United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT
Argued October 21, 2005 Decided June 20, 2006
No. 04-1331
VERIZON TELEPHONE COMPANIES, ET AL.,
PETITIONERS
v.
FEDERAL COMMUNICATIONS COMMISSION AND
UNITED STATES OF AMERICA,
RESPONDENTS
AT&T CORPORATION,
INTERVENOR
Consolidated with
04-1332
On Petitions for Review of an Order of the
Federal Communications Commission
Sean A. Lev argued the cause for petitioners. With him on
the briefs were Michael K. Kellogg, Mark L. Evans, Scott H.
Angstreich, Michael E. Glover, Edward Shakin, James G.
Harralson, and Bennett L. Ross. Richard M. Sbaratta entered an
appearance.
2
Richard K. Welch, Counsel, Federal Communications
Commission, argued the cause for respondents. With him on the
brief were R. Hewitt Pate, III, Assistant Attorney General, U.S.
Department of Justice, Robert J. Wiggers and Robert B.
Nicholson, Attorneys, and John E. Ingle, Deputy Associate
General Counsel, and Laurel R. Bergold, Counsel. John A.
Rogovin and Samuel L. Feder, Counsel, entered appearances.
Judy Sello, David W. Carpenter, and David L. Lawson were
on the brief for intervenor AT&T Corporation. James P. Young
entered an appearance.
Before: GINSBURG, Chief Judge, and ROGERS and GRIFFITH,
Circuit Judges.
Opinion for the Court filed by Circuit Judge GRIFFITH.
GRIFFITH, Circuit Judge: This matter involves the use of an
accounting rule, “add-back,” in a complex area of regulation
addressing the rates charged by local telephone exchange
carriers for access to their networks. Its resolution, however, is
relatively straightforward because, at its core, petitioners’
challenge cannot overcome the broad delegation of power
Congress has given the Federal Communications Commission
(“FCC” or “Commission”) to suspend petitioners’ rates and
determine whether they are “just and reasonable.” Petitioners
contend that the FCC unreasonably required their 1993 and 1994
tariffs to comply with the add-back rule years after those tariffs
were filed. But Congress has expressly authorized the FCC to
do what petitioners urge it cannot: suspend petitioners’ tariffs
upon their filing, subject petitioners to an accounting order to
track revenue earned under the tariffs, and determine at a later
date whether petitioners’ tariffs contain “just and reasonable”
rates. 47 U.S.C. § 204(a)(1). We conclude that the Commission
reasonably applied its “quasi-legislative authority,” see Global
3
NAPs, Inc. v. FCC, 247 F.3d 252, 259 (D.C. Cir. 2001), under
47 U.S.C. § 204(a)(1) in rejecting petitioners’ suspended tariffs
for failing to apply add-back.
I.
Significant background is needed to understand the issue
before us. Prior to September 1990, local telephone companies
(local exchange carriers or “LECs”) were subject to “rate-of-
return” regulation in setting prices for interstate carriers to
access their local telephone networks. 1993 Annual Access
Tariff Filings; 1994 Annual Access Tariff Filings, 19 F.C.C.R.
14,949, 14,949 ¶ 2 (2004) (the “Tariff Order”). As we
explained in National Rural Telecom Ass’n v. FCC, 988 F.2d
174 (D.C. Cir. 1993),
[r]ate-of-return regulation is based directly on cost.
Firms so regulated can charge rates no higher than
necessary to obtain sufficient revenue to cover their
costs and achieve a fair return on equity. As one virtue
of perfect competition is that it drives prices down to
cost, rate-of-return regulation seems on its face a
promising way to regulate natural monopolies, in
principle roughly duplicating the benefits of
competition.
Id. at 177-78 (quotation marks and internal citations omitted).
Under rate-of-return regulation, if an LEC earned more than was
permitted by the regulated rate, the company was required to
refund those over-earnings to its ratepayers. Price Cap
Regulation of Local Exch. Carriers, 8 F.C.C.R. 4415, 4415 ¶ 5
(proposed July 6, 1993) (“Add-Back NPRM”). The Commission
“required LECs to treat refund payments as adjustments to the
period in which the overearnings occurred, rather than to the
period in which the refund is paid.” Id. “Thus, LECs ‘added-
4
back’ the amount of any refund for prior excess earnings into the
total earnings used to compute the rate of return for the current
earnings period.” Tariff Order, 19 F.C.C.R. at 14,950 ¶ 2. The
reason for requiring add-back was simple: for rate-of-return
regulation to work, a current earnings period needed to reflect
current earnings and not be distorted by refunds paid in the
current period for past overcharges. Add-back “provide[d] a
clear picture of current earnings for the reporting period” by
allowing the Commission to determine “whether an access
category being adjusted through a refund is earning above its
adjusted maximum rate of return in the monitoring period.”
