United States Court of Appeals FOR THE EIGHTH CIRCUIT

___________ No. 97-3446

___________ Southwestern Bell Telephone Company, * * Petitioner, * * Bell Atlantic Telephone Companies, * Petition for Review of An Order * of the Federal Communications Intervenor on Petition, * Commission. *
v. * * Federal Communications Commission * and United States of America, * * Respondents, * * New Valley Corporation, * f/k/a Western Union, * * Intervenor on Petition. *

___________ Submitted: January 16, 1998 Filed: March 11, 1998The Honorable Howard F. Sachs, United States District Judge for the Western 1 District of Missouri, sitting by designation.
-2- ___________ Before RICHARD S. ARNOLD, Chief Judge, MORRIS SHEPPARD ARNOLD , Circuit Judge, and SACHS, District Judge. 1

___________ MORRIS SHEPPARD ARNOLD, Circuit Judge.
I. In the early 1980s, following the breakup of AT&T, the Federal Communicat ions Commission required local telephone companies, or local exchange carriers ("LECs"), to provide long-dis tance companies, also called interexchange carriers ("IXCs"), with
access to local exchange facilities at a regulated and approved rate. Interexchang e service g enerally originates with LEC facilities through which the sending party i s connected to the IXC, and then terminates with LEC faciliti es. An IXC cannot provide service without access to local facilities.

Th e LECs provided two types of service to meet the obligation that the FC C imposed on them. First, they offered switc hed access services in which the IXCs used the LECs' regular local service facilities for originating and terminating long-distance telephone calls; second, they offered special access services in which an IXC woul d have the exclusive use of certain dedicated LEC facilities linking the IXC with it s customers through the intermediar y of LEC serving wire centers ("SWCs"). In return, the IXC s would have to pay the LECs a reasonable fee, as determined by the FCC

. Only the special access charges are relevant to this case.
During the period that these special access rates were in effect, special access circuits were used primarily to transmit telex, tele graph, video, voice, digital, and other-3-

signals between end users and IXCs. At issue in this appeal are cost allocation s relat ing to only two of the nine generally available circuit or channel types, namely , met allic and voice-grade channels. Metallic service was the lowest grade of servic e offered, and a voice-grade circuit was, as its name suggests, a circuit capable o f carrying data in the frequency range of voices.
The rates charged for special access channels comprised t hree components. The basic component was the charge for utilizing a "loop." The loop is the connectio n between the end user's premises and a nearby SWC, as well as between an IXC's local connection point and the appropriate SWC. All IXCs use some amount of loop service in connecting interstate lines with end users. The second component of the rate was the charge for utilizing a "trunk." The trunk is the connection between two SWCs , necessary to facilitate connections between end users and IXCs associated b y proximity with different SWCs. (Thus a typical long-distance transmission w ould begin with an e nd user connected by a LEC loop to a nearby SWC. The SWC would, i f necessary, be connected to another SWC via the LEC's trunk equipment, and another loop would connect the SWC to the IXC's line. At the receiving end the sam e seque nce would be duplicated in reverse.) The third component of the rates , denominated "optional features and functions," is not relevant to this case.
In the early 1980s, the FCC permitted LECs to charge only a "reasonable rate" for thi s mandatory service, that is, a rate that enabled the LECs to recover the cost of providing the service plus something called a "reasonable rate of return." Because the LECs us ed the same facilities to provide different types of service to differen t customers, the

rate-setting process necessarily involved the allocation of shared costs among d isparate users. This case arose from a dispute over the method by which the LECs allocated the costs in their tariffs.
In 1983, the FCC decided that the system of exchange access c ompensation then in effect was unlawfully discriminatory. See 47 U.S.C. § 202(a). The FCC thus-4-

decided to replace tha

t system with a more uniform rate structure. Over the course of the nex t year and a half, in order to comply with new FCC guidelines, the LEC s proposed va rious revised special access tariffs. All of them were suspended an d
even tually found unlawful by the FCC. In March, 1985, in accordance with a fe w specified adjustments from their previous proposal, the LECs filed tariffs that wer e accepted subject to investigation. Although the FCC never suspended these tariffs, it did instruct the LECs to keep accurate accounts of the charges in order to facilitat e accurate ref

unds if they should prove necessary. These rates remained in effect fo r about six months.
Early in 1986, the FCC issued a final order concluding its investigation an d uph olding these special access tariffs. In determining that the cost allocations in th e tariffs were reasonable, the FCC rejected argu ments in particular from Western Union, an IXC, that several specific costs allocated to the loop component of the rates should be alloca ted exclusively to the trunk component. It later rejected Western Union' s argumen t that metallic service rates should be lowered to preserve their previou s relati onship with low-quality voice-grade service, the rate of which was lowered as a result of the FCC's order.

