Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-caDC-93-01462/USCOURTS-caDC-93-01462-0/pdf.json

Parties Involved:
Federal Communications Commission
Respondent
Pacific Bell
Petitioner
United States of America
Respondent

Document Text:

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United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued April 11, 1995 Decided August 1, 1995

93-1166

MCI TELECOMMUNICATIONS CORPORATION, ET AL.,

PETITIONERS

v.

FEDERAL COMMUNICATIONS COMMISSION AND

UNITED STATES OF AMERICA,

RESPONDENTS

-

PACIFIC BELL, ET AL.,

INTERVENORS

-

Consolidated with

93-1191, 93-1223, 93-1224, 93-1234, 93-1235, 93-1236,

93-1237, 93-1238, 93-1239, 93-1280, 93-1281, 93-1282,

93-1287, 93-1288, 93-1353, 93-1418, 93-1427, 93-1446,

93-1462, 93-1527, 93-1528, 93-1529, 93-1530, 93-1531,

93-1532, 93-1535, 93-1536, 93-1537, 93-1538, 93-1539,

93-1540, 93-1541, 93-1542, 93-1543, 93-1544, 93-1545,

93-1546, 93-1559, 93-1598, 93-1606, 93-1607, 93-1608,

93-1609, 93-1613, 93-1644, 93-1677, 93-1685,

93-1825, 94-1123, 94-1124, 94-1332

-

On Petitions for Review of Orders of the

Federal Communications Commission

Robert J. Aamoth argued the cause for MCI Telecommunications Corporation and the other

Interexchange Carrier Petitioners. With him on the briefs were Frank W. Krogh, Donald J. Elardo,

Roy L. Morris, Michael B. Fingerhut, and Genevieve Morelli. Leon M. Kestenbaum entered an

appearance.

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Mark L. Evans argued the cause for the Local Exchange Carrier Petitioners and Intervenors. With

him on the briefs were Alan I. Horowitz, M. Robert Sutherland, Joseph Di Bella, James P. Tuthill,

John W. Bogy, James L. Wurtz, Durward D. Dupre, Paul Walters, Robert B. McKenna, Alan Y.

Naftalin, Charles R. Naftalin, Gerard J. Duffy, and Francis E. Fletcher, Jr. Richard C. Hartgrove,

Robert S. Lynch, William B. Barfield, Benjamin H. Dickens, Jr., Alfred W. Whittaker, Floyd S.

Keene, Curtis A. Bradley, Jr., E. Edward Bruce, Eugene D. Gulland and Margaret D. Brown

entered appearances.

Douglas E. Hart argued the cause for Cincinnati Bell Telephone Company. With him on the briefs

was Thomas E. Taylor. Lisa A. Thornton entered an appearance.

Laurel R. Bergold, Counsel, Federal Communications Commission, argued the cause for

Respondents. With her on the briefs were AnneK. Bingaman, Assistant AttorneyGeneral, Catherine

G. O'Sullivan and Robert J. Wiggers, Attorneys, United States Department of Justice, William E.

Kennard, General Counsel, Daniel M. Armstrong, Associate General Counsel, and John E. Ingle,

Deputy Associate General Counsel, Federal Communications Commission.

Peter D. Keisler argued the cause for Interexchange Carrier Intervenors. With him on the briefs were

AndrewD. Lipman, Ky E.B. Kirby, MarkC. Rosenblum and Robert J. McKee. Marc E. Manly, John

R. Ferguson, John Thorne, Lawrence W. Katz and Michael D. Lowe entered appearances.

Before: EDWARDS, Chief Judge; WALD and GINSBURG, Circuit Judges.

Opinion for the Court filed by Circuit Judge GINSBURG.

GINSBURG, Circuit Judge: In these consolidated cases, we review 21 orders of the Federal

Communications Commission adjudicating damage actions filed by several interexchange carriers

(IXCs) alleging that various local exchange carriers (LECs) overcharged them for interstate access

services. The LECs ask us to set aside the 21 orders on the ground that the Commission's approach

to awarding damages is unlawful and most of the IXCs' damages claims are barred by the statute of

limitations. The IXCs want us to modify the Commission's orders only insofar as they allow the

LECs to take "limited offsets" against the damage awards to the IXCs. One IXC (Allnet

Communication Services, Inc.) argues in the alternative that if limited offsets are to be allowed, then

the Commission should increase the interest rate payable on its award of damages. Because we

conclude that the Commission's general approach to damages is not unlawful and that the IXCs'

claims are not barred by the applicable statute of limitations, we deny the petitions of the LECs in

their entirety. Because we agree with the IXCs that the Commission's limited offset policy is

unlawful, we grant the IXCs' petitions with regard to that issue, vacate the Commission ordersin part,

and remand these matters to the Commission to recalculate the IXCs' damages. Allnet's petition is

dismissed as moot in view of our decision invalidating limited offsets.

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I. BACKGROUND

Interexchange carriers such as petitioner MCI pay LECs for access to local telephone users.

From the mid-1970's until the early 1990'sthe Commission's primary method for regulating the price

of interstate access was to prescribe a maximum rate of return on equity that a LEC could earn from

the sale of interstate access over a given period of time. See National Rural Telecom Ass'n v. FCC,

988 F.2d 174 (D.C. Cir. 1993) (reviewing the Commission's later switch from rate-of-return to

price-cap regulation). The claims at issue here are based upon certain LECs' having earned rates of

return above the maxima prescribed by the Commission. In order properly to understand those

claims, however, the reader may find an abbreviated regulatory history helpful.