Amendment of Part 65, Interstate Rate of Return Prescription,
1 F.C.C.R. 952, 956 ¶ 43 (1986).
“In September 1990, the Commission replaced rate-of-
return regulation for the largest LECs with . . . price cap
regulation.” Tariff Order, 19 F.C.C.R. at 14,950 ¶ 3. Under the
price cap regime, “the regulator sets a maximum price, and the
firm selects rates at or below the cap. Because cost savings do
not trigger reductions in the cap, the firm has a powerful profit
incentive to reduce costs.” Nat’l Rural Telecom, 988 F.2d at
178. “Price cap regulation is intended to provide better
incentives to the carriers than rate of return regulation, because
the carriers have an opportunity to earn greater profits if they
succeed in reducing costs and becoming more efficient.” Bell
Atl. Tel. Cos. v. FCC, 79 F.3d 1195, 1198 (D.C. Cir. 1996). The
Commission had to address three basic questions in setting up
price cap regulation: (1) what initial price caps should be; (2)
how to address inflation in future years; and (3) how to account
for the LECs’ future efficiency and innovation. The
Commission answered the first question by “cho[osing] existing
rates,” the second question by selecting “an escalator based on
general price inflation,” and the third by providing for “an
annual percentage reduction [to the price caps] for expected
savings from innovation and other economies.” Nat’l Rural
5
Telecom, 988 F.2d at 178 (citing Policy and Rules Concerning
Rates for Dominant Carriers, Second Report and Order, 5
F.C.C.R. 6786, 6792, 6814 (1990) (“LEC Price Cap Order”)).
At issue here is this third determination: the percentage
reduction applied to price cap indices (“PCIs”) annually, known
as a productivity factor or “X-factor.”
The Commission sought to create a productivity factor that
would “generate lower rates for customers while offering LECs
a fair opportunity to earn higher profits.” LEC Price Cap Order,
5 F.C.C.R. at 6801 ¶ 120. But the Commission believed that it
would be “difficult to determine a single, industry-wide
productivity offset that will be perfectly accurate for the industry
as a whole or for individual LECs or market conditions at a
given time.” Id. Accordingly, the Commission adopted two
mechanisms to prevent an imperfect productivity factor (i.e., one
that does not accurately represent efficiency gains or losses)
from distorting customer rates or the LECs’ profits. Under its
“sharing plan” mechanism, the Commission required
participating LECs to “share” their earnings above a certain
level with their interstate access customers by lowering their
price caps in the following year. LEC Price Cap Order, 5
F.C.C.R. at 6801 ¶ 124. Price cap LECs were allowed to choose
one of two X-factors, which would dictate how much their rates
would be lowered and the extent of their sharing obligation.
Specifically,
a price cap LEC opting for an X-factor of 3.3 percent
and earning a rate of return above 12.25 percent was
required to share half of earnings above 12.25 percent
and all earnings above 16.25 percent with its access
customers. [LEC Price Cap Order, 5 F.C.C.R. at 6801
¶ 125.] For LECs that elected a more challenging 4.3
percent X-factor, 50 percent sharing began for rates of
return above 13.25 percent, and 100 percent sharing
6
began at rates of return above 17.25 percent. [LEC
Price Cap Order, 5 F.C.C.R. at 6787-88 ¶¶ 7-10.]
Tariff Order, 19 F.C.C.R. at 14,951 n.9.1 Thus, an LEC that
selected a 4.3 percent X-factor would initially have to cut rates
more than a competitor that selected a 3.3 percent X-factor, but
could keep a greater percentage of its earnings. Alternatively,
a “low-end adjustment” mechanism “permitted price cap LECs
earning less than 10.25 percent in a particular year to adjust their
PCIs and rates upward in the following year to a level that
would have allowed them to achieve an earnings rate of at least
10.25 percent for the year in which they under-earned.” Id. at
14,951 ¶¶ 3, 4.
