**Before the**

**Federal Communications Commission**

**Washington, D.C. 20554**

+----------------------------------+----+------------------------------+
| In the matter of                 | *  | CC Docket No. 93-193         |
|                                  | *) |                              |
| 1993 Annual Access Tariff        | ** | CC Docket No. 94-65          |
| Filings Phase 1                  |    |                              |
|                                  | *  | CC Docket No. 93-193         |
| 1994 Annual Access Tariff        | *) |                              |
| Filings                          | ** | CC Docket No. 94-157         |
|                                  |    |                              |
| AT&T Communications Tariff       | *  |                              |
| F.C.C. Nos. 1 and 2, Transmittal | *) |                              |
| Nos. 5460, 5461, 5462, and 5464  | ** |                              |
| Phase II                         |    |                              |
|                                  | *  |                              |
| Bell Atlantic Telephone          | *) |                              |
| Companies Tariff F.C.C. No. 1,   | ** |                              |
| Transmittal No. 690              |    |                              |
|                                  | *  |                              |
| NYNEX Telephone Companies Tariff | *) |                              |
| F.C.C. No. 1, Transmittal No.    | ** |                              |
| 328                              |    |                              |
|                                  | *  |                              |
|                                  | *) |                              |
|                                  | ** |                              |
|                                  |    |                              |
|                                  | *  |                              |
|                                  | *) |                              |
|                                  | ** |                              |
|                                  |    |                              |
|                                  | *  |                              |
|                                  | *) |                              |
|                                  | ** |                              |
|                                  |    |                              |
|                                  | *  |                              |
|                                  | *) |                              |
|                                  | ** |                              |
|                                  |    |                              |
|                                  | *  |                              |
|                                  | *) |                              |
|                                  | ** |                              |
|                                  |    |                              |
|                                  | *  |                              |
|                                  | *) |                              |
|                                  | ** |                              |
|                                  |    |                              |
|                                  | *  |                              |
|                                  | *) |                              |
|                                  | ** |                              |
|                                  |    |                              |
|                                  | *  |                              |
|                                  | *) |                              |
|                                  | ** |                              |
|                                  |    |                              |
|                                  | *  |                              |
|                                  | *) |                              |
|                                  | ** |                              |
|                                  |    |                              |
|                                  | *  |                              |
|                                  | *) |                              |
|                                  | ** |                              |
+----------------------------------+----+------------------------------+

**ORDER TERMINATING INVESTIGATION**

**Adopted: March 14, 2005 Released: March 30, 2005**

By the Commission: Commissioner Abernathy not participating; former
Chairman Powell did not participate in the final consideration of this
item.

**TABLE OF CONTENTS**

**[Para.]{.underline}**

I. INTRODUCTION 1

II\. BACKGROUND 2

III\. DISCUSSION 18

A. Exogenous Treatment for Pre-January 1, 1993 SFAS-106 Costs 18

1\. Positions of the Parties 18

2\. Discussion 20

B. Rate Base Adjustments 32

1\. Positions of the Parties 33

a\. Verizon and SBC 33

b\. AT&T and WorldCom 35

2\. Discussion 39

a\. Section 204 Deadline Issue 39

b\. Interpretation of the Pre-1997 Rate Base Rules 42

c\. Reasonableness of the LECs' Decision to Correct and to Make
Retroactive Adjustments to the Rate Base 51

d\. Accounting and Cost Issues 57

i\. Deduction of Prepaid OPEB Amounts in Account 1410 58

ii\. Ameritech's Adjustments to Remove Account 4310 Amounts 60

iii\. Timing of OPEB Rate Base Impacts 64

iv\. Curtailment Costs 66

v\. Base Factor Portion (BFP) Calculation 69

C. Other OPEBs Issues 72

IV\. ORDERING CLAUSES 73

# Introduction {#introduction .Style-Heading-1-+-Left}

1.  In this order, we resolve several pending tariff investigations
    related to the accounting treatment of certain postretirement
    benefits other than pensions, known as \"OPEBs.\" In particular, we
    address local exchange carrier (LEC) claims (1) that accrued OPEB
    costs were eligible for exogenous treatment in price caps; and (2)
    that accrued OPEB liabilities need not be deducted from their
    interstate rate bases. As set forth more fully below, we find that
    Verizon has justified exogenous treatment for accrued OPEB costs for
    the years 1991 and 1992. We also find that it was reasonable for
    LECs subject to price cap regulation to include accrued OPEB costs
    in their interstate rate bases. Accordingly, we conclude that those
    LECs were permitted to make exogenous adjustments to their price cap
    indices to reflect the reduced sharing obligations flowing from
    inclusion of these costs in the rate base.

# background

2.  In December 1990, the Financial Accounting Standards Board (FASB)
    adopted SFAS-106 for companies that follow generally accepted
    accounting principles (GAAP). SFAS-106 established new financial
    accounting and reporting requirements for any employer offering
    postretirement benefits other than pensions (OPEBs) to its
    employees.[^1] OPEBs typically consist of health and dental care
    benefits and life insurance.

3.  SFAS-106 requires companies to account for OPEBs on an accrual
    basis, rather than on a "pay-as-you-go" or cash basis. Thus,
    SFAS-106 treats these benefits as a form of deferred compensation
    earned by employees during their working years, and it requires
    recognition of the costs of OPEBs during the years the employees
    earn the benefits before they retire, rather than during the years
    when the company actually pays benefits.

4.  The accounting standard in SFAS-106 adopted in 1990 created two
    categories of OPEB expenses, "ongoing amounts" and the "transitional
    benefit obligation" (TBO). The "ongoing amount" represents the
    yearly expense that a firm recognizes as its current employees earn
    benefits that will be paid after they retire. SFAS-106 also requires
    companies to "book" (*i.e.,* to recognize on their financial
    records) the amount of their unfunded obligation for OPEBs to
    retirees and to active employees existing as of the date of their
    implementation of SFAS-106. This unfunded obligation, referred to as
    the TBO, reflects the amount that a company would have accrued on
    its books as of the effective date of the accounting change if it
    previously had been operating under the accrual method.[^2] SFAS-106
    permits companies whose benefits plans have active participants
    either to recognize the TBO as an immediate expense or to amortize
    it over the average remaining service years of plan participants. If
    the average remaining service period is less than 20 years, SFAS-106
    permits the employer to use a 20-year period rather than an average
    period.

5.  In December 1991, the Common Carrier Bureau, under delegated
    authority, issued an order approving the requests of two LECs to
    adopt SFAS-106-type accounting for OPEBs, on or before January 1,
    1993.[^3] The Common Carrier Bureau declined, however, to allow any
    LECs or AT&T to adopt the SFAS-106 option of immediately recognizing
    the full TBO, because the amounts involved were so large that
    accounting for them as one-time expenses would have distorted the
    carriers\' earnings during the affected period. Instead, the Common
    Carrier Bureau required the carriers to use the other SFAS-106
    option of amortizing the TBO expense over either a 20-year period or
    the average remaining service period of active plan
    participants.[^4]

6.  On May 4, 1992, the Common Carrier Bureau released *RAO Letter 20*
    to provide carriers with accounting and ratemaking instructions for
    OPEBs in a manner consistent with SFAS-106.[^5] *RAO Letter 20*
    identified the Part 32 accounts that carriers must use to record
    OPEB costs under SFAS-106.[^6] It directed the LECs to deduct
    accrued OPEB liabilities recorded in USOA Account 4310 from their
    interstate rate bases and to include prepaid OPEB benefits recorded
    in USOA Account 1410 in their interstate rate bases.[^7]

7.  After the Common Carrier Bureau required AT&T and the LECs to
    conform their regulatory accounting practices to SFAS-106, several
    LECs subject to price cap regulation filed tariff transmittals in
    1992 that included exogenous treatment for the change in OPEB
    costs.[^8] The Common Carrier Bureau suspended the 1992 transmittals
    for five months and set them for investigation, and made all price
    cap regulated LECs subject to this investigation.[^9] On January 22,
    1993, in its *OPEB Order,* the Commission terminated the
    investigation and denied the LECs\' requests for exogenous treatment
    of OPEBs.[^10]

8.  In the *OPEB Order*, the Commission addressed the two types of OPEB
    expenses. With respect to the OPEB amounts accruing after the
    SFAS-106 change \-- the ongoing amounts \-- the Commission found
    that LECs have substantial control over the level of OPEB expenses.
    Accordingly, the Commission found that, with regard to the ongoing
    amounts, the LECs failed the first prong of the test for exogenous
    cost treatment that requires a cost to be outside of a carrier's
    control.[^11] With regard to the TBO amounts, the Commission stated
    that it did not have to resolve the control issue because the LECs
    had failed to establish that the TBO had not affected the economy
    generally (and was therefore not already accounted for in the GNP-PI
    portion of the price cap formula) \-- the second prong of the test
    for exogenous cost treatment.[^12] Finally, the Commission indicated
    that it might further consider exogenous treatment of the TBO
    amounts based on a better and more complete record, and suggested
    the annual 1993 access tariff filings as a possible forum for such
    consideration.[^13] Accordingly, in the 1993 annual access tariff
    filings, several LECs included adjustments to their price cap
    indices and rates based on exogenous treatment of certain TBO
    amounts. Effective July 1, 1993, AT&T also revised its price cap
    indices to reflect the LECs' proposed changes in access prices and
    to include adjustments for exogenous treatment of its own TBO
    amounts.[^14] The Commission suspended the LECs' and AT&T's
    transmittals for one day and imposed an accounting order.[^15] The
    Commission designated the LEC portion of the investigation as "Phase
    I" and the AT&T portion of the investigation as "Phase II."[^16]

9.  On July 12, 1994, the United States Court of Appeals for District of
    Columbia Circuit reversed and remanded the *OPEB Order*, concluding
    that the Commission had not adequately explained its denial of the
    LECs' request for exogenous treatment of the SFAS-106 incremental
    costs and remanding the case for consideration of the amount of
    OPEB-related costs that are eligible for exogenous treatment.[^17]
    Because the carriers had withdrawn the tariffs that were the subject
    of the *OPEB Order*, and no tariffs remained pending in the remanded
    CC Docket No. 92-101, the Commission vacated the *OPEB Order* and
    terminated the CC Docket No. 92-101 proceeding.[^18] In response to
    the court's remand of the *OPEB Order,* however, LECs filed tariff
    revisions that sought exogenous treatment of SFAS-106 amounts that
    they had not previously claimed.[^19] The Common Carrier Bureau
    suspended these tariffs for one day, imposed an accounting order,
    and initiated a further series of tariff investigations.[^20]

10. In April 1995, in its *Performance Review Order,* the Commission
    adopted new economic cost standards for exogenous treatment of
    accounting changes.[^21] In applying the new standards to SFAS-106,
    the Commission again rejected exogenous treatment of OPEB-related
    costs.[^22] The Commission noted, however, that the new standards
    would operate on a prospective basis only and would not affect the
    pending investigations of exogenous claims associated with
    implementation of SFAS-106 in CC Docket Nos. 93-193 and 94-157.[^23]

11. On June 30, 1995, the Common Carrier Bureau consolidated three
    separate pending investigations of exogenous claims (in CC Docket
    Nos. 93-193 and 94-157) into a single proceeding, designating CC
    Docket No. 94-157 as the docket number for this investigation.[^24]
    The first investigation examines several issues relating to the 1993
    annual access tariffs,[^25] including the LECs\' claims for
    exogenous treatment of the TBO portion of SFAS-106.[^26] The second
    investigation involves certain AT&T transmittals that proposed rates
    designed to recover LEC access charges that included the LECs'
    SFAS-106 costs, as well as AT&T\'s own SFAS-106 amounts.[^27] The
    third investigation in the *Combined OPEB Investigations Order*
    involves proposed tariff revisions filed by Bell Atlantic and NYNEX
    that sought exogenous treatment of SFAS-106 amounts not previously
    claimed.[^28] The Common Carrier Bureau included four additional
    proposed tariff revisions in CC Docket No. 94-157.[^29] In each of
    the orders initiating these OPEB tariff investigations, the Common
    Carrier Bureau suspended the tariffs for one day and imposed
    accounting orders in the event the carriers\' proposed rates were
    later found to be unreasonable.[^30]

12. On March 7, 1996, the Commission rescinded the portion of *RAO
    Letter 20* that addressed the rate base treatment of OPEB-related
    liabilities.[^31] The Commission explained that sections 65.820 and
    65.830 of its rules "define explicitly those items to be included
    in, or excluded from, the interstate rate base."[^32] Because
    accrued OPEB expenses were not listed among the enumerated
    deductions, the Commission found that the staff in *RAO Letter 20*
    erroneously had construed its rules when it directed the LECs to
    exclude those expenses*.* At the same time, however, the Commission
    tentatively concluded as a matter of policy that accrued OPEB
    expenses ought to be excluded from the interstate rate base.
    Accordingly, the Commission instituted a proceeding to consider
    amending its rules to require the exclusion of accrued OPEB costs
    from the interstate rate base.[^33]

13. In response to the *RAO 20 Rescission Order*, the LECs proposed to
    increase their PCIs for the 1996-1997 tariff period by adjusting
    their rate base treatment of OPEBs for certain prior years,
    resulting in reduced sharing obligations for those periods.[^34]
    Thus, in filing their 1996 annual access tariffs, Ameritech, Bell
    Atlantic, BellSouth, Nevada Bell, Pacific Bell, Southwestern Bell, U
    S West, Lincoln Telephone, GTE, and Sprint LTCs amended their Price
    Cap Regulation Rate of Return Monitoring Reports (FCC Form 492A) to
    increase their interstate rate bases by the amount of the accrued
    OPEB costs they previously had deducted from the rate bases in
    response to *RAO Letter 20*.[^35] The increases to the LECs'
    interstate rate bases lowered their reported rates of return,
    thereby decreasing their calculated price cap sharing
    obligations.[^36] Reduced sharing obligations resulted in higher
    PCIs.[^37] Ameritech amended its FCC Form 492A to reflect OPEB
    liability costs accrued in 1992-1994; Bell Atlantic, Pacific Bell,
    Southwestern Bell, and Lincoln Telephone amended their earnings
    reports to reflect OPEB costs in 1993, 1994, and 1995.[^38] U S West
    amended its FCC Form 492A to include OPEB costs accrued in 1993,
    1994, and 1995.[^39]

14. In a June 24, 1996 order, the Common Carrier Bureau found that "the
    LECs' rate base treatment of OPEBs raises a substantial question of
    lawfulness under existing rules that warrants investigation."[^40]
    The Common Carrier Bureau also agreed with AT&T that "the LECs . . .
    failed to document and explain the derivation of the rate base
    adjustments underlying the \[proposed tariff\] revisions."[^41] The
    Bureau determined that it would investigate the extent to which the
    LECs were seeking to increase their rate bases to reflect accrued
    OPEB costs while simultaneously seeking exogenous treatment for the
    same costs. [^42] It suspended the LEC tariffs, imposed an
    accounting order, and initiated an investigation.[^43] In 1997, the
    Commission amended Part 65 of its rules to require LECs to deduct
    OPEB liabilities from the rate base.[^44] These rules became
    effective on April 30, 1997.[^45]

15. The OPEB tariff investigation lay dormant for several years. In
    December 2001, the Commission adopted an order summarily terminating
    more than one hundred stale or moot docketed proceedings that
    allegedly had been "resolved by the issuance of final orders that
    were not subject to judicial review, or if subject to judicial
    review, were affirmed and the court's mandate was issued."[^46]
    Although the Commission had not completed the OPEB investigation, it
    erroneously listed the OPEB docket, CC Docket No. 94-157, as one of
    the terminated proceedings.

