[t]he rate of return of 10.22% shown on the De-

cember 1978 Interstate Monthly Report No. 1 is the

rate or return for 1978 based on the Commission’s

directives appropriate to that year, including the

December 21 [IDC] decision mentioned above. [Let-

ter from Mr. William Stump to the Chief of the

Common Carrier Bureau, dated July 25, 1979.)

(emphasis added)

14. On September 27, 1979, additional information

was requested from Mr. Thomas Lawrence, a member of

AT&T’s FCC Financial and Accounting Matters Staff,

as to the measurement of the revenues that AT&T had

received during 1978 that were in excess of the 10.0 per-

cent specified in our decision in Docket No. 20376. Spe-

cifically, Mr. Lawrence was asked to

[p]lease state: (1) what total revenues for 1978

would have been required to achieve an after tax

rate of return of 10.00 percent and (2) the income

tax rates (federal, state, and if applicable, munic-

ipal) which have been applied to any revenues which

Te

50a

have resulted in earnings in excess of the 10.00%

rate of return specified in Docket No. 20376. (em-

phasis added)

In response thereto, Mr. Lawrence stated:

Pursuant to your request, we have computed the

revenues that would have been required to achieve

an after-tax rate of return of 10.0% for the year

1978. The data utilized in the attached analysis in-

dicates that the revenues required to achieve a

10.0% return would have been $101.0 million less

than the revenues shown on the Interstate Monthly

Report No. 1 for the year 1978 as issued by AT&T

on January 22, 1979... . (Letter from Mr. Thomas

Lawrence, AT&T, dated October 26, 1979) (empha-

sis added).

15. In its comments in this proceeding, AT&T has also

stated that an earned rate of return measurement of

10.22 percent would result in $101.0 million of revenues

in excess of 10 percent.’® In light of the information that

is before us, we conclude that AT&T’s 1978 interstate and

foreign services revenues exceeded the level that was au-

thorized by $101,000,000.*°

18 AT&T Comments, para. 64.

19 In the case before us here, there is no issue of tact that re-

quires a trial type evidentiary hearing. We have relied upon the

IMR 1 that AT&T has supplied to this Commission. AT&T’s alter-

native measurements of its earned rate of return during 1978

(vis. 9.89 percent, 10.02 percent, 10.09 percent, 10.1 percent) have

been rejected on the basis of our earlier decisions with respect to

IDC (9.89 percent, 10.02 percent), and our assessment of the “1978

Annual FDC Report” (10.09 percent, 10.1) percent). The resolu-

tion of these measurement issues depends either upon the mean-

ing of our prior decisions (see Appendix A, infra), or upon the fact

that we accord no weight to the measurement of AT&T’s rate of

return that is contained in AT&T’s 1978 Annual FDC Report. As

AT&T noted in its Opposition to the NCCB petition, “the pertinent

data are already before the Commission in reports routinely filed

as well as previous correspondence ... .” AT&T Opposition at 3,

n.* (filed August 2, 1979).

SN ee re eee Le ees

5la

16. The $101 million in excess revenues that AT&T

received *® during 1978 are exclusive of interest. In

prior refund cases, it has been our policy to award sim-

ple interest at the rate that has been computed by the

Commissioner of the Internal Revenue Service. Although

comments suggested that another interest rate be

adopted, we see no compelling reason to depart from that

well established practice here.* It has also been the Com-

mission’s practice to compute interest from the date of

the complaint.~ In this case, however, we have deter-

mined that the final date for the determination of

AT&T’s excess revenues is at the conclusion of AT&T’s

fiseal year on December 31, 1978. Accordingly, interest

shall be calculated from that date, rather than from the

December 20, 1978, date of the GSA letter. The Internal

Revenue Service interest rates that were applicable from

January 1, 1979 are: 6 percent from January 1, 1979,

through January 31, 1980; 12 percent from February 1,

1980, through January 31, 1982; 16 percent from Jan-

uary 1, 1983, through June 30, 1983; 20 percent from

February 1, 1982, through December 31, 1982; 11 per-

cent from July 1, 1983 through December 31, 1984; and

13 percent from January 1, 1985 to June 30, 1985.5

20 AT&T’s reported gross revenues were based upon tariffs that

included connecting and concurring carriers that received revenues

through the division of revenues and settlements processes.

21 The National Citizens Committee for Broadcasting, the Con-

sumer Federation of America and the Missouri Public Interest Re-

search Group requested that interest be accrued at the prime rate.

The USOCA supported that request.

22 Teleprompter Inc. v. Chesapeake and Potomac Tel. Co. 79

FCC 2d 232, 238-39 (1980), recon. 85 FCC 2d 23 (1981); Georgia

Power Co. v. Columbus Cablevision, Inc., FCC 84-100 (released

March 20, 1984) at para. 9 n.9.

—_—_—

23 Rev. Rul. 83-171, 1983-47 I.R.B. 7; Rev. Rul. 84-66; IRB 1984-18

(April 30, 1984). See references cited in para. 16 n.22, supra.

52a

B. Restitution

17. The Notice of Inquiry requested comments on the

action that this Commission should take when the earned

rate of return exceeds the rate that has been authorized.

Information in response to that request suggests that the

mechanism that entails the least administrative expense

would require the imposition of a temporary discount

upon interstate services for a period that is sufficient to

reduce carrier revenues by the amount that is to be re-

stored to interstate ratepayers. During the time that has

elapsed since comments were received in this proceeding,

the Bell System Operating Companies have been divested

from AT&T, the Division of Revenues process has ter-

minated, access charges have been implemented, and

earlier settlements procedures have been supplanted by

the NECA administered distribution of access charges

revenues under Part 69 of the Commission’s rules.*

Whatever weight might properly be ascribed to the con-

clusion that, in a pre-divestiture environment, temporary

discounts on services are less expensive and more effi-

ciently administered than cash refunds has added weight

in the post-divestiture environment. In structuring an

appropriate remedy, this conclusion is particularly com-

pelling in light of the joint nature of the interstate ser-

vices that were provided by AT&T, the Bell System

Operating Companies, and the independent telephone

companies during 1978. During that period, local ex-

change and other connecting carriers that received rev-

enues that flowed from the provision of services pursuant

to AT&T’s interstate and foreign services tariffs also

shared in aggregate revenues that were excessive. Tra-

ditional concepts of equity would, therefore, require that

those entities that received excess revenues proportion-

2447 C.F.R. § 69.601 et seq.

Se ne See eae

53a

ately share the burden of restoring those revenues to the

subscribers from whom they were received.*

18. Effecting restitution has been further complicated

by the fact that it is virtually impossible to achieve a

“direct targeting” of the amounts that should be re-

funded to particular recipients. Since 1978, ratepayers

have died, changed names, and changed addresses. Cor-

porations and other entities having de jure status as

ratepayers during 1978 have been dissolved, estates have

been liquidated and distributed, conservators have been

appointed, and trustees in bankruptcy have become suc-

cessors in interest to rights of bankrupt ratepayers in

refunds. Moreover, even if each element within the class

of 1978 ratepayers were still in existence and identifi-

able as ascertainable addresses, it would still not be pos-

sible to allocate the amount of 1978’s excess revenues,

with accrued interest, that should be directly refunded

to each of those ratepayers without additional proceed-

ings that would be extensive and time consuming. Also,

as we have heretofore observed, we cannot conclude, on

25 Section 201(a) of the Communications Act empowers the Com-

mission, after opportunity for hearing, to establish the division of

charges among common carriers that engage in the joint provision

of interstate and foreign telecommunications services. 47 U.S.C.