Sharing and low-end adjustments were first applied to the
LECs’ 1992 access tariffs. Some LECs had to lower their price
caps based upon 1991 earnings, while others were permitted to
increase price caps for 1992. One year later, those adjustments
raised an issue not addressed by the Commission in
promulgating its price cap plan: what effect should the
adjustments made to 1992 price caps based upon over- or under-
earnings from 1991 have in calculating the rates of return for
1992 (and thereby determining the rates to be charged for
1993)? In calculating the rates to be charged for 1993, LECs
1
Rate-of-return regulation used a rate-of-return calculation to
set “a maximum allowable return” based upon LECs’ costs and a
prescribed rate of return. Tariff Order, 19 F.C.C.R. at 1949-50 ¶ 2;
see Nat’l Rural Telecom, 988 F.2d at 177-78. Even under the price
cap regime at issue here, however, a rate-of-return calculation is
necessary to determine, among other things, an LEC’s sharing or low-
end adjustment. See Bell Atl., 79 F.3d at 1199 (“Sharing entails a
one-time adjustment to a local exchange carrier’s price cap index
when its rate of return for the previous year has been abnormally
high.”); id. at 1199 n.4 (explaining that low-end adjustments were
calculated using a “mechanism [that] mirrors the sharing adjustment”).
7
had to determine whether (1) to “add back” the adjustment made
to rates for 1992 in calculating the rate of return for 1992, as
occurred prior to price cap regulation or (2) to calculate the rate
of return for 1992 without considering the effect of sharing or
low-end adjustments made because of earnings from 1991.
Perhaps not surprisingly, LECs that could achieve higher rates
for 1993 by applying add-back chose to apply add-back, and
LECs that could achieve higher rates for 1993 by not applying
add-back chose not to apply add-back. Thus, each LEC took the
position on add-back that would allow it to maximize its price
caps for 1993. See id. at 14,951 ¶ 4.
This selective use of an accounting rule by the LECs did not
go unnoticed by the Commission. The Commission initiated a
rulemaking regarding add-back, proposing that its price cap
regime include a specific rule mandating add-back. See Add-
Back NPRM, 8 F.C.C.R. at 4417 ¶ 15. Soon thereafter, noting
that the add-back issue was unresolved and pending in the
rulemaking proceeding, the Commission suspended 1993 tariffs
for one day, issued an accounting order, and set for investigation
all 1993 access tariffs for carriers that benefitted from a low-end
adjustment or were subject to sharing for 1992. When price cap
LECs filed 1994 tariffs, the Commission suspended those rates
as well, issued an accounting order, and broadened the scope of
the 1993 investigation to include 1994 tariffs.
A. The Add-Back Rulemaking.
In the Add-Back NPRM, the Commission indicated that no
“commenters in the LEC Price Cap rulemaking or in the
subsequent reconsideration proceeding discussed the details of
rate of return calculations, or requested that [it] eliminate
add-back from the rate of return calculations of the LEC price
cap plan.” Id. at 4416 ¶ 10. The Commission, “[h]owever, . . .
recognize[d] that this issue was neither expressly discussed in
8
the LEC price cap orders nor clearly addressed in [its] Rules.”
Id. at 4415 ¶ 4. The Commission “believe[d] that [add-back]
continue[d] to be an appropriate and indeed probably necessary
component of the [price-cap] backstop.” Id. at 4416 ¶ 11.
Because “[t]he amounts of sharing or lower formula adjustment
implemented in one year . . . relate to productivity performance
in a prior year[,] . . . unless add-back occurs, the relationship
between rate of return and productivity growth becomes
hidden.” Id. Furthermore, an “unadjusted rate of return
effectively double-counts the amount of the backstop
adjustment, once in the base year and then again in the tariff
year.” Id. at 4416 ¶ 12. Finally, without add-back, the
Commission believed that “the effective rate of return [for
LECs] over time could fall outside the range of returns [it]
judged to be reasonable.” Id. at 4416 ¶ 13.
After receiving and addressing comments, the Commission
adopted a new regulation that explicitly required add-back under
its price cap rules. See Price Cap Regulation of Local Exch.