16. Upon discovering the error, the Wireline Competition Bureau (Bureau)
    reinstated CC Docket No. 94-157 on February 25, 2003.[^47]
    Recognizing that the existing OPEB record might be stale and not
    reflect the parties' current positions, the Bureau directed the
    parties to "state in full their arguments" on the OPEBs issues and
    to "identify clearly the portions of the previous filings \[that\]
    are no longer relevant."[^48] The Bureau also directed Verizon to
    submit a direct case and studies to show that "OPEB-related costs
    incurred prior to January 1, 1993 are eligible for exogenous
    treatment."[^49] The Bureau noted that AT&T in an October 2002 *ex
    parte* had requested agency action with respect to two specific
    issues involving OPEBS: (1) whether LECs may treat as exogenous
    SFAS-106 costs incurred before January 1, 1993 (the date by which
    the Commission's rules required implementation of SFAS-106), and (2)
    the proper rate base treatment of OPEBs under investigation in
    conjunction with the 1996 access tariffs. The Bureau stated that it
    would limit the pending investigation to those issues unless parties
    timely identified other issues in response to the request for
    comments.[^50] Verizon filed its direct case on April 11, 2003.[^51]
    On May 12, 2003, AT&T Corp. (AT&T) filed its opposition.[^52]
    Verizon filed its rebuttal on May 27, 2003.[^53] On April 8, 2003,
    Verizon, SBC Communications, Inc. (SBC), AT&T, and WorldCom filed
    comments concerning the rate base adjustment issue.[^54] On April
    22, 2003, Verizon, AT&T, and SBC filed reply comments.[^55]

17. On March 27, 2003, Verizon filed a petition for reconsideration of
    the *Erratum Order.*[^56] Treating Verizon's petition as an
    application for review, in 2004 the Commission affirmed the Bureau's
    decision in the *Erratum Order* and denied Verizon's petition.[^57]

# DISCUSSION

## Exogenous Treatment for Pre-January 1, 1993 SFAS-106 Costs

### Positions of the Parties

18. Verizon asserts that its OPEB costs incurred prior to January 1,
    1993 are eligible for exogenous treatment under price cap
    regulation.[^58] Citing the court's decision in *Southwestern Bell*,
    Verizon asserts that both USOA and GAAP changes, if approved by the
    Commission, meet the definition of being beyond the carrier's
    control.[^59] According to Verizon, the only difference between a
    USOA change and a GAAP change is that the latter is mandatory only
    after the carrier files a notice of its intent to adopt the change
    and if the Commission does not disapprove the adoption within 90
    days of the notice.[^60] Verizon asserts that the date that the
    carrier complies with the accounting changes is irrelevant, as the
    "control" standard for exogenous treatment under price caps is met
    if the Commission approves the accounting change.[^61] In further
    support of this argument, Verizon cites the Common Carrier Bureau's
    order approving adoption of SFAS-106 and its direction to adopt the
    accounting change "on or before January 1, 1993."[^62]

19. AT&T maintains that the Commission's rules in effect in 1993
    prohibited Verizon from receiving exogenous treatment of any
    purported costs associated with pre-1993 implementation of SFAS-106
    for two reasons. First, AT&T asserts, the Commission's *1990 Price
    Cap Order* provides that "no GAAP change can be given exogenous
    treatment until the Financial Accounting Standards Board has
    actually approved the change and it has become effective."[^63]
    Second, AT&T avers that the implementation of SFAS-106 was not
    mandatory -- and thus not exogenous -- until January 1, 1993.
    According to AT&T, any conversion to SFAS-106 accounting for OPEBs
    prior to this date was voluntary -- a decision within the control of
    the company.[^64]

### Discussion

20. In determining whether to allow exogenous treatment of Verizon's
    OPEBs costs, we apply the price cap rules that were in effect at the
    time the tariffs under investigation were filed.[^65] Those rules
    generally provided exogenous treatment for "costs that are triggered
    by administrative, legislative or judicial action beyond the control
    of the carriers."[^66] Costs arising from changes made in the
    Uniform System of Accounts were considered exogenous as a matter of
    law because such costs "are imposed by this Commission and are
    outside of the control of carriers."[^67] While the Commission
    recognized that "there is no difference in principle" between a cost
    change caused by a USOA revision and one caused by a change in
    GAAP,[^68] insofar as both types of changes were beyond the
    carrier's control, the rules did not "authorize carriers to adjust
    their price caps automatically to reflect \[GAAP\] changes."[^69] A
    GAAP change did not qualify for exogenous treatment unless it first
    had been "actually approved" by the Financial Accounting Standards
    Board.[^70] In other words, the rules precluded exogenous treatment
    of costs arising from the anticipation that the FASB would approve a
    GAAP change.[^71] Once the FASB prescribed a GAAP change, section
    32.16(a) of the Commission's rules required the carriers' "records
    and accounts \[to\] be adjusted to apply \[the\] new accounting
    standard\[\]."[^72] That change would "automatically take effect" 90
    days after the carrier notified the agency that it proposed to
    implement the change, "unless the Commission notifie\[d\] the
    carrier to the contrary."[^73] The Commission's practice was to
    permit FASB-approved GAAP changes to go into effect unless the
    agency determined that the GAAP change was incompatible with the
    agency's regulatory needs. [^74]

21. Under the Commission's rules, the price cap indices determine the
    percentage by which a LEC could increase or must decrease its
    aggregate rates each year. The basic PCI formula had three
    components: (1) an inflation element measured by the Gross National
    Product-Price Index ("GNP-PI");[^75] (2) a productivity offset of
    3.3 percent which represented the amount by which the LECs
    historically have exceeded productivity in the economy as a whole,
    plus a 0.5 percent "consumer productivity dividend;"[^76] and (3)
    exogenous cost adjustments. A GAAP change was not accorded exogenous
    treatment unless the LEC showed that the change "will not be double
    counted in the Price Cap Index, once in the GNP-PI and once as an
    exogenous cost."[^77]

22. We find that Verizon has justified exogenous treatment for accrued
    OPEB costs for the years 1991 and 1992. As shown below, the costs
    Verizon treats as exogenous were associated with implementing a
    FASB-prescribed change in the GAAP that the Commission had approved
    and had directed to be put into effect "on or before January 1,
    1993."[^78] In addition, the record demonstrates that the exogenous
    treatment of SFAS-106 costs would not lead to appreciable "double
    counting" of these costs by their inclusion in the GNP-PI.

23. [SFAS-106's Approval By the FASB and the FCC]{.underline}. Verizon's
    tariff revisions took effect January 1, 1991, *i.e.*, subsequent to
    when the FASB had "actually approved"[^79] the accounting change at
    issue here. In December 1990, the FASB in SFAS-106 directed that
    companies should change the prevailing practice of accounting for
    postretirement benefits on a pay-as-you-go or cash basis "by
    requiring accrual, during the years that the employee renders the
    necessary service, of the expected cost of providing those
    benefits."[^80] The FASB determined that the accrual method provides
    "more relevant and useful information than does cash basis
    accounting" of OPEB costs because the former "goes beyond cash
    transactions and attempts to recognize the financial effects of
    non-cash transactions and events as they occur."[^81] According to
    the FASB, the recognition and measurement of the accrued obligation
    to provide OPEB benefits gives users of financial statements "the
    opportunity to assess the financial consequences of employers'
    compensation decisions."[^82] While the FASB made the change
    effective "for fiscal years beginning after December 15, 1992," it
    emphasized that "\[e\]arlier application is encouraged."[^83] The
    FASB in SFAS-106 thus approved the change to accrual accounting for
    OPEBs in December 1990 and required firms to implement that
    accounting change no later than the fiscal year commencing December
    15, 1992.

24. Moreover, in its *OPEB Approval Order* released December 26, 1991,
    the Commission's staff, acting under delegated authority, reviewed
    SFAS-106 and affirmatively concluded that its implementation "did
    not conflict with \[the Commission's\] regulatory objectives."[^84]
    The staff required all subject carriers, including Verizon, to adopt
    SFAS-106 accounting "on or before January 1, 1993."[^85] Five days
    later, Verizon adopted SFAS-106 effective January 1, 1991.[^86]
    Verizon thus implemented SFAS-106 after its approval by the agency,
    in full compliance with the time frame prescribed in the *OPEB
    Approval Order*.

25. Relying on the fact that the price cap rules barred exogenous
    treatment for costs of implementing a GAAP change before the change
    has become effective,[^87] AT&T argues Verizon cannot obtain
    exogenous treatment for any accrued OPEB costs that were incurred
    before December 15, 1992.[^88] We disagree. As noted above, although
    the FASB made SFAS-106 "effective for the fiscal years beginning
    after December 15, 1992," [^89] it affirmatively encouraged firms to
    put SFAS-106 in effect before that mandatory deadline. More
    significantly, Verizon implemented SFAS-106 after the Commission's
    staff under delegated authority directed carriers to put SFAS-106 in
    effect "on or before January 1, 1993 as a mandatory practice for
    purposes of the USOA."[^90] Thus, at the time Verizon implemented
    SFAS-106, the carrier had been authorized to make that GAAP change
    effective for purposes of regulatory accounting "before January 1,
    1993" -- a period of time that clearly encompasses 1991 and 1992.

26. AT&T also argues that Verizon's 1991 and 1992 OPEB costs did not
    qualify for exogenous treatment under the price cap rules because
    Verizon's implementation of SFAS-106 was not beyond its control
    until January 1, 1993. According to AT&T, the "Commission did not
    require the LECs to reflect SFAS-106 in their accounting books until
    January 1, 1993," and thus Verizon's decision to implement SFAS-106
    for the years 1991 and 1992 was purely "voluntary."[^91] We find
    AT&T's contention unpersuasive.

27. The issue of whether costs associated with the implementation of
    SFAS-106 are beyond the carrier's control within the meaning of the
    then applicable exogenous cost rules is a matter of second
    impression. In its *OPEB Order*, the Commission denied exogenous
    treatment of the costs associated with the implementation of
    SFAS-106 in access tariffs filed by several price cap LECs in
    early 1992. [^92] Even though the Commission recognized that "the
    change to accrual accounting by FASB was not within the carriers'
    control," it found that the carriers failed to satisfy the control
    test because the "LECs can exercise substantial control over the
    level and timing of OPEB expenses."[^93] The court of appeals, in
    reversing that determination, held that the Commission had
    misconstrued its control test. The court pointed out that a "FASB
    change \[in the GAAP\] adopted by the Commission is not a change
    under control of the carrier, and, once mandated by the Commission,
    the change satisfies the control criterion."[^94] It explained that
    the price cap rules treated GAAP changes that had been adopted by
    the FASB and approved by the Commission "on a par" [^95] with USOA
    changes, noting that "\[f\]or both types of accounting changes, the
    Commission's mandate brings about the change and demonstrates that
    the carriers lacked control."[^96] Consistent with the court's
    decision in *Southwestern Bell*, we find that Verizon's decision to
    implement SFAS-106 in this case was beyond the carrier's control
    under the then applicable exogenous price cap rules because that
    GAAP change had been adopted by the FASB and mandated by the
    Commission.

28. We reject AT&T's claim that Verizon's implementation of SFAS-106 did
    not satisfy the control test because the *OPEB Approval Order* gave
    Verizon the option of waiting until January 1, 1993 to implement
    SFAS-106. *Southwestern Bell* establishes that the proper inquiry is
    not the carrier's "'control over the level and timing of OPEB
    expense'"[^97] but rather whether the accounting change itself was
    "mandated by the Commission."[^98] The *OPEB Approval Order* adopted
    SFAS-106 "'as a mandatory practice for purposes of the USOA'"[^99]
    and directed carriers to implement that accounting change "on or
    before January 1, 1993."[^100] AT&T's claim that the agency did not
    mandate SFAS-106 until January 1, 1993 disregards the crucial phrase
    "or before" in the *OPEB Approval Order*. Where, as here, a
    governmental entity requires action "on or before" a particular
    date, the act of complying "before" the last permissible day is no
    less mandatory than the act of complying "on" the expiration of the
    deadline. Just as the filing of a tax return is not a "voluntary"
    act because the taxpayer chooses to file on April 1 instead of April
    15, Verizon's implementation of SFAS-106 was not a "voluntary" act
    because it elected to put the mandated accounting change into effect
    before January 1, 1993.