§ 201(a) (1982). Section 201(b) requires that all charges “in con-

nection with such communication service shall be just and reason-

able,” and “any such charge .. . that is unjust or unreasonable is

hereby declared to be unlawful... .” 47 U.S.C. §202(a) (1982).

We have concluded that AT&T’s 1978 interstate tariffs yielded

excessive reveneus to the providers of those services. As a conse-

quence, it is not inappropriate to adjust the prospective division of

charges among those carriers by their proportionate shares of the

excess revenues that were received during 1978. We are herewith

instituting the hearing that is required by Section 201(a) in the

context of tariff revisions that we have required. See para. 25,

infra. We recognize, in structuring the remedy that is contained

herein, that the record in this proceeding is inadequate to permit a

quantitative assessment of the restitution obligations of the inde-

pendent telephone companies that participated in revenues that

were derived from AT&T’s 1978 tariffs.

54a

the basis of AT&T’s 1978 FDC study, that the propor-

tions of the excess revenues that would be allocated to

each tariffed service offering during 1978 would be

correct.”®

19. We have thus concluded that restitution can best

be accomplished through a mechanism that will permit

us to apply 1978’s excess revenues, with accrued inter-

est, to benefit subscribers utilizing the interstate and for-

eign telecommunications services of AT&T and its con-

necting and concurring carriers.** Accordingly, we direct

26 Para. 12, supra.

27 See Bebchick v. Public Uilities Commission, 318 F.2d 187,

103-04 (D.C. Cir. en banc), cert. denied, 373 U.S. 913 (1963) (opin-

ion permitting utility commission to fashion relief to benefit a class

of ratepayers where individual ratepayers who had been overcharged

could not be identified). In this case, we could have ordered an

immediate discount. However, we have recently imposed revisions

to interstate tariffs for switched services and have been conducting

an extended review of the private line and special access service

tariffs. Additional revisions to reflect changes in assets, expenses,

and patterns of demand in exchange access tariffs will be necessary

periodically. Because the imposition of unnecessary administrative

expenses is undesirable, we have concluded that it will be more

efficient to address the revenue requirement adjustments that we

have required in the context of tariff revisions that will be occurring

during 1985. This decision is based upon the fact we have previ-

ously established an orderly procedure for the annual revision of

exchange carrier customer line charges, that provides for exchange

carrier filings that are to have a scheduled effective date of

June 1. See Section 69.3 of the Commission’s Rules. Those revisions

would ordinarily require changes in AT&T’s interexchange tariffs,

that would require an assessment of AT&T’s supporting documen-

tation. As a consequence, it would be administratively more efficient

and less expensive to ensure that appropriate modifications have

been made to interstate tariffs during the period that has been

scheduled for that process, rather than providing for an additional

round of tariff modifications and review on top of those that have

been required in the context of our most recent orders. We have

also concluded that it is not feasible to disproportionately allocate

1978’s excess revenues, with accrued interest, among categories of

interstate services on the basis of AT&T’s 1978 FDC Report (see

55a

AT&T to reduce its estimate of its 1985 revenue require-

ment by its proportionate share of 1978’s excess revenues

(including accrued interest) ,2* and we further direct that

the NECA shall reduce the estimated 1985 carrier com-

mon line pooled revenue requirements by the balance.”

C. Legal Authority ee

20. After a full hearing on the record, the Adminis-

trative Law Judge entered an Order in Docket No. 20376

that provided that AT&T’s interstate earnings were not

para. 12, supra). At this point, we feel that the administrative,

technical, and data complexities, that are associated with effecting

restitution in a timely manner, require that we adopt the approach

that is contained herein.

28 The “Plan of Reorganization” that implements the “Modifica-

tion of Final Judgment” provides that contingent liabilities that

relate to interstate rates be apportioned on the basis of “relative

investment devoted to interstate services as of the effective date of

divestiture (as calculated in accordance with the FCC-prescribed

Separations Manual in effect on the date of divestiture), adjusted

to reflect the assignments of assets under this Plan of Reorganiza-

tion (CPE and InterLATA assets to AT&T, and intraLATA assets

to the BOCs).” “Plan of Reorganization”, filed in United States v.

Western Elec. Co. & AT&T, C. A. No. 82-0192 (D.D.C., filed Decem-

ber 16, 1982) at 188. We find that such an allocation would be a

reasonable and equitable division of the restitution obligations of

the exchange and interexchange carriers.

29 Interest on AT&T’s pro rata share of the $101,000,000 shall be

accrued from January 1, 1979, to the date upon which AT&T files

tariff revisions that reflect the reductions in revenue requirements

that have been ordered herein. The aggregate reduction in revenue

requirements is to be allocated among the estimated revenue re-

quirements for each service offering by a constant proportion (e.g.

the revenue requirement of each service offering shall be reduced

by a fraction that is equal to AT&T’s total restitution obligation

divided by AT&T’s total 1985 interstate revenue requirement). In-

terest on the exchange carrier portion of the restitution obligation

shall be computed from January 1, 1979, and shall conclude on the

date that NECA files 1985 exchange carrier common line charges

that reflect the restitution obligation that we have imposed today.

56a

to exceed 10.0 percent.*° After expressly affirming the

decision of the Administrative Law Judge, the Commis-

sion stated that AT&T’s earnings were “not to exceed

10 percent’”’,*? and further stated that it would “not re-

quire any downward adjustment of AT&T’s overall inter-

state rates provided its overall rate of return does not

exceed 10 percent.” ** AT&T did not, however, seek dur-

ing 1978 to modify the rate of return prescription that

AT&T now contends had been vacated by rapidly chang-

ing economic circumstances. Nor did this Commission or

any court modify, during 1978, the Docket No. 20376

prescription orders. After receiving evidence during

1980, we did prescribe an interim date of return of 10.5

percent based upon the preliminary evidence that was

then before us.** At that time we took care to point out

that the Commission’s Docket No. 20376 prescription or-

ders had not lapsed, and that changes in AT&T’s cost of

capital could not “simply be determined by reference to

changes in economic conditions without a hearing. Thus,

we note that general fluctuations in the economy do not,

as AT&T implies, weaken or invalidate an outstanding

prescription such that a carrier may freely exceed it by

filing increased rates.” ** The proper procedure for a car-

80 AT&T Co. (Docket 20376), 57 FCC 2d 979, 1005 (1975).

81 AT&T Co. (Docket 20376), 57 FCC 2d 960, 973 (1976).

82 Td.

33 See AT&T Petition for Determination of Fair Rate of Return

in CC Docket No. 79-63 (filed March 8, 1979). AT&T, 78 FCC 2d

661, 668-70, 672 (1980). Based in large measure upon information

that was provided with respect to economic conditions during 1981,

we subsequently concluded that AT&T’s prescribed rate of return

should be increased to 12.75 percent. AT&T, 86 FCC 2d 221, 251

(1981).

