Opinion ID: 699532
Heading Depth: 3
Heading Rank: 1

Heading: The teaching of AT & T

Text: 11 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. 12 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 underearnings that 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 believed--based upon certain FCC ratemaking orders and upon representations by the Commission's counsel at oral argument--that the Commission viewed its rate-of-return prescriptions as stating 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. 13 The Commission responded to our decision by clarify[ing] its view of rate-of-return regulation, as follows: 14 [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 us that 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 earnings level that is fully adequate to assure attraction of capital on favorable terms, and an earnings level which, if sustained over time, would be confiscatory. 15 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 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). 16 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 offsets-- viz., offsets for underpayments made by the same customer for other access services during the same monitoring period--the Commission's approach to damages has caused many LECs to earn, in the aggregate, less than the maximum rate of return allowed for the monitoring period(s) at issue. As the Commission's approach has been clarified, however, that does not necessarily mean that any LEC earned less than the minimum amount necessary to attract capital and, in fact, no LEC has demonstrated that its rate 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. 17 The LECs offer up the Sixth Circuit's decision in Ohio Bell Tel. Co. v. F.C.C., 949 F.2d 864 (1991), and our decision in Virgin Islands Tel. Corp. v. F.C.C., 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 of service any underearnings that 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 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 access service. 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 any further than does AT & T. 18 We are quite frankly mystified 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 earnings that were running above the prescribed rate of return as of the middle of an on-going monitoring period--a 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. 19 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's refusal 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 AT & T, however, relies upon the very interpretation of that case that we rejected above; we therefore find Cincinnati Bell's separate argument unconvincing. 20