Western Unio n petitioned the D.C. Circuit for review of the FCC's order. I n 1988 that court

determined that the FCC had failed adequately to explain its rejection of We stern Union's arguments and remanded the case to the FCC for reconsideration of three specific issues. See Western Union C orp. v. FCC , 856 F.2d 315, 316-17, 320 (D .C. Cir. 1988). Almost immediately thereafter the FCC's Common Carrier Bureau invited interested p arties to comment on how it should resolve the issues remanded to it. It d id not resolve those issues until nearly nine years later. In its order the FC C reversed itself on two of th e three matters remanded, on the ground that the LECs had failed adequately to justify the cost allocations at issue.-5-

South western Bell, an LEC, then filed a timely petition for review with thi s court. We affirm.

II. Both Sout hwestern Bell and the FCC raise threshold issues only tenuousl y related to the merits of the case: Southwestern Bell argues that certain procedura l infirmities abrog ated the FCC's authority to order these refunds, and the FCC posits a procedu ral bar to this court's authority to consider Southwestern Bell's petition. W e find none of these arguments persuasive.

Southw estern Bell maintains that the FCC had no authority to orde r Southwestern Bell to refund money to Western Union because the FCC violated two procedural provisions of 47 U.S.C. § 204(a). The two provisions in question are the statute's time limitations and its supposed requirement that before tariffs can b e retroactively altered they must first be suspended.

Section 20 4(a)(1) permits the FCC to suspend a proposed charge or tariff for a pe riodof up to five months beyond the time that it would otherwise go into effect , during which period the FCC may conduct an investigation to assess the legality of the proposed rates. If the FCC does not rule on the legality of the proposed tariffs within the all otted time, those tariffs automatically go into effect until it does so. Sectio n 20 4(a)(2)(A) limits the time period to five months for the issuance of such a rulin g (be fore the 1996 amendments, the period was 12 or 15 months, depending on th e complexity of the issues involved).

In th is case, the FCC made the rates in question effective on April 1, 1985

. Then, in orders in January and November, 1986, it con cluded that the tariffs were legal and ended its investigation. After the D.C. Circ uit remanded the matter to the FCC for reconsideratio n, the FCC, as we have said, failed to act on the case for nine years , neither ordering refunds nor confirming its earlier position. When the FCC did finally-6-

issue its order, more than

12 years had passed between the effective date of the tariffs and the FCC's refund order. Southwestern Bell argues that the FCC is barred fro m ordering thes e refunds now because of its excessively slow proceeding. We disagree because we believe that the time constraint imposed by § 204(a)(2)(A) do es not operate
as a stat ute of limitations and that its violation therefore does not end the FCC' s authority to act.

We ha ve held that "[a]bsent specific statutory direction, an agency's failure t o meet a mandatory time limit does not void subsequent agency action." Newton County Wildlife Ass 'n v. U.S. Forest Service , 113 F.3d 110, 112 (8 Cir. 1997), cert. denied , th 66 U.S.L.W . 3355 (1998). See also Brotherhood of Railway Carmen Division v

. Pena , 64 F.3d 702, 704-05 (D.C. Cir. 1995). Section 204(a)(2)(A) contains n o provisiontouching on the appropriate remedy, if any, for the FCC's failure to adher e to the time limit that it imposes. Thus the section does not operate as a statute o f limitations, and the FCC does not lose its authority to act for having violated it.
Southwestern Bell also contends that in failing to su spend the proposed rates the FCC failed to comply with a statutory requirement that it do so, and so lost its authority to act. But we believe that § 204(a)(1) does not require the FCC to suspend th e propo sed rates before it investigates them -- it only allows the FCC to do so. Th e statute states that, either on its own initiativ e or upon complaint, and pending a hearing concerning the lawfulne ss of a proposed charge, the FCC "may suspend the operation of such charge ... in whole or in part but not for a period longer than five month s beyond the time when it would otherwise go into effect."

We be lieve that the primary purpose of the suspension is to mitigate th e transacti on costs that might be incurred if the FCC eventually rejects the tariff: If the investigation can be completed i n five months, and the rates are found to be illegal, no refunds are necessary if the tariffs were suspended, because th e illegal rates were never imposed. But in any case the language of § 204(a)(1) is permissive, not mandatory:-7-

it does not require the FCC to suspend proposed tariffs; it only gives it the authority to do so. But see Illinois Bell Tel. Co. v. FCC, 966 F.2d 1478, 148 1-82 (D.C. Cir. 1992).

