Opposition Brief — BellSouth Telecommunications, Inc. v. Federal Communications Commission

No. 95-1230 : ; |

In the Supreme Court of the United States

OCTOBER TERM, 1995

BELLSOUTH TELECOMMUNICATIONS, INC., ET AL.,

PETITIONERS

v.

FEDERAL COMMUNICATIONS COMMISSION, ET AL.

ON PETITION FOR A WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE DISTRICT OF COLUMBIA CIRCUIT

BRIEF FOR THE FEDERAL RESPONDENTS

IN OPPOSITION

DREW S. Days, III

Solicitor General

Department of Justice

Washington, D.C. 20530

(202) 514-2217

WILLIAM E. KENNARD

General Counsel

CHRISTOPHER J. WRIGHT

Deputy General Counsel

JOHN E. INGLE

Deputy Associate

General Counsel

DANIEL M. ARMSTRONG

Associate General Counsel

LAUREL R. BERGOLD

Counsel

Federal Communications Commission

Washington, D.C. 20554

QUESTION PRESENTED

Whether the Federal Communications Commission

(FCC) properly awarded damages to the customers of

local exchange companies (LECs) for the LECs’ vio-

lation of FCC orders prescribing the maximum rates

of return that the LECs could earn.

(I)

TABLE OF CONTENTS

Page

Opinion below ..............ccsssssccrreqessesseseessscrcrensscsncsoeesescoees 1

I oto, cadsashnesdidy moons ubeetandsdosenvoseusees 1

gs a ooh cisslepaSenedenapanoeniinciaascaseoes 2

PRR IIIIINT epeecevoeeesescscisdssassacasennesnsvesecevoccsansesdisasevaracqessee 11

CIN chic ciusal vksbinasepecsocbecnscaoi\ccancigigiinteocnsebheaeccocsess 26

TABLE OF AUTHORITIES

Cases:

American Telephone & Telegraph Co. v. FCC:

OED FB ae Te Ge BITE) sncbtsneincdcsesbsiscossverevecessooes 15

BE Fe ee i CAE: BOIOD inc vivecencetconscnrcissssccssccvessee 15

572 F.2d 17 (2d Cir. 1977), cert. denied, 439 U.S

I i shat h Gnncrncbacuubedecipstshe asevsicaviaca<eesenss 15

SO Fe Se Ce. CAE, TIBS) ce vcsccesccccesecssccscresesasses 22

Arizona Grocery Co. v. Atchison, T. & S.F. Ry.,

a I IR a sacnsdeansirandeiinace <eiensarveeess 2, 14, 15, 22

Baer Bros. v. Denver & Rio Grande R.R., 233

Bi I IID sien pubis bncdkbidepivsceicbavesssteedeasebonecbscses 20

Capital Network Systems, Inc. v. FCC, 28 F.3d

Ee es IE dkcevvin Winkexecivinvbennckansy ensconeiepevrceene 2

Dayton-Goose Creek Ry. v. United States,

I: A EY oc cinviaiavscincetecstiscoectnasentsoenes 16, 17, 24

FPC v. Natural Gas Pipeline Co., 315 U.S. 575

RN RN Bik, kk sonksededdcunannunsouhostoberines smheene 17, 18

FPC v. Tennessee Gas Transmission Co., 371 U.S.

IE ichicsh inceuseussavskivovvepebtavinbtstunapineoewve 16, 18, 21, 24

Illinois Bell Telephone Co. v. FCC, 966 F.2d 1478

ID cise cccebidadansbbodnbaonyesdoondee$bidvesenbheense 22

Maislin Indus. v. Primary Steel, Inc., 497 U.S.

I aie vais ccc caduahovnpenesssncpibverscdtnatbaubncsataneesséece 22

MCI Telecommunications Corp. v. Cincinnati Bell

Tel. Co., FCC File No. E-90-423 (filed Aug 30,

SE tei nN aha canumssicicasovatubepanitteaauserevonssanesersss 7-8

MCI Telecommunications Corp. v. FCC, 712 F.2d

Be ae IED isin dccccanscvondecpantbeksiien snvdctctsncosagiinne 15

(III)

IV

\

Cases—Continued: Page

Meeker v. Lehigh Valley R.R., 236 U.S. 412

(SOTBY 5 iscnccccsseccashaascteniaies ae coetaee nena eaanashowais 23

Nader v. FCC, 520 F.2d 182 (D.C. Cir. 1975)..... 3, 10, 14,

15, 18, 19, 20

New England Telephone & Telegraph Co. v. FCC,

826 F.2d 1101 (D.C. Cir. 1987), cert. denied, 490

15.8. OP 5 asnccuaien 3, 4, 6, 10, 14, 15, 18, 20, 21

Permian Basin Area Rate Cases, 390 U.S. 747

GRE are Ray Seek tec eer, Phe ee SE Seren, 62h REN 3

Potomac Elec. Power Co. v. Public Utilities

Comm’n of D.C., 158 F.2d 521 (D.C. Cir.), cert.

denied, 831 US. SIC (AGRB) snc cccccccccccccsccscesccccsss 18-19, 24

Reiter v. Cooper, 507 U.S. 258 (1993) ...............seeeees 23

Southwestern Beli Telephone Co. v. FCC, 10 F.3d

892 (D.C. Cir. 1993), cert. denied, 114 S. Ct. 2673

CRIED cacincnssesesdnoasodiniaceneimacaaiseicdkacieuabacennalasanae 5-6

United States v. Associated Transport, Inc., 505

FB GGG. COLC.. Cie, DIG): cs scccsttarcnscvocsarcetigbteicntasscens 23

United States v. FCC, 707 F.2d 610 (D.C. Cir.