A. Regulatory History

In 1972 the Commission decided that rather than prescribe the ratesthat AT&T could charge

it would prescribe the maximum rate of return that AT&T could earn (8.5%) and leave it to the

carrier to set its rates at a level designed to yield up to the prescribed rate of return. See American

Tel. & Tel. Co. and the Assoc. Bell System Companies, Charges for Interstate Telephone Service,

Decision and Order, Docket No. 19129, 38 F.C.C.2d 213 (1972). Upon review, we upheld this

rate-of-return approach as an appropriate exercise of the Commission's general regulatory powers

under § 4(i) of the Communications Act, 47 U.S.C. § 154(i). See Nader v. FCC, 520 F.2d 182, 203-

04 (1975).

In 1976 the Commission raised AT&T's allowable rate of return to 9.5%, American Tel. &

Tel. Co., ChargesforInterstate Telephone Service, Decision, Docket No. 20376, 57 F.C.C.2d 960,

972-73 (1976), plus a buffer of .5% inasmuch as it announced that it would not take enforcement

action unlesstheCompany'sreturn actually exceeded 10%. Id. at 973. AT&T thereupon filed a tariff

structure that produced a return below 10% for 1976 and 1977, but in 1978 the same rates produced

a return above the 10% ceiling. The Commission responded by requiring AT&T (and the

post-divestiture Bell Operating Companies) to return their excess earningsto customers by reducing

future rates. AT&T Earnings of Interstate and Foreign Services During 1978, Decision, CC Docket

No. 79-187, 102 F.C.C.2d 52, 62-63 (1984). AT&T challenged the Commission's statutory authority

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to require such a refund, but the court upheld the FCC's authority to impose that remedy, again

pursuant to § 4(i). New England Tel. & Tel. Co. v. FCC, 826 F.2d 1101, 1106-09 (1987) (NETCO

).

Bythe time the court published its decision inNETCO, however, the Commission had already

changed course, establishing a more comprehensive approach to regulating the LECs' rate of return.

See Authorized Rates of Return forthe Interstate Services of AT&T Communications and Exchange

Telephone Carriers, Phase I, Report &Order, CC Docket No. 84-800, 58 Rad. Reg. 2d 1647 (P&F)

(1985) (Prescription Order), recon., Memorandum Opinion & Order, 59 Rad. Reg. 2d 1592 (P&F)

(1986) (Prescription Reconsideration). The Commission still prescribed a maximum rate of return

that a LEC could earn from the sale of interstate access overall, but now it also set a maximum rate

of return for each of three specific types of interstate access service (viz., "special," "common line,"

and "switched traffic sensitive") and established a refund mechanism whereby a LEC would

automatically be required at the end of a monitoring period to refund allrevenuesthat it had collected

above the amount corresponding to its allowed rate of return for each category. Prescription

Reconsideration, 59 Rad. Reg. 2d at 1604. Thus, a LEC could be required automatically to refund

its excess earnings for one type of access service even if its earnings from the provision of access

services overall were below the maximum rate of return allowed. The Commission recognized this

possibility, but explained that categorical (i.e., type-specific) rate-of-return prescriptions were

necessary in order to prevent rate discrimination: without them, the LECs could charge an excessive

rate to purchasers of one type of access in order to subsidize the rate charged to purchasers of

another type. Id. at 1603. Upon review this court held, following NETCO, that the Commission has

the statutory authority both to prescribe a rate of return and to order a refund when that prescription

is violated; at the same time we held that the Commission's decision to require automatic refunds for

each category in which a LEC overearned was arbitrary and capricious and therefore unlawful

because that mechanism was inconsistent with what the court perceived to be the Commission's

general approach to rate-of-return regulation. American Tel. & Tel. Co. v. FCC, 836 F.2d 1386,

1390-92 (1988) (AT&T).

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B. The Present Proceedings

Although the court overturned the automatic refund rule, it did not strike down the rates of

return that the Commission had authorized, either for accessservice in generalor for any specific type

of access. The Commission therefore continued to set general and categorical rates of return that

limited the amount that a LEC could earn over any given two-year monitoring period. For example,

for the 1987-88 and 1989-90 monitoring periods, the Commission prescribed a maximum rate of

return of 12% both for overall earnings and for each type ofservice, and added enforcement buffers

of .25% for overall earnings and .4% for each category. See Authorized Rates of Return for the

Interstate Services of AT&T Communications and Exchange Telephone Carriers, Phase III,

Memorandum Opinion &Order, CC Docket No. 84-800, 60 Rad. Reg. 2d 1589, 1607 (P&F) (1986)

(setting percentage rates ofreturn for 1987-88); American Tel. &Tel. Co. v. Central Tel. Co., et al.,

Memorandum Opinion & Order, 8 F.C.C.R. 3546, 3547 (1993) (observing that rates of return for

1987-88 period were extended through 1989-90 period).

Shortly after the court's decision in AT&T, the IXCs began to file complaints with the

Commission, pursuant to §§ 206-09 of the Communications Act, 47 U.S.C. §§ 206-09, seeking

damages from each LEC that had allegedly overcharged the IXCs for access service because it had

earned (either for a category of service or overall) more than the maximum allowable rate of return

for the monitoring period. The IXCs based their allegations upon the reports that the LECs are

required to file with the Commission after the end of each monitoring period; the IXCs alleged (and

most LECs conceded) that they reported earnings in excess of the maximum prescribed levels. The

complaints at issue here relate to the monitoring periods 1985-86, 1987-88, and 1989-90.