34 AT&T, 78 FCC 2d at 666 n.7. Although AT&T contends that

economic conditions during 1978 were sufficiently different to have

vacated the 1976 prescription, we do not perceive AT&T’s factual

predicate to have been well founded. Our assessment of economic

57a

rier who contends that an outstanding order is improper

is to petition the Commission to modify that order.*

During 1978 AT&T did not conform to the Commission’s

procedural rules by seeking an order that would have

vacated the 1976 prescription order. Accordingly, there

is no statutory basis that would lead to the conclusion

that the 1976 prescription was not in full force and ef-

fect during 1978.*°

21. We next turn to an argument that was raised by

USITA. In discussing the Commission’s authority under

Section 205(a), USITA stated “[t]he FCC accepted the

rates filed by AT&T in 1976. These rates became lawful

rates, and AT&T could charge neither greater nor lesser

rates. Yet this is precisely what the Commission would

be doing in ordering refunds for 1978.” ** In essence,

USITA appears to contend that the interstate tariffs

under which AT&T was providing service during 1978

were “lawful rates.” In this regard, several observations

are in order. First, the Commission had never made an

affirmative finding that any of AT&T’s tariffed charges

during 1978 were “just and reasonable” within the mean-

ing of the Communications Act. Second, tariffed charges

of AT&T that were in effect during 1978 had been found

by this Commission to be unlawful (see Appendix B,

infra, and references cited therein). The continuation of

those services was permitted because the detrimental ef-

and financial market conditions that are of public record with re-

spect to 1978, as well as AT&T’s interstate earnings during 1978,

reaffirms our convinction that AT&T’s prescribed rate of return

was within the correlative range of economic and financial market

conditions that we considered at the time of the rate of return pre-

scription in early 1976.

35 See Sections 1.2, 1.106, and 1.401 of the Commission’s Rules,

47 CFR §§ 1.2. 1.106, and 1.401 (1978). Commission orders continue

in force until the Commission or a court of competent jurisdiction

issues a superseding order. 47 USC § 408 (1978).

36 See AT&T, 78 FCC 2d at 665-70.

37 USITA Comments at 5-6.

58a

fects that would have resulted from a disruption in the

provision of those services outweighed the harm that

would result from the continued provision of those serv-

ices at rates that had not been adequately justified. We

did not, however, intend that AT&T’s charges would re-

sult in revenues that exceeded the limit that we pre-

scribed in Docket No. 20376.*° USITA’s contention that

AT&T’s interstate charges during 1978 were ipso facto

lawful because they were filed at this Commission is in-

correct. It is clear that under Arizona Grocery v. Atchi-

son, Topeka, and Santa Fe Railway Co. that rates that

become effective may subsequently be found to have vio-

lated statutory standards.*® It is also clear under the

Communications Act that a carrier is under an affirma-

tive duty to revise its rates to conform to outstanding

prescription order.*®

38 AT&T, 57 FCC 2d 960, 973 (1976); AT&T, 78 FCC 2d at 667.

See also Appendix B, infra, and citations contained therein. The

difficulties that the Commission was encountering with respect to

AT&T’s tariffs are described in Docket No. 18128, 61 FCC 2d 587

(1976), recon., 67 FCC 2d 1441 (1978); Notice of Inquiry in CC

Docket No. 79-245 (In the Matter of American Telephone & Tele-

graph Co. Manual and Procedures for Allocation of Costs), 73 FCC

2d 629 (1979); WATS, 66 FCC 2d 9, 51-56 (1977), recon. 69 FCC

2d 2031( 1979); DDS, 67 FCC 2d 1195, 1229-30 (1978), recon., 70

FCC 2d 616, 630-33 (1979). To the extent that services with

associated charges that have been found to be unlawful have been

provided through the use of plant that has been jointly used in the

provision of other services at charges that have not been deter-

mined to be “just and reasonable”, we confront a situation that, in

the absence of enforcement of the overall rate of return prescrip-

tion, would potentially permit_carriers to achieve unlimited rates

of return unless this Commision were to terminate the provision of

those services.

39 Arizona Grocery v. Atchison, Topeka & Santa Fe Railway Co.,

284 U.S. 370, 384 (1931). See Caterfone, 13 FCC 2d 420, recon.

denied, 14 FCC 2d 571 (1986).

40 Section 205(a) of the Communications Act of 1934, as amended,

47 U.S.C. § 205(a) (1978) (Commission may “prescribe what will be

... thereafter observed ....’’).

59a

22. Because Section 205(a) does not expressly con-

tain the word “refunds”, USITA further contends that

any Commission action pursuant to a Section 205(a)

prescription could not embrace refunds as a mechanism

for remediation. While Section 205 does not specifically

provide for the enforcement of Commission prescriptions

through refund orders, Section 4(i) gives the Commis-

sion broad authority to “perform any and all acts, make

such rules and regulations, and issue such orders, not

inconsistent with this Act, as may be necessary in the

execution of its functions.” *7 In Nader v. FCC, the Court

expressly recognized that the power to order refunds is

inherent in the Commission’s prescription authority.”

III. ORDERING CLAUSES

23. IT IS ORDERED That the GSA and NCCB peti-

tions are granted to the extent stated in the rulings and

procedures that have been adopted herein and are, in all

other respects, denied.**

24. IT IS FURTHER ORDERED That restitution

shall be effected as provided herein, and that changes in

exchange carrier rates that implement this order shall be

reflected in AT&T’s estimated revenue requirements.

25. IT IS FURTHER ORDERED pursuant to Sec-

tions 4(i)-{j), 201, and 202 of the Communications Act,

That comments may be filed within twenty (20) days

from the date of each tariff filing that implements this

4147 U.S.C. § 154(i) (1978). With respect to the relationship

between Section 4(i) and Section 205(a), the Court in the Nader

case stated that the “discretion that must be afforded the Commis-

sion in the exercise of its ratemaking power is enhanced by Section

4(i) of the Communications Act...” Nader v. FCC, 520 F.2d 182,

203 (D.C. Cir. 1975).

42 Nader v. FCC, supra, at 204-05 n.25.

43 See AT&T Co. (Order Instituting Hearing), supra, at 690 n.4.

60a

Order, and reply comments may be filed within ten (10)

days thereafter.

26. IT IS FURTHER ORDERED That the Secretary

shall cause this decision to be published in the Federal

Register.

27. IT IS FURTHER ORDERED That the Secretary

shall, by registered mail, serve a copy of this decision

and notice of hearing upon the American Telephone and

Telegraph Company and each of the Bell System Operat-

ing Companies in accordance with Sections 416 and 413

of the Communications Act of 1934, as amended, and

shall enter proof of service in the docket in this

proceeding.

28. IT IS FURTHER Ordered that the Secretary shall

transmit a copy of this order to the NECA.

FEDERAL COMMUNICATIONS COMMISSION

WILLIAM J. TRICARICO, Secretary

nate! ee

ee a ee on 2k

6la m*

APPENDIX A

Interest During Construction

1. In correspondence with the Common Carrier Bu-

reau, and in its comments in this proceeding, AT&T has

asserted that the earned rate of return measurements

that AT&T reported in the IMR 1 and the 1978 Annual

FDC Report should be reduced by 0.20% on the basis

of “full compliance” with Docket 19129 (Phase II). In

the interest of brevity, those adjustments shall be re-

ferred to hereinafter as either the “Interest During Con-

struction” or “IDC” adjustments. The 9.89% measure-

ment of AT&T’s earned rate of return for 1978 results

from the deduction, by AT&T, of 1978’s Interest During

Construction from the revenues that AT&T’s employed in

presenting the 10.09% 1978 earned rate of return figure

that was contained in AT&T’s FDC Report. Similarly,

the 10.02% measurement results from deducting IDC

from the 10.22% figure that AT&T filed in its IMR-1

Report for December, 1978. To understand the nature of

AT&T’s contentions it is necessary to review “IDC” con-

cepts and our decisions with respect to IDC from the

ratemaking perspective that is relevant here. Subsequent

paragraphs in this. Appendix discuss IDC, our decisions

with respect to IDC, AT&T’s correspondence with respect

to IDC, and the measurement of AT&T’s earned rate of

return during 1978.

