Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-caDC-04-01332/USCOURTS-caDC-04-01332-0/pdf.json

Parties Involved:
BellSouth Corporation
Petitioner
Federal Communications Commission
Respondent
United States of America
Respondent

Document Text:

United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued October 21, 2005 Decided June 20, 2006

No. 04-1331

VERIZON TELEPHONE COMPANIES, ET AL.,

PETITIONERS

v.

FEDERAL COMMUNICATIONS COMMISSION AND

UNITED STATES OF AMERICA,

RESPONDENTS

AT&T CORPORATION,

INTERVENOR

Consolidated with

04-1332

On Petitions for Review of an Order of the

Federal Communications Commission

Sean A. Lev argued the cause for petitioners. With him on

the briefs were Michael K. Kellogg, Mark L. Evans, Scott H.

Angstreich, Michael E. Glover, Edward Shakin, James G.

Harralson, and Bennett L. Ross. Richard M. Sbaratta entered an

appearance.

USCA Case #04-1332 Document #975358 Filed: 06/20/2006 Page 1 of 23
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Richard K. Welch, Counsel, Federal Communications

Commission, argued the cause for respondents. With him on the

brief were R. Hewitt Pate, III, Assistant Attorney General, U.S.

Department of Justice, Robert J. Wiggers and Robert B.

Nicholson, Attorneys, and John E. Ingle, Deputy Associate

General Counsel, and Laurel R. Bergold, Counsel. John A.

Rogovin and Samuel L. Feder, Counsel, entered appearances.

Judy Sello, David W. Carpenter, and David L. Lawson were

on the brief for intervenor AT&T Corporation. James P. Young

entered an appearance.

Before: GINSBURG, Chief Judge, and ROGERS and GRIFFITH,

Circuit Judges.

Opinion for the Court filed by Circuit Judge GRIFFITH.

GRIFFITH, Circuit Judge: This matter involves the use of an

accounting rule, “add-back,” in a complex area of regulation

addressing the rates charged by local telephone exchange

carriers for access to their networks. Its resolution, however, is

relatively straightforward because, at its core, petitioners’

challenge cannot overcome the broad delegation of power

Congress has given the Federal Communications Commission

(“FCC” or “Commission”) to suspend petitioners’ rates and

determine whether they are “just and reasonable.” Petitioners

contend that the FCC unreasonably required their 1993 and 1994

tariffs to comply with the add-back rule years after those tariffs

were filed. But Congress has expressly authorized the FCC to

do what petitioners urge it cannot: suspend petitioners’ tariffs

upon their filing, subject petitioners to an accounting order to

track revenue earned under the tariffs, and determine at a later

date whether petitioners’ tariffs contain “just and reasonable”

rates. 47 U.S.C. § 204(a)(1). We conclude that the Commission

reasonably applied its “quasi-legislative authority,” see Global

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NAPs, Inc. v. FCC, 247 F.3d 252, 259 (D.C. Cir. 2001), under

47 U.S.C. § 204(a)(1) in rejecting petitioners’ suspended tariffs

for failing to apply add-back.

I.

Significant background is needed to understand the issue

before us. Prior to September 1990, local telephone companies

(local exchange carriers or “LECs”) were subject to “rate-ofreturn” regulation in setting prices for interstate carriers to

access their local telephone networks. 1993 Annual Access

Tariff Filings; 1994 Annual Access Tariff Filings, 19 F.C.C.R.

14,949, 14,949 ¶ 2 (2004) (the “Tariff Order”). As we

explained in National Rural Telecom Ass’n v. FCC, 988 F.2d

174 (D.C. Cir. 1993),

[r]ate-of-return regulation is based directly on cost.

Firms so regulated can charge rates no higher than

necessary to obtain sufficient revenue to cover their

costs and achieve a fair return on equity. As one virtue

of perfect competition is that it drives prices down to

cost, rate-of-return regulation seems on its face a

promising way to regulate natural monopolies, in

principle roughly duplicating the benefits of

competition.

Id. at 177-78 (quotation marks and internal citations omitted).

Under rate-of-return regulation, if an LEC earned more than was

permitted by the regulated rate, the company was required to

refund those over-earnings to its ratepayers. Price Cap

Regulation of Local Exch. Carriers, 8 F.C.C.R. 4415, 4415 ¶ 5

(proposed July 6, 1993) (“Add-Back NPRM”). The Commission

“required LECs to treat refund payments as adjustments to the

period in which the overearnings occurred, rather than to the

period in which the refund is paid.” Id. “Thus, LECs ‘addedUSCA Case #04-1332 Document #975358 Filed: 06/20/2006 Page 3 of 23
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back’ the amount of any refund for prior excess earnings into the

total earnings used to compute the rate of return for the current

earnings period.” Tariff Order, 19 F.C.C.R. at 14,950 ¶ 2. The

reason for requiring add-back was simple: for rate-of-return

regulation to work, a current earnings period needed to reflect

current earnings and not be distorted by refunds paid in the

current period for past overcharges. Add-back “provide[d] a

clear picture of current earnings for the reporting period” by

allowing the Commission to determine “whether an access

category being adjusted through a refund is earning above its

adjusted maximum rate of return in the monitoring period.”

