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

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## Record

- **Collection:** Supreme Court brief
- **Document type:** Appendix
- **Published:** January 1, 1989
- **Citation:** 490 U.S. 1039

## Text

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W] FILED

' JAN 30 1989
No. 88———

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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&

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385002_0821%3A2. Public record. Not legal advice.