Opinion ID: 603765
Heading Depth: 2
Heading Rank: 1

Heading: Rate of Return Prescription

Text: 3 The Communications Act of 1934, ch. 652, 48 Stat. 1064 (codified as amended at 47 U.S.C. §§ 151-613 (1988)), authorizes the FCC to regulate interstate telecommunications services to ensure that tariffs are just, reasonable and nondiscriminatory. 47 U.S.C. §§ 201-205 (1988). One means the Commission may use to achieve this end is the imposition of a rate of return prescription on local exchange carriers like Vitelco. AT & T v. FCC, 836 F.2d 1386, 1388 (D.C.Cir.1988); see also Nader v. FCC, 520 [300 U.S.App.D.C. 361] F.2d 182, 203-04 (D.C.Cir.1975) (the power to prescribe rates of return is necessary for the Commission to carry out its [ratemaking] functions in an expeditious manner). The Commission's regulation of rates of return is premised on the notion that the FCC can set a target rate that balances investors' interests in competitive returns on capital against ratepayers' interests in fair pricing. See Federal Power Comm'n v. Hope Natural Gas Co., 320 U.S. 591, 603, 64 S.Ct. 281, 288, 88 L.Ed. 333 (1944). Thus, the FCC attempts to set the target rate of return high enough to assure confidence in the financial integrity of the enterprise, so as to maintain its credit and to attract capital, while simultaneously limiting the ability of carriers to charge ratepayers exorbitant prices. Id.; see also AT & T,86 FCC 2d 221, 223 (1981). Because of changing market forces and the amorphous nature of the interests being weighed, this balancing is an imprecise science. See United States v. FCC, 707 F.2d 610, 618 (D.C.Cir.1983). So when the Commission exercises discretion in selecting a target rate, it is understood that the choice represents merely one point within a broad zone of reasonableness. AT & T, 836 F.2d at 1390 (quoting Jersey Central Power & Light Co. v. FERC, 810 F.2d 1168, 1177 (D.C.Cir.1987) (en banc)). 4 The means by which the regulated rate of return drives actual carrier pricing is straightforward. Carriers subject to rate of return prescriptions set their service charges so that projected revenues exceed projected operating expenses by an amount that will yield the authorized rate of return. AT & T, 836 F.2d at 1388. If the carrier's projections prove correct, net return on capital will match the authorized return. However, because of the indeterminacy of the figures used in the calculations, carriers will virtually never earn precisely their authorized rate of return. Id.; see also Communications Satellite Corp., 3 FCC Rcd 2643, 2647 (1988) (FCC has long recognized the imprecision inherent in requiring carriers to set tariff rates that will produce the exact level of revenues necessary to produce the anticipated return). For this reason, the Commission allows for a spread or buffer range above the authorized return within which the Commission will not take remedial action. Authorized Rates of Return for the Interstate Service of AT & T Communications and Exchange Telephone Carriers, 58 RR 2d 1647, 1648-49 (1985) (Authorized Rates ); Communications Satellite Corp., 3 FCC Rcd at 2647. 5 To alleviate some of the imprecision inherent in the prescribed rate of return methodology, the FCC has devised several safeguards, one of which is particularly relevant to this appeal. To provide carriers with a fair opportunity to achieve their authorized rates of return, the Commission employs what it deems a long evaluation period allowing short-term earnings peaks and valleys to offset each other. MCI Telecommunications Corp. v. Pacific Northwest Bell Tel. Co., 5 FCC Rcd 216, 217 (1990). In selecting this approach, the FCC weighed the ratepayers' interests in more frequent rate reviews (to limit the possibilities for overcharges) against the carriers' desire for longer review periods (to dampen the impact of short-term oscillations). Authorized Rates, 58 RR 2d at 1652. The Commission ultimately concluded that these competing interests intersect at a two-year rate-monitoring period. 47 C.F.R. § 65.701(a) (1992); Authorized Rates, 58 RR 2d at 1651-52. The two-year monitoring period minimizes the impact of seasonal peak and valley earnings periods. Moreover, since local exchange carriers must revise their access charges on an annual basis, see 47 C.F.R. § 69.3(a), they may correct for erroneous projections in the first year through rate adjustments in the second year. See Authorized Rates, 58 RR 2d at 1652. 1 6 As originally crafted, the Commission's rate of return regulations required an automatic refund of any amount collected in excess of a carrier's authorized rate of [300 U.S.App.D.C. 362] return plus the specified buffer. See Authorized Rates, 58 RR 2d at 1653-57. However, we rejected the mandatory refund rule as arbitrary and capricious, holding it inconsistent with the Commission's regulatory theory of rate-of-return prescription. See AT & T v. FCC, 836 F.2d at 1389. The fundamental flaw in the Commission's mandatory refund scheme was that it created a one-way ratcheting effect, forcing carriers to refund earnings accumulated in excess of their authorized return, but prohibiting carriers from recouping earnings shortfalls. Id. at 1390. Thus, when measured beyond the short term, carriers subject to the Commission's mandatory rate-of-return and refund regulations were virtually sure to suffer an economic loss. Id. at 1391. 7 Our decision in AT & T did not question the Commission's authority under the Communications Act to order refunds of amounts collected in violation of a rate-of-return prescription. Id. at 1392. That issue had been addressed in New England Tel. & Tel. Co. v. FCC, 826 F.2d 1101, 1107-08 (D.C.Cir.1987), cert. denied, 490 U.S. 1039, 109 S.Ct. 1942, 104 L.Ed.2d 413 (1989), where we specifically held that the Commission has authority under section 4(i) of the Communications Act, 47 U.S.C. § 154(i), to order refunds in conjunction with rate-of-return prescriptions. The decision in AT & T, however, emphasized that the Commission's authority to order refunds where a carrier has violated an outstanding rate-of-return prescription 8 must ... be exercised in a way that does not contradict the Commission's own theory of rate of return regulation. An obvious example of a scheme that would be consistent with the Commission's view of the rate of return prescription as a minimum, is one in which the carrier, in addition to being required to return amounts that exceeded the target return, would be permitted to recover amounts by which it fell short of the target. We are confident that the Commission can imagine other schemes that would not tend to prevent carriers from earning the return needed to enable them to attract necessary capital. It is of course the Commission, not this court, that is empowered to exercise its judgment in choosing a course of action. We do not mean to suggest that any one valid course of action is preferable to any other. If the Commission's choice is to survive judicial scrutiny, however, it must conform to the Commission's understanding of its task. 9 AT & T, 836 F.2d at 1392 (citations omitted). In short, the Commission's refund mechanism must provide carriers with a fair opportunity to achieve their regulated rates of return over the long-term.