The fact that the FCC customarily suspends proposed rates does not mean that it s failure to do so in any particular instance invalidates its subsequent action

. Furtherm ore, a possible secondary purpose of the suspension, that is, to put th e company with the proposed rates on notice of possible defects in the tariff, is served by another provision in the section, namely, that the FCC may require the proposing companies to keep an accounting during the period of investiga tion in order to facilitate a refund should one be necessary. That is precisely what the FCC did in this case.

III. The FCC also raises a procedural objection to our immediate adjudication of this case. Its argument is that 47 U.S.C. § 405(a) requ ires Southwestern Bell to exhaust all administrative remedies prior to raising an issue before the court. That statute forbids judicial review of a dispute where the party seeking review "relies on questions of fact or law upon

which the Commission ... has been afforded no opportunity to pass." Id. Southwestern Bell's procedur al issues relating to the interpretation of § 204(a) present questions of law not yet passed on by the FCC. Thus, the FCC argues, Southwestern Bell must pre sent these issues to the FCC itself in an application for review befor e raising them in this court.

Butex haustion is not required when unreasonable administrative delay woul d render the admi nistrative remedy inadequate. See Gibson v. Berryhill , 411 U.S. 564, 575, n.14 (1973) (noting that administrative remedies are deemed inadequate "[m]ost often ... because of delay by the agency"), and Smith v. Illinois Bell Tel. Co. , 270 U.S. 587, 591-92 (1926) (petitioner "is not required indefinitely to await a decision of the rate -making tribunal before applying to a federal court for equitable relief"). In thi s case, the FCC failed for nine years to adjudicate t he issue before it on remand from the-8-

D.C. Circuit, in part, no doubt, because the tariffs at issue in this appeal were in effect foronly six months before they were replaced and are thus no longer relevant. Th e resolution of the issues that this case raises wi ll therefore have little or no future effect.

But precisely because the issues are s tale and irrelevant from the FCC's point of view, we believe that if we were to defer first to the FCC to resolve them, further delay would be not only possible but inevitable. As the FCC's attorney noted at ora l argument , "There is a lot going on at the Commission -- this case is almost a relic. " The FCC's record of delay in this matter may not, as we have said, invalidate its action, but it does render an administrative remedy manifestly inadequate.

IV. When the D.C. Circuit remanded matters relevant to this case to the FCC, i t singled ou t three issues for further consideration: The misallocation of costs in th e determi nationof loop rates, the misallocation of plant investment to the rates fo r metallic service, and the disproportionate rates charged to users of two-wire metallic service. Se e Western Union Corp. , 836 F.2d at 318-19. The court did not determine that th ese allocations are unreasonable, merely that the FCC acted arbitrarily i n
co nfirming them. Id. at 320. Upon review, the FCC reversed itself on the first tw o issues and stood by its decision on the third. Southwestern Bell argue s that in reversing its earlier decisions on these two issues, the FCC acted arbitrarily and capriciously.

A. Southwestern Bell bases this argument, in part, on an incorrect interpretation of the FCC's order on remand. It contends correctly that the FCC merely requeste d comments from interested parties on whether the record as it existed was adequate for the FCC to determine ho w the costs should be allocated. But Southwestern Bell goes
on to maintain that because the FCC asked only whether supplemental informatio n might be necessary and did not actuallyrequest any supplemental information, its final-9-

determi nationthat the LECs did not adequately justify their cost allocations wa s arbitrary because this conclusion did not follow logically from the requests in its order. That is , Southwestern Bell argues that the determination that the record was no t suf ficient to justify the cost allocations should have been made only after the LEC s were asked to submit any necessary supplemental infor mation, and that they did not do so because the order on remand did not request it. The only proper determination that the FCC could have made, Southwe stern Bell argues, short of deciding that the record was sufficient and that the costs were ju stified, was a determination on how the record should be supplemented.

Butthis c onclusion misses the point. The FCC was under no obligation t o inform the LECs how they might best supplement the record, or even torequest that the record be supplemented. The question on remand was whether the FCC was correct i n determining that the LECs properly justified their cost allocations in 1985, and the F C C asked for comments relating to its ability to make this determination. But it did not seek new justifications. It then determined that, in fact, the LECs did not meet their burden of proof in justifying the relev ant cost allocations. Southwestern Bell is off the markin arguing that it should have been told how it might supplement the record i n order to justify its allocations. Furthermore, the FCC notes in its refund order that if the LECs can offer supplemental evidence to suggest that the refunds should b e reduced, they may do so. It is in this context that the LECs may attemp t anew to justify
some or a ll of their 1985 allocations. But on the question addressed by the D.C

. Circuit's remand and the FCC's order, namely, whether the allocations were properly justified at the time that they were made, supplemental evidence was irrelevant. It is worth po inting out, too, that all of the LECs that responded to the FCC's request fo r comments argued that the record as it existed provided more than adequate support for their cost allocations.-10-

Southwestern Bell also argues that the FCC simpl y did not provide any basis for its opinion on remand that the LECs did not in fact adequa tely justify their original cost allocations. It is to this question that we now turn.