29. Moreover, AT&T's interpretation of the control test is inconsistent
    with the facts underlying *Southwestern Bell*. The LECs in that case
    successfully challenged the Commission's rejection of exogenous
    treatment of accrued OPEB costs in tariffs that had been filed by
    the LECs in February and March 1992.[^101] Notwithstanding the fact
    that LECs had implemented SFAS-106 before January 1, 1993, the court
    held that the Commission had erred in finding the accrued OPEB costs
    were within the LECs' control.

30. [Double Counting.]{.underline} There is substantial record evidence
    demonstrating that the exogenous treatment of SFAS-106 costs will
    not lead to appreciable "double counting" of these costs by their
    inclusion in the GNP-PI.[^102] This evidence, which was not
    contested in any filing made in response to the *Erratum Order,*
    includes, *inter alia*: two comprehensive econometric studies \--
    the Godwins Study[^103] and a study performed by the National
    Economic Research Associates ("NERA");[^104] a macroeconomic
    model;[^105] and expert analyses.[^106] The court of appeals, while
    noting that the Godwins and NERA studies employed different
    assumptions and used different methodological approaches, held in
    effect that these two studies alone established a *prima facie* case
    that the exogenous treatment of SFAS-106 costs would not lead to
    appreciable "double counting" and that the Commission erred in
    rejecting them.[^107] The court pointed out that "\[t\]he
    substantial identity of results \[of these two studies\] in the face
    of widely varying assumptions" tended to show that the outcome was
    "insensitive to this variation, \[which in turn\] rendered the
    conclusions more robust."[^108] We find the NERA and Godwins studies
    to be credible and conclude that these studies, along with the other
    record material referenced above, show that the exogenous treatment
    of OPEB costs will not result in appreciable "double counting."

31. [Economic Cost Requirement.]{.underline} AT&T states that it is
    "absurd" for Verizon to seek exogenous treatment of its
    implementation of SFAS-106 because that accounting change merely
    altered the timing of the recognition of the specified costs on the
    LECs' books of account without changing Verizon's actual economic
    costs.[^109] We agree that "SFAS-106 does not require the LECs to
    change their OPEB commitments to employees, but merely to change the
    timing of the recognition of these costs on their books."[^110] We
    also recognize that because LECs "have the option of leaving cash
    flow unchanged," "SFAS-106 has had little or no effect on the
    opportunity cost and economic cost to LECs."[^111] Indeed, in 1995,
    the Commission in its *Performance Review Order* changed its
    exogenous rules to require a showing of real economic costs in order
    to qualify for exogenous treatment, and expressly recognized that
    this new rule would make most if not all costs resulting from the
    implementation of SFAS-106 ineligible for exogenous treatment.[^112]
    The Commission, however, made clear that this new rule would operate
    on a prospective basis and that the tariffs in this investigation
    would be "judged under the rule in effect when the tariffs were
    filed."[^113] Under those rules, the fact that SFAS-106 was a change
    solely to the accounting rule presented "no obstacle to exogenous
    cost treatment."[^114] We thus reject AT&T's suggestion that we deny
    exogenous treatment for the OPEB costs at issue in this
    investigation on the grounds that they did not affect economic
    costs.

## Rate Base Adjustments

32. We now address the price cap carriers' 1996 claims related to their
    rate base treatment of accrued OPEB costs. At that time, the
    carriers adjusted their rate base treatment of OPEBs for prior years
    by increasing their interstate rate bases by the amount of accrued
    OPEB costs that they previously had deducted in response to *RAO
    Letter 20*. These increases lowered the carriers' reported rates of
    return, thereby potentially decreasing their calculated price cap
    sharing obligations. Reduced sharing obligations resulted in higher
    PCIs and, potentially, higher rates.

### Positions of the Parties

#### Verizon and SBC

33. The LECs frame the issue as whether the Commission's rules required
    carriers subject to price cap regulation to deduct OPEB liabilities
    from the interstate regulated rate base for purposes of calculating
    earnings for years prior to 1997, when the Commission changed the
    rules to require such deductions.[^115] The LECs rely on the
    Commission's *RAO 20 Rescission Order* as support for their
    contention that deduction of OPEB costs from their rate bases was
    not appropriate prior to 1997. In that order, the Commission stated,

    Sections 65.820 and 65.830 of our rules define explicitly those
    items to be included in, or excluded from, the interstate rate base.
    The Bureau cannot properly address any additional exclusion in an
    RAO letter, which under Section 32.17 of our rules must be limited
    to explanation, interpretation, and resolution of accounting
    matters.[^116]

    Verizon argues that the Commission found in the *RAO 20 Rescission
    Order* that the previous deductions that the carriers had made
    pursuant to *RAO Letter 20* were contrary to the Commission's rules.
    Consequently, according to Verizon, "the price cap carriers had an
    obligation to conform their books for the period covered by *RAO
    Letter 20* to the Commission's view of its own rate base
    rules."[^117] Verizon contends that those rules permit carriers to
    deduct only specific listed items from the interstate regulated rate
    base, and, for the period at issue, OPEB liabilities were not among
    them.[^118] Thus, the LECs argue, the effect of the *RAO 20
    Rescission Order* was to require carriers to restate their
    rate-of-return reports and their sharing obligations for the prior
    years to reverse the OPEB liabilities deduction previously required
    by *RAO Letter 20*.[^119]

34. The LECs also cite the *RAO 20 Rescission Order* to rebut the
    argument that the Commission has broad discretion to interpret its
    rules and that a rule change is not required in order to direct
    carriers to deduct OPEB liabilities from their rate bases:

> We also are not persuaded by MCI's argument that the Commission can
> amend Part 65 through an interpretation without providing affected
> parties with any notice of or chance to comment on the amendment.
> Giving rate base recognition to OPEB in Part 65 would constitute a
> rule change for which proper notice and comment must be given.[^120]

Verizon further argues that the D.C. Circuit has already rejected an
attempt by the Commission to alter the treatment of OPEB costs without a
rule change, stating that the court in *Southwestern Bell Telephone
Company* held that the Commission was bound by its rule concerning the
exogenous treatment of GAAP changes, such as SFAS-106, until such time
as it amended the rules though a notice and comment rulemaking
proceeding.[^121]

#### AT&T and WorldCom

35. AT&T states that the LECs must establish that: (1) they have an
    unassailable right as a matter of law for each of the four years
    preceding the 1996 tariff filings to add to their rate bases
    unfunded OPEB liabilities that they previously deducted; (2) those
    rate base additions entitle them as a matter of law to make
    exogenous cost increases to their PCIs to reflect reduced sharing
    obligations for those prior years; and (3) they have met their
    burden of proof to demonstrate with record support that they
    performed the rate base, sharing, and PCI calculations correctly,
    adding no more than was previously deducted and reflecting all of
    the relevant offsetting effects.[^122] AT&T argues that LECs have
    failed to establish these points.

36. First, AT&T argues that Commission rules prohibit rate base changes
    after 15 months from the end of the calendar year to which rate base
    calculations apply, a time period that expired well before the
    tariffs at issue were filed.[^123] Second, AT&T asserts that the
    LECs failed to provide adequate cost support for their PCI increases
    and failed to include offsetting costs in their rate base
    recalculations.[^124] AT&T and WorldCom further claim that the LECs'
    proposed exogenous adjustment is not permitted by section 61.45(d)
    of the Commission's rules without a rulemaking, rule waiver, or
    declaratory ruling.[^125] AT&T argues that Commission rules prohibit
    exogenous cost increases designed to implement accounting changes
    that do not reflect "economic cost changes."[^126]

37. AT&T also asserts that the D.C. Circuit's decision in *Southwestern
    Bell Telephone Company* does not preclude the Commission from
    engaging in rulemaking in these tariff proceedings to establish the
    appropriate rate base treatment of OPEB costs.[^127] It contends
    that a tariff investigation is itself a rulemaking in which the
    Commission may implement or change rules to better serve the public
    interest or to prevent the violation of Commission policy.[^128]
    AT&T denies that rejecting the LECs' request to restate their prior
    years' rate bases for purposes of calculating their sharing
    requirements would be retroactive ratemaking. Instead, precluding
    the LECs from adjusting their PCIs to reflect their recalculated
    sharing obligations for the years 1992-94 is consistent with their
    actual tariffs and accounting practices during those years and does
    not require "retroactive" assumptions or adjustments.[^129] Indeed,
    AT&T argues, it is the LECs that seek a special adjustment to their
    price caps.[^130]

38. AT&T contends that, based on the LECs' submissions, the LECs have
    unlawfully reduced their sharing obligations by approximately \$173
    million.[^131] SBC asserts that AT&T's method of calculating the
    reduced sharing obligation of the SBC LECs overstates the alleged
    obligation by approximately \$12 million.[^132]

### Discussion

#### Section 204 Deadline Issue

39. As a threshold matter, we reject SBC's claim that the Commission
    lacks authority to pursue this tariff investigation because the
    agency did not complete action within the five-month deadline
    established by section 204(a)(2)(A).[^133] 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.

40. Section 204(a)(1) expressly authorizes the Commission to hold a
    hearing on the lawfulness of the rates, terms and conditions of
    interstate tariffs filed with the agency.[^134] While section
    204(a)(2)(A) directs the Commission to conclude that hearing within
    five months, that provision does not "specify a consequence for
    noncompliance with statutory timing provisions,"[^135] let alone
    prescribe the "drastic remed\[y\]" of ousting the agency of
    jurisdiction.[^136] 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.[^137] Consistent with that principle, the court
    of appeals 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.\"[^138]

41. SBC's construction of section 204(a)(2)(A) would undermine the
    statutory purpose. Congress enacted the time limits in section
    204(a)(2)(A) in order "to spur the \[Commission\] to action, not to
    limit the scope of \[its\] authority."[^139] A primary purpose of
    section 204 is "to protect consumers and competitors from unlawful
    rates in effect while the investigation is pending."[^140] 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.[^141] We do not
    believe that Congress intended that anomalous result when it enacted
    section 204(a)(2)(A).[^142]

#### Interpretation of the Pre-1997 Rate Base Rules

42. The LECs defend their adjustments as corrective measures necessary
    to ensure that their rate bases are consistent with the applicable
    regulations, and thus we address first whether the Part 65 rules in
    effect when the tariffs were filed required inclusion of accrued
    OPEB liabilities in the interstate rate base.[^143] Based upon the
    language of the relevant rule provisions, the regulatory history,
    and administrative precedent, we conclude that those rules required
    the LECs to include accrued OPEB costs in the interstate rate base.

43. Under well-established law, the language is the "starting point" in
    construing the meaning of a statutory or regulatory provision.[^144]
    Section 65.800 of the Commission's rules provides that the rate base
    "shall consist of" certain assets "minus any deducted items computed
    in accordance with \[section\] 65.830."[^145] Section 65.830, in
    turn, enumerates specific deductions from the rate base. While the
    current version of section 65.830 explicitly provides for the
    deduction from the rate base of liabilities recorded in Account 4300
    (previously numbered as Account 4310), including accrued OPEB
    liabilities, the language prescribing that deduction was not adopted
    until 1997. Nothing in the language of the pre-1997 version of
    section 65.830 suggests that accrued OPEB liabilities are among the
    expenses that are to be deducted from the rate base.[^146] To the
    contrary, the fact that former section 65.830 expressly contained an
    explicit deduction for accrued pension costs, which are analogous to
    accrued OPEB liabilities, indicates strongly the Commission's intent
    that accrued OPEB liabilities should not be deducted from the rate
    base.

44. The regulatory history corroborates that the pre-1997 version of
    section 65.830 did not require the deduction of accrued OPEB
    liabilities. In its 1987 rulemaking leading to the codification of
    the rate base rules, the Commission initially proposed section
    65.830 to require that "\[t\]he interstate portion of zero-cost
    funds shall be deducted from the interstate rate base."[^147] That
    broadly stated rule, if adopted, would have required the deduction
    not only of accrued pension liabilities but any other zero-cost long
    term liabilities, including accrued OPEB expenses that were or
    subsequently might be included in Account 4310. The Commission,
    however, did not adopt that proposed rule. Instead, the Commission
    promulgated a rule containing an enumeration of narrowly defined
    deductions that included the "interstate portion of unfunded accrued
    pension costs (Account 4310)"[^148] without reference to any other
    type of zero-cost long-term liabilities. The Commission's
    codification of a narrowly worded deduction for pension expenses,
    coupled with its failure to adopt the proposed rule requiring the
    deduction of all zero-cost long term liabilities, further supports
    our conclusion that the former rule did not permit the deduction
    from the rate base of zero-cost liabilities other than pension
    expenses.