Carriers, 10 F.C.C.R. 5656, 5657, 5659 ¶¶ 4, 16 (1995) (the
“Add-Back Rulemaking Order”). The Add-Back Rulemaking
Order noted that the Commission’s price cap rules had not
“specif[ied] the manner in which these [sharing and low-end]
adjustments should be treated by the LECs in computing their
interstate earnings for the year in which the sharing or low-end
adjustment is effected,” id. at 5656 ¶ 1, and indicated that “in
adopting the LEC Price Cap Order, the Commission did not
state that it intended to eliminate the requirement under
rate-of-return regulation that carriers subtract revenues
reflecting out-of-period earnings for purposes of calculating
current year earnings,” id. at 5661 ¶ 32. According to the
Commission, the issue of how to treat these adjustments did not
arise until 1993, the first year that price caps would be based
upon prices that were previously subjected to adjustments. See
id. at 5658 ¶ 10. Absent explicit guidance on add-back from the
9
Commission in the price cap context, the Commission noted
again that LECs had taken divergent approaches on whether to
apply this accounting rule. See id. at 5658 ¶ 11. After a lengthy
analysis, the Commission concluded that adding back a sharing
adjustment “ensures that the earnings thresholds applied to
determine price cap LECs’ sharing obligations are those [the
Commission] intended when [it] adopted” the price cap plan, id.
at 5660 ¶ 22, and that adding back any low-end adjustment was
also necessary for essentially the same reason, see id. at 5661
¶ 28.
Several parties petitioned for review of the Add-Back
Rulemaking Order in this Court, arguing that “the add-back
requirement is arbitrary and capricious because it requires
carriers to recognize ‘phantom’ earnings and because it requires
carriers to share more than the original price cap rules intended.”
Bell Atl., 79 F.3d at 1205. We rejected those arguments and
held that the Commission reasonably applied add-back, noting
that add-back “provides useful information about the carrier’s
productivity because it reflects what the carrier could have
earned but for the sharing obligation.” Id. at 1206. The
Commission also reasonably determined that add-back “resulted
in the right level of sharing, and . . . was a necessary part of the
sharing mechanism.” Id. We also rejected petitioners’
argument that adopting an add-back rule would result in
retroactive rulemaking. We noted that (1) “[t]he sharing rules
do not regulate past transactions; they regulate future rates;” and
(2) “the add-back rule does not change the past legal
consequences of carriers’ decisions to choose the 3.3 percent X-
factor rather than the 4.3 percent X-factor” because “[t]he state
of the law has never been clear, and the issue has been disputed
since it first arose in 1993,” meaning that the “rule does not
upset . . . reasonable reliance interests.” Id. at 1207.
10
B. The 1993 and 1994 Tariff Suspension Proceedings.
Five days after initiating notice and comment proceedings,
the Commission entered its order suspending and opening an
investigation of 1993 tariffs for LECs that benefitted from a
low-end adjustment or were subject to sharing in 1992, 1993
Annual Access Tariff Filings, 8 F.C.C.R. 4960, 4965 ¶ 32
(Common Carrier Bureau 1993), and, as noted, took the same
approach to 1994 tariffs, 1994 Annual Access Tariff Filings, 9
F.C.C.R. 3705, 3713 ¶ 12 (Common Carrier Bureau 1994). For
both matters (the “1993 and 1994 investigations”), the
Commission entered an “accounting order,” so that the LECs’
access charges for 1993 and 1994 could be tracked and refunds
could be ordered if those tariffs were found to be unlawful.
Both suspension orders noted the Commission’s pending
rulemaking on the add-back issue, but did not specify any
timetable for when the 1993 and 1994 investigations would be
completed. Even after the Add-Back Rulemaking Order was
released in 1995, and after this Court in Bell Atlantic rejected in
1996 the challenges of various LECs to the Add-Back
Rulemaking Order, the Commission was silent about the 1993
and 1994 investigations. Finally, in 2003, the Commission
issued an order seeking comments “to refresh a record that, due
to passage of time and several mergers and acquisitions among
the interested parties, may have now grown stale.” Further
Comment Requested on the Appropriate Treatment of Sharing
and Low-End Adjustments, 18 F.C.C.R. 6483, 6487 (2003). On
July 30, 2004, pursuant to its authority under 47 U.S.C.