FOR siininckciscenena cesta tibibiacicastanbaiieiesacanan ede ta aiieciescs tenis: 14

Virgin Islands Telepixone Corp. v. FCC, 989 F.2d

RRA MERC. Clit BEI ois evcsdeusthntsatvcssuccedaneiimeneeces 19, 20, 21

Wisniewski v. United States, 353 U.S. 901 (1957) ... 18

Statutes and regulation:

Communications Act, 47 U.S.C. 151 et seq.:

SE RE Sees MED eccteicn shah datiehapaveescacsnvnteinutien’s 3

SG DORE), ST CEE Be)” pacenctnciesntcinsiscescosees 2, 14, 15

Pe BEE 8 ae eR OR ener ee eee 2, 20

§ 204, 47 U.S.C. 204 (Supp. V 1998).................. 20, 22

§ 204(a), 47 U.S.C. 204(a) (Supp. V 1993)........... 2

§ 204(a)(1), 47 U.S.C. 204(a)(1) (Supp. V 1993)... 3

ee 2k Te iene eRe ene 3

© i Fe Er IE ice rces sosetieaviccateveckccntviaces 13

DR ee a ae ened erences cap anerasicdoesess 13, 14, 21

§§ 206-209, 47 U.S.C. 206-209 ...........cccccsccscccsccseess 2 2

SB er Ui re heres eiiosccdeascckldasabiesaae 2, 20

DO Ge Te ee sei pstsscsenphnsiccecssiciccsconsxsaresess 3

V

Statutes and regulation—Continued: Page

© OG, Oy TEs Ga sven sancti ceehcosttcseccensnsenecsicieene 3, 13

BT I vines esecincecccetecschsinsacsuscnccssqenescsveseys 6

Miscellaneous:

Amendment of Part 65, Interstate Rate of Return

Prescription: Procedures and Methodologies to

Establish Reporting Requirements, 1 FCC Red

GU CID isc secs hectic nce atd ts iedy eta accencrnenberssncese 4,6

Amendment of Parts 65 and 69 of the Commission’s

Rules to Reform the Interstate Rate of Return

Represcription and Enforcement Processes,

T FCC Red 4688 (1902) .....ccccscccccccesssccccccsscccccsesseseses

Authorized Rate of Return for the Interstate

Services of AT&T and Exchange Telephone

Carriers, CC Docket No. 84-800, Phase III, 1986

WL 290922 (FCC) (released Aug. 26, 1986) ............. 8

Authorized Rates of Return for the Interstate

Services of AT&T Communications and Exchange

Carriers, FCC 85-527, 50 Fed. Reg. 41,350 (1985),

recon. granted in part, FCC 86-114, summarized in,

51 Fed. Reg. 11,033 (1986), further recon. denied,

2 FCC Red 190 (1987), rev’d in part sub. nom.

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

~]

COG. Tae. TD sicinssacacnsarelncacenssersndawsticcientnnsienesses 4,5,8

2 P. Garfield & W. Lovejoy, Public Utility

Beant’ COG) sciseccesseiccssascsncscecosessscsccssccssoseseeses 3

Policy and Rules Concerning Rates for Dominant

Carriers, 5 FCC Red 6786 (1990), recon. granted in

part, 6 FCC Red 2637 (1991), aff'd sub. nom.

National Rural Telecomm. Ass’n v. FCC, 988 F.2d

174 CDG. Cie. WRBB): acscccscoscsnccvsneccvegvesonetosessncescosenerss 12

Represcribing the Authorized Rate of Return for

Interstate Services of Local Exchange Carriers,

5 FCC Red 7507, recon. denied, 6 FCC Red 7195

(1991), aff ’d sub. nom. Illinois Bell Tel. Co. v.

FCC, 988 F.2d 1254 (D.C. Cir. 1993) .........cccceresseees 7

In the Supreme Court of the Gnited States

OCTOBER TERM, 1995

No. 95-1230

BELLSOUTH TELECOMMUNICATIONS, INC., ET AL.,

PETITIONERS

Vv.

FEDERAL COMMUNICATIONS COMMISSION, ET AL.

ON PETITION FOR A WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE DISTRICT OF COLUMBIA CIRCUIT

BRIEF FOR THE FEDERAL RESPONDENTS

IN OPPOSITION

OPINION BELOW

The opinion of the court of appeals (Pet. App. la-

26a) is reported at 59 F.3d 1407.

JURISDICTION

The judgment of the court of appeals was entered on

August 1, 1995. Petitions for rehearing were denied

on October 4, 1995. Pet. App. 120a-123a. The Chief

Justice extended the time to file a petition for a writ

of certiorari to, and including, February 1, 1996. The

petition for a writ of certiorari was filed on that date.

The jurisdiction of this Court is invoked under 28

U.S.C. 1254(1).

(1)

STATEMENT

1. The Communications Act authorizes the Fed-

eral Communications Commission to ensure that the

rates for interstate communications services pro-

vided by common carriers are just and reasonable. 47

U.S.C. 201(b). To carry out that duty, the Commis-

sion may, upon complaint, adjudicate the lawfulness of

a carrier’s rates for past periods. 47 U.S.C. 206-209.

If the Commission determines that the complainant

should be awarded damages, the agency “shall” order

the carrier to pay the complainant the amount to

which it is entitled. 47 U.S.C. 209.

In addition to its quasi-adjudicatory authority, the

Commission has quasi-legislative authority, under

which it may review the lawfulness of rates set forth

in the tariffs by which common carriers generally

implement rate changes. 47 U.S.C. 203. The Com-

mission may reject a tariff if it is unlawful on its face.

See, e.g., Capital Network Systems, Inc. v. FCC, 28

F.3d 201 (D.C. Cir. 1994). The Commission also may

investigate legally suspect rates and suspend those

rates for up to five months pending the investigation.

47 U.S.C. 204(a) (Supp. V 1993). When the suspension

period ends, the tariff revisions go into effect whether

or not the Commission has completed its investi-

gation. Jbid.. The Commission may, however,

require the carrier to keep an accounting of its col-

lections under the new rates and, at the end of the

investigation, order the carrier to make refunds if the

1 In that event, the tariff binds the carrier and its

customers, but its terms may be challenged in a complaint

proceeding. See Arizona Grocery Co. v. Atchison, T. & S.F.

Ry., 284 U.S. 370, 384-385 (1932).

rates are not justified. 47 U.S.C. 204(a)(1) (Supp. V

1993).