2. When a utility constructs plant, the construction of

the plant is frequently, although not necessarily, financed

through the issuance of interest bearing debt. Inclusion

of the interest that was incurred to finance the plant

construction could result in “double counting”? and there-

1 The “double counting” would occur as a consequence of allowing

the carrier to earn its allowed rate of return (cost of capital) on

the funds which were being used for constructing plant, while, at

the same time permitting the carrier to accrue “interest during

construction” which the carrier is subsequently permitted to recover

from ratepayers.

a

62a

fore a double recovery to the carrier if the plant that

was under construction were also included in the car-

rier’s rate base for allowed rate of return measurement

purposes. As a hypothetical example of this possibility,

assume that during 1978 a carrier had $573,478,000 of

telephone plant under construction and had incurred

$46,786,000 in interest during 1978 to finance that plant

while it was under construction. If that carrier were

permitted to earn an allowed rate of return of 10% on

the plant under construction in its revenue requirements

for that year, and also receive IDC, the carrier would

have been permitted to earn $104,133,000? or 18.16% *

on that investment as compared with the allowed rate of

return of 10%.

3. The issue that AT&T raised in its letters of Janu-

ary 19, 1979, May 3, 1979, and in its comments with

respect to IDC had its genesis in our consideration of

AT&T’s network capacity in the Phase II Final Decision

and Order in Docket No. 19129, 64 FCC 2d 1, 44-60

(1977). At that time, we noted that our practice had

been to “[i]nclude plant under construction in the rate

base and charge interest during construction. The inter-

est during construction is included in income for rate-

making purposes and is added to the construction work

in progress to be included in utility plant when the con-

struction work is placed in service.” Jd. at 56. An ex-

planation of that treatment for rate making purposes

will help to clarify the background that underlies

AT&T’s proposed adjustment.

4. Upon occurrence of the condition that the con-

structed plant is actually placed in service,s AT&T has

been permitted to add IDC to the cost of that constructed

2 ($573,478,000) (.1) + $46,786,000 = $104,133,000.

3 $104,133,000/$563,478,000 = .1816, or 18.16%.

4 See Phase II Final Decision and Order in Docket No. 19129, 64

FCC 2d 1 45-53, 56-62 (1977).

ee

63a

plant, which, in turn, was then included in AT&T’s rate

base and depreciation expense for ratemaking purposes.

To avoid “double counting’, in the period(s) prior to

the constructed plant’s actual commitment to service

(and subsequent thereto), we required, for ratemaking

purposes, that while the plant was being constructed

(termed “construction work in progress’) the interest

that was being incurred on the construction be added to

the revenues of the carrier to offset the rate of return

which the carrier was being permitted to earn upon the

plant while it was being constructed. Not including the

credit to revenues of IDC for ratemaking purposes would

have resulted in the following consequences: (1) the

carrier would be permitted to earn a rate of return on

plant under construction; (2) the carrier would then be

permitted to take the portion of return which was asso-

ciated with the construction of the plant (IDC) and place

that money in the rate base (thereby being compensated

twice for the use of the money necessary for construc-

tion of the same plant); and (3) the carrier would sub-

sequently be permitted to earn the allowed rate of return

upon the IDC, for which the carrier has already been

compensated when the carrier had been permitted to earn

a rate of return on the plant while it was under con-

struction (see (1), above).

5. A numerical illustration of these concepts may be

helpful. Assume that a carrier’s allowed rate of return

is ten percent, that the carrier borrows at ten percent to

finance construction, and that $10,000 in construction ex-

penditures occur during 1978. Under this scenario, the

carrier is permitted to recover its cost of capital (the

allowed rate of return of ten percent) on the construc-

tion, or $1,000 ($10,000 x .1) during 1978. The subse-

quent inclusion of IDC ($10,000 x .1 = $1,000) during

1978 in the carrier’s rate base would permit the carrier

to recover a second round of capital costs (the “double

count”) when that carrier is subsequently permitted to

64a

recover the $1,000 of IDC in increased depreciation ex-

pense in subsequent time periods, and is also permitted

to earn the allowed rate of return upon the IDC that is

in the rate base. The offsetting entry that we had re-

quired from Docket No. 16258, 9 FCC 2d 960, 972

(1967), reduced the revenue requirement by adding, for

rate evaluation purposes, IDC to the revenues that the

carrier was receiving. This had the direct effect of in-

creasing the measurement of the carrier’s earnings for

ratemaking purposes.

6. The treatment of IDC that was discussed in the

three preceding paragraphs was examined by the Trial

Staff in Docket No. 19129. In our Phase II Final Deci-

sion and Order in Docket No. 19129, supra at 60, we

found “sufficient merits in the Trial Staff’s criticism of

our present procedures for treating PUC and IDC to in-

stitute changes to eliminate some of the problems it has

asserted.” Specifically, our Order stated:

[w]e shall continue the practice . . . of including

short-term construction projects in the curent rate

base as the investment is incurred. We shall, how-

ever, neither compute nor capitalize IDC on such

amounts, but rather . . . treat short-term projects

similarly to plant in service.

7 * * *

Furthermore, we shall require all projects which

actually take longer than one year to complete to be

removed from the rate base at the end of the year,

unless given a waiver by this Commission. In that

event, IDC will be computed starting at the end of

one year in accordance with the procedures set forth

below. Additionally, any project suspended longer

than six months will be removed from the rate base

and no IDC will be computed on such amounts.

Projects designed with construction time exceeding

one year will be removed from the rate base ab

mitio....

ala A ates stintin yaad & ha ete tees

* ee ee ae

ea” on

65a

64 FCC 2d 1, 59 (1977). In addition, we explained that:

[w]e realize that changes to the Uniform System of

Accounts will be required in order to implement

these rate base changes, as projects with completion

dates exceeding one year must be isolated from those

taking less than one year. We are also concerned

that the necessary accounting changes are not in-

consistent with regulatory systems of the several

states. Accordingly, we are by separate Order insti-

tuting a proceeding, pursuant to Section 220(i) of

the Act ..., to solicit the views of the states on the

proposed accounting changes.

Id. at 60. ape

7. The proceeding to amend the Uniform System of

Accounts (“USOA”) as suggested in Docket No. 19129

was instituted by a Notice of Proposed Rulemaking,

which was adopted on April 28, 1977 (Docket No. 21230),

and published in the Federal Register on May 138, 1977,

42 Fed. Reg. 24291). In that Notice, we pointed out that

in our Phase II Final Decision and Order in Docket No.

19129 we had “prescribed, among other things, the treat-

ment of certain plant and expense items for ratemaking

purposes”; that “[a]lthough the investigation in Docket

No. 19129 was limited to the operations of [AT&T]...

the conclusion reached therein should be rules of general

applicability”; and, that the USOA “should therefore re-

flect the view expressed in Docket No. 19129 that “or-

derly implementation of certain of those prescriptions

[including plant under construction] will require amend- ~

ment of the Uniform System.”

