**Before the**

**Federal Communications Commission**

**Washington, D.C. 20554**

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| In the matter of                 | *  | CC Docket No. 93-193         |
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| 1993 Annual Access Tariff        | ** | CC Docket No. 94-65          |
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| 1994 Annual Access Tariff        | *) |                              |
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**ORDER**

**Adopted: June 28, 2004 Released: July 30, 2004**

**Response Due Date: August 30, 2004**

**Reply Comment Due Date: September 13, 2004**

By the Commission: Commissioner Martin approving in part, dissenting in
part, and issuing a statement at a later date. Commissioner Abernathy
not participating.

# Introduction

1.  In this order, pursuant to section 204 of the Communications Act of
    1934, as amended (Act),[^1] we find just and reasonable the 1993
    interstate access tariffs of price cap local exchange carriers
    (LECs) that implemented a sharing or lower formula adjustment in
    their 1992 Price Cap Indices (PCIs) and that applied add-back in
    computing their 1992 earnings and rates of return and resulting 1993
    PCIs.[^2] We find unjust and unreasonable the 1993 annual access
    tariffs of price cap LECs that implemented a sharing or lower
    formula adjustment in their 1992 PCIs and that failed to apply
    add-back in computing their 1992 earnings and rates of return and
    resulting 1993 PCIs. We make the same findings for the 1994
    interstate access tariffs of price cap LECs that implemented a
    sharing or lower formula adjustment in their 1993 PCIs. Finally, we
    direct price cap LECs that implemented a sharing or lower formula
    adjustment and failed to apply add-back in computing their 1992 and
    1993 earnings and rates of return to make certain recalculations and
    submissions to implement this order.

# background

2.  Prior to September 1990, LEC interstate access rates were subject to
    rate-of-return regulation. Under rate-of-return regulation, LECs
    could charge rates that earned a maximum allowable return on
    interstate investment.[^3] LECs treated any Commission-ordered
    refunds of excess earnings as an adjustment to earnings in the
    period in which the excess earnings occurred, rather than to the
    period in which the refund was actually paid by a reduction in
    rates.[^4] Thus, LECs "added-back" the amount of any refund for
    prior excess earnings into the total earnings used to compute the
    rate of return for the current earnings period. A refund thus had
    the same effect on earnings that it would have had if a LEC had
    written a check for the amount of its excess earnings on the last
    day of the prior earnings period during which the excess earnings
    occurred.[^5]

3.  In September 1990, the Commission replaced rate-of-return regulation
    for the largest LECs with an incentive-based system of price cap
    regulation.[^6] Under the original price cap plan, the ceiling or
    maximum price a LEC could charge for interstate access services was
    determined by the PCI, a formula which was adjusted annually by a
    measure of inflation minus a productivity factor, or \"X
    factor.\"[^7] A LEC's interstate rate of return in one year could be
    the basis for "back stop" adjustments to that carrier's price cap
    indices and rates in the following year.[^8] Specifically, the
    Commission required price cap LECs to "share" a portion of their
    earnings above a certain level with their interstate access
    customers by lowering their PCIs and rates in the following
    year.[^9] This mechanism is called a "sharing obligation." The
    Commission's rules also permitted price cap LECs earning less than
    10.25 percent in a particular year to adjust their PCIs and rates
    upward in the following year to a level that would have allowed them
    to achieve an earnings rate of at least 10.25 percent for the year
    in which they under-earned.[^10] This mechanism is called a
    "low-end" or "lower formula" adjustment. In devising these "back
    stop" adjustments, the Commission imported the concept of "rate of
    return" directly from the previous rate-of-return regime to ensure
    that LEC rates under price cap regulation did not become
    unreasonably high or low due to the varying operational and economic
    circumstances of the many individual LECs.[^11] The Commission
    determined that the sharing and low-end adjustments would be
    one-time adjustments to a single year's rates, so as not to affect
    future earnings.[^12] To provide price cap LECs greater incentives
    to increase efficiency, the Commission eliminated the sharing
    obligation in 1997.[^13]

4.  The first application of the sharing and low-end adjustment
    mechanisms occurred in the 1992 annual access tariff filings. LECs
    with earning levels above 12.25 percent in 1991 lowered their PCIs
    in tariff year 1992 because of the sharing requirement. LECs with
    earnings below 10.25 percent in 1991 increased their PCIs in tariff
    year 1992 because of the low-end adjustment mechanism. The issue of
    how the sharing and low-end adjustments in 1992 should be reflected
    in the LECs' 1992 earnings figures, which were used to determine the
    sharing and low-end adjustments for tariff year 1993, was raised in
    the 1993 annual access tariff filings. Some price cap LECs proposed
    using 1992 earnings levels without the add-back adjustment, while
    others applied an add-back adjustment. The latter approach was
    favored by those LECs that had received a low-end adjustment in 1992
    because it allowed them to charge higher rates in 1993. The LECs
    that experienced higher earnings during the same period chose not to
    apply an add-back adjustment, which would have required greater
    sharing obligations on their part.[^14]

5.  To address the question of whether or not to apply the add-back
    adjustment, the Commission took two separate actions. For the 1993
    annual access tariffs, the Common Carrier Bureau[^15] suspended the
    tariffs of price cap LECs that had implemented a sharing or lower
    formula adjustment in 1992 for one day, issued an accounting order,
    and initiated an investigation.[^16] Before the Commission completed
    the 1993 investigation, price cap LECs filed their 1994 annual
    access tariffs. Because of the similarities of the add-back issues
    in 1993 and 1994, the Bureau suspended the 1994 access tariffs of
    the price cap LECs that had implemented a sharing or low-end
    adjustment in 1993 and incorporated the 1994 access tariffs into the
    1993 investigation.[^17] In doing so the Bureau stated: "prior to
    the termination of this \[1994\] investigation, we will give parties
    an opportunity to present any legal argument or factual
    circumstances that would lead us to conclude that the decisions
    reached in \[the 1993 investigation\] on add-back issues should not
    control our treatment of the 1994 access transmittals."[^18]
    Separately, the Commission initiated a rulemaking to consider
    whether add-back should be required as an explicit rule.[^19] In
    1995, the Commission determined in the *Add-Back Order* that
    add-back produced the same results for price cap and rate-of-return
    regulation, was consistent with price cap efficiency incentives and
    was necessary to enforce earnings restrictions, and, therefore, was
    a required element of price cap earnings calculations.[^20] It
    adopted this rule prospectively for the 1995 annual access tariff
    filings, specifically reserving for the 1993 and 1994 tariff
    investigations the question of whether the price cap rules before
    the *Add-Back Order* required an add-back adjustment.[^21] In
    adopting the rule prospectively, the Commission noted that, "\[W\]e
    believe that adoption of this explicit rule -- even if we were to
    assume that the add-back adjustment is not already required under
    existing rules -- does not constitute a major change to the LEC
    price cap rules."[^22] Finally, on April 7, 2003, the Commission
    issued a public notice seeking comment to refresh the record in this
    proceeding, and to present any legal arguments or factual
    circumstances supporting a conclusion that a determination of the
    add-back issue for the 1993 access tariffs should not control the
    treatment of add-back for the 1994 access tariffs.[^23]

# DISCUSSION

## Positions of the Parties

6.  In general, the LECs contend that prior to adoption of the *Add-Back
    Order* in 1995, application of an add-back adjustment was either
    optional[^24] or not allowed.[^25] SBC and Verizon contend that,
    while add-back was not required, it was reasonable for price-cap
    carriers to apply or not apply add-back in calculating their 1993
    sharing obligations.[^26] SBC also argues that it would only be
    reasonable to require add-back if the sharing mechanism was intended
    to act as a refund and that the purpose of sharing was to better
    calibrate the PCI to actual productivity gains.[^27] Sprint argues
    that add-back was not allowed at all, and points out that at least
    one of its subsidiary LECs did not apply an add-back adjustment in
    calculating its earnings even though it was eligible for a low-end
    adjustment.[^28] Qwest and Sprint contend that the outcome of these
    investigations is dictated by the outcome of the add-back
    rulemaking.[^29] Thus, Qwest argues and Sprint agrees that, because
    the Commission concluded in the *Add-Back Order* that the rule
    change requiring an add-back adjustment would be effective
    prospectively, the only remaining issue before the Commission is the
    administrative closing of these investigations.[^30]