Amendment of Part 65, Interstate Rate of Return Prescription,

1 F.C.C.R. 952, 956 ¶ 43 (1986).

“In September 1990, the Commission replaced rate-ofreturn regulation for the largest LECs with . . . price cap

regulation.” Tariff Order, 19 F.C.C.R. at 14,950 ¶ 3. Under the

price cap regime, “the regulator sets a maximum price, and the

firm selects rates at or below the cap. Because cost savings do

not trigger reductions in the cap, the firm has a powerful profit

incentive to reduce costs.” Nat’l Rural Telecom, 988 F.2d at

178. “Price cap regulation is intended to provide better

incentives to the carriers than rate of return regulation, because

the carriers have an opportunity to earn greater profits if they

succeed in reducing costs and becoming more efficient.” Bell

Atl. Tel. Cos. v. FCC, 79 F.3d 1195, 1198 (D.C. Cir. 1996). The

Commission had to address three basic questions in setting up

price cap regulation: (1) what initial price caps should be; (2)

how to address inflation in future years; and (3) how to account

for the LECs’ future efficiency and innovation. The

Commission answered the first question by “cho[osing] existing

rates,” the second question by selecting “an escalator based on

general price inflation,” and the third by providing for “an

annual percentage reduction [to the price caps] for expected

savings from innovation and other economies.” Nat’l Rural

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Telecom, 988 F.2d at 178 (citing Policy and Rules Concerning

Rates for Dominant Carriers, Second Report and Order, 5

F.C.C.R. 6786, 6792, 6814 (1990) (“LEC Price Cap Order”)).

At issue here is this third determination: the percentage

reduction applied to price cap indices (“PCIs”) annually, known

as a productivity factor or “X-factor.”

The Commission sought to create a productivity factor that

would “generate lower rates for customers while offering LECs

a fair opportunity to earn higher profits.” LEC Price Cap Order,

5 F.C.C.R. at 6801 ¶ 120. But the Commission believed that it

would be “difficult to determine a single, industry-wide

productivity offset that will be perfectly accurate for the industry

as a whole or for individual LECs or market conditions at a

given time.” Id. Accordingly, the Commission adopted two

mechanisms to prevent an imperfect productivity factor (i.e., one

that does not accurately represent efficiency gains or losses)

from distorting customer rates or the LECs’ profits. Under its

“sharing plan” mechanism, the Commission required

participating LECs to “share” their earnings above a certain

level with their interstate access customers by lowering their

price caps in the following year. LEC Price Cap Order, 5

F.C.C.R. at 6801 ¶ 124. Price cap LECs were allowed to choose

one of two X-factors, which would dictate how much their rates

would be lowered and the extent of their sharing obligation.

Specifically,

a price cap LEC opting for an X-factor of 3.3 percent

and earning a rate of return above 12.25 percent was

required to share half of earnings above 12.25 percent

and all earnings above 16.25 percent with its access

customers. [LEC Price Cap Order, 5 F.C.C.R. at 6801

¶ 125.] For LECs that elected a more challenging 4.3

percent X-factor, 50 percent sharing began for rates of

return above 13.25 percent, and 100 percent sharing

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1

 Rate-of-return regulation used a rate-of-return calculation to

set “a maximum allowable return” based upon LECs’ costs and a

prescribed rate of return. Tariff Order, 19 F.C.C.R. at 1949-50 ¶ 2;

see Nat’l Rural Telecom, 988 F.2d at 177-78. Even under the price

cap regime at issue here, however, a rate-of-return calculation is

necessary to determine, among other things, an LEC’s sharing or lowend adjustment. See Bell Atl., 79 F.3d at 1199 (“Sharing entails a

one-time adjustment to a local exchange carrier’s price cap index

when its rate of return for the previous year has been abnormally

high.”); id. at 1199 n.4 (explaining that low-end adjustments were

calculated using a “mechanism [that] mirrors the sharing adjustment”).

began at rates of return above 17.25 percent. [LEC

Price Cap Order, 5 F.C.C.R. at 6787-88 ¶¶ 7-10.]

Tariff Order, 19 F.C.C.R. at 14,951 n.9.1

 Thus, an LEC that

selected a 4.3 percent X-factor would initially have to cut rates

more than a competitor that selected a 3.3 percent X-factor, but

could keep a greater percentage of its earnings. Alternatively,

a “low-end adjustment” mechanism “permitted price cap LECs

earning less than 10.25 percent in a particular year to adjust their

PCIs and rates upward in the following year to a level that

would have allowed them to achieve an earnings rate of at least

10.25 percent for the year in which they under-earned.” Id. at

14,951 ¶¶ 3, 4.