After the carrier has an opportunity for a hearing,

the Commission also may prescribe the just and

reasonable rates or practices “to be thereafter ob-

served” by the carrier. 47 U.S.C. 205. When the

Commission does so, the carrier “shall not thereafter

publish, demand, or coilect any charge other than the

charge so prescribed, or in excess of the maximum

* * * so prescribed.” 47 U.S.C. 205; see also 47

U.S.C. 408, 416; Permian Basin Area Rate Cases,

390 U.S. 747, 779 (1968).

In addition to prescribing rates and practices, the

Commission may prescribe rates of return under

Section 4(i) of the Act in conjunction with Section 205

of the Act. See New England Telephone & Tele-

graph Co. v. FCC, 826 F.2d 1101, 1106-1107 (D.C. Cir.

1987), cert. denied, 490 U.S. 1039 (1989); Nader v.

FCC, 520 F.2d 182 (D.C. Cir. 1975). The rate of

return is “the amount of money a utility earns, over

and above operating expenses, depreciation expenses,

and taxes, expressed as a percentage of the legally

established net valuation of utility property, the rate

base.” 2 P. Garfield & W. Lovejoy, Public Utility

Economics 116 (1964). Earnings by a carrier that

exceed the maximum set forth in a rate of return

prescription are “unlawful and shall not occur.” New

England Telephone, 826 F.2d at 1106 (emphasis

omitted).

2 Section 4(i) of the Act, 47 U.S.C. 154(i), provides:

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 function.

4

2. a. In 1984, the court of appeals in New England

Telephone upheld the Commission’s authority to

enforce a rate of return prescription by requiring

carriers to refund to their customers earnings that

exceeded the prescribed maximum. 826 F.2d at 1106-

1109. The court rejected the carriers’ contention that

the refund order constituted unlawful retroactive

ratemaking. The court explained that refunds are an

“absolutely necdssary” means of enforcing an exist-

ing prescription order. 826 F.2d at 1108. The court

upheld the Commission’s authority to issue a refund

order even if a carrier had acted in good faith in set-

ting the rates that produced the excessive earnings.

Id. at 1106.

b. In 1985, the Commission established rules for

prescribing rates of return for the local exchange

carriers (LECs) and procedures to enforce those

prescriptions.* Under the rules, the Commission pre-

scribed maximum returns for the LECs’ overall

interstate earnings and for three categories of access

charge rate elements. Rate of Return Reconsidera-

tion, FCC 86-114, at 19 (¥ 37) (released Mar. 24, 1986);

see 51 Fed. Reg. 11,033, 11,034 (1986) (summary of

3 Authorized Rates of Return for the Interstate Services of

AT&T Communications and Exchange Carriers, FCC 85-527

(released Sept. 30, 1985), 50 Fed. Reg. 41,350 (Rate of Return

Order), recon. granted in part, FCC 86-114 (released Mar. 24,

1986), summarized in, 51 Fed. Reg. 11,033 (Apr. 1, 1986) (Rate

of Return Reconsideration), further recon. denied, 2 FCC Red

190 (1987), rev’d in part sub. nom. American Telephone &

Telegraph Co. v. FCC, 836 F.2d 1386 (D.C. Cir. 1988) (AT&T);

Amendment of Part 65, Interstate Rate of Return Pre-

scription: Procedures and Methodologies to Establish Report-

ing Requirements, 1 FCC Red 952 (1986), recon. denied, 2 FCC

Red 5340 (1987) (Reporting Requirements Order).

5

Commission Memorandum and Order). The Commiss-

ion recognized that its review of earnings on a

category-by-category basis might result in refunds of

excessive earnings in some categories even though

the LECs’ return was not excessive overall. Jd. at 18

({ 34). The Commission pointed out, however, that its

duty under the Act to ensure just and reasonable

rates required it “to prevent one class of customers

from paying excessive rates or cross-subsidizing

other customers.” Jd. at 9 (¢ 10); see Pet. App. 36a.

The Commission included safeguards to give the

LECs an opportunity to achieve the prescribed rates

of return. The Commission announced that it would

not take remedial action unless a carrier’s rate of

return exceeded both the prescribed return and a

specified “buffer.” Rate of Return Order, FCC 85-527

(released Sept. 30, 1985); see 50 Fed. Reg. at 41,350-

41,353 ({¥ 4-22). The Commission also said that it

would review the LECs’ earnings levels only in three

broad categories, and not on the basis of each rate

element. Rate of Return Reconsideration at 18-19 (4

36). In addition, the Commission adopted a two-year

monitoring period instead of the traditional one-year

period. Rate of Return Order, 50 Fed. Reg. at 41,354

({ 24). The longer period decreased the possibility

that temporary fluctuations in earnings levels would

precipitate a violation, see Virgin Islands Telephone

Corp. v. FCC, 989 F.2d 1231, 1233 (D.C. Cir. 1993), and

increased the LECs’ opportunity to file mid-course

corrections to avoid deficiencies and over-earnings.

See 50 Fed. Reg. at 41,354 (¢ 24). To monitor the

4 “The term ‘mid-course correction filing’ generally refers

to an LEC’s proposed rate adjustment to account for actual

costs experienced under rate-of-return regulation that deviate

6

LECs’ compliance with the rate of return

prescriptions and to give them an “early warning

system” for the need to file mid-course corrections,

the Commission required each LEC to file quarterly

and biennial rate of return reports that set forth data

on its overall rate of return and its rate of return for

each service category. Reporting ReYquirements

Order, 1 FCC Red 952 (1986), recon. denied, 2 FCC

Red 5340 (1987); 47 C.F.R. 65.600(b).

The Commission adopted an automatic refund

mechanism to enforce its rate of return prescriptions.

Under that scheme, whenever the LEC exceeded a

maximum prescription (for either the overall return

or any of the three service category returns), the

excess earnings automatically would have been

returned to all affected ratepayers in the form of

revenue requirement reductions in later periods. 50

Fed. Reg. at 41,353-41,355 ({{ 23-38).

c. On review, the court of appeals reaffirmed the

Commission’s authority to require carriers to return

to their ratepayers earnings in excess of a rate of

return prescription. AT&T, 836 F.2d at 1392 (citing

New England Telephone). The court set aside the

automatic refund rule, however, on the ground that it

was inconsistent with prior Commission statements

about the nature of its rate of return prescriptions.