7.  All of the LECs assert that any finding imposing an add-back
    requirement under these tariff investigations would amount to
    impermissible retroactive rulemaking.[^31] Verizon further asserts
    that requiring an add-back requirement now would have an unjust
    retroactive impact because prior knowledge of the existence of a
    required add-back adjustment would have influenced a carrier's
    selection between a 3.3 percent or 4.3 percent productivity factor
    or X-factor, which in turn would have affected revenue.[^32]
    BellSouth asserts that the Commission could not have intended to
    require an add-back adjustment in 1993 and 1994 because neither the
    price cap rules nor the annual reporting form in effect at that time
    contained provisions addressing treatment of sharing or low-end
    adjustments from prior years.[^33] All of the LECs further argue
    that, by taking more than twelve months to conclude these
    investigations, the Commission is barred from ordering refunds or
    taking any further action.[^34] The LECs assert, therefore, that the
    Commission should either terminate the investigations with no
    further action,[^35] or find that the application of add-back was at
    the option of each LEC.[^36]

8.  AT&T contends that the 1993 and 1994 access tariffs of LECs that
    failed to compute their rates of return by applying the add-back
    adjustment are unlawful because, by the Commission's own analysis,
    the intended purposes of price cap regulation could only be achieved
    by applying add-back.[^37] AT&T also argues that it would be
    arbitrary to allow LECs to apply add-back on an optional basis
    because the rates established by LECs that opted not to apply
    add-back would frustrate the intended purposes of price cap
    regulation.[^38] AT&T estimates that a decision requiring add-back
    would result in a \$55 million refund to access customers. AT&T
    estimates that if the Commission determines that add-back should not
    have been applied, those LECs that did apply add-back would be
    required to refund \$37.5 million.[^39] In reply to LEC claims that
    requiring add-back now would amount to impermissible retroactive
    rulemaking, AT&T argues that a tariff investigation is a stand-alone
    rulemaking in which the Commission may lawfully make appropriate,
    rate-related determinations.[^40] In reply to claims that the
    Commission is barred by the 1988 amendments to the Act setting a
    twelve-month period for concluding a tariff investigation, AT&T
    contends that neither court opinions nor the legislative history of
    the twelve-month provision support such an interpretation.[^41]

## Failure to Apply Add-Back Results in Unreasonable Rates.

9.  The central issue before us is whether just and reasonable rates can
    be achieved pursuant to the requirements of section 201 of the Act
    and the *LEC Price Cap Order* if add-back is not required.[^42] As
    discussed earlier,[^43] the term "add-back" describes the process
    that eliminates the effects on the current year's earnings of
    sharing or low-end adjustments that were required by the prior
    year's earnings. The process requires a price cap LEC to add an
    amount equal to the sharing adjustment to its current year's
    revenues before calculating its rate of return for the current year.
    If the LEC made a low-end adjustment in the current year's rates to
    reflect low earnings in the prior year, the amount of the adjustment
    will be subtracted from the current year's revenues before computing
    the rate of return for the current year. The current year's
    earnings, thus adjusted, will determine whether a sharing or low-end
    adjustment for the current year is warranted in the next tariff
    year.[^44]

10. In general, for purposes of determining any adjustment in the next
    tariff year, adding an amount equal to the sharing adjustment to the
    current year's earnings calculation increases a LEC's earnings to
    the level that they would have reached if there had been no sharing
    adjustment.[^45] Similarly, by excluding low-end adjustment amounts
    from the current year's earnings calculation, the LEC's earnings
    level used to compute the next tariff year's sharing or low-end
    adjustments would be lowered to the level that earnings would have
    reached if there had been no low-end adjustment.[^46] This result is
    entirely consistent with the intent of the *LEC Price Cap Order*.

11. The intent of the *LEC Price Cap Order* was to enhance efficiency on
    the part of the LECs by establishing profit-making incentives while
    placing reasonable parameters on carrier earnings.[^47] The
    Commission was careful to base X-factor calculations (adjustments to
    the PCI) on industry-wide productivity, not on the rates of return
    for individual LECs.[^48] In contrast, the Commission intended the
    sharing and low-end adjustment mechanisms, as part of the backstop
    plan, to effect hard upper limits on LEC earnings and create an
    earnings floor.[^49] They were based on individual LEC rates of
    return and were intended to operate as a one-time adjustment to a
    single year's rates, so a LEC would not risk affecting future
    earnings.[^50] The Commission, in fact, explicitly declined to adopt
    a proposed stabilizer mechanism that would have permanently adjusted
    individual LEC PCIs to reflect individual productivity gains.[^51]
    Rather, the Commission chose a sharing mechanism that was intended
    only to return excess earnings, plus interest, to customers through
    a one-time reduction in a carrier's PCI.[^52] Similarly, the
    Commission chose to allow adjustments for low earnings that would
    ensure LECs could continue to earn at the minimum level required to
    "raise the capital necessary to provide new services that \[their\]
    local customers expected."[^53] Applying add-back ensures the
    results the Commission intended in adopting the sharing and
    lower-formula adjustment mechanisms.

12. If add-back is not applied to sharing, future earnings are distorted
    because reductions that were intended to return excess earnings to
    customers are treated as actual reductions in carrier
    productivity.[^54] Likewise, if add-back is not applied to low-end
    adjustments, future earnings are distorted because increases that
    were intended to allow the LEC the opportunity to make-up for
    earnings below the rate floor are treated as actual increases in
    productivity.[^55] Consequently, the result of not applying add-back
    to LECs subject to sharing obligations is that such carriers may
    earn above the earnings ceilings that the Commission adopted in the
    *LEC Price Cap Order*.[^56] Similarly, without add-back, LECs that
    qualify for a low-end adjustment may not obtain the full opportunity
    to earn the minimum level adopted in the *LEC Price Cap Order.*[^57]
    Because the result of not applying add-back defeats the purpose of
    the earnings parameters adopted in the *LEC Price Cap Order,* we
    find it unreasonable for the LECs subject to this investigation to
    not apply add-back.

13. We also reject SBC's contention that the sharing mechanism was not a
    refund but a means of calibrating the PCI to actual LEC productivity
    gains on a going forward basis, and thus add-back was not
    required.[^58] As noted above, the Commission considered adopting a
    stabilizer based on individual LEC earnings as a permanent
    adjustment to calibrate individual LEC PCIs.[^59] The Commission
    explicitly rejected this stabilizer in response to LEC concerns
    about its potential adverse effect on productivity incentives.[^60]
    For example, if the Commission had adopted a stabilizer, a LEC with
    an unusually productive year could limit its future profits.[^61]
    The Commission's discussion of the refund option for excess earnings
    is instructive.[^62] It is true that the Commission rejected
    proposals for a direct refund requirement when it adopted the
    sharing and low-end adjustment backstop mechanisms. The Commission,
    however, was addressing concerns about the mechanics of returning
    excess earnings to customers, not concluding that the sharing
    mechanism would be used to calibrate individual LEC PCIs.[^63] The
    Commission rejected direct refunds due to administrative
    difficulties related to the allocation of refunds among customers,
    not because refunds were contrary to the intent of the sharing
    mechanism.[^64] For example, the Commission rejected Bell Atlantic's
    proposal to give direct refunds to carrier customers and reflect the
    balance in an adjustment to the PCI because such refunds could have
    provided a "double refund \[to carrier customers\] at the expense of
    end users."[^65] Accordingly, nothing in SBC's contention persuades
    us that add-back should not be required for the 1993 access tariffs.

14. We also note that rate of return, as a component of the backstop, is
    not redefined in the *LEC Price Cap Order*. Instead, it was
    incorporated as a widely familiar device from the previous
    rate-of-return system that would be used to determine sharing and
    low-end adjustments.[^66] The price cap methodology, particularly
    during the years in which sharing was applied, was closely linked to
    rate-of-return regulation. Price cap carriers reported their
    earnings and made sharing or low-end adjustments when they met
    certain specific benchmark earnings levels. Add-back was applied
    under rate-of-return regulation "to provide a clear picture of
    current earnings for the reporting period" and to see "whether an
    access category being adjusted through a refund is earning above its
    adjusted maximum rate of return . . . ."[^67] As with rate-of-return
    carriers, price cap LECs' current tariff year earnings become
    reasonably accurate only when they add-back the prior year's sharing
    or low-end adjustment amounts. Accordingly, requiring add-back is
    consistent with prior Commission ratemaking practices.

15. After reviewing the relevant orders and comments, and considering
    the different rates of return when add-back is applied and add-back
    is not applied, we conclude that an add-back requirement is
    essential if the sharing and low-end adjustment mechanisms are to
    achieve their intended purposes. We find that just and reasonable
    rates cannot be achieved without the application of add-back because
    of the distortions that result when it is not applied. Add-back
    corrects deviations in earning calculations, and ensures that a
    LEC's earnings fall within the earnings parameters that the
    Commission selected in the *LEC Price Cap Order*.