Although the Commission adjudicated the complaintsseparately and the details of each differ

somewhat, the agency set forth the general principles under review here in two orders, both of which

pertain to the claims made by MCI. See MCI Telecommunications Corp. v. Pacific Northwest Bell

Tel. Co., et al., Memorandum Opinion &Order, 5 F.C.C.R. 216 (1990) (MCI Liability Order); MCI

Telecommunications Corp. v. Pacific Bell Tel. Co., et al., Memorandum Opinion & Order, 8

F.C.C.R. 1517 (1993) (MCI Damages Order). In those orders (as in the others under review) the

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Commission held that a LEC that earnsin excess ofthe prescribed rate ofreturn (either for a category

or overall) for a monitoring period violates the Communications Act. MCI Liability Order, 5

F.C.C.R. at 223. The Commission further held that "the proper starting point for assessing damages

based on violations of a rate of return prescription is to look at the difference between the amount

[the IXC complainant] paid for [the defendant LEC's] interstate access services and the amount it

would have paid if [the LEC] had charged rates that produced returns within the Commission's

prescribed levels." MCI Damages Order, 8 F.C.C.R. at 1525. The Commission then allowed each

defendant LEC to take "limited offsets," meaning that the defendant LEC could subtract from the

amount that the IXC overpaid, as derived above, any amount that the same IXC customer had

"underpaid" the LEC (i.e., insofar as it had paid a rate that yielded a return below the prescribed

maximum) for any category of service during the same monitoring period. Id. at 1528.

II. ANALYSIS

The LECs and the IXCs both attack the Commission's rules, albeit from opposite directions.

The LECs seek vacatur of some if not all of the damage decisions, while the IXCs ask us effectively

to increase the amount of damages awarded in most of the cases.

A. The LECs' Claims

The LECs contend that: (1) the Commission's approach to damages is precluded by our

decision in AT&T; (2) the Commission improperly concluded that LEC earnings in excess of the

allowed rates of return are per se unlawful; (3) the Commission improperly allowed the IXCs to

recover damages without requiring themeach to show what would have been the just and reasonable

rate and by exactly how much it overpaid; and (4) most of the damage claims are barred by the

two-year statute of limitations in the Communications Act. None of these assertions has merit.

1. The teaching of AT&T

The LECs argue that all of the damage awards should be reversed because they are

functionally equivalent to the automatic refund remedy that we disapproved in AT&T. The LECs'

argument fails because, the question of functional equivalence quite apart, it proceeds from a

misunderstanding of our AT&T decision.

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In AT&T we took issue with the automatic refund rule because it required a LEC to refund

earnings to the extent that it earned more than the allowable rate of return for a particular type of

service without any offset for any types of service in which the LEC had earned less than the

allowable rate of return. That approach "virtually guaranteed" that the LECs would earn an

aggregate rate of return below that which the Commission had prescribed. AT&T, 836 F.2d at 1390-

91. The LECs suggest that we thereby fashioned a broad rule prohibiting the Commission from

awarding damages for overearnings in one category of service without allowing a LEC to offset all

underearningsthat it had for other categories. On the contrary, our holding was much more narrow:

The Commission's approach was unlawful because it was inconsistent with what we were told was

the Commission's own understanding of its of rate-of-return regulation. Id. at 1390-91. We

believedbased upon certain FCC ratemaking orders and upon representations by the Commission's

counsel at oral argumentthat the Commission viewed itsrate-of-return prescriptions asstating not

only the maximum that a LEC could reasonably charge its customers but also the minimum that the

LEC could charge and still attract investment capital. Id. at 1390. We therefore held that a refund

rule that would inevitably cause the LEC to earn an overall rate of return below the prescribed level

was unreasonable because it amounted to a "self-contradiction" and "would operate over the long run

to put [the LECs] out of business." Id. at 1390-91.

The Commission responded to our decision by "clarify[ing]" its view of rate-of-return

regulation, as follows:

[W]e do not view [the rate-of-return] prescription as "both a maximum and a

minimum." That is, it does not represent a unique balance point such that "if the rate

were higher, the balance would tip in favor of the investor; if lower, it would tip in

favor of the consumer." Our accumulated experience with rate of return

prescriptions, and our review of the cost of capital evidence in this proceeding,

convince usthat there is no such point. Indeed, even the lower boundary of our range

of cost of capital estimates does not represent a bright line such that a company

earning just below that level would be forced out of business. We believe there is a

substantial gap between an earningslevel that isfully adequate to assure attraction of

capital on favorable terms, and an earnings level which, ifsustained over time, would

be confiscatory.

Represcribing the Authorized Rate of Return for Interstate Services of Local Exchange Carriers,

Order, CC Docket No. 89-624, 5 F.C.C.R. 7507, 7532 (1990); accord Amendment of Parts 65 and

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69 of the Commission's Rules to Reform the Interstate Rate of Return Represcription and

Enforcement Processes, Notice of Proposed Rulemaking and Order, CC Docket No. 92-133, 7

F.C.C.R. 4688, 4701 (1992).

This clarification is critical for two reasons. First, it allays any concern with

"self-contradiction": Even if the Commission's new approach has the same effect as did the automatic

refund rule in AT&T, that outcome no longer appears to be inconsistent with the Commission's view

of how rate-of-return regulation should work. Second, it removes the premise from which the AT&T

court reasoned that the refund rule would operate over the long run to put LECs out of business. It

is, of course,still true that by awarding damages on a category-by-category basis while allowing only

limited offsetsviz., offsets for "underpayments" made by the same customer for other access

services during the same monitoring periodthe Commission's approach to damages has caused

manyLECsto earn, in the aggregate, lessthan the maximumrate ofreturn allowed for the monitoring

period(s) at issue. As the Commission's approach has been clarified, however, that does not

necessarily mean that anyLEC earned lessthan the minimumamount necessary to attract capital and,

in fact, no LEC has demonstrated that itsrate of return (i.e. net of damage awards) was unreasonably

low. Indeed, the LECs make no factual showing at all with respect to that issue. Hence, even

assuming arguendo that the Commission's approach to awarding damages is functionally equivalent

to the automatic refund remedy held unlawful in AT&T, that is no warrant for striking down the

Commission's damage awards here. As we explained in NETCO, the LECs "have no statutory

entitlement to a perfectly balanced regulatory regime; rather they are entitled only to earn an overall

reasonable return." 826 F.2d at 1108-09.

