Opinion ID: 388054
Heading Depth: 2
Heading Rank: 1

Heading: FDC v. LRIC

Text: 22 The Department of Justice filed a brief on behalf of the United States as a statutory respondent; it did not file a petition for review on behalf of any agency which it represents. See United States v. ICC, 337 U.S. 426, 69 S.Ct. 1410, 93 L.Ed. 1451 (1949). Nevertheless the Department contends that the Commission acted arbitrarily and capriciously in adopting fully distributed costs as its costing methodology. We reject this contention and affirm the Commission with respect to this issue. 12 23 We emphasize that the question is not whether this court, if it were examining the merits of FDC Method 1, FDC Method 7, LRIC, or any other method, as a matter of first impression, would have selected one over the others. Rather, the question is whether the FCC made a reasonable selection from the available alternatives. The court does not substitute its judgment for that of the agency, but merely confines the agency within the areas within which it may reasonably exercise its discretion. See Greater Boston Television Corp. v. FCC, 143 U.S.App.D.C. 383, 393, 444 F.2d 841, 851 (1970), cert. denied, 403 U.S. 923, 91 S.Ct. 2223, 29 L.Ed.2d 701 (1971). And of course the Commission has broad discretion in selecting methods for the exercise of its powers to make and oversee rates. FPC v. Texaco, Inc., 417 U.S. 380, 387-89, 94 S.Ct. 2315, 2321-22, 41 L.Ed.2d 141 (1974); Permian Basin Area Rate Cases, 390 U.S. 747, 776, 88 S.Ct. 1344, 1364, 20 L.Ed.2d 312 (1968). 24 In Docket No. 18,128 the Commission attempted to deal with AT&T's ratemaking in a way that would permit the company to compete fully in any markets without allowing it to use revenues from captive monopoly markets as a source for cross-subsidies. To accomplish this it was necessary for the Commission to learn as much as possible about the relevant cost of providing the different classes of service. The question was, which costs were relevant. 25 The Commission found that the relevant costs were fully distributed costs, which it prescribed as the standard for judging AT&T's rates. We cannot say that this standard is either impermissibly rigid and restrictive of AT&T's ability to compete, as the Department of Justice contends, or impermissibly vague as AT&T argues. We recognize that the Commission will not allow rates to depart from full costs without a strong public interest showing, and that guidelines remain to be worked out in negotiations with the FCC staff and in Commission actions on specific rate filings. We think however that the Commission's standard is both sufficiently flexible and sufficiently informative. 26 The Commission explained that FDC was in its judgment the standard most consistent with its regulatory responsibility and objectives. 61 F.C.C.2d at 589. In particular, the Commission found: 27 1. That knowledge of the full costs of service is essential to holding the carrier accountable for investment and pricing decisions, which, in turn, is the touchstone of just and reasonable ratemaking. 61 F.C.C.2d at 609-12. 28 2. That allocation of full costs to each service, with exceptions where cost economies will be realized and can be demonstrated, is essential to avoid discriminatory pricing. Id. at 612-14, 626-27, 632-33. 29 3. That full cost definition and allocation are consistent with encouraging efficiency and innovation in providing service. Id. at 614-15. 30 4. That full cost standards are essential to enable potential and actual competitors to judge the attractiveness of markets with full knowledge of the market rules. Id. at 615-18, 632-33. 31 Conceding that there was no perfect set of principles and that other methods than FDC also were plausible, id. at 606-07, 668, the Commission concluded: 32 (I)n order to determine whether rate levels and rate level relationships are just, reasonable or not unduly discriminatory the actual full costs of providing service must be known and certain, irrespective of whether rates are in direct relationship to costs or depart therefrom. In the latter case the ascertainment of actual full costs still provides the relevant standard to aid in the determination of lawfulness of rates. 33 Id. at 668. 34 The Department of Justice appears to assume that FDC pricing erects a protective umbrella over new entrants in private line markets, leaving AT&T with virtually no freedom to price competitively. (DOJ Br., pp. 34-40) The Department says the Commission's failure rationally to consider this effect on competition in private line market requires reversal. 35 In fact, competition was central to the proceeding. A prime objective was to establish market rules for established and emerging carriers. 13 And the agency was at pains to avoid placing a protective umbrella over new carriers. 61 F.C.C.2d at 615-19. On the other hand there was legitimate concern that failure to get a handle on AT&T's costs would enable the company to use cross-subsidies from monopoly services as an anticompetitive 'protective umbrella'  of its own. Id. at 616. 36 In the end, the FCC found that LRIC pricing, whatever its merit in a purely competitive environment, should not be applied selectively to AT&T's competitive services in a manner that would burden monopoly service customers with all residual costs. Id. at 627-49. The Commission also considered and rejected the Defense Department's alternative marginal costing approach, finding it to have essentially the same defects as AT&T's LRIC. Id. at 632 n.77. Defense urged the adoption of FDC Method 7 if incremental costing were not acceptable. Id. at 661. 37 FDC is not the inflexible barrier to rate competition that the Department of Justice suggests. Although the Commission requires full cost data in support of all rate filings, its order expressly contemplates departures from full costs when the carrier can justify them on the ground of efficiency or other public interest grounds. Id. at 663, 666, 668. Competitive necessity is one basis for departing from full costs. Id. at 654-55. The standard for judging competitive necessity is essentially the same standard the Second Circuit approved in American Tel. & Tel. Co. v. FCC, 449 F.2d 439, 449-50 (2d Cir.1971). 38 A persuasive argument for FDC pricing rather than LRIC was made in comments filed by the Department of Justice in 1970 in the Specialized Common Carrier Services proceeding, Docket No. 18,920. (FCC Br., Attachment B) These comments were incorporated in Docket No. 18,128. Responding to AT&T's claim that it should be allowed to compete in the private line market by offering rates based on long-run incremental costs, the Department stated that: 39
40 2. The difficulty of determining the real costs would create the danger that AT&T would drive out or discourage new entrants even if its cost is higher. 41 3. Low rates are not the only goal of communications policy, but must be considered along with innovation in services and improvements in quality that might come with new entry. 42 4. The Commission should judge rates as predatory by means of a standard based on long run fully distributed costs. 43 5. It is certainly true that the determination of 'fully distributed' or 'long-run average' costs involves estimates and somewhat arbitrary allocation formulas. Nevertheless, this standard is considerably more susceptible to regulatory control, and leaves less discretion in the regulated carrier, than in incremental cost approach. 44 The Commission rejected LRIC after considering the Department's current arguments in the light of its 1970 representations, together with the other relevant factors and policies. We cannot say that the Commission's conclusion, reached in the exercise of its discretion, was arbitrary or capricious and therefore we will not disturb it. 14