## Requiring a Rate Adjustment Pursuant to a Section 204 Tariff Investigation Is Not Retroactive Rulemaking.

16. Commenters' claims that the Commission is precluded from requiring
    add-back in this tariff investigation require us to determine which
    rules, if any, apply here.[^68] It is well established that an
    administrative agency in the performance of its statutory duties
    must adhere to its regulations.[^69] Therefore, if the regulations
    in effect when the tariffs were filed had established the regulatory
    treatment of add-back, we would be required to follow those rules in
    determining the lawfulness of the tariffs under investigation. We
    find, however, that our price cap regulations did not explicitly
    address add-back until 1995. Moreover, in adopting these amendments
    we determined that they would be given prospective application
    only.[^70] We find, therefore, that the applicable rules, *i.e.*,
    the pre-1995 rules in effect when the tariffs under investigation
    were filed, did not speak explicitly to the add-back practices at
    issue in this investigation. Because we do not apply the 1995 rule
    amendments in determining the lawfulness of the tariffs under
    investigation, there can be no reasonable argument based on those
    amendments for alleging that the Commission in this investigation
    engages in impermissible retroactive rulemaking.

17. According to the LECs, the fact that the Commission's pre-1995 rules
    neither required nor prohibited application of add-back precludes
    the Commission from determining the reasonableness of the LECs'
    add-back practices in the tariffs under investigation. We disagree.
    Section 204(a) explicitly authorizes the Commission to investigate
    the lawfulness of "any new or revised charge, classification,
    regulation or practice" contained in a filed tariff.[^71] This broad
    grant of authority empowers the Commission to determine the
    reasonableness of applying add-back in the tariffs under
    investigation whether or not the Commission at the time the tariffs
    were filed had promulgated rules explicitly requiring add-back.[^72]
    A tariff investigation is a rulemaking of particular applicability
    under the Administrative Procedure Act[^73] and the Commission, in
    the exercise of its section 204 authority, "routinely makes
    significant policy and methodological decisions based on the records
    developed in tariff investigations."[^74] The Commission has also
    explained why it may order refunds at the completion of an
    investigation:

> as a tradeoff for permitting rates under investigation to go into
> effect, Section 204(a) specifically authorizes the Commission to order
> refunds at the conclusion of such a proceeding if such relief is
> appropriate. Thus, it is obvious from the nature of the statutory
> scheme, and from the fact that this proceeding was commenced through a
> Designation Order rather than a Notice of Proposed Rule Making, that
> any conclusions this Commission reached with respect to the lawfulness
> of strategic pricing would be applied to rates that took effect
> subject to the investigation, and that the Commission would exercise
> its statutory authority to determine whether a refund was
> appropriate.[^75]

Moreover, section 204(a) assigns to the carriers the burden of proving
the lawfulness of the filed tariffs under investigation.[^76] The LECs
do not satisfy that statutorily imposed burden merely by showing that
they have not violated explicit regulatory provisions. To the contrary,
the LECs must affirmatively show that their tariffed "charges,
practices, classifications, and regulations" are "just and reasonable"
under the Act.[^77]

18. Commenters' assertions to the contrary, nothing in the *Add-Back
    Order* supports a claim that applying add-back to the 1993 and 1994
    access tariffs constitutes impermissible retroactive rulemaking. The
    *LEC Price Cap Order's* silence on add-back was not a basis to
    conclude that the Commission could not determine, in the course of
    these section 204 investigations, that the LECs' tariffs that did
    not incorporate add-back produced rates that were unjust and
    unreasonable within the meaning of section 201(b). In adopting
    add-back prospectively for the 1995 access tariffs, the Commission
    reserved for the tariff investigations the question of whether the
    price cap rules before the *Add-Back Order* required an add-back
    adjustment.[^78] Thus, the *Add-Back Order* did not, as Qwest and
    Sprint claim,[^79] dictate the result of the tariff investigations.

19. Similarly, nothing in the court opinion upholding the add-back
    amendments, *Bell Atlantic v. FCC,* supports a claim that requiring
    add-back in this investigation would result in an impermissible
    retroactive rule.[^80] While the court found that the Commission
    properly applied the 1995 add-back rule prospectively, it expressly
    noted the ongoing tariff investigations with no indication that its
    finding applied to those separate, ongoing proceedings.[^81] In
    responding to LEC claims that even a prospective add-back rule was
    unlawfully retroactive because it changed past legal consequences of
    their choice between a 3.3 percent or 4.3 percent X factor, the
    Court noted that the LECs "made their X-factor decisions in the face
    of considerable uncertainty about whether the 1990 *LEC Price Cap
    Order* included add-back . . . Petitioners who chose the 3.3 percent
    offset in previous years have already received the benefit of that
    decision through higher price caps in those years."[^82] This
    language cannot be construed as a finding that the *Add-Back Order*
    precludes requiring add-back in the tariff investigations. Rather,
    the court noted that the Commission concluded in the *Add-Back
    Order* that add-back had been implicit in the original price cap
    rules.[^83]

20. This history also defeats LEC claims that it would now be
    inequitable for the Commission to find the 1993 access rates of LECs
    failing to apply add-back in determining their 1993 sharing or lower
    formula adjustment obligations to be unreasonable and to order
    refunds. Specifically, Verizon claims that, had the LECs known that
    the Commission would require add-back for the 1993 and 1994 access
    tariffs, they might have made a different selection between the 3.3
    percent and 4.3 percent X factors.[^84] The *Bell Atlantic* court's
    finding that the LECs had already received the benefit of their
    productivity factor choices applies equally to the 1993 and 1994
    access tariffs. Further, the LECs were on notice from the time their
    tariffs were suspended that add-back practices were open to question
    and had been found to raise a substantial question of lawfulness
    under the Act for which the application of add-back was a potential
    remedy.[^85] We believe it would not be fair to deny customers that
    have paid the allegedly unlawful charges a remedy because of the
    delay in concluding this proceeding. Moreover, to the extent that we
    find the tariffed rates to have been unlawful, requiring refunds
    does not amount to a penalty; it merely requires the return of
    revenues to which the LECs were not entitled in the first
    place.[^86]

## The Section 204(a)(2)(B) Twelve-Month Time Limit Does Not Preclude a Finding of Unreasonable Rates

21. We reject commenters' claims that the Commission lacks authority to
    pursue this tariff investigation because it did not complete the
    investigation within the twelve month deadline established by
    section 204(a)(2)(B).[^87] We acknowledge that significant time has
    passed since the Commission initiated this investigation.
    Nevertheless, the Commission's failure to conclude this tariff
    investigation within the statutory time frame does not affect our
    authority to conduct it to its conclusion.

22. Section 204(a)(1) expressly authorizes the Commission to determine
    the lawfulness of filed tariffs.[^88] While section 204(a)(2)(B)
    directs the Commission to make that determination within twelve
    months, it does not "specify a consequence for noncompliance with
    statutory timing provisions,"[^89] let alone prescribe the "drastic
    remed\[y\]" of ousting the agency of jurisdiction.[^90] The Supreme
    Court has made clear that the failure of a governmental entity to
    act within a statutory deadline does not itself divest that entity
    of jurisdiction to take subsequent action.[^91] Consistent with that
    principle, the Eighth Circuit Court of Appeals, in approving a
    refund ordered twelve years after initiation of a tariff
    investigation, has held that \"the time constraint imposed by
    section 204 does not operate as a statute of limitations and that
    its violation therefore does not end the FCC\'s authority to
    act.\"[^92]

23. Further, *Illinois Bell Tele. Co. v. FCC*, cited by Verizon in
    support of its contention that the Commission may not order refunds
    after twelve months have passed,[^93] is inapposite. In that case,
    the District of Columbia Circuit held that the Commission lacks
    authority to order a refund under section 204 unless it has first
    issued a suspension order.[^94] The Court did not address the wholly
    separate issue of whether the Commission's failure to act within the
    section 204(a) deadline divests the agency of its authority to
    investigate a tariff and to order a refund. Indeed, the District of
    Columbia Circuit in other contexts has "repeatedly concluded that
    missing a statutory deadline does not divest an agency of authority
    over a case or issue."[^95]

24. Commenters' construction of section 204(a)(2)(B) would undermine the
    statutory purpose. Congress enacted the time limits in section
    204(a)(2)(B) in order "to spur the \[Commission\] to action, not to
    limit the scope of \[its\] authority."[^96] A primary purpose of
    section 204 is "to protect consumers and competitors from unlawful
    rates in effect while the investigation is pending."[^97] Divesting
    the Commission of its authority to make customers and competitors
    whole by ordering refunds at the conclusion of a tariff
    investigation would unfairly deprive innocent ratepayers of a
    statutory remedy because of the delay by the agency.[^98] We do not
    believe that Congress intended that anomalous result when it enacted
    section 204(a)(2)(B).[^99]

## FCC Form 492A Does Not Demonstrate That Add-Back Is Not Required

25. Some commenters assert that, because the Commission changed the
    annual rate of return report form for price cap LECs, it intended
    not to require price cap LECs to apply an add-back adjustment in
    calculating their rates of return.[^100] In April 1993, the
    Commission announced approval by the Office of Management and Budget
    (OMB) of the revised annual rate of return reporting form for price
    cap LECs, FCC Form 492A.[^101] The new price cap form was a modified
    version of FCC Form 492, used by rate-of-return carriers. In
    adopting the revised form the Commission stated it was seeking "a
    simplified and more relevant set of information," but was silent on
    the issue of add-back and rate of return calculations.[^102] In
    addition to the caption of the form, the changes included the
    removal of report items 7 ("Net Return (incl. effect of FCC Ordered
    Refund) (3+6)") and 8 ("Rate of Return (incl. effect of FCC Ordered
    Refund) (7/4) Annualized") that appeared on Form 492, and the
    addition of a new report item called the "Sharing/Low End Adjustment
    Amount."