The LECs offer up the Sixth Circuit's decision in Ohio Bell Tel. Co. v. FCC, 949 F.2d 864

(1991), and our decision in Virgin Islands Tel. Corp. v. FCC, 989 F.2d 1231 (1993), as further

support for their claim that the Commission must allow a LEC to offset against an award of damages

for overearnings on one type ofservice any underearningsthat it had for other types. Although Ohio

Bell involved an individual refund rather than the general, automatic refund provision, the Sixth

Circuit expressly followed our decision in AT&T; it held that it is inconsistent with the Commission's

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own rate-of-return regulatory policy for the Commission to require that a LEC refund overearnings

on a category-by-category basis without allowing it to offset underearnings in other categories of

interstate accessservice. Id. at 872-74. So far as the opinion reveals, however, the Sixth Circuit was

not aware of the Commission's clarifying statement; that court appears to have believed, as had we

in AT&T, that the Commission regarded the target rate of return as both a maximum and a minimum.

That premise having since been removed, Ohio Bell does not advance the LECs' argument anyfurther

than does AT&T.

We are quite franklymystified by the LECs' attempt to draw support from our Virgin Islands

decision. In that case we reversed a Commission order that required a LEC to refund interstate

access earningsthat were running above the prescribed rate of return as of the middle of an on-going

monitoring perioda factual situation not present in any of the cases before us now. Indeed, in

reversing the Commission we explained that its decision to require a refund in the middle of the

monitoring period was "analogous to that of a parent who admonishes his child not to eat more than

one candy bar per day, and then concludes that the prescription has been violated when he observes

the child eat the first half of a candy bar in one minute." 989 F.2d at 1238. Moreover, we explained

that "AT&T ... emphasized that the Commission's authority to order refunds where a carrier has

violated an outstanding rate-of-return prescription "must ... be exercised in a way that does not

contradict the Commission's own theory of rate of return regulation.' " Id. at 1234 (quoting AT&T,

836 F.2d at 1392). The Virgin Islands opinion, therefore, only strengthens our view that AT&T was

based narrowly upon the apparent conflict between the Commission's automatic refund and its own

rate-of-return philosophy, as we then understood it, and not upon the LECs' broader reading of that

case.

Petitioner Cincinnati Bell Telephone Company makes a separate argument that differs from

that of the other LECs only in emphasis. Because Cincinnati Bell had overearnings for all three types

of access service during the 1987-88 monitoring period, it focuses not upon offsets among types of

services but upon the Commission'srefusal to allow it to offset earnings below the prescribed rate of

return for prior and subsequent monitoring periods. Its argument that such offsets are required under

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AT&T, however, relies upon the very interpretation of that case that we rejected above; we therefore

find Cincinnati Bell's separate argument unconvincing.

2. The Commission's approach to establishing a violation of the act

The IXCs base their damage claims upon § 206 of the Communications Act, which provides:

In case any common carrier shall do ... any act, matter, or thing in this [Act]

prohibited or declared to be unlawful ... such common carrier shall be liable to the

person ... injured thereby for the full amount of damagessustained in consequence of

any such violation of the provisions of this [Act]....

47 U.S.C. § 206. Although the LECs' earnings exceeded the maximum rates of return prescribed by

the Commission, they contend that such overearning does not by itself constitute a violation of the

Communications Act and therefore cannot serve as the sole basis for their damage liability pursuant

to § 206. We disagree.

As discussed above, in NETCO, 826 F.2d 1106-07, we held that the Commission has the

statutory authority to prescribe a carrier's maximum rate of return and to require a LEC that fails to

comply to refund earnings in excess thereof. More important, we held that:

The Commission's chief concern in issuing [rate-of-return] prescriptionsis protecting

just and reasonable rates.... The idea of a prescription ... is that the agency has

proclaimed that a certain situationhere a return in excess of 10%is unlawful and

shall not occur.

Id. at 1106 (emphasis in original). Relying upon our earlier decision in Nader we further explained

that a rate-of-return prescription has "the force of a statute" and is "no less binding" than an order

establishing the maximum rate that a carrier may lawfully charge. Id. at 1107. In AT&T we

reconfirmed all this, explaining that in Nader we had held "that the Commission has power under [the

Communications Act] to prescribe rates of return as well as rates," and that in NETCO we had held

that the "prescription of a rate of return ... represent[s] a proclamation by the Commission that

earnings in excess of the prescribed rate are unlawful...." 836 F.2d at 1392. Hence, all these

casesNader, NETCO, and AT&Tstand squarely in opposition to the LECs' position: We have

repeatedly held that a rate-of-return prescription has the force of law and that the Commission may

therefore treat a violation of the prescription as a per se violation of the requirement of the

Communications Act that a common carrier maintain "just and reasonable" rates, see 47 U.S.C. §

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201(b).