836 F.2d at 1390. As the court understood those prior

statements, the Commission viewed the rate of return

prescription as establishing not only the maximum

allowable level of earnings but also the minimum

earnings necessary to cover the cost of capital. On

from cost projections employed in initial rate-setting pro-

ceedings.” Southwestern Bell Telephone Co. v. FCC, 10 F.3d

892, 893 n.1 (D.C. Cir. 1993).

————— a __ervrXrX—_—_—_— ee

7

the basis of that understanding, the court determined

that a rule that automatically refunded to consumers

excessive earnings every time that a carrier

overearned, without ever taking into account

underearnings, “would operate over the long run to

put a carrier out of business.” Jbid. The court

distinguished such a remedial rule from the award of

a refund for the violation of a rate of return

prescription in “an individual case.” Jd. at 1392.

The Commission later clarified that a rate of re-

turn prescription does not establish the minimum

earnings necessary to attract investment. Repre-

scribing the Authorized Rate of Return for Inter-

state Services of Local Exchange Carriers, 5 FCC

Red 7507, 7532 (4 217), recon. denied, 6 FCC Red 7195

(1991), aff’d swb. nom. Illinois Bell Telephone Co. v.

FCC, 988 F.2d 1254 (D.C. Cir. 1993) (1990 Pre-

scription: Order). The Commission explained that a

“substantial gap” exists “between an earnings level

that is fully adequate to assure attraction of capital

on favorable terms, and an earnings level which, if

sustained over time, would be confiscatory.” bid.°

3. This case began when customers of the LECs

filed complaints with the Commission between 1989

and 1991 seeking damages on the ground that the

rates they had paid for interstate access service had

produced earnings for the LECs that exceeded the

maximum rates of return prescribed by the Com-

mission. E.g., MCI Telecommunications Corp. Vv.

5 See also Amendment of Parts 65 and 69 of the Com-

mission’s Rules to Reform the Interstate Rate of Return

Represcription and Enforcement Processes, 7 FCC Red 4688,

4701 (| 97) (1992) (a prescribed rate of return “is a point within

a broad zone of reasonableness”).

8

Cincinnati Bell Telephone Cvw., File No. E-90-423,

MCI Complaint at 5 (filed Aug. 30, 1990). The LECs

argued that the complaints failed to state a claim for

relief; they generally did not, however, dispute the

customers’ contention that the LECs’ own rate of

return monitoring reports showed that the LECs’

interstate earnings overall or their earnings for one

or more of the three interstate access categories

exceeded the maximum rate of return prescriptions.

See, e.g., Pet. App. 37a-38a.

In a series of orders, the Commission held that the

LECs were liable for damages to the customers. E..,

Pet. App. 49a. The Commission determined that

undisputed evidence in the LECs’ own monitoring

reports established that the LECs had violated the

rate of return prescriptions. E.g., id. at 30a, 49a-50a.

The Commission also determined that those vio-

6 The rate of return prescriptions at issue in this case

involve the 1985-1986 monitoring period (which extended from

October 1, 1985, to December 31, 1986), the 1987-1988 moni-

toring period (which extended from January 1, 1987, to

December 1, 1988), and the 1989-1990 monitoring period (which

extended from January 1, 1989, to December 30, 1990). The

prescribed rate of return for the interstate access services of

the LECs during the 1987-1988 monitoring period was 12.75%.

See Rate of Return Order, 50 Fed. Reg. at 41,350 (¢ 4). With

the buffer, the maximum prescribed return was 13.10% overall

and 13.25% for any service category. See, e.g., Pet. App. 36a-

37a. For the 1987-1988 and 1989-1990 monitoring periods, the

Commission lowered the prescribed return to 12%, with a

maximum allowable return of 12.25% on overall earnings and

12.40% for the service categories. Authorized Rate of Return

for the Interstate Services of AT&T and Exchange Telephone

Carriers, CC Docket No. 84-800, Phase III, 1986 WL 290922

(F.C.C.) (released Aug. 26, 1986), recon. denied, 2 FCC Red

5636 (1987).

9

lations constituted a violation of Section 201(b) of the

Act. Pet. App. 49a-50a. The Commission explained

that a rate of return prescription represents an

agency determination that rates that produce

earnings in excess of the maximum prescribed level

are unjust and unreasonable, and therefore prohibited

by Section 201(b). Pet. App. 84a n.29.

The Commission rejected the LECs’ contention

that, to recover damages, the customers not only had

to prove that they had been injured by paying rates

that produced unlawful rates of return but also had to

establish what specific rates would have produced

lawful rates of return. Pet. App. 10la-103a. The

Commission pointed out that the LECs retain

substantial flexibility both in setting their initial

rates and in making midterm corrections. I/d. at 60a-

6la. The Commission reasoned that it would be unfair

to permit the LECs, “who were in the best position to

set their rates at lawful levels in the first place, and

who later had opportunities to correct those rates, to

avoid responsibility for those unlawful rates, at the

expense of their customers.” /bid.

The Commission determined that the appropriate

“starting point” for measuring damages was the

difference between the amount that the customer

actually had paid and the amount that it would have

paid if the LEC had charged rates that produced

earnings within the prescribed return. Pet. App.

101a. The Commission then offset that sum by the

amount of underearnings the LEC had experienced in

other access service categories that the customer had

purchased during the same monitoring period. £.g.,

id. at 107a-108a.

4. Both the LECs and the customers filed petitions

for review of the Commission’s orders in the United

10

States Court of Appeals for the District of Columbia

Circuit. The court denied the LECs’ petitions in

their entirety. Pet. App. 7a-20a. In response to the

customers’ petitions, the court set aside the Com-

mission’s use of offsets in calculating damages. Jd. at

20a-26a. |

The court upheld the Commission’s determination

that the LECs had violated the Communications Act

by earning more than the maximum prescribed rate of

return, stating: “We have repeatedly held that a rate-

of-return prescription has the force of law and that

the Commission may therefore treat a violation of the

prescription as a per se violation of the requirement

of the Communications Act that a common carrier

maintain ‘just and reasonable’ rates.” Pet. App. 13a

(citing Nader and New England Telephone); see id.

at 12a-13a. The court rejected the LECs’ reliance on

the court’s prior decision in AT&T. It explained that

AT&T had held only that the Commission could not

act in a manner inconsistent with its own under-

standing of its rate of return regulation. The court

observed that the Commission had later clarified its

understanding of a rate of return prescription, and

the court determined in light of that clarification that

there was no conflict between the damages awards in

this case and the agency’s regulatory policy. I/d. at

7a-1la.