26. Commenters say these changes removed line item entries for reporting
    add-back adjustments, and consequently indicate that an add-back
    adjustment was no longer required in calculating and reporting rates
    of return. In order to adopt rules or change its rules, however, the
    Commission must do more than merely alter a reporting form. Under
    basic principles of reasoned decision making, the Commission must
    state that it is adopting a rule and explain the reasons why.[^103]
    Here, however, the expressed purpose for changing the form was
    merely to simplify reporting.

27. When add-back was explicitly adopted prospectively by the *Add-Back
    Order* in 1995, the Commission modified the Commission's rules to
    reflect the decision and directed the Common Carrier Bureau to
    revise Form 492A to the extent necessary to reflect the add-back
    requirement more clearly.[^104] The Bureau did not revise the form,
    likely because no changes to the form were necessary to implement
    the *Add-Back Order*. Rather, both Form 492 and Form 492A allowed
    price cap LECs to apply add-back and accurately report earnings and
    rates of return.

## 1994 Investigation

28. In the public notice seeking to refresh the record in this
    proceeding, the Bureau explicitly invited parties to "present any
    legal argument or factual circumstance that would lead us to
    conclude that the decision reached with respect to appropriate
    treatment of sharing and low-end adjustments for the 1993 access
    tariffs should not control our treatment of sharing and low-end
    adjustments for the 1994 access tariffs."[^105] None of the parties
    presented any reasons to persuade us to treat the two sets of
    tariffs differently. Therefore, based upon the administrative record
    before us, we conclude that the 1994 access tariffs of price cap
    LECs that did not apply add-back are unjust and unreasonable.

## Required Filings 

29. We order price cap LECs that implemented a sharing or lower formula
    adjustment and failed to apply add-back in their 1993 and 1994
    access tariff filings to: (a) recalculate their 1992 and 1993
    earnings and rates of return making such an adjustment; (b)
    determine the appropriate sharing or lower formula adjustment to
    their PCIs for the subsequent tariff year; (c) compute the amount of
    any resulting access rate decrease; and (d) submit a plan for
    refunding the amounts owed to customers plus interest as a result of
    any such rate decrease. After reviewing the recalculations and
    refund plans submitted in response to this order, and replies
    received on these recalculations and refund plans, we will, as
    appropriate, approve, disapprove, or order modification of the filed
    recalculations and refund plans.

30. We also note that Verizon and Qwest argue that the rates subject to
    this investigation were below the rates that applicable PCIs would
    have allowed them to file and, therefore, they have "headroom" which
    precludes the Commission from ordering refunds. [^106] While this
    claim may have merit, we cannot make a determination that any
    applicable refunds are offset by headroom until we review the
    recalculations and replies to the recalculations submitted in
    response to this order. Therefore, any price cap LEC claiming that
    headroom offsets any refund obligation should provide detailed
    calculations demonstrating this fact in response to this order.

# FILING PROCEDURES

31. Recalculations and, if applicable, refund plans in response to this
    order are due **August 30, 2004.** Replies to the recalculations and
    any applicable, refund plans are due **September 13, 2004.** When
    making these filings please reference CC Docket Nos. 93-193 and
    94-65. An original and four copies of all filings should be
    addressed to Marlene H. Dortch, Secretary, Federal Communications
    Commission, 445 12^th^ Street, SW, Room TW-B204, Washington,
    DC 20554. A courtesy copy should be addressed to Chief, Pricing
    Policy Division, Wireline Competition Bureau, 445 12th Street, S.W.,
    Room 5-A225, Washington, DC 20554, and e-mailed to
    <julie.saulnier@fcc.gov>. A courtesy copy should also be addressed
    to Best Copy and Printing, Portals II, 445 12th Street, S.W., Room
    CY-B402, Washington, DC 20554, telephone 1-800-378-3160, or sent via
    e-mail to [www.bcpiweb.com]{.underline}. Parties also are strongly
    encouraged to submit their filings via the Internet through the
    Electronic Comment Filing System at http://www.fcc.gov/cgb/ecfs/.
    Generally, only one copy of an electronic submission must be filed.
    In completing the transmittal screen, parties should include their
    full name, Postal Service mailing address, and the applicable docket
    number, which in this instance is CC Docket Nos. 93-193 and 94-65.
    Parties may also submit an electronic comment via Internet e-mail.
    To get filing instructions for e-mail comments, parties should send
    an e-mail to ecfs@fcc.gov, and should include the following words in
    the body of the message: "get form." A sample form and directions
    will be sent in reply.

32. Interested parties who wish to file via hand-delivery are also
    notified that the Commission will only receive such deliveries
    weekdays from 8:00 a.m. to 7:00 p.m., via its contractor, Natek,
    Inc., located at 236 Massachusetts Avenue, NE, Suite 110,
    Washington, DC 20002. **The Commission no longer accepts these
    filings at 9300 East Hampton Drive, Capitol Heights, MD 20743.**
    Please note that all hand deliveries must be held together with
    rubber bands or fasteners, and envelopes must be disposed of before
    entering the building. In addition, this is a reminder that the
    Commission no longer accepts hand-delivered or messenger-delivered
    filings at its headquarters at 445 12th Street, SW, Washington,
    DC 20554. Messenger-delivered documents (*e.g.*, FedEx), including
    documents sent by overnight mail (other than United States Postal
    Service (USPS) Express and Priority Mail), must be addressed to 9300
    East Hampton Drive, Capitol Heights, MD 20743. This location is open
    weekdays from 8:00 a.m. to 5:30 p.m. USPS First-Class, Express, and
    Priority Mail should be addressed to the Commission's headquarters
    at 445 12th Street, SW, Washington, DC 20554. The following chart
    summarizes this information:

+-----------------------------------+----------------------------------+
| **TYPE OF DELIVERY**              | > **PROPER DELIVERY ADDRESS**    |
+-----------------------------------+----------------------------------+
| Hand-delivered paper filings      | > 236 Massachusetts Avenue, NE,  |
|                                   | >                                |
|                                   | > Suite 110, Washington, DC      |
|                                   | > 20002 (Weekdays - 8:00 a.m. to |
|                                   | > 7:00 p.m.)                     |
+-----------------------------------+----------------------------------+
| Messenger-delivered documents     | > 9300 East Hampton Drive,       |
| (*e.g.*, FedEx), including        | >                                |
| documents sent by overnight mail  | > Capitol Heights, MD 20743      |
| (this type excludes USPS Express  | >                                |
| and Priority Mail)                | > (Weekdays - 8:00 a.m. to 5:30  |
|                                   | > p.m.)                          |
+-----------------------------------+----------------------------------+
| USPS First-Class, Express, and    | > 445 12^th^ Street, SW          |
| Priority Mail                     | >                                |
|                                   | > Washington, DC 20554           |
+-----------------------------------+----------------------------------+

# ordering clauses

33. Accordingly, IT IS ORDERED that, pursuant to sections 4(i), 4(j),
    201(b), 204(a), and 403 of the Communications Act of 1934, as
    amended, 47 U.S.C. §§ 154(i), 154(j), 201(b), 204(a), and 403, the
    1993 and 1994 annual access tariffs of price cap local exchange
    carriers failing to make the add-back adjustment ARE UNLAWFUL.