8. On February 24, 1978, subsequent to the institu-

tion of the rulemaking proceeding to modify the neces-

sary accounts, we considered on our own motion (FCC

78-103, 67 FCC 2d 1429) the problem of plant under

construction and IDC in Docket No. 19129 and observed

that:

66a

fuJnder the provisions of our decision [Docket

19129], see para. 322, our revised treatment of Plant

Under Construction (PUC) and Interest During

Construction (IDC) for ratemaking purposes be-

came effective for reporting year 1977. It was also

originally determined that certain changes to our

accounting rules were necessary for the orderly im-

plementation of our revised policy. Accordingly, on

May 9, 1977, we released a Notice of Rulemaking

for comment by various states regarding the pro-

posed amendments to the Uniform System of Ac-

counts. ... Until that time [7.e., until the USOA

is amended in accordance with the requirements of

Section 220 of the Act], present accounting rules

will remain in effect, although, for ratemaking pur-

poses, interest is not to be calculated on projects

scheduled.to be completed in less than one year.

67 FCC 2d 1429, 1435-36 (emphasis added).

We further-stated:

[wle are using this opportunity to clarify the rate

base treatment of IDC accrued before the effective

date of the above accounting change. For the rea-

son stated below, we find the appropriate treatment

is to disallow such IDC for ratemaking purposes

during calendar year 1977. Traditionally, IDC has

been designed, in part, to compensate investors for

funds prudently invested in construction projects,

since projects while under construction generally

generate neither revenues nor profits. However, be-

cause we are allowing investment in construction

projects that are completed in less than one year to

be included immediately in the rate base, AT&T

will have the opportunity to earn an immediate fair

return. To allow AT&T the additional opportunity

to capitalize IDC at the time the associated PUC

goes into service, and thus to recover such IDC over

67a

the life of the facility, would compensate AT&T’s

investors twice. We find such “double counting” not

to be in the public interest and shall therefore dis-

allow such IDC, effective January 1, 1977, from re-

spondent’s interstate rate base.

Id. at 1486 (emphasis added).

9. About a month later, on March 27, 1978, Mr. Wil-

liam R. Stump, AT&T Assistant Vice President for FCC

Financial and Accounting Matters, wrote to the Chief of

the Common Carrier Bureau seeking additional infor-

mation as to the treatment of IDC. The letter stated:

[i]t is clear that the Commission intends to disallow

the inclusion of IDC from the rate base, for rate-

making purposes, during the pendency of changes .

in the Uniform System of Accounts to avoid any pos-

sibility of “double dipping” during the Docket 19129

(Phase II) Final Order and the necessary account-

ing changes in Docket 21230.

It also appears to be the Commission’s intent in

Paragraphs 14 and 15 to restore this IDC to the

rate base once the new accounting changes go into

effect and the opportunity for “double dipping” no

longer exists.

While this is a logical approach and appears to be

the intent of the Commission, the wording in Para-

graphs 14 and 15 is not as clear as it might be in

this regard. It would be helpful if this point could

be clarified in the Order prescribing the necessary

accounting changes.

In reply, the Bureau Chief agreed with AT&T’s inter-

pretation that the Commission’s intent in Docket No.

19129 was to exclude IDC from the rate base for rate-

making purposes pending necessary accounting changes

as a means of avoiding the opportunity for “double dip-

ping.” On the other hand, unlike AT&T, the Bureau

68a

Chief did “‘not read the Commission’s orders as evidenc-

ing an intent to restore the IDC to rate base once the

new accounting changes prescribed by Docket 21230 be-

come effective.”

10. On May 11, 1978, the Commission issued the

Amendment of Part 31 Report and Order (Docket No.

21230), 68 FCC 2d 902. Consistent with our findings in

Docket No. 19129, our decision in Docket No. 21230

amended the USOA to require, inter alia, that the ac-

count for telephone plant under construction be sub-

divided into two parts: one to show those projects to be

completed in more than a year (long-term projects).

Basically, those projects to be completed within one year

were to be placed in the plant accounts immediately and

no IDC was to be accrued thereon. Long term projects

(e.g. those which are to be completed in more than one

year) were to accrue IDC but were to be placed in plant

accounts only when ready for service. Those accounting

changes were ordered to become effective on January 1,

1979. See Amendment of Part 31, supra, at 908; recon.,

FCC 79-678 (released November 6, 1979).

11. On June 2, 1978, AT&T filed an “Application For

Review” challenging the conclusions reached by the Bu-

reau Chief in his May 8, 1978, letter “as contrary to

statutory requirements, case precedent, the Commission’s

decision in Docket 19129 Phase II and Commission pol-

icy.” AT&T requested that we set aside the Bureau

Chief’s conclusions and hold instead:

1. that IDC accrued by AT&T on short term Plant

Under Construction in 1977 and 1978 was allow-

able for interstate ratemaking purposes; and

2. that the Bureau Chief exceeded his authority in

concluding that interest accrued on short term

plant during 1977 and 1978 should be written

off AT&T’s books as an unrecoverable cost.

=. Oe ee

—

69a

AT&T’s Application For Review also stated:

[wlhile it is true, as [the Common Carrier Bureau

Chief’s] letter states, that “capitalized IDC is re-

covered through increased depreciation charges over

the life of the plant on which IDC was initially ac-

erued” this does not amount to double counting, so

long as the IDC is included as income for ratemak-

ing purposes ... (emphasis added)

12. Thus, AT&T’s June 2, 1978, Application For Re-

view requested, for ratemaking purposes during 1977

and 1978, that this Commission continue in effect the

IDC treatment that AT&T was then using for account-

ing and ratemaking purposes in its IMR 1 reports which

was, in fact, the same accounting and ratemaking treat-

ment that this Commission had prescribed in 1967 in

Docket No. 16258. As noted above, AT&T expressly

stated that IDC, under that method, must be included

with income for ratemaking purposes to offset the “double

counting” that would otherwise result. Upon further

consideration, we granted AT&T’s request that had the

consequence that insofar as the ratemaking treatment of

IDC on Plant Under Construction was concerned for

1977 and 1978, AT&T would continue its existing report-

ing of IDC (which included the revenue credit of IDC

to offset “double counting”) and that our ratemaking as-

sessment would correspend thereto.®

13. Against this factual backdrop, we now consider

AT&T’s statements regarding the appropriate treatment

of IDC during 1978 insofar as they concern the measure-

ment of AT&T’s earned rate of return for 1978. On

January 19, 1979, AT&T stated, with respect to AT&T’s

earned rate of return during 1978: “[i]n 1978, on the

basis of full compliance with Docket 19129 (Phase II)

5 See In the Matter of the American Telephone and Telegraph

Co., 72 FCC 2d 1 (decided December 21, 1978; adopted in final

form on May 30, 1979; released June 1, 1979).

70a

requirements it was 10.02%—for all practical purposes,

right at the upper part of the range....” (Letter from

Mr. William Stump, AT&T, to the Acting Chief of the

Common Carrier Bureau, dated January 19, 1979).

14. On May 3, 1979, in response to a letter by the

Chief of the Common Carrier Bureau with respect to the

10.02% measurement, AT&T stated:

[y]ou ask that we fully explain the difference be-

tween the 10.22% rate of return reported on the

Interstate Monthly Report No. 1 (IMR 1) and the

10.02% rate of return mentioned in my letter as

having been calculated on the basis of full compli-

ance with the Docket 19129 (Phase II) requirements.

