Opinion ID: 603765
Heading Depth: 2
Heading Rank: 2

Heading: The Merits of the Commission's Decision

Text: 23 Under the Commission's rate-of-return prescription rules, the earnings of local access carriers are evaluated over consecutive two-year periods that begin on January 1 of odd-numbered years and end on December 31 of even-numbered years. 47 C.F.R. § 65.701(a); see also Ohio Bell Tel. Co. v. FCC, 949 F.2d 864, 870 (6th Cir.1991) (Commission's practice is to review earnings over a two-year period); MCI Telecommunications Corp. v. Southern Bell Tel. & Tel. Co., 5 FCC Rcd 1954 (1990) (two-year monitoring period is existing Commission policy). The two-year review period allows the Commission to monitor interstate access rates while still providing carriers an opportunity to respond to changing market conditions with mid-course rate revisions. For instance, Vitelco's annual access rates were revised in July of each year. Thus, within each two-year monitoring period, the company would normally have two scheduled rate revisions to correct for excessive or inadequate earnings. 24 In this case, Vitelco attempted to use its rate revision opportunities to keep its earnings within the permissible range. In its annual access rate filing in April, 1990, Vitelco significantly reduced the rates that [300 U.S.App.D.C. 366] were to take effect in July, 1990. 2 Since Vitelco only had data for the first three months of the year, and since a full one-fourth of the standard monitoring period remained after the interim period (July to December, 1990), it was not unreasonable for Vitelco to believe that it could reduce its earnings over the two-year review period to an acceptable level. Indeed, this case is a prototypical example of the kind of situation in which the two-year monitoring period should protect carriers from having their rates adjudged based on unforeseen and unforeseeable earnings variations over short intervals. 25 Thus, it was unremarkable when, throughout the administrative process, the Commission appeared to embrace its standard practice of evaluating carrier earnings over a two-year period. For instance, in the order suspending the interim rate, the Bureau explained that the purpose of the ensuing investigation was to determine whether the interim rates would allow Vitelco to accumulate earnings above its authorized rate of return. Virgin Islands Tel. Corp., 5 FCC Rcd at 112 (emphasis added). Similarly, in its order designating issues for investigation, the Bureau explained that the purpose of [the] investigation [was] to determine whether the [interim rates] may be excessive, i.e., whether the rates ... produce revenues that exceed a revenue requirement that is computed in accordance with ... the Commission's Rules. Virgin Islands Tel. Corp., 5 FCC Rcd at 1622. Thus, throughout the investigation, it appeared that Vitelco's earnings over the first six months of 1990 would be factored into the FCC's standard bi-annual evaluation, covering January 1, 1989 to December 31, 1990. 26 The surprise came when the Commission rendered its ultimate decision in the case. In that decision, the Commission concluded that Vitelco had earned in excess of its authorized return during the January-June 1990 period. Refund Order, 6 FCC Rcd at 7351. Given the structure of rate-of-return prescriptions, the Commission's conclusion is a nonsequitur. Under the present system, the target authorized return is a number that has meaning only in relation to the full two-year monitoring period. Thus, it makes no sense to speak of the authorized return for the January-June, 1990 period. The Commission's reasoning is 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 less than one minute. The one-candy-bar-per-day rule, like the authorized return rule, only has meaning with respect to the predetermined period of time. As the authorized return rule is presently formulated, that period of time is two years. If the Commission is allowed to uncouple the rate-of-return percentage from its temporal mooring without warning or explanation, the meaningful constraints that rate-of-return prescriptions provide turn into ad hoc limitations governed only by the preferences of the decisionmaker. 27 This case exemplifies the evil of ignoring the temporal dimension of rate-of-return regulation. Here, the Commission's narrow focus on Vitelco's earnings during the first six months of 1990 led it to exclude from consideration alleged underearnings during 1989. See Direct Case at 12. Similarly, the imposition of an arbitrarily short monitoring period precluded consideration of Vitelco's annual access rate revisions and their effect on earnings over the remainder of 1990. Thus, although Vitelco's projections were apparently made in good faith and were based on the best available information, the Commission ordered a refund of excessive earnings over a limited period of time simply because those projections turned out to be wrong. The Commission attempts to defend the abbreviated monitoring period used in this case by linking it directly to the period of time that Vitelco's interim rates were in effect. Refund Order, 6 FCC Rcd at 7351. However, this conflates two independent time frames--the period during which a rate is in effect and the period over which a carrier's [300 U.S.App.D.C. 367] earnings are measured--without reason or explanation. In order to assess the reasonableness of Vitelco's earnings as against the authorized rate of return, the Commission was required to consider earnings for the entire period during which the authorized rate was in effect. 