§ 204(a)(1) to determine whether a regulated tariff contained
“just and reasonable” rates, see 47 U.S.C. § 201(b), the
Commission released an order determining that 1993 tariffs of
LECs which were subject to a sharing or low-end adjustment in
1992 were just and reasonable if they applied add-back, and that
1993 tariffs of LECs which were subject to a sharing or low-end
11
adjustment in 1992 were not just and reasonable if they had not
applied add-back. Tariff Order, 19 F.C.C.R. at 14,949 ¶ 1. The
Commission reached the same determination with respect to
1994 tariffs. Id. The Commission left open the question of
refunds for any overcharges that resulted from the imposition of
unjust and unreasonable rates, concluding that it would hold
further proceedings on the scope of any refunds. See id. at
14,961-62 ¶ 29 (“After reviewing the recalculations and refund
plans submitted in response to this order, and replies received on
these recalculations and refund plans, we will, as appropriate,
approve, disapprove, or order modification of the filed
recalculations and refund plans.”). Two LECs that participated
in the proceedings that led to the Tariff Order, Verizon
Communications Inc. (and its various subsidiaries) (“Verizon”)
and BellSouth Corporation (“BellSouth”), filed these timely
petitions for review of the Tariff Order.
II.
Even where the “parties assure us that we have jurisdiction
over [a] case, we have an independent obligation to be certain.”
Midwest Indep. Transmission Sys. Operator, Inc. v. FERC, 388
F.3d 903, 908 (D.C. Cir. 2004) (citing Steel Co. v. Citizens for
a Better Env’t, 523 U.S. 83, 94-95 (1998)). Petitioners assert
that we have jurisdiction to review their challenge to the Tariff
Order pursuant to 47 U.S.C. § 402(a) and 28 U.S.C. §§ 2342(1),
2344, which the Government does not dispute. “[Section]
402(a) provides that review shall be sought through the general
petition process prescribed in 28 U.S.C. §§ 2341-2351.” N. Am.
Catholic Educ. Programming Found., Inc. v. FCC, 437 F.3d
1206, 1208 (D.C. Cir. 2006). “Section 2342 of the Judicial
Review Act confers on the court of appeals ‘exclusive
jurisdiction to enjoin, set aside, suspend (in whole or in part), or
to determine the validity of . . . all final orders of the Federal
Communications Commission made reviewable by section
12
402(a) of title 47.’” Am. Ass’n of Paging Carriers v. FCC, 442
F.3d 751, 755 (D.C. Cir. 2006) (quoting 28 U.S.C. § 2342)
(emphasis added).
As “§ 402(a) applies only to final orders,” N. Am. Catholic,
437 F.3d at 1209 (emphasis in original), some discussion is
needed regarding our jurisdiction to review the Tariff Order
when that order contemplates further proceedings regarding
refunds that petitioners may or may not have to provide—i.e.,
when that order does not appear to be “final.” “[U]nder a
well-established principle of finality, when a tribunal elects to
resolve the issue of liability in a particular action while
reserving its determination of damages on that liability, that
decision generally is not considered ‘final’ for purposes of
judicial review.” Verizon Tel. Cos. v. FCC, 269 F.3d 1098,
1104 (D.C. Cir. 2001). “This basic understanding of finality is
the norm not only in civil litigation, but also in the
administrative context, at least where the relevant statute does
not embrace a non-traditional view of finality.” Id. Although
the Tariff Order determined that petitioners’ 1993 and 1994
tariffs were unlawful, the Commission made clear that
proceedings would continue regarding what refunds would
occur, i.e., what liability petitioners would have.
As we recognized in Verizon, however, this norm of finality
may be “supplanted by statute.” Id. at 1104-05 (holding, despite
the pendency of future proceedings to determine damages, the
Commission’s determination that LECs had imposed
unreasonable charges was final action subject to review per 47
U.S.C. § 208(b)). The same is true here: the Tariff Order
completed the Commission’s “hearing and decision” regarding
“the lawfulness” of the LEC’s tariffs, id. § 204(a)(1), making it
a “final order” over which we may exercise jurisdiction under
§ 204(a)(2)(C) (“Any order concluding a hearing under this
section shall be a final order and may be appealed under section
13
402(a) of this title.”). Thus, we have jurisdiction to review the
LECs’ challenge to the Commission’s lawfulness conclusion in
the Tariff Order.
III.
Section 201(b) of the Communications Act (the “Act”), 47
U.S.C. § 201(b), provides that charges for interstate or foreign
communications “shall be just and reasonable.” See Bell Atl., 79
F.3d at 1202. Section 204(a)(1) of the Act, 47 U.S.C.
