Opinion ID: 699532
Heading Depth: 2
Heading Rank: 1

Heading: The LECs' Claims

Text: 10 The LECs contend that: (1) the Commission's approach to damages is precluded by our decision in AT & T; (2) the Commission improperly concluded that LEC earnings in excess of the allowed rates of return are per se unlawful; (3) the Commission improperly allowed the IXCs to recover damages without requiring them each to show what would have been the just and reasonable rate and by exactly how much it overpaid; and (4) most of the damage claims are barred by the two-year statute of limitations in the Communications Act. None of these assertions has merit.
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
21 the act 22 The IXCs base their damage claims upon Sec. 206 of the Communications Act, which provides: 23 In case any common carrier shall do ... any act, matter, or thing in this [Act] prohibited or declared to be unlawful ... such common carrier shall be liable to the person ... injured thereby for the full amount of damages sustained in consequence of any such violation of the provisions of this [Act].... 24 47 U.S.C. Sec. 206. Although the LECs' earnings exceeded the maximum rates of return prescribed by the Commission, they contend that such overearning does not by itself constitute a violation of the Communications Act and therefore cannot serve as the sole basis for their damage liability pursuant to Sec. 206. We disagree. 25 As discussed above, in NETCO, 826 F.2d at 1106-07, we held that the Commission has the statutory authority to prescribe a carrier's maximum rate of return and to require a LEC that fails to comply to refund earnings in excess thereof. More important, we held that:The Commission's chief concern in issuing [rate-of-return] prescriptions is protecting just and reasonable rates.... The idea of a prescription ... is that the agency has proclaimed that a certain situation--here a return in excess of 10%--is unlawful and shall not occur. 26 Id. at 1106 (emphasis in original). Relying upon our earlier decision in Nader we further explained that a rate-of-return prescription has the force of a statute and is no less binding than an order establishing the maximum rate that a carrier may lawfully charge. Id. at 1107. In AT & T we reconfirmed all this, explaining that in Nader we had held that the Commission has power under [the Communications Act] to prescribe rates of return as well as rates, and that in NETCO we had held that the prescription of a rate of return ... represent[s] a proclamation by the Commission that earnings in excess of the prescribed rate are unlawful.... 836 F.2d at 1392. Hence, all these cases--Nader, NETCO, and AT & T--stand squarely in opposition to the LECs' position: We have repeatedly held that a rate-of-return prescription has the force of law and that the Commission may therefore treat a violation of the prescription as a per se violation of the requirement of the Communications Act that a common carrier maintain just and reasonable rates, see 47 U.S.C. Sec. 201(b). 27 The LECs attempt to avoid this seemingly inevitable conclusion by relying once again upon our Virgin Islands decision. There, after holding the Commission's refund order invalid because it was imposed as of the middle of a monitoring period, we went on to note that: 28 the prescribed rate of return is but one component of a carrier's tariff schedules. 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. 29 989 F.2d at 1239. We also went on to list the sort of factors that the Commission should consider in deciding whether to order a refund, including: (1) whether the LEC's projections were reasonable when made; (2) the actual harm suffered by the ratepayer; and (3) any overriding equitable considerations. Id. at 1240. 30 Seen in context, however, we do not think that our Virgin Islands decision is a bar to the Commission's decision to treat earning more than the prescribed rate of return as a per se violation of the Act for the purpose of adjudicating a damage claim. Virgin Islands arose under Sec. 204 of the Communications Act, which provides that, under certain circumstances, the Commission itself may ... require [a carrier that has collected an excessive amount] to refund, with interest, ... such portion of such charge ... as by its decision shall be found not justified. 47 U.S.C. Sec. 204. Because the Sec. 204 refund remedy is couched in permissive terms, the court was in effect advising the Commission of the issues it must consider in exercising its discretion whether to require a refund. In the present cases, by contrast, the Commission is responding to complaints brought by customers of the LECs under Sec. 206 of the Act, which is phrased in mandatory terms: A carrier that has violated the Act shall be liable to the person or persons injured thereby for the full amount of damages sustained in consequence of any such violation.... 47 U.S.C. Sec. 206. Therefore, the factors that we set out in the Virgin Islands case do not apply where, as here, the Commission is adjudicating a damage claim made by a customer pursuant to Sec. 206. 31
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.
