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

Heading: Equating damages (before limited offsets) with earnings

Text: 32 in excess of prescribed rates of return 33 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, --- U.S. ----, ----, 113 S.Ct. 1213, 1217, 122 L.Ed.2d 604 (1993); Meeker v. Lehigh Valley R.R. Co., 236 U.S. 412, 428, 35 S.Ct. 328, 334, 59 L.Ed. 644 (1915); Oneida Motor Freight, Inc. v. I.C.C., 45 F.3d 503, 507 (D.C.Cir.1995). 34 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 overearned--the difference between the LEC's actual and prescribed rates of return--times 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. 35 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 of return rather than an actual rate. Therefore they do not address, let alone answer, the fundamental question at issue here--whether 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. 36 In support of its simplified approach, the Commission notes that to require the complaining 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: 37 [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. 38 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 it--the LEC presumably knew at least approximately what its revenues and costs were--to 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. 39 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 & THEORETICAL ECON. 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 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. 40 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.