45. Moreover, our interpretation of the pre-1997 version of section
    65.830 adheres to the Commission's construction of that rule in both
    the *RAO Rescission Order* and the *RAO Rescission Reconsideration*
    decisions. In 1992, the Commission's staff in its *RAO Letter 20*
    directed the LECs, *inter alia,* to deduct accrued OPEB liabilities
    recorded in Account 4310 from the rate base.[^149] The sole basis
    for the staff's directive was that OPEB liabilities "are similar to
    pension expenses" and thus should be accorded the same rate base
    treatment.[^150] On review, the Commission in the *RAO Rescission
    Order* rescinded RAO Letter 20 and vacated the staff's ratemaking
    instructions.[^151] The Commission pointed out that sections 65.820
    and 65.830 "define explicitly those items to be included in, or
    excluded from, the interstate rate base."[^152] The Commission found
    that the staff, by directing the LECs to exclude accrued OPEBs from
    the rate base, had inserted an "additional exclusion\[\]" into
    section 65.830 "for which the Part 65 rules do not specifically
    provide."[^153] Because the staff, under the guise of a rule
    interpretation, in effect had amended section 65.830, the Commission
    ruled that *RAO Letter 20* "exceeded the Bureau's delegated
    authority."[^154] The Commission expressly interpreted section
    65.830 to provide that, while "unfunded accrued pension costs
    recorded in Account 4310 are removed from the rate base, . . . other
    items recorded in Account 4310, *such as accrued OPEB liabilities*,
    are not removed from the rate base."[^155]

46. The Commission in its *RAO Rescission Order* was not unsympathetic
    to the policy rationale underlying *RAO Letter 20.* In fact, the
    Commission in that order expressed its "tentative
    agree\[ment\]"[^156] that accrued OPEB liabilities should be given
    the same rate base treatment as pension expenses and instituted a
    notice and comment rulemaking to make the necessary changes to
    section 65.830.[^157] In the rulemaking section of that order, the
    Commission proposed language amending section 65.830 to "accord to
    all of the zero-cost funds recorded in Account 4310, including
    accrued OPEB liabilities, the same rate base treatment currently
    accorded to accrued pension liabilities."[^158] The Commission would
    have not instituted that rulemaking or vacated the ratemaking
    instructions contained in the *RAO Letter 20* if it had believed
    that the pre-1997 version of section 65.830 reasonably could have
    been interpreted to permit the deduction of accrued OPEB costs from
    the rate base. Instead, the Commission simply would have itself
    declared that such deductions did not violate its rules -- an action
    that would have mooted the issue of improper delegation and avoided
    the need to initiate a rulemaking. AT&T thus is mistaken in
    contending that the Commission in the *RAO Rescission Order* held
    that "the wrong Commission entity issued the plainly lawful ruling
    that OPEBs, like other zero cost funds, must be deducted from the
    rate base."[^159] While the Commission determined that its staff had
    acted beyond the scope of its delegated authority, it also decided
    as a matter of substantive law that the staff had erred in
    interpreting section 65.830 to require the deduction of accrued OPEB
    expenses from the rate base. The Commission in interpreting the
    pre-1997 version of section 65.830 affirmatively determined that
    accrued OPEB liabilities are not to be "removed from the rate
    base."[^160]

47. The Commission reaffirmed this construction of the pre-1997 rules in
    the *RAO Rescission Reconsideration*. In that order it again
    rejected the argument that it should interpret section 65.830 to
    require the deduction of accrued OPEB costs from the rate base
    because those costs are similar to pension expenses. The Commission
    reiterated that the inclusion of accrued OPEB expenses as a rate
    base deduction, as provided by *RAO Letter 20,* "would \[require\] a
    rule change" and pointed out that the agency lacked authority to
    "amend Part 65 through an interpretation without providing affected
    parties with any notice of or chance to comment on the
    amendment."[^161]

48. Thus, in each of the two decisions in which it addressed the issue,
    the Commission authoritatively construed the pre-1997 version of
    section 65.830 to require the inclusion of accrued OPEB costs into
    the rate base. We adhere to that administrative precedent in
    concluding in this investigation that the pre-1997 rule did not
    permit the LECs to deduct accrued OPEB costs from the rate
    base.[^162] Where, as here, an administrative agency "has given its
    regulation a definitive interpretation,"[^163] an agency "'can only
    change that interpretation as it would formally modify the
    regulation itself: through the process of notice and comment
    rulemaking.'"[^164]

49. AT&T claims that this tariff investigation is itself a rulemaking
    that empowers the Commission to "implement or change" its
    rules.[^165] AT&T urges the Commission to exercise that alleged
    rulemaking authority to establish in this tariff investigation that
    accrued OPEB liabilities should have been excluded from the rate
    base calculations during the time period in question. We reject that
    argument. Although a "tariff investigation is a rulemaking of
    particular applicability under the Administrative Procedure
    Act,"[^166] the Commission lacks power in a tariff investigation to
    change its governing regulations retroactively.[^167] In performing
    ratemaking duties under section 204 the Commission cannot simply
    ignore its published regulations and pretend they had never been
    promulgated. The Commission's rules establish agency policy until
    such time as they are rescinded or amended in a notice and comment
    rulemaking.[^168] In the absence of a waiver, an administrative
    agency must adhere to its regulations as long as those rules are in
    effect.[^169] The Commission did not amend section 65.830 to require
    the deduction of accrued OPEB expenses from the rate base until
    1997, and then it specified that the rule amendment would have
    prospective effect only.[^170] The subsequent rule change has no
    effect on our decision in this investigation, which must be based
    upon the rules in effect when the tariffs were filed. And, as noted
    above, those rules did not permit the LECs to deduct accrued OPEB
    liabilities from the rate base.

50. In any event, AT&T is mistaken in arguing that the Commission in the
    course of this tariff investigation gave parties the notice and
    opportunity to comment required for a rule amendment by the
    Administrative Procedure Act ("APA").[^171] In instituting this
    tariff proceeding, the Commission stated that it would investigate
    the lawfulness of the LECs' rate base treatment of OPEBs "under
    existing rules."[^172] That order supplied notice of the
    Commission's intent to apply its existing rate base rules to the
    tariffs under investigation, and did not supply notice of any intent
    to consider amendments to those rules. The Commission in this tariff
    investigation neither proposed changes to section 65.830 nor
    provided parties with any opportunity to comment on amendments to
    that section.

#### Reasonableness of the LECs' Decision to Correct and to Make Retroactive Adjustments to the Rate Base

51. We next address whether the LECs, in the tariff revisions under
    investigation, acted reasonably in recalculating their rate bases
    for the years 1992 through 1995 by adding back accrued OPEB
    liabilities after the Commission issued its *RAO Rescission Order.*
    We believe the corrections were reasonable. The LECs deducted
    accrued OPEB liabilities during the years 1992 through 1995 solely
    to comply with the staff's *RAO Letter 20.* That formal published
    staff opinion was binding upon the LECs during the time that it
    remained in effect.[^173] When the Commission rescinded that staff
    order and authoritatively interpreted the pre-1997 version of
    section 65.830 to require the inclusion of accrued OPEB costs in the
    rate base, the LECs acted reasonably in adjusting their computations
    in conformance with that rule interpretation. The LECs had an
    obligation to ensure that their rate bases conformed to the
    governing rules and the adjustments the LECs made ensured that the
    composition of their rate bases during the years 1992 through 1995
    was consistent with agency regulations as definitively interpreted
    by the Commission.

52. AT&T argues that, even if the pre-1997 version of section 65.830
    required the LECs to include accrued OPEBs in the rate base, other
    rules in effect at the time the tariffs were filed barred the LECs
    from making retroactive adjustments to the rate base for purposes of
    calculating their sharing obligations under the price cap rules.
    AT&T claims that the LECs' adjustments violate section 65.600(d)(2),
    which it contends proscribes rate base changes made more than 15
    months after the end of the calendar year.[^174] AT&T also argues
    that the LECs' exogenous cost changes are barred by section
    61.45(d), which limits exogenous cost changes to "those cost changes
    that the Commission shall permit or require by rule, rule waiver, or
    declaratory ruling."[^175] According to AT&T, not only did the
    Commission not issue a rule, waiver, or declaratory ruling expressly
    sanctioning those changes, but the retroactive adjustment is
    inconsistent with the agency policy limiting "exogenous cost
    treatment of cost changes resulting from changes in the USOA
    requirements to economic cost changes*.*"[^176] The LECs deny that
    their adjustments violate sections 65.600(d)(2) or 61.45(d).[^177]
    To the extent the Commission finds that a waiver is necessary, U S
    West (now Qwest) asks the Commission to waive its rules to permit it
    and the other LECs to make the appropriate adjustments.[^178]

53. For purposes of this tariff investigation we will assume, but not
    decide, that the LECs' retroactive adjustments are inconsistent with
    sections 65.600(d)(2) and 61.45(d). We find it to be in the public
    interest to grant waivers of these rules to the extent necessary to
    permit the LECs to restore for the years 1992 through 1995 the
    accrued OPEB liabilities that the LECs deducted from their rate
    bases in compliance with the now vacated *RAO Letter 20.* Section
    1.3 gives the Commission plenary authority to waive "at any time"
    any rule provision on its own motion or at the request of a
    petitioning party "for good cause."[^179] Good cause exists "if
    particular facts would make strict compliance inconsistent with the
    public interest."[^180]

54. We conclude that, in the specific circumstances of this case, it
    would be inequitable to enforce the deadline in section 65.600(d)(2)
    requiring a carrier to make corrections or modifications to its rate
    base within 15 months of the calendar year to which the entries
    applied. As noted above, the LECs had a statutory obligation to
    adhere to the *RAO Letter 20* during the time period in which that
    order was in effect. These carriers hardly could have been expected
    to file rate base adjustments reversing the effects of the *RAO
    Letter 20 before* the Commission vacated that staff decision in
    March 1996. AT&T's construction of section 65.600(d)(2), however,
    would set a deadline for the filing of such rate base adjustments
    that falls, for at least some of the years in question, before the
    *RAO Rescission Order* had been issued*.* It is unquestioned that
    the LECs filed their rate base adjustments in a prompt manner
    shortly after the Commission issued the *RAO Rescission Order.* In
    these particular circumstances, we find it serves the public
    interest to waive section 65.600(d)(2) to the extent that the rule
    imposes a 15-month deadline for the filing of the rate base
    adjustments at issue in this investigation.

55. Given the unusual circumstances of this case, we also find that the
    public interest is served by a waiver, if one is necessary, of the
    rule provision limiting exogenous cost adjustments to economic cost
    changes.[^181] By granting a waiver, we enable the LECs to rectify
    the effects of the vacated *RAO Letter 20* and to ensure that their
    rate bases are consistent with the agency's regulations. As shown
    above, the version of section 65.830 in effect when the tariffs were
    filed required the inclusion of accrued OPEB liabilities in the
    LECs' rate base. Had the staff not erroneously directed the LECs to
    deduct such liabilities in the now vacated *RAO Letter 20*, the LECs
    would have included accrued OPEB liabilities in their rate bases in
    the years 1992 through 1995 without any need for any "exogenous"
    cost adjustments. The only reason that the LECs made "exogenous"
    costs adjustments in 1996 was to rectify the effects of complying
    with *RAO Letter 20.*

56. It is well-established that an agency has authority to "'undo . . .
    what was wrongfully done by virtue of \[a legally erroneous\]
    order.'"[^182] Indeed, "\[w\]hen the Commission commits legal error,
    the proper \[action\] is one that puts the parties in the position
    they would have been in had the error not been made."[^183]
    Permitting the LECs to adjust their rate bases to include accrued
    OPEB liabilities in the years 1992 through 1995 puts both the LECs
    and their interexchange customers exactly in the position they would
    have been in if the staff had not issued the now vacated *RAO Letter
    20*. It enables the LECs to calculate their sharing obligations and
    PCIs free from the rate base errors arising from their compelled
    adherence to the now vacated *RAO Letter 20.* In other words, the
    waivers we grant today advance the public interest by permitting the
    LECs to correct the errors arising solely from their compliance with
    the staff's legally deficient order.

#### Accounting and Cost Issues

57. Having decided that the LECs were authorized to make exogenous
    increases in 1996 in order to adjust their price cap indices to
    reflect the effect of the rescission of *RAO Letter 20*, we now turn
    to AT&T's arguments concerning costs and accounting.

##### Deduction of Prepaid OPEB Amounts in Account 1410

58. AT&T argues that the LECs did not establish that the prepaid OPEB
    Account 1410 amounts, which had been added to the rate base under
    *RAO Letter 20*, were deducted when that letter was rescinded.[^184]
    SBC states that, under SFAS-106 accounting, an employer accounts for
    the OPEB liability on a net basis. Accordingly, any asset set aside
    for the payment of future OPEB liabilities must be offset against
    the OPEB liability account when presenting the company's balance
    sheet.[^185]

59. We agree with SBC. *RAO Letter 20* provides that Account 4310, Other
    Long-Term Liabilities, shall be used to record amounts accrued for
    postretirement benefits. It further states that companies shall
    credit this account for the net periodic cost of postretirement
    benefits recorded in the expense account matrix for the current
    year, and shall debit this account for any fund payments made during
    the current year.[^186] If, on the other hand, fund payments caused
    the postretirement benefits portion of Account 4310 to have a debit
    balance, then, according to *RAO Letter 20*, the debit balance of
    postretirement benefits would be reported in Account 1410, Other
    Non-current Assets.[^187] The accounting is thus a netting process.
    SBC correctly states that, if a company filed an adjustment to its
    rate base to include the amounts recorded in Account 4310, then that
    same company would not have any OPEB prepaid assets in Account
    1410.[^188]

##### Ameritech's Adjustments to Remove Account 4310 Amounts

60. AT&T next alleges that Ameritech overstated its adjustments to
    remove Account 4310 amounts and added more than the amounts
    Ameritech originally deducted in response to *RAO Letter 20*.[^189]
    In response to AT&T's allegations, SBC states that the OPEB
    liability is a balance sheet account, meaning that it reflects a
    cumulative balance for all prior years, plus the current year.[^190]
    SBC also provided additional data showing the annual cumulative
    balances; however, it lacked data from the years 1991 and 1992. SBC
    therefore assumed that the activity in accounts 4310 for those years
    was the same as in 1993.[^191]

61. AT&T argues that these assumptions for the years 1991 and 1992 are
    "counter-intuitive" because, as payments are made, amounts should be
    transferred out of the account. AT&T asserts that a constant rate of
    growth in the account implies that there is no mechanism for
    "relieving" the account. Furthermore, AT&T alleges that amortization
    of the TBO would reduce both current year's and prior years'
    balances in Account 4310.[^192]

62. SBC responds to each of these arguments. Concerning the rate of
    growth of OPEB liability account balances, it argues that the
    Account 4310 balance is increased each year by the amount of
    SFAS-106 expense recognized and is reduced by the amount of actual
    retiree benefits paid and any contributions to the benefit plan
    trust. SBC states that SFAS-106 levels have exceeded benefit
    payments and trust contributions each year, resulting in the growth
    of Account 4310.[^193] With respect to AT&T's argument that there
    appears to be no means of "relieving" the liability account balance,
    SBC states that the relief of Account 4310 occurs from the benefit
    payments or contributions to the trust fund. SBC also clarifies that
    the "incremental" OPEB costs used in its prior analysis represent
    the net amount of the annual expense estimates less the benefit
    payments and contributions.[^194] It also asserts that amortization
    of the TBO does not reduce the current and prior years' balances;
    rather, it increases the current year balance in Account 4310 and
    has no effect on the prior years' balance.[^195]

63. Account 4310 is a balance sheet account. This means the account, and
    in particular the OPEBs sub-account, contains the cumulative
    activity in the account rather than just a single year's activity.
    SBC correctly points out that the liability account is increased by
    recognized OPEB liability and is decreased by amounts paid to
    retirees or paid into trust. Accordingly, there are means of
    "relieving" the liability account. Furthermore, SBC has provided
    reasonable explanations for the growth in the liability account.
    Therefore, we accept SBC's arguments and find that its descriptions
    of the Account 4310 activity are reasonable.