§ 204(a)(1), directs that “[w]henever there is filed with the
Commission any new or revised charge,” the Commission may
investigate “the lawfulness” of the charge and immediately
“suspend the operation of such charge” for a “period [of up to]
five months beyond the time when [the charge] would otherwise
go into effect.” If the Commission’s hearing has “not been
concluded,” the Act allows the “the proposed new or revised
charge . . . [to] go into effect” after five months, but the
Commission may require a carrier to “keep accurate account of
all amounts received” under the potentially unlawful charge
(i.e., order an accounting). Id. In determining whether a new or
revised charge is lawful under § 204(a)(1), the Act provides that
“the burden of proof . . . shall be upon the carrier.” Id.
Section 201(b) also authorizes the Commission to
“prescribe such rules and regulations as may be necessary in the
public interest to carry out the provisions of this chapter.” The
Commission did just that in 1995 when promulgating its add-
back rule through the Add-Back Rulemaking Order. Concerned
that “[w]ithout add-back, the double-counting of backstop
adjustments could effectively permit earnings outside the range
of reasonableness we designated,” Add-Back NPRM, 8 F.C.C.R.
at 4416 ¶ 13, the Commission concluded “that the add-back
adjustment is a necessary element of the sharing and low-end
adjustment mechanisms.” Add-Back Rulemaking Order, 10
14
F.C.C.R. at 5659 ¶ 16. The Commission expressly relied upon,
inter alia, its authority under §§ 201 and 204 in promulgating its
add-back rule. Id. at 5666 ¶ 58. After it did so in 1995, carriers
knew with certainty that rates in future tariffs would have to be
calculated with add-back in order to be considered just and
reasonable under both statutes.
With respect to petitioners’ suspended 1993 and 1994
tariffs, the Commission acted pursuant to those very same
statutes in attempting to determine “whether just and reasonable
rates can be achieved pursuant to the requirements of section
201 of the Act and the LEC Price Cap Order if add-back is not
required.” Tariff Order, 19 F.C.C.R. at 14,954 ¶ 9 & n.42
(citing 47 U.S.C. §§ 201, 204). Thus, the Commission applied
the same statutes and “just and reasonable” statutory standard
that it applied in promulgating its add-back regulation.
Petitioners recognize, as they must, that this Court in Bell
Atlantic resolved a myriad of challenges to the reasonableness
of the add-back concept:
Petitioners . . . claim that the add-back requirement is
arbitrary and capricious because it requires carriers to
recognize “phantom” earnings and because it requires
carriers to share more than the original price cap rules
intended. Neither of these objections strikes us as
persuasive.
***
The Commission uses earnings as a proxy for
measuring a carrier’s productivity; the add-back rule
maintains the link between productivity and earnings.
That the carrier did not actually earn the add-back
amount is beside the point. The add-back amount
provides useful information about the carrier’s
15
productivity because it reflects what the carrier could
have earned but for the sharing obligation.
***
The Commission recognized that the carrier would
have to continue sharing year after year, but thought
this made sense. As the Commission saw it, the
add-back rule does not create a ripple effect. It erases
the ripple effect of the sharing mechanism. . . . The
Commission found that add-back resulted in the right
level of sharing, and that it was a necessary part of the
sharing mechanism. Petitioners offer no basis for
overturning that decision. They simply argue that the
add-back requirement requires them to share too much.
The Commission reasonably decided otherwise.
79 F.3d at 1205-06. Well-aware of Bell Atlantic, petitioners
make no challenge to the concept of add-back; they do not argue
that add-back is inherently unreasonable, nor do they contend
that it is in any way arbitrary in light of other aspects of the
Commission’s price cap system of regulation. Instead,
petitioners present a narrow challenge, contending that the
Commission’s refusal to accept their 1993 and 1994 tariffs
absent add-back meant that the Commission “impermissibly
applie[d] the add-back rule retroactively.”
Petitioners discuss the 1995 Add-Back Rulemaking Order
throughout their brief. Petitioners’ central claim is that the
Commission’s decision to require add-back during these tariff
suspension proceedings “has the same effect as retroactively
applying the 1995 Add-Back [Rulemaking] Order.” In
petitioners’ view, the Add-Back Rulemaking Order “conceded
that [the Commission] was changing the applicable law. . . .
The FCC’s understanding that it was creating a new legal
16
obligation in 1995 . . . is fundamentally incompatible with its
newfound and opportunistic belief that add-back was always
required under the just-and-reasonable requirement of section
201.”
The petitioners’ resort to the 1995 rulemaking in making
their retroactivity argument is, in large measure, a red herring.