Although the court set aside the Commission’s use

of offsets (Pet. App. 20a-26a), it upheld “the Com-

mission’s general approach to damages,” id. at 2a. In

particular, the court agreed with the Commission

that it was not necessary for the customers to specify

what rates the LECs should have charged to produce

a lawful rate of return. The court pointed out that it

would be inequitable to require the complainant “from

11

the outside looking in” to formulate the lawful rate as

a prerequisite to a damages award when the LEC

itself “with its superior information” had been unable

to do so. Jd. at 16a. The court determined that the

Commission had reasonably measured damages as the

difference between the amount that the customers

actually paid and the amount that they would have

paid if the LEC had charged rates that would have

produced lawful rates of return. Jd. at 15a. The court

also found it reasonable for the Commission to

calculate that difference by multiplying the _per-

centage amount by which the LEC’s had overearned

by the amount that the customers had actually paid.

Ibid. The court found that the Commission’s calcula-

tion produced a conservative estimate of damages. Jd.

at 17a.

ARGUMENT

Petitioners contend (Pet. 12-23) that a carrier may

not be held liable in damages for violating the rates of

return prescribed by the Federal Communications

Commission. That contention does not present an

issue of continuing significance, in light of the

replacement of rate of return regulation by a “price

caps” system of regulation for most of the telecom-

munications industry. Moreover, the court of appeals

correctly upheld the Commission’s determination of

liability and, in relevant part, its approach to calcu-

lating damages.’ The court of appeals’ decision does

not conflict with any decision of this Court or of any

’ Petitioners do not seek further review of the court of

appeals’ decision to set aside the Commission’s use of offsets in

calculating damages.

12

other court of appeals. Further review is therefore

not warranted.

1. Most of the telecommunications industry,

including most of petitioners, is no longer subject to

rate of return regulation. In 1990, the Commission

replaced that method of regulation with an incentive-

based “price caps” method of regulation. Policy and

Rules Concerning Rates for Dominant Carriers, 5

FCC Red 6786 (1990), recon. granted in part, 6 FCC

Red 2637 (1991), aff’d swb nom. National Rural

Telecomm. Ass’n v. FCC, 988 F.2d 174 (D.C. Cir

1993). Unlike rate of return regulation, which bases

rates on tue LECs’ individual expenses plus a

reasonable return on the rate base, the price caps

system sets rate ceilings. This system gives LECs

an incentive to reduce their costs by allowing them to

retain higher levels of earnings achieved through

such reductions. The system thus focuses on limiting

the LECs’ rates rather than their rates of return. 5

FCC Red at 6787.

The price caps system applies to most of the local

exchange telecommunications industry. The system

is mandatory for the Bell Operating Companies and

affiliates of the GTE Corporation. Other LECs may

elect to be regulated under the price caps system or

to remain regulated under the rate of return system.

5 FCC Red at 6818-6819 (4 262-265); 6 FCC Red at

2699, 2703 (TF 1388, 145). During the 1993-1994 period

(the latest period for which statistics are available),

price caps companies had more than 90% of the local

exchange interstate revenues, whereas companies

13

regulated under the rate of return method had less

than 10%.°

The advent of the price caps system renders the

question presented of little continuing importance.

LECs subject to price caps regulation are not liable

for damages on the ground that their earnings exceed

a maximum prescribed rate of return. Moreover, any

LEC regulated by the rate of return method can avoid

prospective liability for such damages awards by con-

verting to the price caps System.

2. a. The court of appeals correctly upheld the

Commission’s determination that the customers

established liability under Section 206 of the Act by

proving that the LECs violated the rate of return

prescriptions. See Pet. App. 1la-13a, 49a-5la, 108a.°

When a carrier violates a prescriptive order of the

Commission, it violates the Communications Act

itself. Section 205(a) not only authorizes the Com-

mission to issue prescriptive orders but also directs

carriers to “conform to and observe the regulation or

8 These statistics were compiled by the Industry Analysis

Division of the Commission’s Common Carrier Bureau using

the FCC Form 492 rate of return monitoring reports filed by

non-price caps companies for the January 1, 1993-December 31,

1994 monitoring period and the Form 492a rate of return

reports for 1993 and 1994 filed by price caps companies.

9 47 U.S.C. 206 provides in relevant part:

In case any common carrier shall do, or cause or permit

to be done, any act, matter, or thing in this chapter

prohibited or declared to be unlawful, or shall omit to do

any act, matter, or thing in this chapter required to be

done, such common carrier shall be liable to the person or

persons injured thereby for the full amount of damages

sustained in consequence of any such violation of the

provisions of this chapter * * *,

erential

14

practice so prescribed.” 47 U.S.C. 205(a); see also 47

U.S.C. 416 (carriers have “duty” to “observe and

comply with [Commission] orders so long as the same

shall remain in effect”). Commission prescriptions

have “the force of a statute” to which carriers are

“bound to conform.” Arizona Grocery Co., 284 U.S.

370, 386 (1931); accord New England Telephone, 826

F.2d at 1107; Pet. App. 18a. Although an agency

prescription is not itself “a ‘provision’ of the statute,”

Pet. 18, the violation of such a prescription is an act

that under Section 205(a) is “prohibited or declared to

be unlawful.” 47 U.S.C. 206. Thus, the text of the Act

forecloses petitioners’ contention (Pet. 12-14) that

their admitted violations of the rate of return

prescriptions did not violate the statute.

The court of appeals also correctly upheld the

Commission’s determination that, by charging rates

that produced earnings in excess of the maximum

rate of return, the LECs violated the requirement in

Section 201(b) of the Act that rates be “just and

reasonable.” Pet. App. 12a-13a, 84a n.29.° The Com-

mission has used rate of return prescriptions for

many years to carry out its statutory responsibility

to assure that the rates of common carriers are just

and reasonable. See Nader v. FCC, 520 F.2d 182, 204

10 47 U.S.C. 201(b) provides in relevant part:

All charges, practices, classifications, and regulations for

and in connection with such communication service, shall

be just and reasonable, and any such charge, practice,

classification, or regulation that is unjust or unreasonable is

declared to be unlawful * * *. The Commission may pre-

scribe such rules and regulations as may be necessary in

the public interest to carry out the provisions of this

chapter.