B. The first contested aspect of the LECs' special access rate structure is th e allo cation of some of the costs associated with voice-grade performance investmen t (VGP) and facilities interface equipment (FACIF) to the loop component of the rate. The LECs contend that both of these are charges for equipment used to provide circuit continuity between a customer's premises and its SWC. But it is not clear if, in fact, the equipment is more properly associated with loop service or with trunk service.

Prior to th e 1985 tariff-system shift, VGP charges were placed in a category called "other special" along with investment costs in other sorts of equipment no t otherwise specifically categorized in the old system. The IXCs contend that this old category contai ned charges properly attributable only to the trunk portion of a circuit. FACIF charges were, in the pre-1985 system, alloca ted on a facility- and user-specific bas is. In the 1985 rate scheme, however, VGP charges were allocated to the loo p comp onent, and FACIF charges were aggregated (i.e., no longer facility- and user

spe cific) and allocated to the loop component of each service with which they wer e associated (thus there was a separate FACIF charge i n the loop component for metallic service, for video service, etc.).
The LECs assert, of course, that these allo cations were reasonable and justified. But because certain IXCs (most notably for this appeal, Western Union) used no trunk service (or very little trunk service), those IXCs objected to portions of the ne w allocation system that saddled them with VGP and FACIF costs arguably associated only with p roviding trunk service, and which were only newly allocated to the loo p component in the tariffs.-11-

U p on consideration of this argument, the FCC originally concluded that it was indeed p roper to allocate some VGP and FACIF costs to the loop rate element. I n reviewing this conclusion, however, the D.C. Circuit found that i n approving the tariffs, the FCC had failed to address the pertinent question raised by Western Union, which, the court held, was not whether it was proper to allocate some of the VGP and FACIF costs to the loop element, but rather ho w much of those costs was properly chargeable to it.

In response to the order from the FCC inviting comments on this matter, th e LECs presented several justifications for the a pparent shift in cost allocations. Several LECs argue d that the category that formerly included VGP and FACIF tariffs, th e "other special" category, was only a means for grouping costs and was not limited to trunk equipment. Some argued that VGP and FACIF costs were in fact incurred in the provisionof both loops and trunks. And one LEC argued that the category in which these charges were placed was not based on the function of the equipment at all, and so that costs assigned to trunk categories were not necessarily even trunk costs.
Other LECs argued that th ey had allocated costs in the "other special" category to loop a nd trunk rate elements on the basis of unit-cost studies, and that it wa s impos sible to disaggregate VGP and FACIF costs from other costs in the category

. (U nit-cost

studies identify the cost to a LEC of providing one unit of a particular
se rvice and recommend rates based on recovering that cost plus a reasonable portion of overhead. Thus, costs determined by a unit-cost study will be determined b y reference to the aggregated costs for all of the equipment required to provide a service.)

But the FCC determ

ined that the LECs did not offer sufficient engineering data to demonstrate the extent to which they used VGP and FACIF equipment to provide loop services. Furt

hermore, the FCC faulted the LECs for failing to explain how they actually conducted their unit-cost studies and, notably, for failing to submit thos e studies. These determinations find support in the record.-12-

The FCC then concluded that the specific allocations were unjustified because in a § 204(a) investigation the carrier bears the burden of proving the reasonableness of its charges. See 47 U.S.C. § 204(a)(1) ("the burden of proof to show that the new or revised charge, or proposed charge, is just and reasonable shall be upon the carrier"). The FCC found that although t he LECs did show that they used some amount of VGP and FAC IF equipment in providing loop service, their arguments did not provide a reasonable b asis for determining how much; the FCC further found that the LECs did not carry the burden of demonstrating that the allocation that they used was in fac t reasonable. The FCC did not adopt Wester n Union's proposal that none of these costs should b e allocated to loop charges; it concluded only that the LECs did not properly justify the costs as loop charges.