28 The arbitrariness of the Commission's refund order is highlighted by the FCC's apparent disregard for past practice. Prior to the conclusion of the Vitelco investigation, the Commission had an opportunity to pass on another set of interim rates. See Investigation of Special Access Tariffs of Local Exchange Carriers, 5 FCC Rcd 1717 (1990) (US West ). In US West, the Commission declined to evaluate the carrier's special access rates, which had been in effect from April to October, 1985, in terms of a six-month monitoring period. See 5 FCC Rcd at 1718-19. The similarities between US West and this case are striking. Just as in US West, the rate schedule at issue in this case was designed to respond to a unique set of circumstances--here, the destruction of a majority of Vitelco's lines by a natural disaster. Vitelco's rates were expressly interim and were, like the rates in US West, the first of their kind to be filed by the company. Finally, just as in US West, the company filed for a downward rate revision barely three months into the interim rate period. Indeed, the Commission itself explicitly recognized the similarities between the two cases. See Refund Order, 6 FCC Rcd at 7351 (interim rates in US West were first of their kind, were revised three months into access period, and were based on unique circumstances). Nonetheless, the Commission concluded that US West was not controlling because, Vitelco increased rates during the access year for the sole purpose of avoiding underearnings that did not occur. Id. at 7351. 29 We are unpersuaded by the Commission's attempt to distinguish US West. The Commission's reasoning may be reduced to a single proposition: Vitelco is liable for excessive earnings because, with the benefit of hindsight, the Commission has found that the company was wrong when it projected a decrease in demand. This proposition, though, contravenes the fundamental principles underlying rate-of-return regulation. Naturally, any time a carrier's interim rates, set to offset anticipated shortfalls, generate greater than expected returns, it will follow that the interim rates were not necessary to protect the carrier's income stream; that is, the carrier miscalculated. Under the Commission's construction, a refund in such a situation would always be warranted--i.e., interim rates that generate earnings in excess of the standard rate of return are per se unreasonable. Yet, this leads to the same systematic bias against carriers--forcing carriers to disgorge excess profits, but absorb shortfalls--that we held unlawful in AT & T. Thus, the fact that the projections upon which Vitelco's interim rates were based turned out to be wrong is not sufficient to distinguish the present case from US West. 30 Not only has the FCC failed to take into account the temporal dimension of rate-of-return regulation, but it has also ignored the factors that should be considered in determining whether remedial action is necessary. As we explained above, the Commission's prescribed rate of return is not Mosaic law, but a single point within a broad range of reasonable rates. Furthermore, the prescribed rate of return is but one component of a carrier's tariff schedules. Nader, 520 F.2d at 201. Projected operating expenses, market forecasts and competitive conditions must also be considered by carriers when they settle on a final access rate. Given this multitude of inputs, the prospective selection of a tariff that will generate the prescribed rate of return is necessarily an imprecise endeavor. Thus, once the Commission finds that a carrier has exceeded (as a pure mathematical matter) its prescribed rate of return, it should then consider other relevant factors in determining whether a rate is unreasonable and a refund warranted. See Las Cruces TV Cable v. FCC, 645 F.2d 1041, 1047 (D.C.Cir.1981) (Commission must consider all relevant factors in ordering refunds under section 204). 31 [300 U.S.App.D.C. 368] Naturally, the specific factors to be considered in any given case will vary with the circumstances. However, a few general categories of concerns will nearly always be relevant. For example, in the past, the Commission has considered whether the carrier's projections were reasonable at the time they were made. See Public Serv. Comm'n v. The Chesapeake and Potomac Tel. Co., 5 FCC Rcd 5518, 5519 (1990) (unique forecasting difficulties justified dichotomy between projected and actual earnings). Likewise, the actual harm suffered by ratepayers should be weighed in any refund decision. Las Cruces TV Cable, 645 F.2d at 1047; see also Communications Satellite Corp., 3 FCC Rcd at 2646 (customers' failure to file petitions or complaints ... is also a relevant factor). Furthermore, prior to ordering a refund, the Commission will likely want to take into account changes in the market environment. See Communications Satellite Corp., 3 FCC Rcd at 2646; see also Nader, 520 F.2d at 205 (prescribed rates cannot remain binding during periods of rapidly changing economic conditions); cf. Western Union Tel. Co., 95 FCC 2d 881, 910-11 (1983) (competitive forces substantially justified excessive earnings). Finally, the Commission must factor overriding equitable considerations into any refund decision. Las Cruces TV Cable, 645 F.2d at 1047; see also Communications Satellite Corp., 3 FCC Rcd at 2646 (Commission's inaction could have misled carrier). Although the ultimate decision to order a refund lies within the discretion of the FCC, courts are duty bound to look closely to see if the agency [has] considered relevant factors and if it [has] struck a reasonable accommodation among them. Las Cruces TV Cable, 645 F.2d at 1047. Though we do not intend to describe an exhaustive or mandatory list of considerations, we can find no indication that the Commission weighed any of these factors when it issued its refund order to Vitelco. 32 In short, Vitelco was justified in assuming that the Commission would evaluate earnings over the relevant authorized return monitoring period; the earnings over the interim rate period being but one factor in the calculation. Although we decline to say that the Commission may never adopt a monitoring period that mirrors an interim rate period, its decision to deviate from the standard two-year monitoring period in this case was unforeshadowed and unjustified. Therefore, the Commission was bound to evaluate Vitelco's earnings in light of the company's two-year earnings performance.