Sharing and low-end adjustments were first applied to the

LECs’ 1992 access tariffs. Some LECs had to lower their price

caps based upon 1991 earnings, while others were permitted to

increase price caps for 1992. One year later, those adjustments

raised an issue not addressed by the Commission in

promulgating its price cap plan: what effect should the

adjustments made to 1992 price caps based upon over- or underearnings from 1991 have in calculating the rates of return for

1992 (and thereby determining the rates to be charged for

1993)? In calculating the rates to be charged for 1993, LECs

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had to determine whether (1) to “add back” the adjustment made

to rates for 1992 in calculating the rate of return for 1992, as

occurred prior to price cap regulation or (2) to calculate the rate

of return for 1992 without considering the effect of sharing or

low-end adjustments made because of earnings from 1991.

Perhaps not surprisingly, LECs that could achieve higher rates

for 1993 by applying add-back chose to apply add-back, and

LECs that could achieve higher rates for 1993 by not applying

add-back chose not to apply add-back. Thus, each LEC took the

position on add-back that would allow it to maximize its price

caps for 1993. See id. at 14,951 ¶ 4.

This selective use of an accounting rule by the LECs did not

go unnoticed by the Commission. The Commission initiated a

rulemaking regarding add-back, proposing that its price cap

regime include a specific rule mandating add-back. See AddBack NPRM, 8 F.C.C.R. at 4417 ¶ 15. Soon thereafter, noting

that the add-back issue was unresolved and pending in the

rulemaking proceeding, the Commission suspended 1993 tariffs

for one day, issued an accounting order, and set for investigation

all 1993 access tariffs for carriers that benefitted from a low-end

adjustment or were subject to sharing for 1992. When price cap

LECs filed 1994 tariffs, the Commission suspended those rates

as well, issued an accounting order, and broadened the scope of

the 1993 investigation to include 1994 tariffs. 

A. The Add-Back Rulemaking.

In the Add-Back NPRM, the Commission indicated that no

“commenters in the LEC Price Cap rulemaking or in the

subsequent reconsideration proceeding discussed the details of

rate of return calculations, or requested that [it] eliminate

add-back from the rate of return calculations of the LEC price

cap plan.” Id. at 4416 ¶ 10. The Commission, “[h]owever, . . .

recognize[d] that this issue was neither expressly discussed in

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the LEC price cap orders nor clearly addressed in [its] Rules.”

Id. at 4415 ¶ 4. The Commission “believe[d] that [add-back]

continue[d] to be an appropriate and indeed probably necessary

component of the [price-cap] backstop.” Id. at 4416 ¶ 11.

Because “[t]he amounts of sharing or lower formula adjustment

implemented in one year . . . relate to productivity performance

in a prior year[,] . . . unless add-back occurs, the relationship

between rate of return and productivity growth becomes

hidden.” Id. Furthermore, an “unadjusted rate of return

effectively double-counts the amount of the backstop

adjustment, once in the base year and then again in the tariff

year.” Id. at 4416 ¶ 12. Finally, without add-back, the

Commission believed that “the effective rate of return [for

LECs] over time could fall outside the range of returns [it]

judged to be reasonable.” Id. at 4416 ¶ 13.

After receiving and addressing comments, the Commission

adopted a new regulation that explicitly required add-back under

its price cap rules. See Price Cap Regulation of Local Exch.

Carriers, 10 F.C.C.R. 5656, 5657, 5659 ¶¶ 4, 16 (1995) (the

“Add-Back Rulemaking Order”). The Add-Back Rulemaking

Order noted that the Commission’s price cap rules had not

“specif[ied] the manner in which these [sharing and low-end]

adjustments should be treated by the LECs in computing their

interstate earnings for the year in which the sharing or low-end

adjustment is effected,” id. at 5656 ¶ 1, and indicated that “in

adopting the LEC Price Cap Order, the Commission did not

state that it intended to eliminate the requirement under

rate-of-return regulation that carriers subtract revenues

reflecting out-of-period earnings for purposes of calculating

current year earnings,” id. at 5661 ¶ 32. According to the

Commission, the issue of how to treat these adjustments did not

arise until 1993, the first year that price caps would be based

upon prices that were previously subjected to adjustments. See

id. at 5658 ¶ 10. Absent explicit guidance on add-back from the

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Commission in the price cap context, the Commission noted

again that LECs had taken divergent approaches on whether to

apply this accounting rule. See id. at 5658 ¶ 11. After a lengthy

analysis, the Commission concluded that adding back a sharing

adjustment “ensures that the earnings thresholds applied to

determine price cap LECs’ sharing obligations are those [the

Commission] intended when [it] adopted” the price cap plan, id.

at 5660 ¶ 22, and that adding back any low-end adjustment was

also necessary for essentially the same reason, see id. at 5661

¶ 28. 

Several parties petitioned for review of the Add-Back

Rulemaking Order in this Court, arguing that “the add-back

requirement is arbitrary and capricious because it requires

carriers to recognize ‘phantom’ earnings and because it requires

carriers to share more than the original price cap rules intended.”