34. IT IS FURTHER ORDERED that the price cap LECs that failed to apply
    an add-back adjustment in their 1993 and 1994 access tariff filings
    SHALL RECALCULATE their 1992 and 1993 earnings making such an
    adjustment in compliance with this order, DETERMINE any applicable
    sharing or lower formula adjustment to their PCIs for the subsequent
    tariff year, COMPUTE the amount of any resulting access rate
    decrease, and SUBMIT PLANS for implementing any resulting refunds
    with interest to their access customers, no later than **August 30,
    2004.**

    FEDERAL COMMUNICATIONS COMMISSION

    Marlene H. Dortch

    Secretary

**APPENDIX**

**Add-Back Example**

The following example[^107] illustrates the effects of an add-back
adjustment under the price cap rules and shows that the adjustment is a
necessary component of the sharing mechanism. The example examines the
effects of different regulatory requirements on a company that in the
base year has revenues of \$2425, expenses of \$1000, and a rate base of
\$10,000. Therefore, the company's base year return (*i.e.*, revenues
minus expenses) is \$1425 (\$2425 minus \$1000). The company's rate of
return (ROR) (*i.e.*, return divided by rate base) is 14.25 percent
(\$1425 divided by \$10,000).

Assume first that a company under rate-of-return regulation is required
to refund earnings above a 13.25 percent rate of return, measured on a
calendar year basis and that the company earns 14.25 percent in year 1.
Assume further that the company makes its refunds through a refund check
that is issued on the last day of year 1 rather than by reducing its
rates in the coming year. The following chart shows the effects of the
refund requirement on the company in years 1 through 4, assuming
constant revenues, expenses and rate base.

  ---------------------------- ---------- ---------- ---------- ----------
                               **Year 1** **Year 2** **Year 3** **Year 4**

  Revenues                     2,425      2,425      2,425      2,425

  Expenses                     1,000      1,000      1,000      1,000

  Rate Base                    10,000     10,000     10,000     10,000

  ROR                          14.25      14.25      14.25      14.25

  Refund                       100        100        100        100

  ROR (net of regulation)      13.25      13.25      13.25      13.25
  ---------------------------- ---------- ---------- ---------- ----------

As this example shows, because the company refunds the money owed at the
end of the year in which the liability is incurred, no adjustment to its
revenues is necessary in the following year.

Assume now that the same company is instead subject to a sharing
obligation with an add-back requirement. Assume further that the company
is required to share 50 percent of its earnings above a 12.25 percent
rate of return. The following chart shows the effect of the add-back
requirement on the company in years 1 through 4, again assuming constant
revenues, expenses and rate base.

Add-Back Adjustment

  ------------------------------------- -------- -------- -------- --------
                                        **Year   **Year   **Year   **Year
                                        1**      2**      3**      4**

  Revenues                              2,425    2,325    2,325    2,325

  Expenses                              1,000    1,000    1,000    1,000

  Rate Base                             10,000   10,000   10,000   10,000

  Add-Back                              0        100      100      100

  ROR with Add-Back                     14.25    14.25    14.25    14.25

  Sharing (to be deducted in the next   100      100      100      100
  year)                                                            

  ROR (net of regulation)               13.25    13.25    13.25    13.25
  ------------------------------------- -------- -------- -------- --------

By including an add-back adjustment to its earnings in Year 2 and
thereafter, the company has the same rate of return and returns the same
amount of money to ratepayers as the rate-of-return regulated company
that makes its refund by a check. The add-back adjustment measures the
company's performance in year 2 and each subsequent year after
eliminating the effect of its performance in the prior year from the
calculation of the current year's earnings.

Contrast the foregoing results with those that occur if the same company
is subject to a sharing obligation, but without an add-back requirement.

No Add-Back Adjustment

  ----------------------------------- -------- -------- -------- --------
                                      **Year   **Year   **Year   **Year
                                      1**      2**      3**      4**

  Revenues                            2,425    2,325    2,375    2,350

  Expenses                            1,000    1,000    1,000    1,000

  Rate Base                           10,000   10,000   10,000   10,000

  Sharing (to be returned in next     100      50       75       62.50
  year)                                                          

  ROR                                 14.25    13.25    13.75    13.50
  ----------------------------------- -------- -------- -------- --------

Under this scenario, the company shares fewer revenues than it would
under the rate-of-return or add-back scenarios and earns a different
rate of return each year, even though its financial performance and
underlying costs did not change.

The foregoing examples show that adding back an amount equal to the
sharing adjustment ensures that the earnings thresholds applied to
determine price cap LECs' sharing obligations achieve the intended
benefits of the sharing mechanism. In the example presented above, the
add-back requirement ensures that a price cap carrier incurs the same
sharing obligation (\$100) in year 2 as a carrier that paid a refund on
the last day of the year in which the obligation was incurred. Without
an add-back requirement, the price cap carrier would share a lower
amount (\$50) of its earnings from year 2, because the carrier would
reduce its earnings in year 2 by the amount of the sharing obligation
incurred in the prior year. That result would permit LECs to avoid or
reduce their sharing obligations in year 2 if their unadjusted rate of
return exceeded the sharing benchmarks established by the price cap
rules.

A sharing adjustment under price caps operated very much like a refund
under rate-of-return regulation in that the obligation arose because of
the previous year's high earnings. Further, both the sharing adjustment
and the refund occurred in the year after that in which the high
earnings were realized.[^108] In both cases, ignoring the effects of a
sharing adjustment would make a LEC's earnings, and therefore its
productivity, appear to be lower than it actually was during the year in
which the sharing amount was flowed through to ratepayers.

A comparison of three scenarios involving a low-end adjustment similarly
shows that an add-back adjustment is necessary to achieve the intended
benefits of the low-end adjustment. These scenarios assume a company
that has revenues of \$1925, expenses of \$1000 and a rate base of
\$10,000.

Assume first that the company receives its low-end adjustment through a
check issued to it on the last day of the year in which the low earnings
occur.

  ---------------------- ------------ ------------ ------------ ------------
                         **Year 1**   **Year 2**   **Year 3**   **Year 4**

  Revenues               1,925        1,925        1,925        1,925

  Expenses               1,000        1,000        1,000        1,000

  Rate Base              10,000       10,000       10,000       10,000

  ROR                    9.25         9.25         9.25         9.25

  Low-End Adj.           100          100          100          100

  ROR with Adj.          10.25        10.25        10.25        1025
  ---------------------- ------------ ------------ ------------ ------------

Now assume that the same company is instead subject to a low-end
adjustment mechanism with an add-back requirement.

**Add-Back Adjustment**

  ---------------------------- ---------- ---------- ---------- ----------
                               **Year 1** **Year 2** **Year 3** **Year 4**

  Revenues                     1,925      2,025      2,025      2,025

  Expenses                     1,000      1,000      1,000      1,000

  Rate Base                    10,000     10,000     10,000     10,000

  ROR (before add-back)        9.25       10.25      10.25      10.25

  Add-Back                     0          -100       -100       -100

  Low-End Adj.                 100        100        100        100

  ROR with Add-Back            9.25       9.25       9.25       9.25
  ---------------------------- ---------- ---------- ---------- ----------

As in the sharing example, the company that makes an add-back adjustment
to its revenues in the second year to account for the low-end adjustment
incurred in the first year has the same rate of return and receives the
same amount of money as the company under rate-of-return regulation that
receives its low-end adjustment through a check issued at the end of
year 1.

Contrast those results with the effect of a low-end adjustment mechanism
without an add-back adjustment on the same company.

**No Add-Back Adjustment**

  -------------------------------------- -------- -------- -------- --------
                                         **Year   **Year   **Year   **Year
                                         1**      2**      3**      4**

  Revenues                               1,925    2,025    1,925    2,025

  Expenses                               1,000    1,000    1,000    1,000

  Rate Base                              10,000   10,000   10,000   10,000

  Low-End Adj. (to be regained in next   100      0        100      0
  year)                                                             

  ROR                                    9.25     10.25    9.25     10.25
  -------------------------------------- -------- -------- -------- --------

Under this approach, the company receives less revenues for the low-end
adjustment than it would under the two other approaches illustrated
above and would report a different rate of return each year, even though
its financial performance and underlying cost did not change.

Without an add-back adjustment, LECs that make low-end adjustments
because of prior years' low earnings would be entitled to smaller
adjustments if their current year's earnings fell below the low end of
the range. As our example shows, ignoring the amount (\$100) paid to the
carrier as a low-end adjustment for the prior year would inflate the
carrier's earnings in year 2. Over time, effective earnings could fall
below the benchmark levels that the Commission established as an
integral part of its initial price cap regulatory regime. For example,
the LECs' unadjusted 1993 rates of return used to compute 1994 sharing
and lower-end adjustments would on average be 0.2 percent higher at the
upper end, and 0.5 percent lower at the low end than if adjusted. The
add-back adjustment, however, corrects these deviations and ensures that
the LECs' earnings fall within the range the Commission selected in the
*LEC Price Cap Order.*

[^1]: 47 U.S.C. § 204.