The LECs attempt to avoid this seemingly inevitable conclusion by relying once again upon

our Virgin Islands decision. There, after holding the Commission's refund order invalid because it

was imposed as of the middle of a monitoring period, we went on to note that:

the prescribed rate of return is but "one component" of a carrier's tariff schedules.

Projected operating expenses, market forecasts and competitive conditions must also

be considered by carriers when they settle on a final access rate. Given this multitude

of inputs, the prospective selection of a tariff that will generate the prescribed rate of

return is necessarily an imprecise endeavor. Thus, once the Commission finds that a

carrier has exceeded (as a pure mathematical matter) its prescribed rate of return, it

should then consider other relevant factors in determining whether a rate is

unreasonable and a refund warranted.

989 F.2d at 1239. We also went on to list the sort of factors that the Commission should consider

in deciding whether to order a refund, including: (1) whether the LEC's projections were reasonable

when made; (2) the actual harm suffered by the ratepayer; and (3) any "overriding equitable

considerations." Id. at 1240.

Seen in context, however, we do not think that our Virgin Islands decision is a bar to the

Commission's decision to treat earning more than the prescribed rate of return as a per se violation

of the Act for the purpose of adjudicating a damage claim. Virgin Islands arose under § 204 of the

Communications Act, which providesthat, under certain circumstances, the Commission itself "may

... require [a carrier that has collected an excessive amount] to refund, with interest, ... such portion

ofsuch charge ... as by its decision shall be found not justified." 47 U.S.C. § 204. Because the § 204

refund remedy is couched in permissive terms, the court wasin effect advising the Commission ofthe

issues it must consider in exercising its discretion whether to require a refund. In the present cases,

by contrast, the Commission is responding to complaints brought by customers of the LECs under

§ 206 of the Act, which is phrased in mandatory terms: A carrier that has violated the Act "shall be

liable to the person or persons injured thereby for the full amount of damages sustained in

consequence of any such violation...." 47 U.S.C. § 206. Therefore, the factors that we set out in the

Virgin Islands case do not applywhere, as here, the Commission is adjudicating a damage claimmade

by a customer pursuant to § 206.

3. Equating damages (before limited offsets) with earnings in excess of prescribed rates of return

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Closely related to the LECs' argument against liability for overearning is their claim that, in

order to calculate its damages, an IXC must identify the specific rate that the LEC could reasonably

have charged it. They contend that this is required by both Supreme Court and circuit precedent,

which teaches that a customer's damage is the "difference between the charges paid and the just and

reasonable rate[ ]." United States v. Associated Transport, Inc., 505 F.2d 366, 369 (D.C. Cir. 1974);

see also Reiter v. Cooper, 113 S. Ct. 1213, 1217 (1993); Meeker v. Lehigh Valley R.R. Co., 236

U.S. 412, 428 (1915); Oneida Motor Freight Inc. v. ICC, 45 F.3d 503, 507 (D.C. Cir. 1995).

What the Commission actually did was something rather different. In order to arrive at an

initial (i.e., pre-offset) figure the Commission assumed that an IXC's damages are equal to (1) the

aggregate amount that the IXC paid the LEC for a specific category of access service, (2) less the

aggregate amount that the IXC would have paid for that service had the LEC charged the IXC a rate

that would have produced earnings at the maximum allowed rate of return. MCI Damages Order,

8 F.C.C.R. at 1525. That would be a way of calculating the difference between the charges paid and

the just and reasonable rate, but the Commission did not require the IXCs actually to make this

precise calculation. Rather, for simplicity, the Commission allowed each IXC to approximate that

calculation by multiplying the percentage amount by which the LEC overearnedthe difference

between the LEC's actual and prescribed rates of returntimes the total dollar amount that the IXC

paid for that type of access. See, e.g., MCI Damages Order, 8 F.C.C.R. at 1521-22, 1525.

The cases cited by the LECs do state that the ratemaking agency must establish the just and

reasonable rate in order to calculate damages, but that is all that they say. They do not discuss this

requirement in any detail, and none of them involves a situation in which the regulatory agency had

prescribed a binding rate ofreturn rather than an actualrate. Therefore they do not address, let alone

answer, the fundamental question at issue herewhether an agency that regulates by prescribing a

rate of return may allow a customer that was overcharged because the carrier earned more than its

allowed rate of return, rather than deriving an actual rate, to make a simplifying assumption about

what the reasonable rate would have been.

In support of its simplified approach, the Commission notes that to require the complaining

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IXC to establish the rate that would have produced only a reasonable rate of return for the LEC

would be to ask of it the very thing that the LEC was itself unable to do. MCI Damages Order, 8

F.C.C.R. at 1525. The Commission rejected that idea because, as it said with admirable restraint:

[I]t would be inequitable to permit defendants [the LECs], who were in the best

position to set their rates at lawful levels in the first place, and who later had

opportunities to correct those rates, to avoid responsibility for those unlawful rates,

at the expense of their customers.

Id. The Commission's point is as well-taken as the LECs' is absurd. During any monitoring period

in which its rates appeared destined to yield earnings above (or for that matter below) its authorized

rate of return the LEC could have revised its tariffs to avoid that result. See Prescription Order, 58

Rad. Reg. 2d at 1653-54 (P&F). Moreover, by incorporating a buffer into its rate-of-return

prescriptions the Commission had allowed each LEC some margin for error. These provisions

afforded each LEC considerable flexibility to use the market information available to itthe LEC

presumably knew at least approximatelywhat itsrevenues and costs wereto fashion a rate that was

"reasonable," i.e., would not result in a return above the maximum allowed. If the LEC, with its

superior information, could not (or did not) accurately establish such a rate, then it seems obvious

that the IXC could not (or should not be expected to) establish such a rate from the outside looking

in.