Bell Atl., 79 F.3d at 1205. We rejected those arguments and

held that the Commission reasonably applied add-back, noting

that add-back “provides useful information about the carrier’s

productivity because it reflects what the carrier could have

earned but for the sharing obligation.” Id. at 1206. The

Commission also reasonably determined that add-back “resulted

in the right level of sharing, and . . . was a necessary part of the

sharing mechanism.” Id. We also rejected petitioners’

argument that adopting an add-back rule would result in

retroactive rulemaking. We noted that (1) “[t]he sharing rules

do not regulate past transactions; they regulate future rates;” and

(2) “the add-back rule does not change the past legal

consequences of carriers’ decisions to choose the 3.3 percent Xfactor rather than the 4.3 percent X-factor” because “[t]he state

of the law has never been clear, and the issue has been disputed

since it first arose in 1993,” meaning that the “rule does not

upset . . . reasonable reliance interests.” Id. at 1207.

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B. The 1993 and 1994 Tariff Suspension Proceedings.

Five days after initiating notice and comment proceedings,

the Commission entered its order suspending and opening an

investigation of 1993 tariffs for LECs that benefitted from a

low-end adjustment or were subject to sharing in 1992, 1993

Annual Access Tariff Filings, 8 F.C.C.R. 4960, 4965 ¶ 32

(Common Carrier Bureau 1993), and, as noted, took the same

approach to 1994 tariffs, 1994 Annual Access Tariff Filings, 9

F.C.C.R. 3705, 3713 ¶ 12 (Common Carrier Bureau 1994). For

both matters (the “1993 and 1994 investigations”), the

Commission entered an “accounting order,” so that the LECs’

access charges for 1993 and 1994 could be tracked and refunds

could be ordered if those tariffs were found to be unlawful.

Both suspension orders noted the Commission’s pending

rulemaking on the add-back issue, but did not specify any

timetable for when the 1993 and 1994 investigations would be

completed. Even after the Add-Back Rulemaking Order was

released in 1995, and after this Court in Bell Atlantic rejected in

1996 the challenges of various LECs to the Add-Back

Rulemaking Order, the Commission was silent about the 1993

and 1994 investigations. Finally, in 2003, the Commission

issued an order seeking comments “to refresh a record that, due

to passage of time and several mergers and acquisitions among

the interested parties, may have now grown stale.” Further

Comment Requested on the Appropriate Treatment of Sharing

and Low-End Adjustments, 18 F.C.C.R. 6483, 6487 (2003). On

July 30, 2004, pursuant to its authority under 47 U.S.C.

§ 204(a)(1) to determine whether a regulated tariff contained

“just and reasonable” rates, see 47 U.S.C. § 201(b), the

Commission released an order determining that 1993 tariffs of

LECs which were subject to a sharing or low-end adjustment in

1992 were just and reasonable if they applied add-back, and that

1993 tariffs of LECs which were subject to a sharing or low-end

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adjustment in 1992 were not just and reasonable if they had not

applied add-back. Tariff Order, 19 F.C.C.R. at 14,949 ¶ 1. The

Commission reached the same determination with respect to

1994 tariffs. Id. The Commission left open the question of

refunds for any overcharges that resulted from the imposition of

unjust and unreasonable rates, concluding that it would hold

further proceedings on the scope of any refunds. See id. at

14,961-62 ¶ 29 (“After reviewing the recalculations and refund

plans submitted in response to this order, and replies received on

these recalculations and refund plans, we will, as appropriate,

approve, disapprove, or order modification of the filed

recalculations and refund plans.”). Two LECs that participated

in the proceedings that led to the Tariff Order, Verizon

Communications Inc. (and its various subsidiaries) (“Verizon”)

and BellSouth Corporation (“BellSouth”), filed these timely

petitions for review of the Tariff Order. 

II.

Even where the “parties assure us that we have jurisdiction

over [a] case, we have an independent obligation to be certain.”

Midwest Indep. Transmission Sys. Operator, Inc. v. FERC, 388

F.3d 903, 908 (D.C. Cir. 2004) (citing Steel Co. v. Citizens for

a Better Env’t, 523 U.S. 83, 94-95 (1998)). Petitioners assert

that we have jurisdiction to review their challenge to the Tariff

Order pursuant to 47 U.S.C. § 402(a) and 28 U.S.C. §§ 2342(1),

2344, which the Government does not dispute. “[Section]

402(a) provides that review shall be sought through the general

petition process prescribed in 28 U.S.C. §§ 2341-2351.” N. Am.

Catholic Educ. Programming Found., Inc. v. FCC, 437 F.3d

1206, 1208 (D.C. Cir. 2006). “Section 2342 of the Judicial

Review Act confers on the court of appeals ‘exclusive

jurisdiction to enjoin, set aside, suspend (in whole or in part), or

to determine the validity of . . . all final orders of the Federal

Communications Commission made reviewable by section

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402(a) of title 47.’” Am. Ass’n of Paging Carriers v. FCC, 442

F.3d 751, 755 (D.C. Cir. 2006) (quoting 28 U.S.C. § 2342)

(emphasis added).