41 The Communications Act provides that [a]ll complaints against carriers for the recovery of damages not based on [charges in excess of those made applicable in a tariff] shall be filed with the Commission within two years from the time the cause of action accrues, and not after. 47 U.S.C. Sec. 415(b). The question here is at what point an IXC's cause of action accrues. The LECs argue for what amounts to a time-of-injury rule; they contend that a cause of action accrues on the last day of the monitoring period to which it relates--which would mean that nearly all of the claims at issue here are time-barred. The Commission, on the other hand, argues for what is generally called a discovery-of-injury rule; it contends that a cause of action accrues only when the IXC discovers (or with due diligence should discover) that it has been overcharged. According to the Commission, moreover, that does not occur until after the LEC files its final earnings report for the two-year monitoring period at issue. We agree with the Commission that the discovery-of-injury rule applies to these causes of action. 42 In Connors v. Hallmark & Son Coal Co., 935 F.2d 336, 342 (D.C.Cir.1991), the court (per then-Judge Ruth Bader Ginsburg) aligned the law of this circuit with that of the eight other circuits to have considered the matter and held that the discovery[-of-injury] rule is the general accrual rule in federal courts, applicable in federal question cases in the absence of a contrary directive from Congress. We also explained that the time-of-injury rule is not inconsistent with, and indeed should be considered a part of, the broader discovery-of-injury rule: 43 [I]f the injury is such that it should reasonably be discovered at the time it occurs, then the plaintiff should be charged with discovery of the injury, and the limitations period should commence, at that time. But if, on the other hand, the injury is not of the sort that can readily be discovered when it occurs, then the action will accrue, and the limitations period commence, only when the plaintiff has discovered, or with due diligence should have discovered, the injury. 44 The LECs point to no directive from the Congress suggesting that the general discovery-of-injury rule does not apply to a damage claim asserted under Sec. 206 of the Communications Act. Instead, they rely only upon our recent decision in 3M Co. v. Browner, 17 F.3d 1453 (1994), which involved a civil enforcement proceeding brought for violations of the Toxic Substances Control Act that were alleged to have occurred more than five years earlier. We held that the EPA's cause of action accrued, and thus the five-year statute of limitations began to run, when the violation occurred rather than when the EPA actually discovered or with due diligence should have discovered the violation. Id. at 1460-63. In so doing, we specifically took note of the general discovery-of-injury rule that we had recently adopted in Connors, but explained that it applied only to remedial, civil claims. Id. at 1460. Because the case against 3M was penal in nature--the statute imposed a five-year limitations period for any fine, penalty, or forfeiture--we held that the generally applicable discovery-of-injury rule adopted in Connors did not apply in that case. If the discovery-of-injury rule were applicable to an agency-initiated civil penalty case, then the court would have to determine whether the agency, with the exercise of due diligence should have detected the violations earlier than it had--an oversight activity that (at least absent a statutory directive to the contrary) is better suited to the legislature than to the court. Id. at 1461. 45 As the foregoing suggests, 3M is of no help to the LECs' cause because it deals only with the special circumstance, not present here, of an agency-initiated civil penalty case; 3M leaves the discovery rule of Connors intact for remedial civil actions such as the IXCs brought against the LECs. Therefore we follow the discovery-of-injury rule adopted in Connors to determine when the claims of the IXCs accrued. 46 The LECs contend that even if the discovery-of-injury rule applies, most of the IXCs' claims are time-barred: The Commission allowed them to go forward, according to the LECs, only because it erroneously held that an IXC's claim does not accrue until the LEC from which the IXC seeks damages files its final earnings report for the monitoring period at issue, i.e., nine months after the close of that period. The LECs argue that such a claim accrues three months after the close of the monitoring period, the time by which the Commission requires the LEC to file a preliminary earnings report. 47 The LECs' position would be tenable if, after reviewing the relevant preliminary reports, an IXC exercising due diligence should have discovered that it had been overcharged. Connors, 935 F.2d at 342. But that is not the case. The raison d'etre for the final report is to afford the LEC time to adjust the data submitted in its preliminary report, see Amendment of Part 65, Interstate Rate of Return Prescription: Procedures and Methodologies to Establish Reporting Requirements, Report and Order, CC Docket No. 86-127, 1 F.C.C.R. 952, 954 (1986); it therefore would be passing strange to require an IXC to assume that the preliminary report is a reliable indicator of whether the LEC has earned more than allowed. Indeed, the Commission points out that in five of the claims before us the preliminary report did not accurately reveal whether the LEC had exceeded its allowable rate of return. This, we think, is convincing evidence that even a diligent IXC could not reliably ascertain whether it had been injured solely upon the basis of the preliminary report. Therefore we agree with the Commission that a cause of action for damages pursuant to Sec. 206 does not accrue until after the LEC files its final report.