15

(D.C. Cir. 1975)." Such a prescription reflects the

Commission’s finding that the prescribed level is the

“just and reasonable * * * maximum,” 47 U.S.C.

205(a), and that earnings in excess of that maximum

level “are unlawful,” New England Telephone, 826

F.2d at 1106 (emphasis omitted),” Indeed, such a

finding is an “essential” prerequisite to the

Commission’s exercise of its prescriptive authority

under Section 205(a). American Telephone &

Telegraph Co. v. FCC, 449 F.2d 439, 450 (2d Cir. 1971);

see also American Telephone & Telegraph Co. v.

FCC, 487 F.2d 865, 874 (2d Cir. 1973). In those

circumstances, the only way that the carriers can

realize earnings above the rate of return prescription

is by charging rates that are unjust and unreason-

able, and that therefore violate Section 201(b).

This Court has held that, when an agency has

issued a prescription, it “may not in a subsequent

proceeding, acting in its quasi-judicial capacity,

ignore its own pronouncement promulgated in its

quasi-legislative capacity and retroactively repeal its

own enactment.” Arizona Grocery Co., 284 U.S. at

389. As discussed above, the Commission decided at

the time it issued the prescription that cumulative

rates that produce earnings above the maximum

prescribed level were unlawful. The Commission

1 See also New England Telephone, 826 F.2d at 1106 (Com-

mission’s “chief concern in issuing [a rate of return] pre-

scription is protecting just and reasonable rates”); United

States v. FCC, 707 F.2d 610, 612 (D.C. Cir. 1983).

2 See MCI Telecommunications Corp. v. FCC, 712 F.2d

517, 587 (D.C. Cir. 1983); American Telephone & Telegraph Co.

v. FCC, 572 F.2d 17, 22 (2d Cir. 1977), cert. denied, 439 U.S.

875 (1978); Nader, 520 F.2d at 199.

16

properly gave preclusive effect to that decision in the

adjudicatory proceedings that gave rise to this case.

b. Even apart from the Commission’s obligation to

give effect to its rate of return prescriptions in

adjudicating complaints, the court of appeals cor-

rectly determined that it was reasonable for the

Commission to conclude that utility rates that yield

excessive earnings are unlawful. Decisions of this

Court make clear that an agency may reasonably

infer that excessive earnings are the result of

excessive rates.

In FPC v. Tennessee Gas Transmission Co., 371

U.S. 145 (1972), this Court upheld an interim order in

which the Federal Power Commission (FPC) had

prescribed a rate of return and had ordered a natural

gas company to refund to its customers amounts

above the prescribed level. The Court held that the

FPC could order refunds solely on the basis that the

carrier’s overall earnings were excessive. The Court

explained that, when the rate of return is excessive,

“the revised over-all rate [is] * * * to that extent

unlawful.” Jd. at 153.

The Court had reached a similar conclusion in

Dayton-Goose Creek Ry. v. United States, 263 U.S.

456 (1924). The Court there upheld the consti-

tutionality of the Transportation Act of 1920, which

required the Interstate Commerce Commission (ICC)

to prescribe both uniform rates and an aggregate

reasonable rate of return. See Dayton-Goose Creek

Ry., 263 U.S. at 476-479. If a carrier’s overall

earnings exceeded the prescribed rate of return, the

Act directed the carrier to put one-half of the excess

amount into a reserve fund to be used by that carrier

for certain specified uses, and the other half into a

revolving fund administered by the ICC for the

17

benefit of carriers earning less than the prescribed

rate of return. 263 U.S. at 476-477. In upholding the

statutory provision requiring the “recapture” of

earnings above the prescribed return, the Court held

that a carrier’s rate of return provided a reasonable

standard for gauging the reasonableness of the over-

all rates. The Court explained:

It is clearly unsound to say that the net

operating profit accruing from a whole rate

structure is not relevant evidence in determining

whether the sum of the rates is fair. The invest-

ment is made on the faith of a profit, the profit

accrues from the balance left after deducting

expenses from the product of the rates, and the

assumption is that the operation is economical and

the expenditures are reasonably necessary. If the

profit is fair, the sum of the rates is so. If the

profit is excessive, the sum of the rates is so.

263 U.S. at 483 (emphasis added). Thus, contrary to

petitioners’ contention (Pet. 15-16), Dayton-Goose

Creek Ry. supports, rather than undermines, the de-

cision below.”

3 In Dayton-Goose Creek Ry., the railroad had argued in

the alternative that, if it had no right to the earnings in excess

of the prescribed return, those earnings rightfully belonged to

the shippers, rather than to the government. The Court held

that the railroad had no standing to make that argument. See

263 U.S. at 484. The Court also stated that the shippers had no

right to the excess because the uniform rates “are reasonable

from the standpoint of the shipper.” Jbid. The Court

determined that the rates were reasonable from the shipper’s

standpoint, even if they produced an excessive rate of return

for the carrier, because the excess was used in a manner that

benefited shippers; it was put into a reserve fund that was used

to ensure the integrity of the rail system as a whole, by, for

18

Petitioners’ reliance (Pet. 16) on FPC v. Natural

Gas Pipeline Co., 315 U.S. 575 (1942), is also un-

availing. In that case, the Court upheld an order in

which the FPC had found that the carriers’ rates

were unlawful because they produced excessive

earnings, id. at 580, and as a remedial matter had

erdered the carriers “to file a new rate schedule

which would result in the prescribed reduction in

operating revenues,” id. at 583. The Court held that

the FPC had discretion to leave to the carriers in the

first instance the task of formulating lawful rates to

replace the rates that it had “found to be unjust and

unreasonable.” Jd. at 585. Thus, in FPC v. Natural

Gas Pipeline Co, supra, as in FPC v. Tennessee Gas

Transmission Co., supra, the Court recognized that

it is reasonable for an agency to find that excessive

earnings result from excessive—i.e., “unjust and

unreasonable”—rates.

c. Petitioners also contend that the D.C. Circuit

departed from its own precedent in upholding the

Commission’s determination that rates that yield

earnings in violation of a rate of return prescription

are per se unlawful. Any such intracircuit conflict is

for that court to resolve. See Wisniewski v. United

States, 353 U.S. 901, 902 (1957) (per curiam). In any

event, there is no conflict.