As “§ 402(a) applies only to final orders,” N. Am. Catholic,

437 F.3d at 1209 (emphasis in original), some discussion is

needed regarding our jurisdiction to review the Tariff Order

when that order contemplates further proceedings regarding

refunds that petitioners may or may not have to provide—i.e.,

when that order does not appear to be “final.” “[U]nder a

well-established principle of finality, when a tribunal elects to

resolve the issue of liability in a particular action while

reserving its determination of damages on that liability, that

decision generally is not considered ‘final’ for purposes of

judicial review.” Verizon Tel. Cos. v. FCC, 269 F.3d 1098,

1104 (D.C. Cir. 2001). “This basic understanding of finality is

the norm not only in civil litigation, but also in the

administrative context, at least where the relevant statute does

not embrace a non-traditional view of finality.” Id. Although

the Tariff Order determined that petitioners’ 1993 and 1994

tariffs were unlawful, the Commission made clear that

proceedings would continue regarding what refunds would

occur, i.e., what liability petitioners would have.

As we recognized in Verizon, however, this norm of finality

may be “supplanted by statute.” Id. at 1104-05 (holding, despite

the pendency of future proceedings to determine damages, the

Commission’s determination that LECs had imposed

unreasonable charges was final action subject to review per 47

U.S.C. § 208(b)). The same is true here: the Tariff Order

completed the Commission’s “hearing and decision” regarding

“the lawfulness” of the LEC’s tariffs, id. § 204(a)(1), making it

a “final order” over which we may exercise jurisdiction under

§ 204(a)(2)(C) (“Any order concluding a hearing under this

section shall be a final order and may be appealed under section

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402(a) of this title.”). Thus, we have jurisdiction to review the

LECs’ challenge to the Commission’s lawfulness conclusion in

the Tariff Order.

III.

Section 201(b) of the Communications Act (the “Act”), 47

U.S.C. § 201(b), provides that charges for interstate or foreign

communications “shall be just and reasonable.” See Bell Atl., 79

F.3d at 1202. Section 204(a)(1) of the Act, 47 U.S.C.

§ 204(a)(1), directs that “[w]henever there is filed with the

Commission any new or revised charge,” the Commission may

investigate “the lawfulness” of the charge and immediately

“suspend the operation of such charge” for a “period [of up to]

five months beyond the time when [the charge] would otherwise

go into effect.” If the Commission’s hearing has “not been

concluded,” the Act allows the “the proposed new or revised

charge . . . [to] go into effect” after five months, but the

Commission may require a carrier to “keep accurate account of

all amounts received” under the potentially unlawful charge

(i.e., order an accounting). Id. In determining whether a new or

revised charge is lawful under § 204(a)(1), the Act provides that

“the burden of proof . . . shall be upon the carrier.” Id.

Section 201(b) also authorizes the Commission to

“prescribe such rules and regulations as may be necessary in the

public interest to carry out the provisions of this chapter.” The

Commission did just that in 1995 when promulgating its addback rule through the Add-Back Rulemaking Order. Concerned

that “[w]ithout add-back, the double-counting of backstop

adjustments could effectively permit earnings outside the range

of reasonableness we designated,” Add-Back NPRM, 8 F.C.C.R.

at 4416 ¶ 13, the Commission concluded “that the add-back

adjustment is a necessary element of the sharing and low-end

adjustment mechanisms.” Add-Back Rulemaking Order, 10

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F.C.C.R. at 5659 ¶ 16. The Commission expressly relied upon,

inter alia, its authority under §§ 201 and 204 in promulgating its

add-back rule. Id. at 5666 ¶ 58. After it did so in 1995, carriers

knew with certainty that rates in future tariffs would have to be

calculated with add-back in order to be considered just and

reasonable under both statutes. 

With respect to petitioners’ suspended 1993 and 1994

tariffs, the Commission acted pursuant to those very same

statutes in attempting to determine “whether just and reasonable

rates can be achieved pursuant to the requirements of section

201 of the Act and the LEC Price Cap Order if add-back is not

required.” Tariff Order, 19 F.C.C.R. at 14,954 ¶ 9 & n.42

(citing 47 U.S.C. §§ 201, 204). Thus, the Commission applied

the same statutes and “just and reasonable” statutory standard

that it applied in promulgating its add-back regulation.

Petitioners recognize, as they must, that this Court in Bell

Atlantic resolved a myriad of challenges to the reasonableness

of the add-back concept:

Petitioners . . . claim that the add-back requirement is

arbitrary and capricious because it requires carriers to

recognize “phantom” earnings and because it requires

carriers to share more than the original price cap rules

intended. Neither of these objections strikes us as

persuasive. 

* * * 

The Commission uses earnings as a proxy for

measuring a carrier’s productivity; the add-back rule

maintains the link between productivity and earnings.

That the carrier did not actually earn the add-back

amount is beside the point. The add-back amount

provides useful information about the carrier’s

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productivity because it reflects what the carrier could

have earned but for the sharing obligation.

* * *

The Commission recognized that the carrier would

have to continue sharing year after year, but thought

this made sense. As the Commission saw it, the

add-back rule does not create a ripple effect. It erases

the ripple effect of the sharing mechanism. . . . The

Commission found that add-back resulted in the right

level of sharing, and that it was a necessary part of the

sharing mechanism. Petitioners offer no basis for

overturning that decision. They simply argue that the

add-back requirement requires them to share too much.