Admittedly, any calculation of the rate that will produce a targeted rate of return, whether it

is done by the Commission, an IXC, or for that matter a LEC, is necessarily but an estimate. It is not

possible to know precisely the effect that any given rate, or change from a prevailing rate, will have

upon revenues (and therefore upon the LEC's rate of return); that depends upon the elasticity of the

demand for the service, which cannot be known for certain, 1 ALFRED E. KAHN, THE ECONOMICS OF

REGULATION: PRINCIPLES AND INSTITUTIONS 185-88 (1970); see also Douglas H. Ginsburg, The

Goals of Antitrust Revisited, 147 J. INST'L & THEORETICALECON. 24, 25 (1991). If demand is at all

price-elastic, however, then it is axiomatic that a reduction in the price charged will result in an

increase in the quantity sold and that any reduction in revenues associated with the reduction in price

will be less than proportionate. See WILLIAM J. BAUMOL & ALAN S. BLINDER, ECONOMICS:

PRINCIPLES AND POLICY 468-72 (5th ed. 1991). Nonetheless, the approach that the IXCs have taken

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to calculating damages is premised upon a model in which it is assumed that demand is completely

inelastic over the relevant range (and that short-run marginal cost is zero), so that a one percent

reduction in rates would have produced a full one percent reduction in revenues. In other words, it

establishes as "reasonable" the rate that would have produced earnings within the prescribed level,

holding cost and demand constant. This approach yields a conservative estimate because it implicitly

assumes that the quantity demanded would not increase if the price were lowered. The actual

reasonable rate would, if anything, therefore be lower than the rate derived by the IXCs.

Because any determination of the reasonable rate will necessarily be an estimate under the

rate-of-return regime, and because the estimate relied upon by the IXCs is a conservative one, we

reject the LECs' contention that the Commission failed to require the IXCs adequately to prove their

damages. 

4. The statute of limitations

The Communications Act provides that "[a]ll complaints against carriers for the recovery of

damages not based on [charges in excess of those made applicable in a tariff] shall be filed with the

Commission within two years from the time the cause of action accrues, and not after." 47 U.S.C.

§ 415(b). The question here is at what point an IXC's cause of action accrues. The LECs argue for

what amounts to a "time-of-injury" rule; they contend that a cause of action accrues on the last day

of the monitoring period to which it relateswhich would mean that nearly all of the claims at issue

here are time-barred. The Commission, on the other hand, argues for what is generally called a

"discovery-of-injury" rule; it contends that a cause of action accrues only when the IXC discovers

(or with due diligence should discover) that it has been overcharged. According to the Commission,

moreover, that does not occur until after the LEC files its final earnings report for the two-year

monitoring period at issue. We agree with the Commission that the discovery-of-injury rule applies

to these causes of action.

In Connors v. Hallmark & Son Coal Co., 935 F.2d 336, 342 (D.C. Cir. 1991), the court (per

then-Judge Ruth Bader Ginsburg) aligned the law of this circuit with that of the eight other circuits

to have considered the matter and held that "the discovery[-of-injury] rule isthe general accrualrule

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in federal courts," applicable in federal question cases "in the absence of a contrary directive from

Congress." We also explained that the time-of-injury rule is not inconsistent with, and indeed should

be considered a part of, the broader discovery-of-injury rule:

[I]fthe injury issuch that it should reasonably be discovered at the time it occurs, then

the plaintiffshould be charged with discovery of the injury, and the limitations period

should commence, at that time. But if, on the other hand, the injury is not of the sort

that can readily be discovered when it occurs, then the action will accrue, and the

limitations period commence, only when the plaintiff has discovered, or with due

diligence should have discovered, the injury.

The LECs point to no directive from the Congress suggesting that the general

discovery-of-injury rule does not apply to a damage claim asserted under § 206 of the

Communications Act. Instead, they rely only upon our recent decision in 3M Co. v. Browner, 17 F.3d

1453 (1994), which involved a civil enforcement proceeding brought for violations of the Toxic

Substances Control Act that were alleged to have occurred more than five years earlier. We held that

the EPA's cause of action accrued, and thus the five-year statute of limitations began to run, when

the violation occurred rather than when the EPA actually discovered or with due diligence should

have discovered the violation. Id. at 1460-63. In so doing, we specifically took note of the general

discovery-of-injury rule that we had recently adopted in Connors, but explained that it "applied only

to remedial, civil claims." Id. at 1460. Because the case against 3M was penal in naturethe statute

imposed a five-yearlimitations period for any"fine, penalty, or forfeiture"we held that the generally

applicable discovery-of-injury rule adopted in Connors did not apply in that case. If the

discovery-of-injuryrule were applicable to an agency-initiated civilpenaltycase, then the court would

have to determine whether the agency, with the exercise of due diligence should have detected the

violations earlier than it hadan oversight activity that (at least absent a statutory directive to the

contrary) is better suited to the legislature than to the court. Id. at 1461.

As the foregoing suggests, 3M is of no help to the LECs' cause because it deals only with the

special circumstance, not present here, of an agency-initiated civil penalty case; 3M leaves the

discoveryrule ofConnorsintact for remedial civil actionssuch asthe IXCs brought against the LECs.

Therefore we follow the discovery-of-injury rule adopted in Connors to determine when the claims

of the IXCs accrued.