As the D.C. Circuit noted in its 1988 opinion, an agency's decision will b e overturn ed only if it is found to be "arbitrary, capricious, an abuse of discretion, o r otherwise not in accordance with law." Western Union Corp. , 856 F.2d at 318. See also 5 U.S .C. § 706(2)(A). We discern none of these defects in the FCC's order

. Southwestern Bell mischaracterizes the order as holding that none of these VGP and FACIF costs should have been allocated to the loop component of the tariff. But the order actually states only that Southwestern Bell failed to meet its burden of proving how much of these costs were properly allocated to that component. The order goes
onto require Southwestern Bell to refund the charges to Western Union because the LECs did not justify their allocation to the loop element. It is of course open to th e LECs to supply that justification and to argue that full refunds are not in order. Bu t until they provide such a justifica tion, there is nothing arbitrary about the FCC's order. It merely applies the strict standard that Congress imposed in § 204(a)(1).

C. The seco nd contested substantive issue in this case is the LECs' allocation o f some of the costs associated with s upplying station apparatus and large private branch exchange (PBX) equipment (both located on customer premises) to Western Union's-13-

two- wire metallic and voice-grade services, and the LECs' allegedly excessiv e allocat ionof central office equipment (COE) costs to providing Western Union' s metal lic service. Western Union argues that, although station apparatus and PB X equipment

were not used at all to supply it with two-wire metallic and voice-grad e chan nel termination services, and although COE only very marginally contributed t o the p rovision of metallic service, Western Union was nevertheless charged for thes e apparatuses. At the time that this allocation system was proposed, the FCC accepted the notion that rates for a particular servic e, provided to a specific customer, should be based on the pro-rated cost of providing that service to all of an LEC's customers, not just on the cost of the specific equipment required to provide the service to tha t particular customer. In fact, the FCC had previously rejected as needlessly expensive
a pr oposal for an allocation mechanism that distributed costs associated with voice

grade service on the basis of individual use.

In reviewin g these arguments, the D.C. Circuit found, first, that the FCC ha d failed to address Western Union's allegation that the LECs allocated a disproportionate part of COE costs to providing metallic service. See Western Union Corp. , 856 F.2d at 319. Second, thecourt found that, although the FCC explained why it had rejected the user-specific allocation system with respect to th e provision of voice-grade service, it did not address Western Union's argument that such a system saddled customers of metallic service with costs for which they received no benefits. Id.
Upon reco nsideration, the FCC concluded that the LECs did not meet thei r burden of

justifying the amount of PBX and station apparatus allocated to metalli c service rates. The FCC concluded that the record was at least inconclusive regarding whether the LECs ever employed more than a de minimis amount of this equipment in providing metallic service, and the LECs, in response, provided only g eneral statements indicating that they did in fact use this equipment to prov ide metallic service. In earlier st atements, however, and in connection with other complaint proceedings, the LEC s had indicated th at they employed little or no "circuit equipment" in providing metallic-14-

service. Furthermore, the FCC pointed out that even if the LECs did use large amounts of COE to provide metallic service, they had submitted no r ecords from which it would have been possible to determine whether the specific rate charged was reasonable.

The F CC concedes that it might very well have been reasonable, at times, t o provide metallic service over existing voice lines, thereby occasionally utilizing these facilities. But the LECs have not indicated how often this was done, nor have the y indicate d the portion of voice-grade COE costs actually attributable to providin g metallic serv ice. Because the LECs bear the burden of justifying their rates, the FCC concluded , they are liable for refunds to Western Union for some portion of thes e unsuppo rtedcost allocations. We believe that nothing in this conclusion or it s reasoning even approaches the arbitrary and capricious. The FCC was again merely following the relevant provisions of § 204(a)(1).

Southweste rnBell makes much of the fact that the FCC's order represents a
revers al of its earlier holding that found these allocations reasonable. In fact , Southwes tern Bell argues that "such an about-face is arbitrary and capriciou s decisionma king." But the mere change of an administrative opinion after a lawfu l reconsideration can hardly be arbitrary and capricious on its face. In t his case, the D.C. Circui t ruled that the FCC's prior order accepting the LECs' cost allocations wa s arbitrary and capricious. See Western Union Corp. , 856 F.2d at 320. The court, as we have been at pains to say, made no ruling on the actual reasonableness of th e al locations, but ruled only that the FCC accepted those allocations without prope r justificatio n. Id. Neither the D.C. Circuit nor the FCC has declared that the cos t allocations are unreasonable, but both have declared t hem to be unjustified. This order by the FCC, far from being arbitrary and capricious, incorporates a degree of court

imposed reflection and, we believe, corrects previous arbitrary and ca pricious behavior.

V. For the reasons indicated, we affirm the order of the FCC.-15-

A true copy.

Attest:
CLERK, U.S. COURT OF APPEALS, EIGHTH CIRCUIT.