The 20 basis point difference between the 10.22% re-

ported on the December 1978 IMR 1 as the 1978

interstate ratio of net earnings to average net in-

vestment and the 10.02% ratio mentioned in my let-

ter to you as the 1978 ratio on the basis of full

compliance with the Docket No. 19129 requirements

results from the adjusting out of amounts of inter-

est during construction accrued on short-term plant

under construction in 1978 (see Attachment). The

1977 and 1978 operating results reported in the

1978 IMR 1’s reflected the Docket No. 19129 deci-

sion except for the accrual of these amounts of in-

terest during construction because the changes to

Part 31 of the Commission’s rules which would re-

sult in full implementation of this Decision in this

regard were not effective until January 1, 1979.

(Letter from Mr. William R. Stump, AT&T, to the

Chief, Common Carrier Bureau, dated May 3,

1979.) (emphasis added)

15. In response to further inquiry as to the measure-

ment of AT&T’s earned rate of return during 1978, Mr.

Stump stated, in a letter to the Chief of the Common

Carrier Bureau that was dated July 25, 1979: “[t]he

9 71a

rate of return of 10.22% shown on the December 1978

Interstate Monthly Report No. 1 is the rate of return

for 1978 based on the Commission’s directives appro-

priate to that year, including the December 21 decision-

mentioned above.”

16. In its comments in this proceeding, AT&T has

stated: “[t]he 10.02 and 9.89 percent measurement differ

from the 10.22 and 10.1 percent measurements, respect-

ively, only in that the former two measurements, but not

the latter two, reflect full implementation of the Commis-

sion’s Phase II decision in Docket 19129.” (AT&T com:

ments, para, 63.) AT&T further stated, in a footnote to

paragraph 64 of its comments, that: “[t]he 10.1 percent

was a rounding of a 10.09 percent, so that the excess is

only 9 basis points.”

17. Thus, AT&T has stated in its letter of May 3,

1979, and in its comments in this proceeding that the dif-

ference between 10.02% and the 10.22% reported in

AT&T’s December, 1978, IMR 1 results from AT&T’s

“adjusting out” IDC for 1978. Similarly, the 9.89%

measurement supplied in AT&T’s comments (paras. 60,

63, 64) results from AT&T’s “adjusting out” IDC for

1978 from the 10.09% earned rate of return that AT&T

reported in its “1978 Annual FDC Report.” As hereto-

fore noted, those proposed downward IDC adjustments

ad the earned rates of return measurements associated

therewith have been rejected. As we have heretofore

stated for ratemaking as well as for accounting purposes

during 1978, IDC must be added to AT&T’s revenues for

interstate and foreign services to prevent double count-

ing. In its June 2, 1978, Application For Review, AT&T

acknowledged that IDC must be added to income to pre-

vent double counting during 1978 (see para. 11, supra),

and our June 1, 1979, Memorandum Opinion and Order

expressly recognized that fact. See Memorandum Opin-

ion and Order In The Matter Of The American Tele-

phone and Telegraph Company, 72 FCC 2d 1, 6 (1979).

72a

The “full implementation of the Commission’s Phase II

decision in Docket 19129” to which AT&T refers (AT&T

comments, para. 63; AT&T letters of January 19, 1979,

and May 3, 1979) not only involved accounting changes

that were effective on January 1, 1979, but also involved

concommitant ratemaking changes to prevent double

counting that were also not effective until January 1,

1979. AT&T’s proffered “full implementation” of our

Phase II Decision in Docket No. 19129, by now including

for 1978 inapplicable January 1, 1979, accounting

changes (which intentionally were not to become effective

until January 1, 1979), would, for 1978, result in the

exact result that we have consistently sought to avoid: a

double recovery of IDC.

73a

APPENDIX B

1. This Appendix contains a brief history of AT&T

filings and FCC proceedings that relate to tariffs under

which AT&T was providing interstate services during

1978.

2. On January 29, 1976, AT&T filed “Transmittal No.

12497” which contained revisions to Tariffs FCC Nos.

259, 260, 263, 264, and 267, which were represented as

having been designed to yield a 9.5% rate of return. On

February 5, 1976, after a full hearing, the Commission

released a Memorandum Opinion and Order in Docket

No. 20376, 57 FCC 2d 960 (1976), which prescribed a

fair rate of return for AT&T of 9.5% and permitted

AT&T to earn an additional 0.5% as “an incentive to

increased produttivity and efficiency.” Jd. at 973. On

March 1, 1976, we released a Memorandum Opinion and

Order in Docket No. 20732, 58 FCC 2d 1 (1976), which

considered the tariff revisions that we contained in

Transmittal No. 12497. As noted therein, numerous is-

sues were raised by participants in that proceeding that

were also, in part, being considered in Docket Nos.

18128, 19989, and 20288. Accordingly, pursuant to Sec-

tions 4(i), 4(j), 204, 205, and 403 of Communications

Act of 1934, as amended, the tariff revisions that were

contained in Transmittal No. 12497 were suspended for

one day, a hearing was instituted into the lawfulness of

those tariff revisions, the hearing was held in abeyance

pending further order of this Commission, and we re-

quired “that AT&T maintain an accounting of the reve-

nues derived under these revised tariffs, for possible re-

fund upon resolution of the lawfulness thereof.” Id. at

5. On March 26, 1976, we released an “Errata” in

Docket No. 20732, FCC 76-248, 58 FCC 2d 905 (1976),

which, inter alia, revised paragraph 14 of our Memoran-

dum Opinion and Order in Docket No. 20732, supra, at

5, to read:

T4a

[flor the reasons indicated we shall order AT&T

and all participating telephone companies to main-

tain accounts by service classes and subleasses, [sic]

in the aggregate, specifying the amounts of all in-

creases and the service classification for which such

amounts are accounted. Classifications for which ac-

counts must be kept are as follows: (1) private line

services, by series; (2) MTS and WATS, insofar

as rates have been increased, and for each classifica-

tion of service (e.g., dial station, operator-assisted,

inward WATS, outward WATS, etc.); (3) DDS;

and (4) all other services.

58 FCC 2d 1, 5 (1976). Service of the Errata upon

AT&T was effected on March 26, 1976. On March 29,

1976, the Commission released a Memorandum Opinion

and Order in Docket No. 20736 (In the Matter of Amer-

ican Telephone and Telegraph Company Revision to

Tariff FCC No. 260 (Series 1000), 58 FCC 2d 899

(1976), which similarly provided for the suspension of

certain AT&T tariff revisions, the institution of a hear-

ing at a date to be specified, and the imposition of an

accounting order upon AT&T and upon all carriers par-

ticipating in the provision of the Series 1000 service. Jd.

at 903. In our Final Decision and Order in Docket No.

19989, 59 FCC 2d 671, 709-10 (1976), after having

found the WATS tariff filings at issue therein to be un-

lawful, we stated

[a]lthough the WATS tariff has been found unlaw-

ful as indicated herein, there is a clear public inter-

est requirement for continuity of Inward and Out-

ward WATS service to the public. Further, this pro-

cedure will avoid the confusion and administrative

difficulties which would likely arise if an alternative

WATS tariff was filed to become effective during the

interim period while Bell prepared the tariff filing

required by our Decision. Finally, we note that

existing accounting orders shall continue as set forth

75a

herein to protect the public and we retain our rights

to investigate or reject or impose an accounting

order with respect to the tariff revisions which Bell

must file. In view of the foregoing, the course out-

lined above will best serve the public interest.