The Commission reasonably decided otherwise.

79 F.3d at 1205-06. Well-aware of Bell Atlantic, petitioners

make no challenge to the concept of add-back; they do not argue

that add-back is inherently unreasonable, nor do they contend

that it is in any way arbitrary in light of other aspects of the

Commission’s price cap system of regulation. Instead,

petitioners present a narrow challenge, contending that the

Commission’s refusal to accept their 1993 and 1994 tariffs

absent add-back meant that the Commission “impermissibly

applie[d] the add-back rule retroactively.”

Petitioners discuss the 1995 Add-Back Rulemaking Order

throughout their brief. Petitioners’ central claim is that the

Commission’s decision to require add-back during these tariff

suspension proceedings “has the same effect as retroactively

applying the 1995 Add-Back [Rulemaking] Order.” In

petitioners’ view, the Add-Back Rulemaking Order “conceded

that [the Commission] was changing the applicable law. . . .

The FCC’s understanding that it was creating a new legal

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obligation in 1995 . . . is fundamentally incompatible with its

newfound and opportunistic belief that add-back was always

required under the just-and-reasonable requirement of section

201.”

The petitioners’ resort to the 1995 rulemaking in making

their retroactivity argument is, in large measure, a red herring.

While petitioners view the Commission’s examination of

whether add-back was required for just and reasonable rates

under section 201 as “newfound and opportunistic,” the

Communications Act requires the FCC to determine whether

petitioners have met their burden of showing that the 1993 and

1994 tariffs contained just and reasonable rates. See 47 U.S.C.

§ 201(b) (“All charges . . . shall be just and reasonable, and any

such charge . . . that is unjust or unreasonable is declared to be

unlawful . . . .”); id. § 204(a)(1) (“Whenever there is filed with

the Commission any new or revised charge, . . . the Commission

may . . . enter upon a hearing concerning the lawfulness

thereof . . . . [T]he burden of proof to show that the new or

revised charge, or proposed charge, is just and reasonable shall

be upon the carrier . . . .”). Because the Commission did not

resolve the 1993 and 1994 tariff proceedings in a manner

modeling administrative nimbleness, issuing the Tariff Order

eleven years after those proceedings began, it is true that

petitioners had the benefit of seeing that the Commission would

eventually promulgate a legislative rule that, according to the

Commission, “clarif[ied]” whether price-cap regulation required

add-back. See Add-Back Rulemaking Order, 10 F.C.C.R. at

5659 ¶ 15. But agencies routinely adopt rules through notice

and comment that are consistent with their prior administrative

proceedings. Indeed, an agency acting consistently with its prior

actions is generally what makes an agency action not arbitrary,

although such an action may still be unlawful for other reasons.

Cf. Nat’l Treasury Employees Union v. Fed. Labor Relations

Auth., 404 F.3d 454, 457-58 (D.C. Cir. 2005) (“The Authority’s

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17

failure to follow its own well-established precedent without

explanation is the very essence of arbitrariness.”); Williams

Field Servs. Group, Inc. v. FERC, 194 F.3d 110, 112 (D.C. Cir.

1999) (“Because FERC’s decision is consistent with its

precedent and well-reasoned, we uphold it.”). Petitioners’

argument that the Commission retroactively employed an

accounting concept in rejecting their tariffs under § 204 turns

not upon the Commission’s later consistent rulemaking

proceeding, but upon whether the Commission lawfully acted

within the scope of § 204 in rejecting petitioners’ tariffs, without

raising retroactivity concerns.

A. Suspension, Accounting, and Refunds under 47 U.S.C.

§ 204(a)(1).

Petitioners argue that applying add-back to their suspended

tariffs “impose[s] new substantive obligations that had not

previously existed,” “penalizes LECs for reasonable choices

they made without any rule or agency guidance as to whether

add-back was required,” and impermissibly results in finding the

1993 and 1994 tariffs “unlawful [even though] they [did not]

violate some legal rule in place at the relevant time.” These

retroactivity arguments ignore the elephant in the room: the

suspension, accounting, and refund process authorized by 47

U.S.C. § 204(a)(1), pursuant to which the Commission acted,

and its place in the ratemaking process.

As we have previously summarized:

Under section 203 [of the Act, 47 U.S.C. § 203],

carriers initiate the ratemaking process by filing tariffs

which may take effect after prescribed notice periods.

The FCC may reject a tariff outright if it is patently

unlawful. Alternatively, the Commission may set the

rates for investigation and hearing. 47 U.S.C. § 204(a).

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In addition, the Commission may suspend the effective

date of a filed tariff for a period of up to five months.

After the five-month period has elapsed, the rates

become effective, and a customer is obliged to pay at

the designated rate. In the event the rates are later

found unlawful, the Commission may require the

carrier to effect a refund. 47 U.S.C. § 204(a).

TRT Telecomm. Corp. v. FCC, 857 F.2d 1535, 1538 (D.C. Cir.