##### Timing of OPEB Rate Base Impacts

64. AT&T argues that SBC arbitrarily assumes that the additional OPEB
    rate base impact occurs at the beginning of each year. AT&T contends
    that, if the impact occurred at the end of the year, the average
    rate base effects would not be as great.[^196] SBC responds that its
    analysis assumes that the effects occur on a *pro rata* basis
    throughout the year because the OPEB expense accrual is recorded
    monthly and actual benefit payments are made monthly.[^197] SBC
    states that the amount reflected is the annual activity in the
    account, *i.e.,* the net of the annual OPEB expense recognized less
    the estimated benefit payments and trust contributions. SBC argues
    that AT&T's assumption that the activity would occur only at the end
    of the year is incorrect and violates accounting principles that
    require transactions to be recorded in the period in which they
    occur.[^198]

65. SBC correctly describes the proper accounting and timing
    requirements for recording amounts in the liability account. We find
    that SBC has reasonably explained its calculations of the Account
    4310 amounts offered in support of its tariff filing.

##### Curtailment Costs

66. AT&T challenges SBC's inclusion in its exogenous cost increase of a
    \$24 million "1993 interstate curtailment cost."[^199] According to
    SBC, a force reduction plan resulted in additional SFAS-106
    curtailment costs.[^200] AT&T argues that one-time costs associated
    with company downsizing should result in payment of some of the
    one-time expenses in the year they were incurred, thus reducing the
    "curtailment" effect.[^201]

67. SBC states that SFAS-106 requires companies to recognize curtailment
    costs when certain events occur. It argues that SFAS-106 defines a
    plan curtailment as

    an event that significantly reduces the expected years of future
    service of active plan participants or eliminates the accrual of
    defined benefits for some or all of the future service of a
    significant number of active plan participants. Curtailments
    include: (a) Termination of employees' services earlier than
    expected, which may or may not involve closing a facility or
    discontinuing a segment of business. (b) Termination or suspension
    of a plan so that employees do not earn additional benefits for
    future service.[^202]

    SBC states that Ameritech experienced significant force reduction
    plans which triggered plan curtailments.[^203] It argues that
    SFAS-106 requires that the unrecognized prior service costs,
    including any remaining unrecognized TBO, associated with the future
    years of service that are no longer expected to be rendered, must be
    recognized as a loss and included in those expenses for the
    year.[^204] In effect, SBC continues, a curtailment accelerates the
    recognition of prior service costs and any remaining TBO that had
    not yet been amortized. According to SBC, the recognition of these
    curtailment costs has the same impact on the OPEB liability recorded
    in Account 4310 as does the normal SFAS-106 cost accruals; it
    increases the balance in that account. Any payments that may have
    been related to the curtailment, SBC argues, would have been
    included with all other benefit payments and thus already reflected
    in the Account 4310 activity for the year.[^205]

68. SBC is correct that SFAS-106 recognizes curtailment costs associated
    with force reduction plans. We also find reasonable SBC's conclusion
    that its force reduction plan was "significant" within the meaning
    of "curtailment" as defined in SFAS-106. Thus SBC properly included
    the associated expenses in Account 4310.

##### Base Factor Portion (BFP) Calculations

69. AT&T asserts that the LECs included in their calculations only those
    rate base effects that increased their PCIs and excluded offsetting
    rate base effects that would have reduced their PCIs.[^206]
    According to AT&T, the increased rate base effect of the OPEB
    adjustments affects more than the LECs' rate of return and sharing
    obligations. AT&T argues that these adjustments also affect the
    development of the LECs' prospective base factor portion (BFP)
    revenue requirements used to develop End-User Common Line (EUCL)
    charges.[^207] The increased rate base established in the historical
    period, AT&T continues, allows the LECs to project a correspondingly
    higher prospective rate base that underlies the development of the
    BFP revenue requirement. Thus, AT&T contends, if the LECs are
    permitted to recalculate their interstate rate bases, they should
    also recalculate their historical subscriber line charges and
    carrier common line (CCL) rates. [^208]

70. The record suggests that individual companies took different
    approaches to the BFP calculation. SBC, for example, has submitted
    evidence that Ameritech and Southwestern Bell Telephone Company did
    recalculate their historical BFPs.[^209] SBC states, however, that
    the BFP for Pacific Bell was not revised because it was predicated
    on the assumption that the *RAO 20 Rescission Order* would not
    stand,[^210] and, in fact, the deduction required by *RAO Letter 20*
    was adopted as a rule in 1997.[^211] Verizon contends that Bell
    Atlantic's BFP forecasts for the 1996-97 tariff period were based on
    1995 base period costs, which reflected the full effect of the *RAO
    20 Rescission Order,*[^212] and it furthers argues that it was not
    obligated to make changes for tariff periods prior to 1996.[^213]
    With respect to some companies, we lack record evidence to determine
    exactly how they calculated their BFPs in the relevant period.

71. We find that the variable treatment of the BFP calculation in the
    tariffs subject to this investigation and the lack of record
    evidence counsels against further investigation of this issue.
    Throughout the long and tortured history of this proceeding, the
    appropriate rate base treatment of accrued OPEB costs has been hotly
    contested and the subject of changing and uncertain regulatory
    requirements. The LECs subject to this investigation have, since
    1992, submitted thousands of pages of evidence and argument to the
    Commission. Thirteen years later, we finally decide in this order
    that the LECs were entitled -- indeed required -- to include these
    costs in their interstate rate bases and, therefore, were justified
    in making exogenous adjustments to their price cap indices to
    reflect the reduced sharing obligations flowing from that rate base
    treatment. We also have concluded that the LECs calculated these
    adjustments in a manner consistent with the appropriate rate base
    treatment.[^214] In light of these findings, we believe that the
    cost of requesting additional evidentiary submissions outweighs any
    benefit associated with the outcome of a further inquiry into the
    LECs' calculation of historical BFP. The shared interest of the
    parties, the Commission, and the public in finality and closure
    compels us instead to terminate the investigation at this time.

## Other OPEBs Issues 

72. In the *Erratum Order*, with respect to other OPEB issues under
    investigation in CC Docket No. 94-157, CC Docket No. 94-65, and CC
    Docket No. 93-193, the Bureau requested that parties with interest
    in such issues inform the Bureau of any issue that remains open. The
    Order stated that, if no timely comments in response to this request
    were received, the OPEB investigation in CC Docket No. 94-65 and CC
    Docket No. 93-193 would be terminated without further action. As
    stated in that Order, termination of issues no longer in dispute
    serves the public interest because it reduces the uncertainty to
    which carriers are subject in their normal operations, and it
    permits both carriers and the Commission to devote their resources
    more efficiently to other matters of significance. Because we have
    resolved the OPEB issues addressed in this Order, and because no
    parties raised any issues additional to those specified in the
    *Erratum Order,* we terminate all outstanding OPEB investigations
    other than those addressed by this Order.

# ordering clauseS

73. Accordingly, IT IS ORDERED, pursuant to sections 4(i), 4(j),
    201-205, 403, and 404 of the Communications Act, as amended, 47
    U.S.C. §§ 154(i), 154(j), 201-205, 403, 404, that Verizon's
    exogenous treatment of accrued OPEB costs for the years 1991 and
    1992 WAS LAWFUL.

74. IT IS FURTHER ORDERED that SBC Communications, Inc., the Verizon
    Telephone Companies, BellSouth Telecommunications, Inc., Qwest
    Communications Corp., Alltel Telephone System, and Sprint Local
    Telephone Companies WERE PERMITTED to make exogenous adjustments to
    their price cap indices in 1996 as set forth herein.

75. IT IS FURTHER ORDERED that the investigations of the inclusion of
    OPEB costs in the interstate rate bases of incumbent LECs instituted
    in CC Docket Nos. 93-193 and 94-157, together with the related
    accounting orders, ARE TERMINATED.

    FEDERAL COMMUNICATIONS COMMISSION

    Marlene H. Dortch

    Secretary

[^1]: *Statement of Financial Accounting Standards No. 106 Employers'
    Accounting for Postretirement Benefits Other Than Pensions*,
    SFAS-106 Financial Accounting Standards Board (Dec. 1990)
    (SFAS-106).

[^2]: SFAS-106 defines the TBO as "the unrecognized amount, as of the
    date this Statement is initially applied, of (a) the accumulated
    postretirement benefit obligation in excess of (b) the fair value of
    plan assets plus any recognized accrued postretirement benefit cost
    or less any recognized prepaid postretirement benefit cost."

[^3]: *See* *Southwestern Bell Corporation, GTE Service Corporation*,
    AAD 91-80, *Notification of Intent to Adopt Statement of Financial
    Accounting Standards No. 106, Employers' Accounting for
    Postretirement Benefits Other Than Pensions*, Order, 6 FCC Rcd 7560
    (Com. Car. Bur. 1991) (*OPEB Approval Order*).

[^4]: *Id. See also* *Uniform Accounting for Postretirement Benefits
    Other* *Than Pensions in Part 32*, 7 FCC Rcd 2872 (Accounting and
    Audits Division, Com. Car. Bur. 1992) (*RAO Letter 20*), *vacated*,
    11 FCC Rcd 2957 (1996) (*RAO 20 Rescission Order*), *recon. denied*,
    12 FCC Rcd 2321 (1997) (*RAO 20 Rescission Reconsideration*).

[^5]: *See RAO Letter 20*, 7 FCC Rcd at 2872. *See also 1996 Annual
    Access Tariff Filings; National Exchange Carrier Association
    Universal Service Fund and Lifeline Assistance Rates; NYNEX
    Telephone Company Petition to Advance the Effective Date of the 5.3
    X-Factor to January 1, 1995, Transmittal No. 710*, Memorandum
    Opinion and Order, 11 FCC Rcd 7564, 7567, para. 5 (Com. Car. Bur.
    1996) (*1996 Tariff Order*).

[^6]: *See RAO Letter 20*, 7 FCC Rcd at 2872. Part 32 of the Commission
    rules contains the Uniform system of Accounts ("USOA"). *See* 47
    C.F.R. Part 32.

[^7]: *RAO Letter 20,* 7 FCC Rcd at 2872.

[^8]: *See* *Bell Atlantic Telephone Companies Tariff F.C.C. No. 1,
    Transmittal No. 497* (filed Feb. 28, 1992); *U S West
    Communications, Inc. Tariff F.C.C. Nos. 1 and 4, Transmittal No.
    246* (filed Apr. 3, 1992); and *Pacific Bell Tariff F.C.C. No. 128,
    Transmittal No. 1579* (filed Apr. 16, 1992). The \"Price Cap Index\"
    or \"PCI\" serves as an upper limit on rates. This index is adjusted
    annually for productivity, inflation (GNP-PI), and other factors,
    including exogenous adjustments. Thus, these LEC tariff transmittals
    sought an exogenous adjustment to increase their PCIs, and therefore
    the rates they could charge, to reflect the OPEB costs.

[^9]: *Treatment of Local Exchange Carrier Tariffs Implementing
    Statement of Financial Accounting Standards,* "*Employers Accounting
    for Postretirement Benefits Other Than Pensions*," CC Docket No.
    92-101, Order of Investigation and Suspension, 7 FCC Rcd 2724 (Com.
    Car. Bur. 1992) (*1992 Suspension Order*).

[^10]: *Treatment of Local Exchange Carrier Tariffs Implementing
    Statement of Financial Accounting Standards,* "*Employers Accounting
    for Postretirement Benefits Other Than Pensions*," CC Docket No.
    92-101, Memorandum Opinion and Order, 8 FCC Rcd 1024 (1993) (*OPEB
    Order*). This order directed Bell Atlantic, U S West, and Pacific
    Bell to file tariff revisions removing the OPEB costs from the
    calculation of their PCI. *Id.* at 1037, para. 75.

[^11]: *See OPEB Order*, 8 FCC Rcd at 1033, paras. 53-56. *See also* 47
    C.F.R. § 61.45(d) (1993).

[^12]: *See OPEB Order*, 8 FCC Rcd at 1033-34, paras. 57-59. *See also*
    47 C.F.R. § 61.45(d) (1993).

[^13]: *See OPEB Order*, 8 FCC Rcd at 1037, para. 75.

[^14]: *AT&T Communications Tariff F.C.C. Nos. 1 and 2, Transmittal Nos.
    5460, 5461, 5462, and 5464*, Memorandum Opinion and Order Suspending
    Rates and Designating Issues for Investigation, 8 FCC Rcd 6227 (Com.
    Car. Bur. 1993) (*AT&T OPEB Investigation Order*).

[^15]: *See 1993 Annual Access Tariff Filings*, CC Docket No. 93-193*,
    National Exchange Carrier Association, Transmittal No. 556,
    Universal Service Fund and Lifeline Assistance Rates*, CC Docket No.
    93-123*, GSF Order Compliance Filings, Bell Operating Companies
    Tariffs 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 (Com. Car. Bur. 1993) (*1993 Annual Access Investigation
    Order*); *AT&T OPEB Investigation Order,* 8 FCC Rcd at 6227.

[^16]: *AT&T OPEB Investigation Order,* 8 FCC Rcd at 6227.

[^17]: *Southwestern Bell Telephone Company v. FCC*, 28 F.3d 165 (D.C.
    Cir. 1994).

[^18]: *Treatment of Local Exchange Carrier Tariffs Implementing
    Statement of Financial Accounting Standards,* "*Employers Accounting
    for Postretirement Benefits Other Than Pensions*," CC Docket No.
    92-101, Memorandum Opinion and Order, 10 FCC Rcd 11821 (1995).