As the court of appeals explained (Pet. App. 12a-

13a), its decision in this case followed logically from

its decisions in Nader, which upheld the Com-

mission’s authority to adopt binding rate of return

example, supporting underearning carriers in the region. /d.

at 480. The Court’s determination is inapposite here, because

an LEC’s excessive earnings are not put into a reserve fund

that is used in a manner that benefits the LEC’s customers.

19

prescriptions, and New England Telephone, which

upheld the Commission’s authority to enforce such

prescriptions by refunding to the customers earnings

in excess of the prescribed return. See also Potomac

Elec. Power Co. v. Public Utilities Comm’n of D.C.,

158 F.2d 521, 523 (D.C. Cir.), (when the rate of return

is excessive, “it follows as a matter of law” that the

rates, “instead of being ‘just and reasonable’ as the

law requires them to be, have been excessive”), cert.

denied, 331 U.S. 816 (1946).™

As the court also explained (Pet. App. 10a-1la, 13a-

14a), its decision does not conflict with Virgin

Islands Telephone Corp. v. FCC, 989 F.2d 1231 (D.C.

Cir. 1993). The court in Virgin Islands Telephone

held that the Commission erred in finding that a

carrier had violated the rate of return prescription.

Id. at 1237-1240. The court therefore did not have to

determine whether refunds would have been per-

missible if such a violation had occurred. Although

the court did cite some factors that, in its view, would

have been relevant in determining a refund order for a

violation of a rate of return prescription, its discus-

sion of those factors was dicta. Jd. at 1239-1240.

Moreover, as the court of appeals explained in this

case (Pet. App. 13a-14a), the factors cited in Virgin

Islands Telephone were ones that the court thought

relevant to the Commission’s exercise of its dis-

cretion to order a refund in carrying out its equitable

rate-making authority under Section 204 of the Act;

4 In asserting a conflict with Nader, petitioners rely (Pet.

16) on the statement in that case that a rate of return is not the

equivalent of a rate. Nader, 520 F.2d at 201. The court of

appeals in this case, however, likewise recognized the distinc-

tion. See, e.g., Pet. App. 3a, 13a.

20

those factors “do not apply where, as here, the

Commission is adjudicating a damage claim made by a

customer pursuant to § 206.” Pet. App. 14a; see also

Baer Bros. v. Denver & Rio Grande R.R., 233 U.S.

479, 486 (1914).”

e. Petitioners contend (Pet. 20) that the decision

below exposes carriers to liability for events beyond

their control. The Commission’s rate of return pre-

scriptions, however, give the LECs substantial flexi-

bility in formulating rates and rate structures for

individual services. See Pet. App. 61a; 47 U.S.C. 203;

Nader, 520 F.2d at 201." Moreover, if a carrier’s

initial rates are not properly targeted to achieve the

prescribed rate of return, or if market or cost

changes threaten to cause a departure from the

prescribed return, the LEC may file mid-course cor-

rections to avoid excessive, as well as deficient, levels

of earnings. See Pet. App. 16a, 61a; New England

Tele-phone, 826 F.2d at 1109. Furthermore, the Com-

mission has facilitated a carrier’s ability to avoid

violations and to earn the maximum prescribed rate of

return by the adoption of “buffer[s],” Pet. App. 16a;

New England Telephone, 826 F.2d at 1109, and a two-

1 Compare 47 U.S.C. 204 (Supp. V 1993) (Commission

“may” require refunds in certain circumstances) with 47

U.S.C. 209 (if Commission “determines[s] that any party com-

plainant is entitled to an award of damages,” it “shall” order

carrier to pay complainant the sum to which it is entitled).

16 As long as an LEC complies with the rate of return

prescription, the LEC cannot be liabie for damages even if the

cost of capital drops so much that the prescribed return is ex-

cessive by all economic measures. See New England Telephone,

826 F.2d at 1109.

21

year monitoring period, see Virgin Islands Tele-

phone, 989 F.2d at 1233.”

Petitioners err in suggesting (Pet. 13 n.8, 22) that

they cannot be liable in damages for violating a rate of

return prescription unless the violation was inten-

tional or negligent. Section 206 provides that a

carrier “shall be liable” to those injured by its

unlawful acts “for the full amount of damages.” 47

U.S.C. 206. Thus, the Act does not require a showing

of deliberate or negligent conduct. New England

Telephone, 826 F.2d at 1106. The purpose of an award

of damages, moreover, is not punitive; it merely

requires the carriers “to give up what they never

should have collected in light of the rate of return

prescription.” Jd. at 1108.

Likewise without merit is petitioners’ contention

that they should not be liable in damages “without

any opportunity to recover their underearnings in

other categories or in their overall operations.” Pet.

22. The LECs are not exempt from liability for

charging excessively high rates for certain cate-

gories of service simply because other rates are low

or because their overall earnings are not excessive.

See Pet. App. 59a-60a. As this Court has explained, a

regulated utility bears both the risk of losses for the

7 Petitioners are wide of the mark in citing (Pet. 21 n.10)

Virgin Islands Telephone as a “particularly glaring illustra-

tion” of an LEC’s inability to avoid liability for overearnings

beyond its control. In that case, although the carrier’s earnings

increased greatly during the first six months after Hurricane

Hugo, the court of appeals held that the LEC had not violated

the rate of return prescription because compliance with the

rate of return should be measured over the entire two-year

monitoring period, and not over only a portion of that period.

Virgin Islands Telephone, 989 F.2d at 1237-1240.

22

services it underprices and the prospect of refunding

amounts gained through rates that are unreasonably

high. Tennessee Gas, 371 U.S. at 152-153.

