Opinion ID: 799751
Heading Depth: 1
Heading Rank: 4

Heading: Reinitialization

Text: 33 Reinitialization is the name for the Commission's setting a current price cap at what it would have been if past X- Factors had been different. For instance, if the price cap starts at 100 and the X-Factor is 1% for the first three years, the cap would stand at approximately 97 at the end of those years. 100 (3 x 1) = 97. (The figure is only approximate because of compounding.) If the regulator then changes the X-Factor to 2% and imposes full reinitialization, it would revise the cap to about 94 for the year immediately following. 100 (3 x 2) = 94. In the 1997 Order, the FCC ordered reinitialization for one year, 1996. See 12 FCC Rcd at 16,714, p 179. Under our simple example, then, the cap would fall to approximately 96. 100 (2 x 1) [two years' reduction of 1%] (1 x 2) [one year's reduction of 2%] = 96. 34 Both the LECs and MCI challenge this decision, seeking to have it modified to favor their respective interests.
35 The LECs challenge the FCC's requirement that they include the CPD in the X-Factor used for reinitialization. In Part II, we explained the need to remand the case for further explanation of size of the CPD. We agree with the LECs that if the FCC retains the CPD because of the productivity benefits expected from the elimination of sharing, no element of reinitialization based on the CPD will be appropriate in the absence of evidence linking productivity gains to the anticipation of sharing's elimination; the companies could not have responded to that incentive before its creation. 36
37 The LECs argue that reinitialization fell more harshly on carriers that chose low X-Factors with high sharing obligations for 1996 than on ones that chose high X-Factors. As a result of reinitialization, the low X-Factor carriers lost some of the future benefits of that choice, but were not in a position to recover any of sharing costs that they may have borne because of it. Reinitialization imposed no such asymmetry on companies that had elected a high X-Factor. The LECs' specific complaint is that this was an important aspect of the problem before the Commission, which it was obliged to discuss. See Motor Vehicle Mfrs. Ass'n v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29, 43 (1983). 38 The Commission argues that it failed to discuss the disparity because the LECs never brought the subject up. It cites § 405 of the Communications Act, 47 U.S.C. § 405, which bars review of an issue on which the Commission ... has been afforded no opportunity to pass, see also United States v. FCC, 707 F.2d 610, 619 (D.C. Cir. 1983), unless the petitioners sought rehearing before the Commission--which the LECs did not. The LECs in turn say they couldn't have afforded the Commission a chance to pass on it; the Commission had never given notice of any intent to order reinitialization. 39 Section 405's no opportunity to pass clause does not in terms exclude instances where the lack of opportunity is due to some fault of the Commission--such as its springing a novelty at the last minute. But we need not sort that out here, because we find no fault in the Commission's procedure. Reinitialization may not have been a subject on which the Commission explicitly elicited comment in its notices for this rulemaking, but the prospect surely brooded over the pro-ceeding. In its 1995 mid-course correction of the price caps it had ordered reinitialization--in a form, in fact, that fell only on those LECs that had chosen a low X-Factor in exchange for greater risk of sharing, and not at all on those that had chosen a high one. Performance Review Order, 10 FCC Rcd at 9069-73, pp 245-54. If the perceived asymmetry was as serious as the LECs now make out, we should have expected them to alert the Commission in this proceeding in advance: If you do a reinitialization, at least avoid the dreadful asymmetry of the 1995 order. No such alert was sounded.
40 MCI claims that the FCC should have reinitialized the X Factor all the way back to 1991 (the first year of the price-cap regime). It says the agency has a policy of correcting errors in X-Factor determinations and that it decided in the current rule that prior determinations were in error. In the alternative, MCI argues that the FCC should reinitialize back to 1995, the year in which the previous X-Factor was adopted. 41 In the 1995 interim price cap review, the FCC determined that a single year's productivity estimate generated by its former method was understated, based in large part on the estimate's discrepancy with the results of a TFP study. See Performance Review Order, 10 FCC Rcd at 9053, p 208. It then calculated a new X-Factor designed to eliminate the effects of the understatement and required LECs to set their price caps as though the new X-Factor had been in effect since the advent of price cap regulation. See id. at 9069, p 245. In 1997 the Commission determined that its former method had systematically understated productivity relative to the TFP method, but required reinitialization for one year only. See 1997 Order, 12 FCC Rcd at 16,713-14, pp 178-79. 42 The situations are somewhat similar, but the FCC adequately distinguished them. It rested its 1997 decision to limit reinitialization on the need to limit harm to LEC productivity incentives that could result from the perception that our regulatory policies unnecessarily lack constancy. 1997 Order, 12 FCC Rcd at 16,714, p 179. It seems clear that a second extensive reinitialization would considerably aggravate such a perception. Universal, complete reinitialization would impair the supposed incentive advantages of price caps--which derive from firms' supposing that their efficiencies will not come back to haunt them. 43