[^19]: *See Bell Atlantic Telephone Companies Tariff F.C.C. No. 1,
    Transmittal No. 690, NYNEX Telephone Companies Tariff F.C.C. No. 1,
    Transmittal No. 328, Pacific Bell Tariff F.C.C. No. 128, Transmittal
    No. 1738 and U S West Communications, Transmittal No. 550*, CC
    Docket No. 94-157, Memorandum Opinion and Order, 10 FCC Rcd 1594
    (Com. Car. Bur. 1994) (*Bell Atlantic/NYNEX Investigation Order*).

[^20]: *Id.*

[^21]: *Price Cap Performance Review for Local Exchange Carriers*, CC
    Docket No. 94-1, First Report and Order, 10 FCC Rcd 8961, 9090-97,
    paras. 293-309 (1995) (*Performance Review Order*). The *Performance
    Review Order* amended the Commission's rules to preclude price cap
    index adjustments for accounting changes that involve no changes in
    economic cost "expected to affect prices." *See id*. at 9090, para.
    293. Applying the new rule in the *Performance Review Order,* the
    Commission ordered the price cap indices reduced prospectively, in
    order to preclude recovery of future, amortized installments of OPEB
    costs. *See id.* at 9095-97, paras. 306-309.

[^22]: *Performance Review Order,* 10 FCC Rcd at 9096-97, paras.
    306-309.

[^23]: *Performance Review Order,* 10 FCC Rcd at 9096-97, paras.
    306-309. *See also Bell Atlantic Telephone Cos. v. FCC*, 79 F.3d
    1195, 1204-05 (D.C. Cir. 1996) (holding that the Commission's
    application of its new standard did not constitute impermissible
    retroactive rulemaking).

[^24]: *See 1993 Annual Access Tariff Filings,* CC Docket No. 93-193,
    Phase I, *1994 Annual Access Tariff Filings,* CC Docket No. 94-65,
    *AT&T Communications Tariff F.C.C. Nos. 1 and 2 Transmittal Nos.
    5460, 5461, 5462 and 5464,* CC Docket No. 93-193, Phase II, *Bell
    Atlantic Telephone Companies Tariff F.C.C. No. 1, Transmittal No.
    690, NYNEX Telephone Companies Tariff F.C.C. No. 1, Transmittal No.
    328,* CC Docket No. 94-157, Order Designating Issues for
    Investigation, 10 FCC Rcd at 11804, 11817, para. 32 (1995)
    (*Combined OPEB Investigations Order*).

[^25]: *See 1993 Annual Access Investigation Order,* 8 FCC Rcd 4960.

[^26]: The *1993 Annual Access Investigation Order* also includes an
    investigation of Rochester Telephone Corporation, Tariff F.C.C. No.
    1, Transmittal No. 222, for SFAS-106 TBO amounts that were suspended
    by the Bureau for one day in the 1994 annual access tariff order.
    *See 1994 Annual Access Tariff Filings*, CC Docket No. 94-65,
    Memorandum Opinion and Order Suspending Rates, 9 FCC Rcd 3519 (Com.
    Car. Bur. 1994) (*1994 Annual Access Investigation Order I*); *1994
    Annual Access Tariff Filings*, CC Docket No. 94-65, Memorandum
    Opinion and Order Suspending Rates, 9 FCC Rcd 3705 (Com. Car. Bur.
    1994) (*1994 Annual Access Investigation Order II*).

[^27]: *See AT&T OPEB Investigation Order*, 8 FCC Rcd 6227.

[^28]: *See Bell Atlantic/NYNEX Investigation Order*, 10 FCC Rcd 1594.

[^29]: The Bureau included the following four tariff filings in the
    investigation: *Bell Atlantic Telephone Companies, Tariff F.C.C. No.
    1, Transmittal No. 747*, CC Docket Nos. 94-139 and 94-157,
    Memorandum Opinion and Order Suspending Rates, 10 FCC Rcd 5027 (Tar.
    Div., Com. Car. Bur. 1995); *Pacific Bell, Tariff F.C.C. No. 128,
    Transmittal No. 1773 and U S West, Tariff F.C.C. No. 5, Transmittal
    No. 584*, CC Docket No. 94-157, Memorandum Opinion and Order
    Suspending Rates, 10 FCC Rcd 6038 (Tar. Div., Com. Car. Bur. 1995);
    *The NYNEX Telephone Companies, Tariff F.C.C. No. 1, Transmittal No.
    374*, CC Docket No. 94-157, Memorandum Opinion and Order Suspending
    Rates, DA 95-966 (Tar. Div., Com. Car. Bur., rel. Apr. 27, 1995).

[^30]: *See Combined OPEB Investigations Order*, 10 FCC Rcd at 11812-15,
    paras. 16-23.

[^31]: *RAO 20 Rescission Order,* 11 FCC Rcd at 2961, paras. 25, 27.

[^32]: *Id.* at 2961, para. 25.

[^33]: *Id.*

[^34]: *See 1996 Tariff Order*, 11 FCC Rcd at 7568, para. 7. The sharing
    mechanism provided that carriers would share some portion of
    earnings above a certain level with their customers through future
    price reductions. These sharing obligations were established, *inter
    alia*, to ensure that errors in setting prices under the price cap
    formula would not lead to unreasonably high rates and to ensure that
    a portion of cost reductions were passed through to each carrier\'s
    customers. *See* *Policy and Rules Concerning Rates for Dominant
    Carriers*, CC Docket No. 87-313, Second Report and Order, 5 FCC Rcd
    6786,6797-88, paras. 7-8 (1990) (*1990 Price Cap Order*), *modified
    on recon*[.]{.underline}, 6 FCC Rcd 2637, *further recon. dism'd*, 6
    FCC Rcd 7482 (1991), *aff'd,* *National Rural Telecom. Ass'n v.
    FCC*, 988 F.2d 174 (D.C. Cir. 1993).

[^35]: *1996 Tariff Order*, 11 FCC Rcd at 7568, para. 7. As a result of
    mergers and acquisitions, Ameritech, Nevada Bell, Pacific Bell, and
    Southwestern Bell have become SBC Communications, Inc. Bell Atlantic
    and GTE (including GTE Telephone Operating Companies and GTE system
    Telephone Companies) are part of Verizon Telephone Companies. US
    West Communications is now part of Qwest Communications Corp.
    Lincoln Telephone properties are now owned by Alltel Telephone
    Companies.

[^36]: *Id*.

[^37]: *Id*.

[^38]: *Id*.

[^39]: *Id*.

[^40]: *Id*. at 7573, para. 19.

[^41]: *Id*., para. 20.

[^42]: *Id*. at 7574, para. 21. The Bureau stated that, "\[s\]ince the
    issue of rate base treatment of OPEB costs claimed for the 1992-1993
    period is similar to the issue before us in our investigation of CC
    Docket 93-193, we add the tariff revisions filed by Ameritech, Bell
    Atlantic, U S West, Pacific Bell, Southwestern Bell, and Lincoln to
    that investigation." *Id.*

[^43]: *Id*. at 7566-67, 7573-74, paras. 4, 20-21.

[^44]: *RAO 20 Rescission Reconsideration,* 12 FCC Rcd at 2325-27,
    paras. 14-20.

[^45]: *See id.* at 2331, para. 34.

[^46]: *Termination Order,* 17 FCC Rcd 1199 (2002); 67 Fed. Reg. 3617
    (Jan. 25, 2002).

[^47]: *See* *Stale or Moot Docketed Proceedings, 1993 Annual Access
    Tariff Filings Phase 1,* CC Docket No. 93-193, *1994 Annual Access
    Tariff Filings,* CC Docket No. 94-65, *AT&T Communications Tariff
    F.C.C. Nos. 1 and 2, Transmittal Nos. 5460, 5461, 5462, and 5464,
    Phase II*, CC Docket No. 93-193, *Bell Atlantic Telephone Companies
    Tariff F.C.C. No. 1, Transmittal No. 690*, CC Docket No. 94-157,
    *NYNEX Telephone Companies Tariff F.C.C. No. 1, Transmittal No.
    328*, Order, Notice and Erratum, 18 FCC Rcd 2550, 2558, para. 22
    (Wireline Comp. Bur. 2003) (*Erratum Order*). The Common Carrier
    Bureau was re-named the Wireline Competition Bureau following a
    reorganization in 2002.

[^48]: *Erratum Order,* 18 FCC Rcd at 2558, para. 22.

[^49]: *Id.* at 2558, para. 23.

[^50]: *Id.* at 2559, para 25.

[^51]: *Stale or Moot Docketed Proceedings, 1993 Annual Access Tariff
    Filings Phase 1,* CC Docket No. 93-193, *1994 Annual Access Tariff
    Filings,* CC Docket No. 94-65, *AT&T Communications Tariff F.C.C.
    Nos. 1 and 2, Transmittal Nos. 5460, 5461, 5462, and 5464, Phase
    II*, CC Docket No. 93-193, *Bell Atlantic Telephone Companies Tariff
    F.C.C. No. 1, Transmittal No. 690*, CC Docket No. 94-157, *NYNEX
    Telephone Companies Tariff F.C.C. No. 1, Transmittal No. 328*,
    Direct Case of Verizon, filed Apr. 11, 2003 (Verizon Direct Case).
    Although parties made earlier filings, parties were directed to
    "state in full their arguments on these issues" because the record
    may have become stale and because the old record may not accurately
    reflect current positions of parties that have merged. *See*
    *Erratum Order*, 18 FCC Rcd at 2558, para. 22.

[^52]: *Stale or Moot Docketed Proceedings, 1993 Annual Access Tariff
    Filings Phase 1,* CC Docket No. 93-193, *1994 Annual Access Tariff
    Filings,* CC Docket No. 94-65, *AT&T Communications Tariff F.C.C.
    Nos. 1 and 2, Transmittal Nos. 5460, 5461, 5462, and 5464, Phase
    II*, CC Docket No. 93-193, *Bell Atlantic Telephone Companies Tariff
    F.C.C. No. 1, Transmittal No. 690*, CC Docket No. 94-157, *NYNEX
    Telephone Companies Tariff F.C.C. No. 1, Transmittal No. 328*,
    Opposition of AT&T Corp. to Direct Case, filed May 12, 2003 (AT&T
    Opposition).

[^53]: *Stale or Moot Docketed Proceedings, 1993 Annual Access Tariff
    Filings Phase 1,* CC Docket No. 93-193, *1994 Annual Access Tariff
    Filings,* CC Docket No. 94-65, *AT&T Communications Tariff F.C.C.
    Nos. 1 and 2, Transmittal Nos. 5460, 5461, 5462, and 5464, Phase
    II*, CC Docket No. 93-193, *Bell Atlantic Telephone Companies Tariff
    F.C.C. No. 1, Transmittal No. 690*, CC Docket No. 94-157, *NYNEX
    Telephone Companies Tariff F.C.C. No. 1, Transmittal No. 328,*
    Rebuttal of Verizon to AT&T Opposition to Direct Case, filed May 27,
    2003 (Verizon Rebuttal).

[^54]: *1993 Annual Access Tariff Filings Phase I*, CC Docket No.
    93-193*, 1994 Annual Access Tariff Filings*, CC Docket No. 94-65,
    *AT&T Communications Tariff FCC Nos. 1 and 2, Transmittal Nos. 5460,
    5461, 5462, and 5464 Phase II*, CC Docket No. 93-193, *Bell Atlantic
    Telephone Companies Tariff FCC No. 1, Transmittal No. 690, CC Docket
    No. 94-157, NYNEX Telephone Companies Tariff FCC No. 1, Transmittal
    No. 328*, CC Docket No. 94-157, Comments of Verizon, filed Apr. 8,
    2003 (Verizon Comments), Comments of SBC Communications, Inc., filed
    Apr. 8, 2003 (SBC Comments), Comments of AT&T Corp., filed Apr. 8,
    2003 (AT&T Comments), WorldCom Comments, filed Apr. 8, 2003
    (WorldCom Comments).

[^55]: *1993 Annual Access Tariff Filings Phase I*, CC Docket No.
    93-193, *1994 Annual Access Tariff Filings*, CC Docket No. 94-65,
    *AT&T Communications Tariff FCC Nos. 1 and 2, Transmittal Nos. 5460,
    5461, 5462, and 5464 Phase II*, CC Docket No. 93-193, *Bell Atlantic
    Telephone Companies Tariff FCC No. 1, Transmittal No. 690*, CC
    Docket No. 94-157, *NYNEX Telephone Companies Tariff FCC No. 1,
    Transmittal No. 328*, CC Docket No. 94-157, Reply Comments of
    Verizon, filed Apr. 22, 2003 (Verizon Reply Comments), Reply
    Comments of AT&T Corp., filed Apr. 22, 2003 (AT&T Reply Comments),
    Reply Comments of SBC Communications, Inc., filed Apr. 22, 2003 (SBC
    Reply Comments).

[^56]: *Stale or Moot Docketed Proceedings, 1993 Annual Access Tariff
    Filings Phase 1,* CC Docket No. 93-193, *1994 Annual Access Tariff
    Filings,* CC Docket No. 94-65, *AT&T Communications Tariff F.C.C.
    Nos. 1 and 2, Transmittal Nos. 5460, 5461, 5462, and 5464, Phase
    II*, CC Docket No. 93-193, *Bell Atlantic Telephone Companies Tariff
    F.C.C. No. 1, Transmittal No. 690*, CC Docket No. 94-157, *NYNEX
    Telephone Companies Tariff F.C.C. No. 1, Transmittal No. 328*,
    Petition for Reconsideration of Verizon, filed March 27, 2003
    (Verizon Petition).

[^57]: *Stale or Moot Docketed Proceedings, 1993 Annual Access Tariff
    Filings Phase 1,* CC Docket No. 93-193, *1994 Annual Access Tariff
    Filings,* CC Docket No. 94-65, *AT&T Communications Tariff F.C.C.
    Nos. 1 and 2, Transmittal Nos. 5460, 5461, 5462, and 5464, Phase
    II*, CC Docket No. 93-193, *Bell Atlantic Telephone Companies Tariff
    F.C.C. No. 1, Transmittal No. 690*, CC Docket No. 94-157, *NYNEX
    Telephone Companies Tariff F.C.C. No. 1, Transmittal No. 328*,
    Order, 19 FCC Rcd 2527 (2004).