1988) (citation and quotation marks omitted). If the

Commission “fails to order a suspension,” that failure “does not

mean that the Commission cannot take action to correct an

unreasonable rate.” Ill. Bell Tel. Co. v. FCC, 966 F.2d 1478,

1481 (D.C. Cir. 1992). In “§ 205 Congress provided the

mechanism for prospective relief from unreasonable rates.” Id.

at 1482. “In § 204,” however, “it provided the mechanism for

preventing an unreasonable rate from being filed, or at least

from taking effect only subject to an accounting order and such

further order as would be required. The one supposes

prospective relief, the other the possibility of refund.” Id.

Petitioners’ retroactivity arguments ignore the reality that

their 1993 and 1994 tariffs were suspended and subjected to an

accounting order. Petitioners have been on notice, since the

time those tariffs were filed, that the tariffs’ lawfulness is in

doubt and that they may not contain just and reasonable rates.

“That a carrier is made subject to refunds, accompanied by

liability for interest, is part of the price it pays for the flexibility

in a scheme of carrier-initiated rates. The carrier retains the

initiative to effect a rate increase, but it must account for its

increased revenues if those rates are later found unlawful.” TRT

Telecomm., 857 F.2d at 1553. This suspension process “is not

unique, nor is it new.” Ill. Bell, 966 F.2d at 1481-82 (noting that

section 4 of the Natural Gas Act, (“NGA”), 15 U.S.C. § 717c,

contains the same suspension and refund process, and that

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section 5 of the NGA, 15 U.S.C. § 717d, like the

Communications Act, authorizes prospective relief only absent

suspension). And as we have explained with respect to the

analogous suspension process under the NGA, suspension

“changes what would be purely retroactive ratemaking into a

functionally prospective process by placing the relevant

audience on notice at the outset that the rates being promulgated

are provisional only and subject to later revision.” Columbia

Gas Transmission Corp. v. FERC, 895 F.2d 791, 797 (D.C. Cir.

1990).

Petitioners offer two minimal responses to the fact that their

tariffs were suspended under § 204—one in a footnote and one

in their reply brief. Their footnote contends that “[t]o the extent

the FCC’s [Tariff] Order can be read to suggest that the agency

has the right to create such new substantive rules in a section

204 proceeding, . . . such a rule would be unlawful because it

would create the same unfair retroactive effects that the Bell

Atlantic Court found that the 1995 Add-Back [Rulemaking]

Order carefully avoided by applying the add-back rule only

prospectively.” Whatever petitioners mean by “substantive

rule,” petitioners cannot be right that the Commission may not

suspend a tariff and then require, before accepting a revised

tariff, that it comply with add-back, an accounting rule, in order

to achieve a just and reasonable rate. We do not doubt that a

“‘failure to follow its own regulations’” during a § 204

proceeding would be “‘fatal to the deviant action.’” Way of Life

Television Network, Inc. v. FCC, 593 F.2d 1356, 1359 (D.C. Cir.

1979) (quoting Union of Concerned Scientists v. Atomic Energy

Comm’n, 499 F.2d 1069, 1082 (D.C. Cir. 1974)). But “[§] 204

grants the FCC ‘quasi-legislative authority to evaluate a carrier’s

proposals for new or revised rates.’” Global NAPs, 247 F.3d at

259 (quoting Hi-Tech Furnace Sys., Inc. v. FCC, 224 F.3d 781,

786 (D.C. Cir. 2000)). Given that the Commission is exercising

in these tariff suspension proceedings the same authority to

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2 See Tariff Order, 19 F.C.C.R. at 14,957 ¶ 17 (“Section

204(a) explicitly authorizes the Commission to investigate the

lawfulness of ‘any new or revised charge, classification, regulation or

practice’ contained in a filed tariff. This broad grant of authority

empowers the Commission to determine the reasonableness of

applying add-back in the tariffs under investigation whether or not the

Commission at the time the tariffs were filed had promulgated rules

explicitly requiring add-back. A tariff investigation is a rulemaking

of particular applicability under the Administrative Procedure Act and

the Commission, in the exercise of its section 204 authority, routinely

makes significant policy and methodological decisions based on the

records developed in tariff investigations.”) (footnotes and quotation

marks omitted).

evaluate whether petitioners had submitted “just and reasonable”

charges that the Commission called upon in promulgating its

add-back regulation, it cannot be that the FCC may not address,

in determining what is a “just and reasonable” charge, various

LECs having taken inconsistent positions on an unforeseen

accounting issue. Rather, through these quasi-legislative

proceedings, the Commission has lawfully determined that these

suspended tariffs cannot be just and reasonable absent add-back,

just as it did in the Add-Back Rulemaking Order. Petitioners

alternatively contend that the FCC’s order “expressly rejected”

this understanding of § 204, but the record reveals otherwise.2

B. Applying Add-Back to the 1993 and 1994 Tariffs was

Neither Arbitrary Nor Unreasonable.