[^2]: Add-back requires price cap LECs, in calculating their current
    year interstate rates of return, to add back or subtract from their
    current year earnings the amount of any revenue returned to
    customers due to a sharing obligation or gained due to a lower
    formula adjustment. This rate-of-return computation determines
    whether the LEC must make a sharing or lower formula adjustment to
    its PCI for the next tariff year. Add-back eliminates the effects on
    the current year's earnings of sharing or low-end adjustments that
    were required by the prior tariff year's earnings. A "tariff year"
    as used here refers to the one-year period from July 1 to June 30
    because interstate access tariffs are filed annually on this
    schedule. Thus, the 1993 interstate access tariff year runs from
    July 1, 1993, to June 30, 1994, and the 1993 interstate access rates
    are the rates in effect during this period.

[^3]: The maximum allowable rate of return consists of the prescribed
    rate of return plus four tenths of one percent of the prescribed
    rate of return. *See* 47 C.F.R. § 65.700.

[^4]: The Commission adopted a rule that required a LEC earning more
    than the maximum allowable rate of return on a specified segment of
    its operations during a two-year period automatically to refund the
    excess earnings directly to its interstate access customers.
    *Authorized Rates of Return for the Interstate Service of AT&T
    Communications and Exchange Carriers,* FCC 85‑527 (released Sept.
    30, 1985), 50 Fed. Reg. 41,350 (Oct. 10, 1985), *recon. granted in
    part*, FCC 86‑114 (released March 24, 1986), *summarized in,* 51
    Fed. Reg. 11,033 (April 1, 1986), *further recon. denied,* 2 FCC Rcd
    190 (1987), *rev\'d in part, American Telephone & Telegraph Co. v.
    FCC,* 836 F.2d 1386 (D.C. Cir. 1988)(*AT&T*). The Court of Appeals
    for the District of Columbia Circuit invalidated and remanded this
    rule because, based on its understanding that the rate of return
    prescribed in 1985 was both a maximum and a minimum, it reasoned
    that the absence of a corresponding mechanism for recovery or offset
    of under earnings could result in repeated under earnings that, over
    time, could put a LEC out of business. *AT&T,* 836 F.2d at 1389,
    1393. In a separate rulemaking, the Commission adopted a mechanism
    and Form 492 to account for excess earnings that incorporated an
    add-back requirement. *Amendment of Part 65, Interstate Rate of
    Return Prescription: Procedures and Methodologies to Establish
    Reporting Requirements*, CC Docket No. 86-127, Report and Order, 1
    FCC Rcd 952, 956-57, para. 43 and Appendix C (1986) (establishing a
    rate of return monitoring report, which includes a line to record
    the amount of the refund). *See also* *Price Cap Regulation of Local
    Exchange Carriers, Rate of Return Sharing and Lower Formula
    Adjustment*, CC Docket No. 93-179, Notice of Proposed Rulemaking, 8
    FCC Rcd 4415 (1993) (*Add-Back Notice*); *Price Cap Regulation of
    Local Exchange Carriers, Rate of Return Sharing and Lower Formula
    Adjustment*, CC Docket No. 93-179, Report and Order, 10 FCC Rcd 5656
    (1995) (*Add-Back Order*). Although the *AT&T* court invalidated the
    automatic refund rule, it left the add-back mechanism and form 492
    untouched. Moreover, the court in *AT&T* expressly recognized that
    the Commission had authority both to prescribe a rate of return and
    to order refunds of excess earnings through a reduction in future
    rates. 836 F.2d at 1392, *citing New England Tel. and Tel. Co. v.
    FCC*, 826 F.2d 1101 (D.C. Cir. 1987), *cert. denied,* 490 U.S. 1039
    (1989). *See also MCI Telecommunications Co. v. FCC*, 59 F.3d 1407
    (1995)(Court upheld awards of damages to customers that paid rates
    that produced earnings in excess of prescribed maximum rates of
    return.).

[^5]: *Add-Back Order*, 10 FCC Rcd at 5656-57, para. 2.

[^6]: *Policy and Rules Concerning Rates for Dominant Carriers*, CC
    Docket No. 87-313, Second Report and Order, 5 FCC Rcd 6786 (1990)
    (*LEC Price Cap Order*). At that time the largest LECs included the
    seven regional Bell Operating Companies (BOCs). As a result of
    mergers and acquisitions, today there are four BOCs. For a complete
    summary of the original price cap plan, *see* *LEC Price Cap Order*,
    5 FCC Rcd at 6787-89, paras. 5-19.

[^7]: *Price Cap Performance Review for Local Exchange Carriers*, CC
    Docket No. 94-1, Fourth Report and Order, *Access Charge Reform*, CC
    Docket No. 96-262, Second Report and Order, 12 FCC Rcd 16642, 16646,
    para. 3 (1997) (*Price Cap Fourth Report and Order*). *See also LEC
    Price Cap Order*, 5 FCC Rcd at 6792, paras. 47-49. Exogenous costs
    also are added in determining the PCI. *See* 47 C.F.R. § 61.45(a).

[^8]: *LEC Price Cap Order*, 5 FCC Rcd at 6790-91, paras. 21-37.

[^9]: *Id.* at 6801, para. 124. The amount of the sharing obligation
    varied with certain choices made by each carrier. For example, a
    price cap LEC opting for an X-factor of 3.3 percent and earning a
    rate of return above 12.25 percent was required to share half of
    earnings above 12.25 percent and all earnings above 16.25 percent
    with its access customers. *Id*. at 6801, para. 125. For LECs that
    elected a more challenging 4.3 percent X factor, 50 percent sharing
    began for rates of return above 13.25 percent, and 100 percent
    sharing began at rates of return above 17.25 percent. *Id*. at
    6787-88, paras. 7-10.

[^10]: *Id.* at 6802, para. 127. This low end adjustment has been
    eliminated for price cap LECs that exercise pricing flexibility. 47
    C.F.R. § 69.731.

[^11]: *Id.* at 6801, para. 120. *See also Add-Back Notice*, 8 FCC Rcd
    at 4416, para. 7.

[^12]: *LEC Price Cap Order*, 5 FCC Rcd at 6803, para. 136. *See also*
    *Policy and Rules Concerning Rates for Dominant Carriers*, CC Docket
    No. 87-313, Order on Reconsideration, 6 FCC Rcd 2637, 2691 n.166
    (1991) (*LEC Price Cap Reconsideration Order*), *aff\'d sub nom*.
    *National Rural Telecom Ass\'n v. FCC*, 988 F.2d 174 (D.C. Cir.
    1993).

[^13]: *See Price Cap Fourth Report and Order*, 12 FCC Rcd at 16699-70,
    paras. 147-48.

[^14]: An example demonstrating the implications of applying the
    add-back adjustment was included in the *Add-Back Order*, and is set
    out in the Appendix.

[^15]: In March 2002, the Commission renamed the Bureau the Wireline
    Competition Bureau (Bureau).

[^16]: *See 1993 Annual Access Tariff Filings*, CC Docket No. 93-193,
    *National Exchange Carrier Association Universal Service Fund and
    Lifeline Assistance Rates, Transmittal No. 556,* CC Docket No.
    93-123, *GSF Order Compliance Filings, Bell Operating Companies'
    Tariff for the 800 Service Management System and 800 Data Base
    Access Tariffs,* CC Docket No. 93-129, Memorandum Opinion and Order
    Suspending Rates and Designating Issues for Investigation, 8 FCC Rcd
    4960, 4965, para. 32 (Com. Car. Bur. 1993) (*1993 Designation
    Order*).

[^17]: *See* *1994 Annual Access Tariff Filings*, CC Docket No. 94-65,
    *National Exchange Carrier Association Universal Service Fund and
    Lifeline Assistance Rates, Transmittal No. 612,* Memorandum Opinion
    and Order Suspending Rates, 9 FCC Rcd 3705, 3713, para. 12 (Com.
    Car. Bur. 1994) (*1994 Suspension Order*).

[^18]: *Id.*

[^19]: *Add-Back Notice*, 8 FCC Rcd at 4415.

[^20]: *Add-Back Order*, 10 FCC Rcd at 5659-64, paras. 17-45.

[^21]: *Add-Back Order*, 10 FCC Rcd at 5657, n.3.

[^22]: *Id.* at 5565, para. 50.