Our Designation Order herein imposed an account-

ing order by individual customer account on Bell for

all charges which were increased under the filing of

Transmittal No. 119385, 46 FCC 2d at 86. No ac-

counting order was imposed for the increased

charges resulting from Bell’s March 1975 filing un-

der Transmittal No. 12303, 52 FCC 2d 155, 156,

and a ‘class’ accounting order was imposed for the

increased charges resulting from Bell’s February

1976 filing under Transmittal No. 12493, Docket No.

20732, 58 FCC 2d 1, 4-5 (1976). Moreover, an ac-

counting order by individual customer account re-

mains outstanding with respect to the 1973 WATS

rate increases, 40 FCC 2d 18, 20. As indicated

above, we have found the foregoing WATS tariff

filing unlawful. In the normal case where charges

are found unlawful after hearing, we would pre-

scribe lawful rates, and therefore know what por-

tions of the increases are lawful. Here, however, we

have an insufficient record to support a rate pre-

scription, and we therefore believe it an appropriate

exercise of our discretion not to order any refunds

pending consideration of the tariff revisions filed in

accordance with this Decision. Accordingly, we will

leave the accounting orders now pending in effect.

However, to the extent possible, we shall order Bell

to convert the existing accounting orders by individ-

ual account into “class” accounting orders, i.e., for

Outward MT, Outward FBD(FT), Inward MT and

Inward FBD(FT) services, upon the effective date

of this decision....

* * * *

76a

IT IS FURTHER ORDERED, that the accounting

orders pursuant to 40 FCC 2d 18, 20 and 46 FCC

2d 81, 86 SHALL BE CONVERTED to class ac-

counting orders (for Outward MT, Outward FT/

FBD. Inward MT, Inward FT/FBD categories of

service) insofar as feasible.

Id. at 709-10. By subsequent Memorandum Opinion and

Order in Docket No. 19989, 64 FCC 2d 538, 540-41

(1977), which was released on April 18, 1977, we clari-

fied the earlier accounting orders in Docket No. 19989,

supra, at 709-10, by stating:

[ijn its Reply to AT&T’s Opposition, National Data

restates its view that existing individual accounts

should not be destroyed nor converted to class ac-

counts if the effect would be to eliminate the basis

for possible individual customer refunds, for WATS

customers who have relied upon the accounting order

by individual account issued by the Commission for

the period March 14, 1978 to March 8, 1975 as the

ultimate source of relief. National Data points out I |

that with respect to future individual account record

keeping it has not sought to require compilation of

such records. It also does not deny that it is “con-

cerned about its own hopes for a refund,” claiming

it has suffered several dramatic increases in its

WATS charges since 1973, much to the detriment of

its business operations and economic well being. Na-

tional Data further renews its request that the Com-

mission provide AT&T’s WATS customers some in-

dication as to its view of the likelihood that individ-

ual refunds, for the years 1973, 1974 and 1975, will

be ordered so that if necessary, such customers may

consider seeking aiternate relief. Finally, National

- Data claims its participation in the informal discus-

sions between AT&T and the Bureau will be of

assistance due to its thorough knowledge of the is-

sues which it obtained as a party to Docket No.

77a

19989. To the extent indicated below, we grant the

relief requested by National Data. In regard to Na-

tional Data’s concern about accounting orders and

records, our March 1, 1976 action in Docket No.

20732, supra, sets forth the public policy reasons

justifying the entry of class accounting orders and

supports the conversion of accounting orders by in-

dividual customer account to class accounting orders

as ordered in this particular case. In our March 1,

1976 action, 58 FCC 2d at 4, we stated that “[iJn

major rate cases . .., the imposition of individual

accounting requirements [is] a costly, ineffective

means of protecting the public interest.” Although

we ordered the conversion to class accounting, and

reaffirm that decision here, we never expected AT&T

to physically convert the two accounting orders until

we first decided whether or how any alleged refund

liability was to be considered or determined. See 59

FCC 2d at 709. Thus, no destruction of existing in-

dividual account records, which is National Data’s

major concern, has occured or will occur in the fu-

ture pending further Commission order.

64 FCC 2d 538, 540-41. In the Phase II Final Decision

and Order in Docket No. 19129, 64 FCC 2d 100-01, 110,

released on March 1, 1977, we terminated the outstand-

ing accounting orders with respect to AT&T’s Message

Telecommunications Service. On May 9, 1977, this Com-

mission issued a clarifying Memorandum Opinion and

Order, FCC 77-310, which, inter alia, stated:

{[O]n March 1, 1977, we released the Phase II Final

Decision and Order in our Docket No. 19129 investi-

gation of AT&T, FCC 77-150, 64 FCC 2d 1. We

found in that proceeding, inter alia, that the rate

level of AT&T’s Message Telecommunications Serv-

ice (MTS), reflected in the earnings ratio from the

service through 1975, was just and reasonable dur-

ing the period of this proceeding. Para. 253. Ac-

78a

cordingly, we concluded that maintenance of the out-

standing accounting orders, with the costs thereof

placed upon the operating expenses of AT&T, was

no longer required and terminated all such account-

ing orders with respect to MTS. Paras. 276, 328.

In the Phase II Final Decision, supra, we found the

overall rate levels of MTS reasonableness of the

MTS rate level in that filing remains under question

(footnote omitted), we believe it inappropriate to

terminate the MTS 1976 accounting order. There-

fore, we hereby clarify that para. 328 of the Phase

II Final Decision, supra, does not terminate the ac-

counting order in this proceeding [Docket No.

20732).

Accordingly, IT WAS ORDERED, That the ac-

counts ordered in this proceeding at 58 FCC 2d 1, 5

(1976) shall continue to be kept until further order

of this Commission.

3. On May 9, 1977, the preceding Memorandum

Opinion and Order in Docket No. 20732 was served upon

AT&T. Pursuant to Section 408 of the Communications

Act of 1934, as amended, 47 USC § 408, that order re-

mained in full force and effect during 1978.

4. By Memorandum Opinion and Order in Docket No.

18128, 61 FCC 2d 587, 669 (released October 1, 1976),

this Commission terminated all extant accounting orders

in Docket No. 18128. However, upon reconsideration, by

Memorandum Opinion and Order released on June 13,

1977, 64 FCC 2d 971, 933, we reinstituted the accounting

orders in Docket No. 18128. Upon further reconsidera-

tion, Second Order on Reconsideration in Docket No.

18128, 67 FCC 2d 1441, 1453 (released February 24,

1978), we reaffirmed the reinstitution of the extant ac-

counting orders in Docket No. 18128, and stated:

[als noted above, certain rate increases were found

unjustified while others like Telpak are still subject

79a

to further proceedings. This circumstance allows

that certain users may have been overcharged and

may be entitled to refunds either presently or at the

outcome of the proceeding. Clearly, the carrier,

which has the burden of justifying its rates, should

carry the risk of failure in the proceeding, not the

customer. AT&T would have us place the customer

in the position of bearing the entire risk of overpay-

ment in the event that rates are proven unlawfully

high. We must reject the view, and therefore hold

that maintenance of the accounting orders is neces-

sary to continue to protect customer interests still

extant in this proceeding.

Id. at 1453.