Petitioners argue that “in all events,” the “absence of

guidance from the FCC in the years preceding the issuance of

the Add-Back [Rulemaking] Order” means that “it was entirely

reasonable for carriers to decide not to use an add-back

methodology.” That is, even if the Commission’s § 204

determination was not retroactive, it was arbitrary and

unreasonable for the Commission to require add-back under its

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3

 Perhaps recognizing that the suspension of their tariffs

undermines their retroactivity arguments, petitioners also argue that

the Commission’s decision to suspend their tariffs was wrong in the

first place because it conflicted, in their view, with the LEC Price Cap

Order. Petitioners argue that under that order, “tariffs that comply

with existing price-cap requirements (and thus fall within the ‘bands’

of lawful rates) are presumed to be just and reasonable and will not be

suspended under section 204.” We do not have jurisdiction to address

this “no-suspension zone” challenge, however, because it was not

authority to set “just and reasonable” rates, 47 U.S.C. §§ 201(b),

204(a)(1), “given the uncertainty that characterized the law at

the time and the plausible arguments against using add-back.”

This argument need not detain us long. Petitioners’ argument is

not faithful to §§ 201 and 204. Section 204(a)(1) places the

burden of proving that petitioners’ revised charges are just and

reasonable upon the LECs, and § 201 mandates that the FCC

only accept charges that are just and reasonable. The

Communications Act does not contemplate that any choices the

LECs make will be immunized from § 204(a)(1) and deemed

“just and reasonable” absent explicit guidance to the contrary

from the FCC.

We fail to see how the FCC’s determination on add-back

was arbitrary. Given the conflicting uses of add-back by various

LECs depending upon whether add-back would contribute to

their financial well-being, the Commission sought to take a

uniform, fair position on add-back, and reasonably chose the

position most consistent with its price cap regime. Bell Atl., 79

F.3d at 1206; see Capital Network Sys., Inc. v. FCC, 28 F.3d

201, 206 (D.C. Cir. 1994) (“Reviewing courts accord even

greater deference to agency interpretations of agency rules than

they do to agency interpretations of ambiguous statutory

terms.”). The Commission’s treatment of similarly situated

LECs in the same manner was not arbitrary and capricious.3

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“raised . . . with sufficient clarity before the FCC.” Am. Family Ass’n,

Inc. v. FCC, 365 F.3d 1156, 1166 (D.C. Cir. 2004) (citing 47 U.S.C.

§ 405(a); AT&T Corp. v. FCC, 317 F.3d 227, 235 (D.C. Cir. 2003)).

IV.

Finally, petitioners make a series of arguments claiming that

it was inequitable for the Commission “to require refunds.” As

we have noted, the order petitioners have sought review of, and

the order we have jurisdiction to review, is a liability order. It

reaches a final determination that petitioners’ 1993 and 1994

tariffs did not contain just and reasonable rates because they

failed to utilize add-back. It does not, however, resolve the

refund issue. The Tariff Order only orders the parties to

“RECALCULATE their 1992 and 1993 earnings making such

an adjustment in compliance with this order, DETERMINE any

applicable sharing or lower formula adjustment . . . , COMPUTE

the amount of any resulting access rate decrease, and SUBMIT

PLANS for implementing any resulting refunds . . . .” Tariff

Order, 19 F.C.C.R. at 14,963 ¶ 34 (emphasis added). The

Commission has advised us that after the record and briefing

were filed in this case, the Commission’s staff, acting pursuant

to delegated authority, approved refund plans submitted by

BellSouth and Verizon. See 1993 Annual Access Tariff

Findings; 1994 Annual Access Tariff Findings, __ F.C.C.R. __,

2005 WL 1661860 (Pricing Policy Division 2005). BellSouth

has sought Commission review of that decision, explaining in its

application for review that it “seeks Commission review . . . in

order to ensure that the Commission’s refund decision will be

subject to judicial review if the D.C. Circuit concludes that

review is not available until the Commission issues an order

specifying the precise amount that BellSouth must pay in

refunds.” See Int’l Telecard Ass’n v. FCC, 166 F.3d 387, 388

(D.C. Cir. 1999) (“‘[t]he filing of an application for review [by

the full Commission] shall be a condition precedent to judicial

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review of any order [. . .] taken pursuant to’ delegated

authority”) (first and second alterations in original) (quoting 47

U.S.C. § 155(c)(7)). No party has advised the Court of what

action, if any, Verizon took in response to the staff decision.

Needless to say given our prior discussion of our appellate

jurisdiction to review the Commission’s lawfulness

determination, see supra Part II, the Tariff Order, from which

Verizon and BellSouth petitioned for review, is not the

Commission’s final determination regarding refunds. Because

the petitions for review do not seek to challenge a final agency

action on refunds, we do not have jurisdiction to consider

petitioners’ premature challenge to any future resolution of the

refund issue. See 47 U.S.C. § 402(a); 28 U.S.C. §§ 2342(1),

2344; see also Verizon, 269 F.3d at 1112 (“[T]he FCC has not

reached a conclusive determination that it will compel the LECs

to return all of the monies that they collected . . . . We will not

prejudge these issues in advance of the agency.”).

V.

For the foregoing reasons, we deny in part and dismiss in

part the petitions for review.

So ordered.

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