[^23]: *Further Comment Requested on the Appropriate Treatment of
    Sharing and Low-End Adjustments Made by Price Cap Local Exchange
    Carriers in Filing 1993 and 1994 Interstate Access Tariffs*, *1993
    Annual Access Tariffs*, CC Docket No. 93-193, *1994 Annual Access
    Tariffs,* CC Docket No. 94-65, Public Notice, 18 FCC Rcd 6483 (2003)
    (*Add-Back Public Notice*).

[^24]: *1993 Annual Access Tariffs*, CC Docket No. 93-193; *1994 Annual
    Access Tariffs,* CC Docket No. 94-65, Comments of BellSouth at 12,
    filed May 5, 2003 (*BellSouth Comments*); Comments of SBC
    Communications, Inc. at 5-8, filed May 5, 2003 (*SBC Comments*);
    Comments of Verizon at 12-14, filed May 5, 2003 (*Verizon
    Comments*); Reply Comments of Verizon at 6-9, filed May 19, 2003
    (*Verizon Reply*).

[^25]: *1993 Annual Access Tariffs*, CC Docket No. 93-193; *1994 Annual
    Access Tariffs*, CC Docket No. 94-65, Reply Comments of Sprint
    Corporation at 2, filed May 19, 2003 (*Sprint Reply*).

[^26]: *SBC Comments* at 5-8; *Verizon Comments* at 7-12.

[^27]: *1993 Annual Access Tariffs*, CC Docket No. 93-193; *1994 Annual
    Access Tariffs*, CC Docket No. 94-65, Letter from David Cartwright,
    Director, Federal Regulatory, SBC, to Marlene H. Dortch, Secretary,
    Federal Communications Commission at 8-9 (filed Feb. 27, 2004) (*SBC
    February 27 ex parte*).

[^28]: *Sprint Reply* at 2.

[^29]: *1993 Annual Access Tariffs*, CC Docket No. 93-193; *1994 Annual
    Access Tariffs,* CC Docket No. 94-65, Comments of Qwest Corporation
    at 2-6, filed May 5, 2003 (*Qwest Comments*); *Sprint Reply* at 2.

[^30]: *Qwest Comments* at 2-6; *Sprint Reply* at 2.

[^31]: *BellSouth Comments* at 8-12; *Qwest Comments* at 3-9; *SBC
    Comments* at 8-10; *Verizon Comments* at 11-12; *1993 Annual Access
    Tariffs*, CC Docket No. 93-193; *1994 Annual Access Tariffs,* CC
    Docket No. 94-65, Reply Comments at 4-6, filed May 19, 2003
    (*BellSouth Reply)*; Reply Comments of SBC Communications at 3-5,
    filed May 19, 2003 (*SBC Reply*); *Sprint Reply* at 4.

[^32]: *Verizon Comments* at 14; *Verizon Reply* at 4.

[^33]: *BellSouth Comments* at 8-10. Sprint makes the same observation
    in support of its argument that add-back was prohibited during the
    years in question. *See* *Sprint Reply* at 2.

[^34]: *BellSouth Comments* at 2-7; *Qwest Comments* at 7, n.19; *SBC
    Comments* at 4; *Verizon Comments* at 14-18; *Sprint Reply* at 1-3.

[^35]: *BellSouth Comments* at 12; *Qwest Comments* at 9; *Verizon
    Comments* at 14-18; *BellSouth Reply* at 4-6.

[^36]: *SBC Comments* at 10; *SBC Reply* at 6*; Sprint Reply* at 4.

[^37]: *1993 Annual Access Tariffs*, CC Docket No. 93-193; *1994 Annual
    Access Tariffs,* CC Docket No. 94-65, Comments of AT&T Corp. at
    14-16, filed May 5, 2003 (*AT&T Comments*); Reply Comments of AT&T
    Corp. at 4-7, filed May 19, 2003 (*AT&T Reply*).

[^38]: *AT&T Comments* at 15-16; *AT&T Reply* at 7-11.

[^39]: *AT&T Comments* at 18-19.

[^40]: *AT&T Comments* at 15; *AT&T Reply* at 1-6.

[^41]: *AT&T Reply* at 11-12. *See also* P.L. 100-594, § 8(b), 102 Stat.
    3028 (1988).

[^42]: 47 U.S.C. §§ 201, 204; *LEC Price Cap Order*, 5 FCC Rcd at
    6801-6807, paras. 125-160.

[^43]: *See* n.2, *supra.*

[^44]: *See* Appendix at 2, 4.

[^45]: *Id.* at 2.

[^46]: *Id.* at 4.

[^47]: *LEC Price Cap Order*, 5 FCC Rcd at 6787, para. 1.

[^48]: *Id.* at 6796-98, paras. 75-95.

[^49]: *Id.* at 6801, 6804, paras. 123-25, 147-48. For example, a
    carrier choosing a 3.3 percent productivity offset would be allowed
    "to reach a maximum 14.25 percent rate of return." *Id.*

[^50]: *Id.* at 6803, para. 136. *See also* *Add-Back Order,* 10 FCC Rcd
    at 5659, para. 17 and n.27.

[^51]: *LEC Price Cap Order*, 5 FCC Rcd at 6803, paras. 134-36.

[^52]: *Id.* at 6801, paras. 124-25.

[^53]: *Id.* at 6804, para. 148.

[^54]: *See* Appendix at 2-3.

[^55]: *Id.* at 3-5.

[^56]: *Id.* at 2-3.

[^57]: *Id.* at 3-5.

[^58]: *SBC February 27 ex parte* at 8-9.

[^59]: *LEC Price Cap Order,* 5 FCC Rcd at 6803, paras. 134-35. The
    Commission proposed the adoption of a stabilizer as a backstop
    mechanism to protect against LEC excess or under earnings under
    price caps in the *Price Cap Second FNPRM*. *Policy and Rules
    Concerning Rates for Dominant Carriers*, Report and Order and Second
    Further Notice of Proposed Rulemaking, CC Docket No. 87-313, 4 FCC
    Rcd 2873, 3212-19 (1989) (*Price Cap Second FNPRM*). The proposed
    stabilizer would have permanently modified a LEC's PCI if the LEC's
    earnings fell outside a reasonable range, which was identified as
    the authorized return, plus or minus 2 percent. *Id*. at 3215, para.
    708. In contrast to the sharing and low-end adjustment backstop
    mechanisms that were adopted, the stabilizer was a prospective
    mechanism that would have eliminated any obligation to refund excess
    earnings to end users or opportunity to recoup earnings shortfalls.
    *Id*. at 3215-16, para. 708. The Commission rejected the proposed
    stabilizer in the *LEC Price Cap Order*. *LEC Price Cap Order*, 5
    FCC Rcd at 6802-03, paras. 127, 135.

[^60]: The Commission rejected the automatic stabilizer because its
    adjustment to the PCI would have had a larger and more prolonged
    effect on earnings, rather than the one-time effect of the sharing
    mechanism. *LEC Price Cap Order*, 5 FCC Rcd at 6803, para. 136.

[^61]: *Id*.

[^62]: *Id.* at 6805, paras. 152-54.

[^63]: *Id.* at 6801, 6805, paras. 124-25, 151-54. **"**This level of
    sharing will ensure that consumers receive their fair share of
    productivity gains that occur, just as they would in an industry
    with keener competition. The customer share plus interest will be
    returned in the form of a one-time reduction in the PCI for the next
    rate period . . . ." *Id.* at 6801, para. 124.

[^64]: *Id.* at 6805, para. 153.

[^65]: *Id.* at 6805, para. 154.

[^66]: *Id.* at 6801, paras. 120-121. *See also Add-Back Order,* 10 FCC
    Rcd at 5657, para. 7.

[^67]: *Amendment of Part 65, Interstate Rate of Return Prescription:
    Procedures and Methodologies to Establish Reporting Requirements*,
    CC Docket No. 86-127, Report and Order, 1 FCC Rcd 952, 956-57, para.
    43.

[^68]: *See, e.g.,* *BellSouth Comments* at 8-12; *Qwest Comments* at
    3-9; *SBC Comments* at 8-10; *Verizon Comments* at 11-12; *Sprint
    Reply* at 2.

[^69]: *See,* e*.g., Adams Telecom, Inc. v. FCC,* 38 F.3d 576, 581 (D.C.
    Cir. 1994), *quoting Reuters Ltd. v. FCC*, 781 F.2d 946, 950
    (D.C.Cir.1986) (\"\[I\]t is elementary that an agency must adhere to
    its own rules and regulations.\"). *See Steenholdt v. FAA,* 314 F.3d
    633, 638 (D.C. Cir. 2003); *Southwestern Bell Tele. Co. v. FCC,* 28
    F.3d at 169.