[^58]: Verizon Direct Case at 8.

[^59]: *Id*. (citing *Southwestern Bell*, 28 F.3d at 170); *see also*
    Verizon Rebuttal at 7.

[^60]: Verizon Direct Case at 8 (citing 47 C.F.R. § 32.16).

[^61]: Verizon Direct Case at 8-9.

[^62]: *Id*. at 9 (citing *OPEB Approval Order*, 6 FCC Rcd at 7560,
    para. 3); *see also* Verizon Rebuttal at 8.

[^63]: AT&T Opposition at 10-11 (citing *1990 Price Cap Order* at 6807,
    para. 168 (1990)).

[^64]: AT&T Opposition at 11.

[^65]: In 1995, the Commission amended its price cap rules to limit
    exogenous cost adjustments to accounting practices that affect
    economic costs, thereby making "most if not all cost changes
    resulting from the adoption of SFAS-106" ineligible for exogenous
    treatment. *Performance Review Order*, 10 FCC Rcd at 9095 para. 307.
    The Commission specified that the 1995 amendment would be applied
    "on a prospective basis" and that the tariffs under investigation in
    this case would be evaluated under the exogenous price cap rules in
    effect when the tariffs were filed*. Id*. at 9096-97, paras. 305,
    307.

[^66]: *1990 Price Caps Order*, 5 FCC Rcd at 6807 para. 166. *See
    Southwestern Bell v. FCC*, 28 F.3d at 169) (The "FCC's statement of
    its criteria for exogenous cost treatment \[in its *1990 Price Cap
    Order*\] constituted a rule.").

[^67]: *1990 Price Cap Order*, 5 FCC Rcd at 6807, para. 168. *See*
    *Southwestern Bell v. FCC*, 28 F.3d at 168.

[^68]: *Southwestern Bell v. FCC*, 28 F.3d at 169 (quoting *Policy and
    Rules Concerning Rates for Dominant Carriers*, 4 FCC Rcd 2873,
    3017-18, para. 295 (1989)).

[^69]: *1990 Price Cap Order*, 5 FCC Rcd at 6807, para. 168.

[^70]: *Id*. "The FASB is the authoritative standard setting body for
    accounting practices that are used in the American business
    community." *Responsible Accounting Officer Letter 20, Uniform
    Accounting For Postretirement Benefits Other Than Pensions in Part
    32*, 12 FCC Rcd 2321, 2322 n.9 (1997).

[^71]: In May 1990, AT&T filed a tariff that treated as exogenous the
    costs incurred by its switch from a cash basis to an accrual basis
    accounting for OPEB costs. Although AT&T's tariff predated SFAS-106,
    AT&T attempted to justify the exogenous treatment by claiming that
    FASB "intends to make such accrual accounting mandatory." *American
    Telephone and Telegraph Co.,* 5 FCC Rcd 3680, para. 2 (Com.Car.Bur.
    1990). The staff rejected AT&T's tariff, explaining that neither the
    *1990 Price Cap Order* nor the Commission's rules "enable AT&T to
    claim as exogenous a proposed change in GAAP or USOA." 5 FCC Rcd at
    3680, para. 4. *See also 1990 Price Cap Order*, 5 FCC Rcd at 6807,
    para. 168 ("The price cap mechanism is intended to reflect changes
    in costs that have occurred, not anticipated cost changes.").

[^72]: 47 C.F.R. § 32.16(a) (1991). Unless otherwise noted, all rule
    citations in this order refer to the rules in effect at the time the
    relevant tariffs were filed.

[^73]: *Id.*

[^74]: *See Treatment of Local Exchange Carrier Tariffs Implementing
    Statement of Financial Accounting Standards, "Employers Accounting
    For Postretirement Benefits Other Than Pensions*, CC Docket No.
    92-101, Memorandum Opinion and Order, 10 FCC Rcd 11821, para. 2
    (1995); *1990 Price Cap Order*, 5 FCC Rcd at 6807, para. 168*;
    Revision of the Uniform System of Accounts for Telephone Companies
    to Accommodate Generally Accepted Accounting Principles (Parts 31,
    33, 42, and 43 of the FCC's Rules)*, CC Docket No. 84-469, *Report
    and Order,* 102 FCC 2d 964, 985-87, paras. 71-75 (1985).

[^75]: *See* 47 C.F.R. § 61.45*; 1990 Price Caps Order*, 5 FCC Rcd at
    6792-93, paras. 47-54.

[^76]: *1990 Price Cap Order*, 5 FCC Rcd at 6792, paras. 47-49, 6798-99,
    paras. 96-102.

[^77]: *Southwestern Bell Telephone Co. v. FCC*, 28 F.3d at 168 (quoting
    *Policy and Rules Concerning Rates for Dominant Carriers*, 6 FCC Rcd
    665, 674, para. 75 (1991)).

[^78]: *OPEB Approval Order*, 6 FCC Rcd at 7560, para. 3.

[^79]: *1990 Price Cap Order*, 5 FCC Rcd at 6807, para. 168.

[^80]: Verizon Direct Case at Att. B (citing SFAS-106, at 1).

[^81]: *Id*. (citing SFAS-106, at 2).

[^82]: *Id.*

[^83]: *Id.* (citing SFAS-106, at 35, para. 108).

[^84]: *OPEB Approval Order*, 6 FCC Rcd at 7560, para. 3. The staff
    noted that SFAS-106 provided companies with two alternatives in
    recognizing the transition obligation: a flash-cut approach, *i.e.,*
    recognizing the embedded liability as an expense immediately, or a
    deferral and amortization approach, *i.e.,* amortizing the
    transition obligation over a period of at least 20 years. Expressing
    concern that the incremental effects on interstate expenses of using
    a flash cut would distort the carriers' operating results, the staff
    directed the carriers to amortize the transition obligation in
    implementing SFAS-106*. Id.* at 7560, para. 4. It is undisputed that
    Verizon, in implementing SFAS-106, complied with the staff's
    directive by adopting the deferral and amortization approach to the
    transition obligation.

[^85]: *Id.* at 7560, paras. 3, 5.

[^86]: Verizon at the end of 1991 put SFAS-106 in effect as of January
    1, 1991 "because its books of account were still open for calendar
    year 1991 when the Bureau issued its order and because both the
    \[*OPEB Approval Order*\] and FASB had encouraged early
    implementation." Verizon Direct Case at 4.

[^87]: *See 1990 Price Cap Order*, 5 FCC Rcd at 6807, para. 168 ("no
    GAAP change can be given exogenous treatment until the Financial
    Accounting Standards Board has actually approved the change and it
    has become effective").

[^88]: AT&T Opposition at 1-2, 10-11.

[^89]: SFAS-106 at 35, para. 108.

[^90]: *1992 Suspension Order*, 7 FCC Rcd 2724, para. 3 (quoting *OPEB
    Approval Order*, 6 FCC Rcd at 7560, paras. 3, 5). *See*
    *Southwestern Bell Telephone Co. v. FCC*, 28 F.3d at 169.

[^91]: AT&T Opposition at 11, 13.

[^92]: *See OPEB Order.*

[^93]: *Id.* at 1033, para. 53. *See Southwestern Bell Telephone Co. v.
    FCC*, 28 F.3d at 169.

[^94]: *Southwestern Bell Telephone Co. v. FCC*, 28 F.3d at 170.

[^95]: 28 F.3d at 170.

[^96]: 28 F.3d at 168. *See id.* at 170 ("the 'control' test \[is\]
    satisfied simply by the fact of exogenous imposition of the
    accounting rule").

[^97]: 28 F.3d at 169 (quoting *OPEB Order*, 8 FCC Rcd at 1033, para.
    53).

[^98]: 28 F.3d at 168.

[^99]: 28 F.3d at 169 (quoting *Treatment of Local Exchange Carrier
    Tariffs Implementing Statement of Financial Accounting Standards,
    "Employers Accounting for Postretirement Benefits Other Than
    Pensions*,*"* 7 FCC Rcd at 2725, para.10).

[^100]: *OPEB Approval Order*, 6 FCC Rcd at 7560, para. 3.

[^101]: *See 1992 Suspension Order*, 7 FCC Rcd at n.1. As Verizon
    pointed out, in that case its predecessor, Bell Atlantic, "sought
    exogenous treatment of its OPEB costs for 1991 and 1992, to be
    recovered in the July 1, 1992 through June 30, tariff period \[the
    dates the access tariffs were scheduled to go into effect\]."
    Verizon Rebuttal at 5.

[^102]: *See* Verizon Direct Case, Exh. D "United States Telephone
    Association Direct Case," filed Aug. 14, 1995.

[^103]: Godwins, "Post-Retirement Health Care Study Comparison of Telco
    Demographic and Economic Structures and Actuarial Basis National
    Averages" (1992), *attached to* Verizon Direct Case, Atts. C, E, F.

[^104]: *See* Verizon Direct Case, Att. I.

[^105]: *Id*., Att. D.

[^106]: *Id*., Atts. A, B.

[^107]: *Southwestern Bell Telephone Co. v. FCC*, 28 F.3d at 171-72.

[^108]: *Id*. at 172.

[^109]: AT&T Opposition at 3.

[^110]: *Performance Review Order*, 10 FCC Rcd at 9095, para. 307.

[^111]: *Id*.

[^112]: *Id*.

[^113]: *Id*. at 9096-97, para. 309.

[^114]: *Southwestern Bell Telephone Co. v. FCC*, 28 F.3d at 168 n.1.

[^115]: Verizon Comments at 1; SBC Comments at 7.

[^116]: *RAO 20 Rescission Order*, 11 FCC Rcd at 2961, para. 25.

[^117]: Verizon Reply Comments at 9; *see also* SBC Comments at 7, 9 (in
    light of the *RAO 20 Rescission Order*, LECs "were required to
    include the omitted OPEB costs in their rate base"); Verizon
    Comments at 3 (citing *RAO 20 Rescission Order* as support for its
    view that no rule prohibited the addition of OPEB liabilities to
    rate base).

[^118]: Verizon Comments*.*at 6; Verizon Reply Comments at 3-4; *see
    also* SBC Reply Comments at 3. At the time, section 65.830 stated
    that "\[t\]he following items shall be deducted from the interstate
    rate base: (1) deferred taxes (Accounts 4100 and 4340); (2) customer
    deposits (Account 4040); (3) unfunded accrued pension costs (Account
    4310); and (4) other deferred credits (Account 4360) to the extent
    they arise from the provision of regulated telecommunications
    services. This shall include deferred gains related to
    sale-leaseback arrangements." *See* 65 Fed. Reg. 9047 (Mar. 3,
    1989).

[^119]: Verizon Comments at 6; SBC Reply Comments at 2.

[^120]: Verizon Comments at 5; Verizon Reply Comments at 7-8 (quoting
    *RAO 20 Rescission Order,* 11 FCC Rcd at 2961, para. 28).

[^121]: Verizon Comments at 9-10 (citing *Southwestern Bell Telephone
    Co. v. FCC*, 28 F.3d at 169).

[^122]: AT&T Comments at 2-3.

[^123]: AT&T Comments at 30-31 (citing 47 C.F.R.§ 65.600(d)). The
    15-month rule has been in effect at all times relevant to this
    tariff investigation.

[^124]: AT&T Comments at 31-37; AT&T Reply Comments at 12-15.

[^125]: AT&T Comments at 26-27; WorldCom Comments at 3-4. Section
    61.45(d) states that exogenous cost adjustments in the price cap
    formula are limited to those the Commission permits or requires by
    rule, rule waiver, or declaratory ruling. 47 C.F.R. § 61.45(d).

[^126]: AT&T Comments at 28-30 (citing *Performance Review Order*, 10
    FCC Rcd at 9089, para. 293); *see also* WorldCom Comments at 2-3;
    *but see* Verizon Reply Comments at 8-9 (arguing that its 1996
    tariff filing included no OPEB costs -- only an adjustment for
    sharing in its 1996 tariffs).

[^127]: AT&T Reply Comments at 4.

[^128]: AT&T Comments at 20-23 (citing *1997 Annual Access Tariff
    Filings,* CC Docket 97-149, Memorandum Opinion and Order on
    Reconsideration, 12 FCC Rcd 10597, 10610, para. 30 (1998)); AT&T
    Reply Comments at 3-4.

[^129]: AT&T Comments at 23; *see also* SBC Reply Comments at 4 n.8
    (acknowledging that, under the post-1995 rules, OPEB-related
    accounting changes do not qualify for exogenous treatment).

[^130]: AT&T Comments at 23.

[^131]: AT&T Comments at 37-38.

[^132]: SBC Reply Comments at 6 and Ex. 1. No other party has quantified
    any potential refund liability.

[^133]: SBC Comments at 5-6.

[^134]: 47 U.S.C. § 204(a)(1).

[^135]: *Barnhart v. Peabody Coal Co.,* 537 U.S. 149, 159 (2003).

[^136]: *Brock v. Pierce County*, 476 U.S. 253, 260 (1986).

[^137]: *E.g*., *Barnhart v. Peabody Coal Co*., 537 U.S. at 159; *United
    States v. Montalva-Murillo*, 495 U.S. 711, 717-18 (1990); *Brock v.
    Pierce County*, 476 U.S. 253, 260 (1986). *See also Regions Hospital
    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.").

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

[^139]: *See Brock v. Pierce County*, 476 U.S. at 265.

[^140]: *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").

[^141]: *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 or
    agents to whose care they are confided.'").

[^142]: We note that the legislative history shows that Congress
    contemplated that parties aggrieved by a section 204(a)(2)(A)
    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 the SBC's contention that the Commission's
    violation of the section 204(a)(2)(A) deadline divests the
    Commission of its authority to act under section 204(a)(1).