Petitioners suggest that imposing damages lia-

bility for rate of return violations “denies carriers

the rate stability built into the Communications Act”

by making them “retroactively liable” for charging

their filed rates. Pet. 22-23. It is well-established,

however, that the filed rate is not necessarily the

lawful rate. See Maislin Indus. v. Primary Steel,

Inc., 497 U.S. 116, 128-129 (1990); Arizona Grocery,

284 U.S. at 384. As the LECs acknowledge, Pet. 20,

the customer may contest a filed rate in a complaint

action and recover damages if it shows that the rate is

unjust and unreasonable. 47 U.S.C. 206-209; see

Arizona Grocery, 284 U.S. at 384." In short, liability

for damages arising from filed rates that violate the

Act is an established part of the statutory frame-

work.”

8 Although petitioners rely (Pet. 7) on the concurring

opinion in AT&T, 836 F.2d at 1393, the relief awarded by the

Commission in this case comports with that opinion’s descrip-

tion of the Commission’s adjudicatory authority to award

damages to private parties under Sections 206-209 as a means

“through which an aggrieved customer can obtain relief’ for

paying rates that yield earnings above the prescribed return.

836 F.2d at 1394 (Starr, J., concurring).

19 It does not matter, contrary to petitioner’s suggestion

(Pet. 11), that the challenged rates were not suspended before

they went into effect. Although the court of appeals has held

that the suspension of rates is a condition precedent to the

Commission’s authority to order refunds as part of its discre-

tionary ratemaking authority under Section 204, see Illinois

Bell Telephone Co. v. FCC, 966 F.2d 1478 (D.C. Cir. 1992), it is

not a condition to the Commission’s exercise of its adjudicatory

responsibilities under Sections 206-209.

23

3. The court of appeals correctly upheld the

“Commission’s general approach to damages.” Pet.

App. 2a. The Commission identified the initial, (7.e.

pre-offset) measure of damages as “the difference

between the charges paid and the just and reasonable

rate.” Jd. at 15a, 10la. The Commission reasonably

decided to calculate that difference by determining

the difference between the actual and prescribed rate

of return and then multiplying that percentage

difference by the amount that the customer paid for

the service. Ibid.

As the court of appeals correctly held (Pet. App.

14a-15a), the Commission’s approach was not fore-

closed by the case law on which petitioners have

relied, such as Reiter v. Cooper, 507 U.S. 258 (1993);

Meeker v. Lehigh Valley R.R., 236 U.S. 412 (1915);

and United States v. Associated Transport, Inc., 505

F.2d 366 (D.C. Cir. 1974). See Pet. 18. None of those

cases involved a violation of a rate of return

prescription. Thus, they did not consider whether an

agency, in calculating damages for such a violation,

could “make a simplifying assumption about what the

reasonable rate would have been.” Pet. App. 15a.

The court of appeals also correctly determined that

the Commission’s calculation of damages was fair to

both carriers and their customers. As the court

explained, the LECs themselves had been unable to

establish a precise “reasonable” rate, even with supe-

rior information on their own costs and expenses.

Thus, it would have been inequitable to require the

customer, “from the outside looking in,” to perform

the task that the LEC itself had been unable to do.

Pet. App. 16a. Moreover, as the court correctly ob-

served, the Commission’s approach led to a conserva-

24

tive estimate of damages because it assumed that

demand is price-inelastic. Jd. at 17a.”

Although the court’s economic analysis is amply

supported by expert authority, see Pet. App. 16a-17a,

petitioners challenge the court’s underlying assump-

tion that a rate reduction by the LECs would have

resulted in a reduction in the LECs’ earnings.

Petitioners speculate that a rate reduction might

have increased their earnings, and thus the complain-

ing customers “may have been wndercharged rather

than overcharged.” Pet. 19. Petitioners’ speculation

conflicts with this Court’s recognition that an agency

may reasonably infer that excessive earnings are the

result of excessive rates. See Tennessee Gas, 371

U.S. at 152-153; Dayton-Goose Creek Ry., 263 U.S. at

2» The court of appeals explained that the formulation of a

rate that would produce lawful earnings necessarily is an

estimate, because the effect that any rate or rate change will

have upon the LECs’ revenues (and thus their rate of return)

depends upon a factor that cannot be known for certain: the

level of demand. Pet. App. 17a. The court noted that, in cal-

culating the amount of damages that they sought to recover,

the customers had assumed that demand is not price elastic—

i.e., holding cost and demand ‘constant, they assumed that a

reduction in rates would produce a proportionate reduction in

revenues. The court found that this assumption yielded a con-

servative estimate of damages, because using a price elastic

model would have resulted in a higher damages calculation.

The court reasoned that, if a price reduction increases demand

(and increases the amount of service procured), any reduction

in revenues associated with the reduction in price would be less

than proportionate. Because the “reasonable” rate in this type

of case has to be an estimate, and in light of that fact that the

estimate used by the complainants produced lower damages

than the alternative price elastic approach, the court upheld

the Commission’s determination that the complainants had sus-

tained their burden of proving damages. Ibid.

25

483; see also Potomac Elec. Power Co. v. Public

Utilities Comm’n, 158 F.2d at 523. In any event, even

if it were assumed that petitioners’ theory is correct,

it would not show that the customers had been

undercharged. A rate of return prescription does not

require the LECs, when they charge rates that

produce earnings above the prescribed ceiling, to

exacerbate the violation by reducing their rates to a

level which produces even greater earnings (if such a

hypothetical level were indeed attainable). Rather,

the LECs are required to reduce their rates to a level

that produces earnings at or below the prescribed

ceiling. If the rate reduction were large enough, it

ultimately would reduce the LECs’ earnings to a

lawful level, under any plausible set of economic

assumptions. Pet. App. 16a-17a.

26

CONCLUSION

The petition for a writ of certiorari should be

denied.

Respectfully submitted.

DREW S. DAYS, li!

Solicitor General

WILLIAM E. KENNARD

General Counsel

CHRISTOPHER J. WRIGHT

Deputy General Counsel

JOHN E. INGLE

Deputy Associate

General Counsel

DANIEL M. ARMSTRONG

Associate General Counsel

LAUREL R. BERGOLD

Counsel

Federal Communications Commission

MAY 1996