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The LECs contend that even if the discovery-of-injury rule applies, most of the IXCs' claims

are time-barred: The Commission allowed them to go forward, according to the LECs, only because

it erroneously held that an IXC's claim does not accrue until the LEC from which the IXC seeks

damages files its final earnings report for the monitoring period at issue, i.e., nine months after the

close of that period. The LECs argue that such a claim accrues three months after the close of the

monitoring period, the time by which the Commission requiresthe LEC to file a preliminary earnings

report.

The LECs' position would be tenable if, after reviewing the relevant preliminary reports, an

IXC exercising due diligence should have discovered that it had been overcharged. Connors, 935

F.2d at 342. But that is not the case. The raison d'etre for the final report is to afford the LEC time

to adjust the data submitted in its preliminary report, see Amendment of Part 65, Interstate Rate of

Return Prescription: Procedures and Methodologies to Establish Reporting Requirements, Report

and Order, CC Docket No. 86-127, 1 F.C.C.R. 952, 954 (1986); it therefore would be passing

strange to require an IXC to assume that the preliminary report is a reliable indicator of whether the

LEC has earned more than allowed. Indeed, the Commission points out that in five of the claims

before usthe preliminaryreport did not accuratelyrevealwhether the LEChad exceeded its allowable

rate of return. This, we think, is convincing evidence that even a diligent IXC could not reliably

ascertain whether it had been injured solely upon the basis of the preliminary report. Therefore we

agree with the Commission that a cause of action for damages pursuant to § 206 does not accrue until

after the LEC files its final report.

B. The IXCs' Claims

Recall that the IXCs ask us to vacate only the Commission's "limited offset" rule, that is, its

policy of allowing a LEC to offset against any overcharge that an IXC paid for one type of accessthe

amount that the same IXC "underpaid" the LEC (i.e., insofar asit paid a rate that yielded a return less

than the prescribed maximum) for any other type of access during the same monitoring period. The

IXCs advance three primary contentions: They claim that allowing "limited offsets" (1) violates both

FCC and related ICC precedent, and (2) the "filed rate doctrine"; and (3) was inadequately explained

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(and thus arbitraryand capricious) under the standards ofthe Administrative Procedure Act. Because

we agree with the IXCs' first contention and upon that basis vacate the limited offsets, we do not

reach the latter two claims. (Nor do we consider Allnet's alternative claim that the Commission

improperly set the interest rate it is due on its award of damages.)

In Laning-Harris Coal & Grain Co. v. St. Louis & San Francisco Ry. Co., 15 I.C.C. 37

(1909), a customer complained before the ICC that the defendant railroad had overcharged it by $42

on shipments made during the period 1906-07. "In answer to the complaint defendant admitted that

it is indebted to complainant in said sum, but shows that in 1902 and 1903 it undercharged the

complainant in the sumof $109.50 [and] therefore claimsset-off and asks dismissalofthe complaint."

Id. at 38. The Commission denied the set-off, explaining that:

It is clear that the Commission ... is not authorized to adjudicate the claim of a

railroad company against a shipper, but only the claim of a shipper against a railroad

company.... To award set-off amounts to the same thing as adjudicating the claim of

the railroad company against the shipper, and entry of an order based upon a set-off

could occur only after such adjudication. Plainly, if the Commission is without

authority to determine the rights of the parties, it is also powerless to enter an order

based upon a determination of those rights.

Because the Congress borrowed heavily from the Interstate Commerce Act when it drafted

the Communications Act of 1934indeed the damage sections upon which the IXCs base their

claims are derived from the ICAboth this court and the Commission often turn to decisions under

the ICAfor guidance in interpreting the Communications Act. See, e.g., American BroadcastingCo.

v. FCC, 643 F.2d 818, 820-21 (D.C. Cir. 1980); MCI Telecommunications Corp. v. AT&T, 85

F.C.C.2d 994, 998 (1981). It is not surprising, therefore, that the Commission has expressly adopted

the rule of Laning-Harris. See Thornell Barnes Co. v. Illinois Bell Telephone Co., Decision, Docket

No. 14645, 1 F.C.C.2d 1247 (1965).

The customer in Thornell Barnes wasseeking damages upon the ground that Illinois Bell had

improperly charged him for misdirected calls. After calculating the customer's damages, the

Commission stated:

We do not believe ... that it would be proper to "set off" against this amount the

amount that Barnes was undercharged on certain calls at the station-to-station rate

because this would involve a determination of the carrier'srights against a subscriber,

over which this Commission has no jurisdiction. See Laning-Harris Coal & Grain

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Co. v. St. L. & S.F. R.R. Co., 15 ICC 37 (1908).

Id. at 1275. The IXCs argue that both the ICC's decision in Laning-Harris and the FCC's decision

in Thornell Barnes preclude the Commission from awarding the LECs limited offsets in the present

cases. That, they contend, would "involve a determination of the carrier's rights against a [customer],

over which this Commission has no jurisdiction."

The Commission attempts to distinguish Thornell Barnes on the ground that it involved a

claimfor "set-off" while the instant casesinvolve claimsfor "offsets." Truly; it explains that a set-off

"involvesthe adjudication of a claim separate from the one advanced by the plaintiff" and arguesthat

it "did not adjudicate, through the use of offsets or otherwise, any claims of any LEC against any

customer." Rather, the Commission argues, it considered the offsets only in the course of

determining the damages that the complainants actually incurred. That is appropriate, according to

the Commission, because the "focus of [the IXCs'] complaintsis not [the LECs'] individual interstate

accessrates perse, but the excessive earnings produced by these rates and their effect on [the IXCs]."

MCI Damages Order, 8 F.C.C.R. at 1527. We are not persuaded by the Commission's attempted

distinction.