[^143]: Although the Commission in the *OPEB Adoption Order* amended its
    rules explicitly to require the removal of accrued OPEB costs and
    the other items recorded in Account 4310 from the interstate rate
    base, these rule revisions did not go into effect until April 30,
    1997. *See OPEB Adoption Order*, 12 FCC Rcd at 2321, para. 34 (rules
    to become effective thirty days after their publication in the
    Federal Register); 62 Fed. Reg.15117 (March 31, 1997) (Federal
    Regulation publication of rules). Mindful of the rule against
    retroactive ratemaking, we have not considered the 1997 amendments
    -- or the policy underlying those rule revisions -- in determining
    the lawfulness of the LECs' inclusion of accrued OPEB costs in the
    rate base in the tariffs under investigation. Unless otherwise
    noted, the references to rule provisions in this section are to the
    rules in effect when the tariffs under investigation were filed.

[^144]: *Landreth Timber Co. v. Landreth*, 471 U.S. 681, 685 (1985).
    *See, e.g., Hughes Aircraft Co. v. Jacobson*, 525 U.S. 432, 438
    (1999); *Pennsylvania Department of Public Welfare v. Davenport*,
    495 U.S. 552, 557 (1990).

[^145]: 47 C.F.R. § 65.800 (1995).

[^146]: *Compare* 47 C.F.R. § 65.830 (2003) *with* 47 C.F.R. § 65.830
    (1996).

[^147]: *Amendment of Part 65 of the Commission's Rules to Prescribe
    Components of the Rate Base and Net Incomes of Dominant Carriers*,
    CC Docket No. 86-497, Notice of Proposed Rulemaking, 2 FCC Rcd 332,
    337 (App. A) (1987) (proposed section 65.830). "Zero-cost funds"
    refers to sources of money other than the carrier's investors.
    Examples include customer deposits or advances and deferred income
    taxes, as well as accrued liabilities for pensions and OPEBs.

[^148]: *Amendment of Part 65 of the Commission's Rules to Prescribe
    Components of the Rate Base and New Income of Dominant Carriers*, CC
    Docket No. 86-497, Report and Order, 3 FCC Rcd 269, 285 (App. B)
    (1997) ("*Part 65 Rulemaking Order*"), *recon. granted in part and
    denied in part, 4 FCC Rcd 1697 (1999) ("Part 65 Rulemaking
    Reconsideration*"), *aff'd in part, rev'd in part & dism'd in part,
    Illinois Bell Telephone Co. v. FCC*, 911 F.2d 776 (D.C. Cir. 1990),
    *aff'd, Illinois Bell Telephone Co. v. FCC*, 988 F.2d 1264 (D.C.
    Cir. 1993).

[^149]: *RAO Letter 20,* 7 FCC Rcd 2872.

[^150]: *Id.* at 2872-73.

[^151]: *RAO Rescission Order*, 11 FCC Rcd 2957, para. 1.

[^152]: 11 FCC Rcd at 2961, para. 25.

[^153]: *Id*.

[^154]: *Id.*

[^155]: *Id.* at 2962, para. 32 (emphasis added).

[^156]: *Id.* at 2962, para. 29.

[^157]: *Id.* at 2962-63, paras. 32-33.

[^158]: *RAO Rescission Reconsideration,* 12 FCC Rcd at 2325-26, para.
    14.

[^159]: Letter to Marlene H. Dortch, Secretary, FCC, from David Lawson,
    Counsel, AT&T (March 15, 2004) at 5.

[^160]: *RAO Rescission Order*, 11 FCC Rcd at 2962, para. 32.

[^161]: *RAO Rescission Reconsideration,* 12 FCC Rcd at 2329-30, para.
    28. For the reasons set forth above, we disagree with the staff's
    statement in initiating this investigation that the *RAO Rescission
    Order* left "open the question of the correct rate base treatment of
    OPEBs under current rules," *1996 Tariff Order*, 11 FCC Rcd at 7572,
    para. 19. The staff's statement fails to take into account the fact
    that the Commission in the *RAO Rescission Order* "vacate\[d\] the
    ratemaking instructions" in the *RAO Letter 20.* 11 FCC Rcd at 2959,
    para. 1. In addition, the staff's statement was made prior to the
    Commission's clarification in the *RAO Rescission Reconsideration*
    that the pre-1997 version of section 65.830 did not permit the
    inclusion of accrued OPEB costs into the rate base.

[^162]: In support of its claim that the section 65.830 should be read
    to include OPEBs in the rate base, AT&T relies upon *Ameritech
    Operating Companies*, 10 FCC Rcd 5606, 5611 App. A, para. 6 (1995).
    In that order, the Commission rejected a LEC's practice of including
    an equity component in its calculation of cash working capital for
    inclusion in the rate base under section 65.820(d). In interpreting
    section 65.820(d), the Commission in that order adhered to a
    previous decision that "explicitly \[had\] exclude\[d\] equity from
    cash working capital." 10 FCC Rcd at 5611 App. A, para. 6. We find
    that this decision is not useful in evaluating whether the pre-1997
    version of section 65.830 permitted the inclusion of accrued OPEBs
    in the rate base. The decision cited by AT&T involves neither
    accrued OPEB liabilities nor an agency interpretation of section
    65.830. In any event, the Commission explicitly held that the
    pre-1997 rules required the inclusion of accrued OPEB expenses in
    the rate base in the subsequently decided *RAO Rescission Order* and
    *RAO Rescission Reconsideration.*

[^163]: *Alaska Professional Hunters Association v. FAA*, 77 F.3d 1030,
    1035 (D.C. Cir. 1999).

[^164]: *Id.* at 1033-34 (quoting *Paralyzed Veterans of America v. D.C.
    Arena,* 117 F.3d 579, 586 (D.C.Cir.1997))*. See Southwestern Bell v.
    FCC*, 28 F.3d at 169 ("The Commission "was bound to follow \[its
    exogenous cost rules\] until it altered them through another
    rulemaking.").

[^165]: AT&T Comments (April 8, 2003) at 20 ("AT&T Comments").

[^166]: *1993 Annual Access Tariff Filings,* CC Docket No. 94-65, Order,
    19 FCC Rcd 14949, 14956, para. 17 (2004). *See Tariffs Implementing
    Access Charge Reform,* CC Docket No. 97-250, Memorandum Opinion and
    Order, 13 FCC Rcd 14683, 14747, para. 81 (1998).

[^167]: *See generally Bowen v. Georgetown University Hospital*, 488
    U.S. 204, 208 (1988).

[^168]: *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 Telephone Co. v.
    FCC*, 28 F.3d at 169. The Commission can also waive its rules upon
    the proper showing of good cause.

[^169]: *See Southwestern Bell Telephone Co. v. FCC,* 28 F.2d at 169
    (The FCC was bound to follow its rate base rules governing OPEB
    costs in a tariff investigation "until such time as it altered them
    through another rulemaking.").

[^170]: *RAO Rescission Reconsideration,* 12 FCC Rcd at 2331, para 34.
    In the 1997 rulemaking that amended section 65.830, AT&T correctly
    told the Commission that "any change to the Part 65 rules will
    affect the rate base on a prospective basis and will not affect the
    pending OPEB investigations because those investigations deal with
    past OPEB costs." 12 FCC Rcd at 2328, para. 22. In this tariff
    proceeding, however, AT&T relies on the Commission's policy
    decisions in the 1997 rulemaking to support its argument that the
    tariffs are unlawful. *See, e.g.,* AT&T Comments at 19. As noted
    above, we decline to give retroactive effect to the 1997 rulemaking.

[^171]: AT&T Comments at 20. *See* 5 U.S.C. § 553.

[^172]: *1996 Tariff Order*, 11 FCC Rcd at 7568, para. 7.

[^173]: *See* 47 U.S.C. § 416(c) ("It shall be the duty of every person
    . . . to observe and comply with \[Commission\] orders so long as
    the same shall remain in effect."); 47 U.S.C. § 155(c)(1) (staff
    orders issued under delegated authority "shall have the same force
    and effect" as Commission orders). Although the Commission in the
    *RAO Rescission Order* ultimately held that the staff had exceeded
    its delegated authority, it had not stayed that staff decision
    pending full Commission review and the LECs were bound by that
    decision until it was rescinded by the Commission.

[^174]: AT&T Comments at 25 (citing 47 C.F.R. § 65.600(d)(2)).

[^175]: AT&T Comments at 26-27 (citing 47 C.F.R. § 61.45(d)).

[^176]: AT&T Comments at 28 (citing Price *Cap Performance Review for
    Local Exchange Carriers,* CC Docket No. 94-1, First Report and
    Order, 10 FCC Rcd 8961, 9089-90, para. 292 (1995)).

[^177]: *See, e.g.,* Verizon Reply Comments at 8-9.

[^178]: Letter to Marlene H. Dortch, Secretary, FCC, from John W. Kure,
    Executive Director -- Federal Regulatory, Qwest (March 29, 2004) at
    4.

[^179]: 47 C.F.R. § 1.3. *See also* 47 C.F.R. § 61.45(d)(d)
    (specifically authorizing the Commission to issue waivers of rules
    governing exogenous cost changes). *See generally WAIT Radio v.
    FCC*, 418 F.2d 1153 (D.C. Cir. 1969).

[^180]: *Keller Communications, Inc. v. FCC,* 130 F.3d 1073, 1076 (D.C.
    Cir. 1997) (quoting *Northeast Cellular Telephone Co. v. FCC*, 897
    F.2d 1164, 1166 (D.C. Cir. 1990)). *Accord* *Omnipoint Corp. v.
    FCC*, 78 F.3d 620 631 (D.C. Cir. 1996).

[^181]: *See* *Price Cap Performance Review for Local Exchange
    Carriers,* 10 FCC Rcd at 9089-90, para. 292. The LECs dispute AT&T's
    claim that their rate base adjustments are inconsistent with any of
    the rules in effect when the tariffs were filed. Because we find
    that a waiver is in the public interest assuming the validity of
    AT&T's construction of the applicable regulations, we have no need
    to resolve in this order whether AT&T or the LECs have construed
    properly the relevant price cap rules. In particular, we take no
    position on whether section 61.45(d) authorized the exogenous cost
    adjustments at issue in this case.

[^182]: *Southeastern Michigan Gas Co. v. FERC,* 133 F.3d 34, 42 (D.C.
    Cir. 1998) (quoting *United States Gas Improvement Co. v. Callery
    Properties, Inc*.*,* 382 U.S. 223, 229 (1965)). *See Public
    Utilities Commission of the State Of California v. FERC,* 988 F.2d
    154, 163 (D.C. Cir. 1993).

[^183]: *Exxon Co. v. FERC,* 182 F.3d 30, 49 (D.C. Cir. 1992) (quoting
    *Public Utilities Commission of the State Of California v. FERC,*
    988 F.2d at 168). *See* *Communications Vending Corp. Of Arizona v.
    Citizens Communications Co.,* 17 FCC Rcd 24201, 24215 (2002),
    *aff'd, Communications Vending Corp. of Arizona, Inc*. *v. FCC*, 365
    F.3d 1064 (D.C. Cir. 2004).

[^184]: AT&T Comments at 32, 33-34.

[^185]: *See* Letter to Marlene H. Dortch, Secretary, FCC, from Debra
    Clemens, Associate Director Federal Regulatory, SBC (October 15,
    2004) at 1 (citing SFAS 106, para. 74(C)(6)) (SBC Ex Parte Oct. 15,
    2004).

[^186]: *RAO Letter 20*, 7 FCC Rcd at 2872.

[^187]: *Id.*

[^188]: SBC Ex Parte Oct. 15, 2004 at 1.

[^189]: AT&T Comments at 34-35; AT&T Reply Comments at 14.

[^190]: SBC Comments at 10-12*.*

[^191]: *Id.* at 11.

[^192]: AT&T Reply Comments at 17 (Attachment 1).

[^193]: SBC Ex Parte Oct. 15, 2004 at 2.

[^194]: *Id.; see also* AT&T Reply Comments at 17 (arguing that the 1992
    average would be calculated from the sum of the 1991 and 1992
    accumulated OPEB amounts).

[^195]: SBC Ex Parte Oct. 15, 2004 at 2*.*

[^196]: AT&T Reply Comments at 17.

[^197]: SBC Ex Parte Oct 15, 2004 at 2-3*.*

[^198]: *Id*.

[^199]: AT&T Reply Comments at 18.

[^200]: SBC Comments at 11, n. 24.

[^201]: AT&T Reply Comments at 18.

[^202]: SBC Ex Parte Oct. 15, 2004 at 3 (quoting *SFAS 106* at para.
    96).

[^203]: SBC Ex Parte Oct. 15, 2004 at 3.

[^204]: *Id.* (citing *SFAS 106* at para. 97)(*SFAS-106* states: "The
    unrecognized prior service cost associated with the portion of the
    future years of service that had been expected to be rendered, but
    as a result of a curtailment are no longer expected to be rendered,
    is a loss. For purposes of measuring the effect of a curtailment,
    unrecognized prior service cost includes the cost of plan amendments
    and any remaining unrecognized transition obligation. For example, a
    curtailment may result from the termination of a significant number
    of employees who were plan participants at the date of a prior plan
    amendment.").

[^205]: *Id.*

[^206]: AT&T Comments at 35-36; AT&T Reply Comments at 13.

[^207]: AT&T Comments at 36.

[^208]: *Id.*

[^209]: SBC Ex Parte Oct. 15, 2004 at 4.

[^210]: *Id.* The 1996-97 tariff filing reflected a forecasted BFP. *See
    id.*

[^211]: SBC notes that, if the Commission accepted AT&T's argument that
    Pacific Bell's BFP should have followed the rate base treatment,
    there is no provision in the rules to recover a higher multi-line
    EUCL rate to offset a lower CCL rate. *Id.* SBC asserts that a
    waiver of the Commission's rules would be required to increase the
    multi-line EUCL rate and to permit the combined EUCL rates to exceed
    common line, marketing, and certain residual interconnection charge
    interstate access elements (CMT) recovery. *Id.*

[^212]: Verizon Reply Comments at 16.

[^213]: *Id.*

[^214]: *See supra* paras. 58-68.