[^70]: *Add Back Order,* 10 FCC Rcd at 5665, para. 49.

[^71]: 47 U.S.C. § 204(a). Complementing the Commission's section 204
    authority, section 4(i) authorizes the agency to \"perform any and
    all acts, make such rules and regulations, and issue such orders,
    not inconsistent \[with the express provisions of the Act\], as may
    be necessary in the execution of its functions." 47 U.S.C. § 154(i).
    The "wide-ranging source of authority" in this \"necessary and
    proper clause\" empowers the Commission to take "appropriate and
    reasonable" actions in furtherance of its regulatory duties. *New
    England Tele. & Tele. Co. v. FCC,* 826 F.2d 1101, 1108 (D.C. Cir.
    1987), *cert. denied,* 490 U.S. 1039 (1989).

[^72]: *Cf. In re Permian Basin Rate Cases,* 390 U.S. 747, 1365 (1968)
    (Supreme Court, in analyzing agency's power under cognate ratemaking
    provisions of the Federal Power Act, held that "the Commission's
    broad responsibilities . . . demand a generous construction of its
    statutory authority.").

[^73]: 5 U.S.C. § 551(4).

[^74]: *Tariffs Implementing Access Charge Reform,* CC Docket No.
    97-250, Memorandum Opinion and Order, 13 FCC Rcd 14683, 14717, para.
    80 (1998). *See generally Permian Basin Rate Cases,* 390 U.S. at
    747.

[^75]: *Investigation of Special Access Tariffs of Local Exchange
    Carriers*, CC Docket No. 85-166, Phase II, Part 1, Memorandum
    Opinion and Order, 5 FCC Rcd 4861, para. 7 (1990).

[^76]: 47 U.S.C. § 204(a).

[^77]: 47 U.S.C. § 201(b) ("\[A\]ny . . . charge, practice,
    classification, or regulation that is unjust or unreasonable is
    hereby declared to be unlawful.")

[^78]: *Add-Back Order*, 10 FCC Rcd at 5657, n.3 ("We do not decide in
    this rulemaking whether an add-back adjustment is required for
    purposes of the 1993 and 1994 Annual Access Tariff Filings. That
    issue is under examination as part of our investigation of the 1993
    and 1994 Annual Access Tariff Filings \[citations omitted\].").

[^79]: *Qwest Comments* at 2-6; *Sprint Reply* at 2.

[^80]: *Bell Atlantic Tele. Cos. v. FCC*, 79 F.3d 1195, 1206-07 (D.C.
    Cir. 1996) (*Bell Atlantic*).

[^81]: *Id.* at 1201, 1203.

[^82]: *Id.* at 1207.

[^83]: *Id.* at 1201-1202.

[^84]: Verizon Comments at 14.

[^85]: *See 1993 Designation Order*, 8 FCC Rcd at 4965, para. 33, *1994
    Suspension Order*, 9 FCC Rcd at 3713, para. 12.

[^86]: *See New England Tele. & Tele. Co.,* 828 F.2d at 1107
    (characterizing a refund requirement as a "dispassionate remedy"
    that requires carriers "merely to give up what they never should
    have collected.")

[^87]: *See, e.g., Verizon Comments* at 14-18; *BellSouth Comments* at
    2-7; *SBC Comments* at 4. The 1996 amendments to the Act established
    a five month deadline for completing tariff investigations, but
    maintained the twelve month deadline established by the 1988
    amendments to the Act for tariff investigations begun prior to the
    1996 amendments. *See* P.L. 104-104, sec. 402, § 11, 110 Stat. 56,
    129 (1996); 47 U.S.C. §§ 204(a)(2)(A) and (B). *See also* P.L.
    100-594, § 8(b), 102 Stat. 3028 (1988).

[^88]: 47 U.S.C. § 204(a)(1).

[^89]: *Barnhart v. Peabody Coal Co.,* 537 U.S. 149, 159 (2003).

[^90]: *Brock v. Pierce County,* 476 U.S. 253, 260 (1986).

[^91]: *See, e.g., Barnhart v. Peabody Coal Co.,* 123 S. Ct. 748,
    754-755 (2003); *United States v. Montalva-Murillo,* 495 U.S. 711,
    717-18 (1990); *Brock v. Pierce County,* 476 U.S. 253, 260 (1986);
    s*ee also Regions Hosp. v. Shalala,* 522 U.S. 488, 457 (1988) ("The
    Secretary's failure to meet the deadline, a not uncommon occurrence
    when heavy loads are thrust on administrators, does not mean that
    official lacked power to act beyond it.").

[^92]: *Southwestern Bell Tele. Co. v. FCC,* 138 F.3d 746, 748 (8th Cir.
    1998).

[^93]: *Verizon Comments* at 15-16.

[^94]: *Illinois Bell Tele. Co. v. FCC*, 966 F.2d 1478 (D.C. Cir. 1992).
    Subsequently, however, the Eighth Circuit held that the Commission's
    authority under section 204(a) to investigate a tariff and to order
    refunds is not conditioned upon the issuance of a suspension order.
    *Southwestern Bell Tele Co. v. FCC*, 138 F.3d at 747.

[^95]: *Gottlieb v. Pena,* 41 F.3d 730, 733 (D. C. Cir. 1994).

[^96]: *Brock v. Pierce County,* 476 U.S. at 265.

[^97]: *See* Statement by Sen. Daniel K. Inouye, 134 Cong,. Rec. H10453
    (Oct. 19, 1988), *reprinted in* 1988 U.S. Code Cong. & Admin. News
    at 4111, 4112 (*Inouye Statement*).

[^98]: *Brock v. Pierce County*, 476 U.S. at 263-64. *See also United
    States v. Montalva-Murillo*, 495 U.S. 718 ("\[C\]onstruction of the
    Act must conform to the "'great principle of public policy,
    applicable to all governments alike, which forbids that the public
    interests should be prejudiced by the negligence of the officers of
    agents to whose care they are confided.").

[^99]: We note that the legislative history shows that Congress
    contemplated that parties aggrieved by a section 204(a)(2)(B)
    violation would have the opportunity to seek a writ of mandamus in
    federal court compelling the agency to complete the section 204
    investigation. *See Inouye Statement* at 4114. Indeed, AT&T filed
    just such a petition in connection with this tariff investigation*.
    In re AT&T Corp.,* No. 04-1032 (D.C. Cir., filed Jan. 26, 2004). A
    mandamus remedy \-- a court directive to compel agency action \-- is
    flatly at odds with commenters' claims that the Commission's
    violation of the section 204(a)(2)(B) deadline divests the
    Commission of its authority to act under section 204(a)(1).

[^100]: *BellSouth Comments* at 10, *Verizon Comments* at 3, 8.

[^101]: 58 Fed. Reg. 1799 (April 2, 1993) (notice announcing approval of
    Form 492A).

[^102]: 1993 WL 755602 (F.C.C.) (Jan. 12, 1993) (notice announcing
    submission of proposed Form 492A to OMB for review and approval).

[^103]: *See* 5 U.S.C. § 706; *see also*, *Motor Vehicle Mfrs. Ass'n v.
    State Farm Mutual Automobile Ins. Co.,* 463 U.S. 29, 41-44 (1983).

[^104]: *Add-Back Order,* 10 FCC Rcd at 5666, para. 56. The *Add-Back
    Order* amended then section 61.3 (e) of the Commission's rules to
    clarify that "\[B\]ase year or base period earnings shall not
    include amounts associated with exogenous adjustments to the PCI for
    the sharing or lower formula adjustment mechanisms." *Id.* at 5667,
    App. B.

[^105]: *Add-Back Notice*, 18 FCC Rcd at 6487-88.

[^106]: *1993 Annual Access Tariffs*, CC Docket No. 93-193; *1994 Annual
    Access Tariffs,* CC Docket No. 94-65, Letter from Joseph Mulieri,
    Vice President, Federal Regulatory Advocacy, Verizon to Marlene H.
    Dortch, Secretary, Federal Communications Commission dated March 1,
    2004 at 8-12; Letter from John W. Kure, Executive Director --
    Federal Regulatory, Qwest to Marlene H. Dortch, Secretary, Federal
    Communications Commission dated March 29, 2004 at 2.

[^107]: This example is taken from the *Add Back Order,* 10 FCC Rcd at
    5659-5661, paras. 18-28.

[^108]: The rate-of-return regulation example here assumes that the
    sharing occurs at the end of the year in which the excess earnings
    occurred. In actual practice, rate-of-return regulation requires
    that excess earnings be returned through sharing in the subsequent
    year and that add-back be applied to produce a result equivalent to
    writing a refund check at the end of the year in which the excess
    earnings occurred.