First, while one may be able to construct a distinction between set-offs and offsets, but see

Steinmeyer v. Warner Consolidated Corp., 116 Cal. Rptr. 57, 59-60 (Cal. Ct. App.1974) (using the

two terms interchangeably), the Commission itself blurred the line between the two (if two they be)

in Thornell Barnes. Although the Commission there characterized the claim made by the carrier as

a "set-off," it considered the claim only as part of its damage calculation. The Commission thus

appears to have considered, and rejected as ultra vires, the very manner of proceeding that it now

repackages and embraces as an offset, viz., folding the carrier's undercharge for one service into its

evaluation of the actual damage that the customer suffered by reason of being overcharged for

another. The new approach is inconsistent not only with the Commission's own precedent but also

with the course that the ICC took in the aftermath of Laning-Harris. In Breece Veneer Co. v.

Chesapeake &Ohio Ry. Co., 182 I.C.C. 690 (1932), the ICC awarded a customer reparations in the

amount it was overcharged on certain shipments even asit refused to consider that the customer had

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not paid the carrier at all for a different shipment of the same commodity. The ICC did not accept

the contention (adopted by a lone dissenter) that the strictures of Laning-Harris could be avoided

simply by reducing the damages that the customer receives upon its claim against the carrier by the

amount of the carrier's claim against the customer. Id. at 692. In short, the Commission's attempt

to justify its allowance of offsets here is contrary both to its own precedent and to the ICC's

longstanding interpretation of the cognate provisions of the ICA.

But there is another problem with the Commission's approach: The award of an offset

amounts to an implicit determination that the defendant LEC was entitled to earn more than the

amount that it actually earned from the rates that it charged. Under the rate-of-return regime as the

Commission promulgated it, however, a LEC enjoys no such entitlement, either for interstate access

overall or for any individual type of access. Indeed in NETCO we noted with approval that the

Commission had "declined to set minimumguaranteed rates ofreturn for carriers," 826 F.2d at 1108-

09, and nothing of which we are aware in any subsequent rulemaking proceeding suggests that the

Commission has since changed course. The Commission may not now, in adjudicating an individual

damage complaint, simply manufacture out of whole cloth such a minimum guaranteehere a

guarantee that the LEC will earn for the offsetting service a rate of return no lower than the rate of

return actually obtained plusthe additional amount (up to the maximum allowed) necessary to offset

overearnings on the service for which the IXC has made the claim to be offset.

The Commission attempts to justify this departure from its own regulatory scheme by

explaining that "it is reasonable to inquire into [the IXC's] overall purchase of interstate access

services" because the "focus of[each IXC's] complaintsis not [the LECs'] individual interstate access

rates perse, but the excessive earnings produced by these rates and their effect on [that IXC]." MCI

Damages Order, 8 F.C.C.R. at 1527. That explanation begs the question whether "excessive

earnings" from the provision of one service can be offset by earnings foregone in the provision of

another service. Most of the IXCs' claims are category-specific; that is, they are not based upon the

rate of return that the LEC earned overall from the provision of interstate access services but rather

upon the rate of return that the LEC earned from the provision of a particular type of accessservice.

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The IXCsseek to recover money from the LECsfor having done the very thing that the Commission,

in setting category-specific rate-of-return prescriptions, sought to prohibitnamely, earning more

than the maximum allowed from the provision of a particular service. The Commission cannot avoid

the inconsistency between the regulatory scheme that it devised and its more recent implementation

of that scheme by blaming the IXC for the manner in which it brought its claim, i.e., for focusing

upon the LEC's excessive earnings rather than the specific rate that it charged.

Finally, theCommission's approach to offsetsisinconsistent with the statutory and regulatory

goalof preventing discrimination in the pricing of accessservices. See Prescription Reconsideration,

59 Rad. Reg. 2d at 1603 (justifying category-specific rate-of-return prescriptions on ground that

Commission is "bound by the Communications Act to ensure that rates ... do not produce

unreasonable discrimination or undue preferences"; 47 U.S.C. § 202 ("It shall be unlawful for any

common carrier to make any unjust or unreasonable discrimination in charges"). By awarding an

offset in favor of a LEC the Commission effectively allows the complaining IXC alone to be charged

for the offsetting category ofservice at a rate above what others paid for it, up to the rate that would

yield the maximum rate of return for that type of service. An IXC that can not or does not bring a

refund claim in connection with its purchase of an overearning access service (X) will therefore pay

lessfor the underearning category ofservice (Y) than will the IXC that does bring a successfulrefund

claim. The Commission offers no convincing explanation of why an IXC that purchased little or none

of the service (X) for which the LEC overearned (and hence did not bring an overcharge claim)

should enjoy the low rate that the LEC charged for a service (such as Y) in which it underearned

while an IXC that purchased more of the overpriced service should not.

In sum, by factoring into its damage calculation the complaining IXC's so-called

"underpayments" for other categories of service, the Commission effectively adjudicates the defending

LEC's claim for underearnings, in derogation of (1) FCC and related ICC precedent; (2) the

Commission's rate-of-return regulatory regime, under which a LEC is not entitled to any minimum

rate of return; and (3) the statutory and regulatory norms against rate discrimination. For all these

reasons, we hold that the Commission's limited offset policy cannot stand.

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III. CONCLUSION

In summary, we deny the consolidated petitions of the LECs and the petition of Cincinnati

Bell, and grant the consolidated petitions of the IXCs. The Commission's orders are therefore

affirmed except to the extent that they involve limited offsets, as to which we vacate the

Commission's orders and remand these matters for the Commission to recalculate the complainants'

damages. We dismiss Allnet's petition as moot in view of our decision invalidating limited offsets.

So ordered.

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