5. During 1978, AT&T had in effect several tariffed

rates that the Commission has found to be unlawful or

that have been continued pursuant to Court order. Dur-

ing April 1976, AT&T filed Tariff revisions 12546 and

12547 introducing the multi-schedule private line (MPL)

rates. On May 19, 1976, the Commission suspended the

effective date of the MPL rates, and set those rates for

investigation. In the Matter of American Telephone &

Telegraph Company, 59 FCC 2d 428 (1976). At that

time, we stated: r

[s]ubstantial questions have been raised concerning

the lawfulness of the MPL rate structure. Some of

the specific features of the tariff which need close

scrutiny are, among others, the increases in the

charges of services of 25 miles or less in length, the

high charge for the first mile of service, the possible

anti-competitive implications of the decreases in

charges for long haul services, and the possibility

of unlawful discrimination between users.

Id. at 431. The MPL rates became effective on August

20, 1976, following expiration of the three-month suspen-

sion period. Those rates remained in effect with minor

80a

revisions through 1978. On March 19, 1979, the Admin-

istrative Law Judge, after a lengthy hearing, released his

decision. As reported in the Commission’s final decision,

the Administrative Law Judge:

found eight separate violations of Docket No. 18128

requirements in the MPL cost studies. He thus con-

cluded, that the costing practices and classifications

underlying those cost studies are not just and rea-

sonable within the meaning of Section 201(b) of the

Communications Act (47 USC §202(b)); that

AT&T has failed to demonstrate that such classifi-

cations and practices would not constitute an unjust

or unreasonable discrimination in violation of Sec-

tion 202(a) of the Act. (47 USC § 202(a)); and

that AT&T has not met or even attempted to meet

the cost allocation guidelines set out in the Docket

No. 18128 Decision. The Judge concluded that the

Series 2000/3000 transmittals at issue are unlawful

and must be rejected.

In the Matter of American Telephone and Telegraph

Company, 74 FCC 2d 1, 7 (1979). On September 20,

1979, the Commission in its Final Decision in Docket

No. 20814 found that as a consequence of the use of

AT&T’s basic service philosophy, AT&T had “failed to

carry its burden of justifying the MPL tariff under Sec-

tion 201(b) of the Act in accordance with Docket No.

18128 requirements.” 74 FCC 2d 1, 41 (1979). The

Commission then concluded that the public interest re-

quired that AT&T’s tariff remain in effect until the

Commission was in a position to prescribe new rates, or

until a new carrier initiated tariff became effective. In

the Commission’s Final Decision and Order in Docket

No. 19989, 59 FCC 2d 671 (1976), recon., 64 FCC 2d

538 (1977), the Commission, in considering AT&T’s

WATS tariff rates, concluded that:

pursuant to Section 201(b) and 202(a) of the Act,

the tariff schedules filed with Bell Transmittal Nos.

ee

8la

11657 and 11935 (and revisions thereto) are found

unlawful as indicated herein, ARE NULL AND

VOID, effective 210 days after publication of this

Decision in the Federal Register.

IT IS FURTHER ORDERED, That Bell shall file

tariff revisions accompanied by the information re-

quired by Section 61.38 of the Commission’s Rules,

37 CFR 61.38, and which meet the guidelines speci-

fied herein;

IT IS FURTHER ORDERED, That the provisions

of Section 61.58 of the Commission’s Rules, 47 CFR

61.58, ARE WAIVED, and the tariff revisions to be

filed on not less than 60 days notice; 59 FCC 2d

671, 709-710.

In response to this order, AT&T filed Transmittal 12745

which was to become Effective on August 1, 1977. On

July 21, 1977, the Commission concluded that

AT&T’s WATS tariff filing, Transmittal No. 12745,

IS REJECTED, except to the extent WATS services

are to be initiated to and from points outside the 48

contiguous states....

IT IS FURTHER ORDERED, That the effective

date of paragraph 90 of our Decision in Docket No.

19989, 59 FCC 2d 671, 709-710 (1976), which de-

clared the present WATs tariff null and void IS

DEFERRED, pending further Commission Order.

In the Matter of American Telephone and Telegraph

Company (Long Lines Department) Revisions to Tariff

FCC No. 259 Wide Area Telecommunications Service

(WATS), Transmittal No. 12745, 66 FCC 2d, 62-63

(1977).

6. On November 21, 1978, the Commission, in the

preceding WATS Decision, set forth a mechanism for

the filing of revised WATS tariffs. Thus, the WATS

82a

tariffed rates, found to be unlawful in 1976, remained

in effect during 1978 with the minor exceptions noted

above. On January 17, 1977, the Commission released

the Memorandum Opinion and Order In The Matter of

American Telephone and Telegraph Company Investiga-

tion Into The Lawfulness Of Tariff FCC No. 267, Offer-

ing A Dataphone Digital Service Between 5 Cities

(Docket No. 20288), 62 FCC 2d 774 (1977), recon.

denied, 64 FCC 2d 994 (1977), regarding the provision

of dataphone digital service. In that Decision, the Com-

mission stated:

[T]he rates and conditions of AT&T’s Tariff No.

267, as specified herein, are unjust, unreasonable,

and unlawful, in violation of § 201(b) of the Com-

munications Act ... . Accordingly, we require

AT&T to file an interim tariff offering dataphone

digital service at rates designed to yield the 9.5%

return, as provided herein, no later than February

22, 1977, effective on thirty days notice.

62 FCC 2d 774, 807 (1977). AT&T filed interim rates

patterned after the rates in Tariff No. 260 (Series 2000/

3000) under Transmittal 12687 which became effective

on March 24, 1977. In allowing those tariffed rates to

become effective, the Commission stated:

[we] find that AT&T has substantially complied

with our guidelines set forth in the Docket 20288

Decision. Upon examination of the arguments in

the petitions for investigation and rejection, we can-

not agree that the requested relief is warranted.

Therefore, we will show the tariff revisions which

reflect the interim rates to become effective.

In The Matter Of American Telephone and Telegraph

Company, 63 FCC 2d 936, 937 (1977). On July 25,

1977, AT&T filed revised Dataphone Digital Service

(“DDS”) tariffs under Transmittal 12790 to become ef-

fective on January 16, 1978. On January 12, 1978, the

ot renee Soba po diuealande:

83a

Commission rejected proposed DDS tariff rates on the

ground that the filing did not comply with the Commis-

sion’s Order in Docket No. 20288. In The Matter Of

American Telephone and Telegraph Company Revisions

Of Tariff No. 267 Dataphone Digital Service (DDS),

67 FCC 2d 1195 (1978), recon. denied, 70 FCC 2d 616

(1979). Since its initial tariff offering service to five

cities, AT&T expanded in phases the number of cities to

be served. Each incremental tariff filing for each in-

cremental service was based upon the interim rates that

were filed in 1977.

7. On October 1, 1976, the Commission released its

Memorandum Opinion and Order in Docket No. 18128,

61 FCC 2d 1444 (1978), aff'd. sub nom. Aeronautical

Radio, Inc. v. FCC, 642 F.2d 1221 (D.C. Cir., 1980),

cert. denied, 451 U.S. 920 (1981). In that Decision, the

Commission found that it was:

[uJnable to find that the TELPAK offering, as

presently structured, constitutes a proper response

to the extent of competition posed by private micro-

wave. We nevertheless believe that a properly struc-

tured bulk rate offering, which would compete with

private microwave or other competitive alternatives

is justified. However, it is clear -from the record

herein, that the nationwide rate differential exist-

ing between TELPAK and like private line service

cannot be supported by alleged cost comparability

between TELPAK and hypothetical private micro-

wave systems.

61 FCC 2d 587, 658 (1976) (emphasis in the original).

In response to this finding, the Commission concluded

that:

The rate level diff

This text is long and has been trimmed here. Open the source document for the complete record.