While petitioners view the Commission’s examination of
whether add-back was required for just and reasonable rates
under section 201 as “newfound and opportunistic,” the
Communications Act requires the FCC to determine whether
petitioners have met their burden of showing that the 1993 and
1994 tariffs contained just and reasonable rates. See 47 U.S.C.
§ 201(b) (“All charges . . . shall be just and reasonable, and any
such charge . . . that is unjust or unreasonable is declared to be
unlawful . . . .”); id. § 204(a)(1) (“Whenever there is filed with
the Commission any new or revised charge, . . . the Commission
may . . . enter upon a hearing concerning the lawfulness
thereof . . . . [T]he burden of proof to show that the new or
revised charge, or proposed charge, is just and reasonable shall
be upon the carrier . . . .”). Because the Commission did not
resolve the 1993 and 1994 tariff proceedings in a manner
modeling administrative nimbleness, issuing the Tariff Order
eleven years after those proceedings began, it is true that
petitioners had the benefit of seeing that the Commission would
eventually promulgate a legislative rule that, according to the
Commission, “clarif[ied]” whether price-cap regulation required
add-back. See Add-Back Rulemaking Order, 10 F.C.C.R. at
5659 ¶ 15. But agencies routinely adopt rules through notice
and comment that are consistent with their prior administrative
proceedings. Indeed, an agency acting consistently with its prior
actions is generally what makes an agency action not arbitrary,
although such an action may still be unlawful for other reasons.
Cf. Nat’l Treasury Employees Union v. Fed. Labor Relations
Auth., 404 F.3d 454, 457-58 (D.C. Cir. 2005) (“The Authority’s
17
failure to follow its own well-established precedent without
explanation is the very essence of arbitrariness.”); Williams
Field Servs. Group, Inc. v. FERC, 194 F.3d 110, 112 (D.C. Cir.
1999) (“Because FERC’s decision is consistent with its
precedent and well-reasoned, we uphold it.”). Petitioners’
argument that the Commission retroactively employed an
accounting concept in rejecting their tariffs under § 204 turns
not upon the Commission’s later consistent rulemaking
proceeding, but upon whether the Commission lawfully acted
within the scope of § 204 in rejecting petitioners’ tariffs, without
raising retroactivity concerns.
A. Suspension, Accounting, and Refunds under 47 U.S.C.
§ 204(a)(1).
Petitioners argue that applying add-back to their suspended
tariffs “impose[s] new substantive obligations that had not
previously existed,” “penalizes LECs for reasonable choices
they made without any rule or agency guidance as to whether
add-back was required,” and impermissibly results in finding the
1993 and 1994 tariffs “unlawful [even though] they [did not]
violate some legal rule in place at the relevant time.” These
retroactivity arguments ignore the elephant in the room: the
suspension, accounting, and refund process authorized by 47
U.S.C. § 204(a)(1), pursuant to which the Commission acted,
and its place in the ratemaking process.
As we have previously summarized:
Under section 203 [of the Act, 47 U.S.C. § 203],
carriers initiate the ratemaking process by filing tariffs
which may take effect after prescribed notice periods.
The FCC may reject a tariff outright if it is patently
unlawful. Alternatively, the Commission may set the
rates for investigation and hearing. 47 U.S.C. § 204(a).
18
In addition, the Commission may suspend the effective
date of a filed tariff for a period of up to five months.
After the five-month period has elapsed, the rates
become effective, and a customer is obliged to pay at
the designated rate. In the event the rates are later
found unlawful, the Commission may require the
carrier to effect a refund. 47 U.S.C. § 204(a).
TRT Telecomm. Corp. v. FCC, 857 F.2d 1535, 1538 (D.C. Cir.
1988) (citation and quotation marks omitted). If the
Commission “fails to order a suspension,” that failure “does not
mean that the Commission cannot take action to correct an
unreasonable rate.” Ill. Bell Tel. Co. v. FCC, 966 F.2d 1478,
1481 (D.C. Cir. 1992). In Ҥ 205 Congress provided the
mechanism for prospective relief from unreasonable rates.” Id.
at 1482. “In § 204,” however, “it provided the mechanism for
preventing an unreasonable rate from being filed, or at least
from taking effect only subject to an accounting order and such
further order as would be required. The one supposes
prospective relief, the other the possibility of refund.” Id.
Petitioners’ retroactivity arguments ignore the reality that
their 1993 and 1994 tariffs were suspended and subjected to an
accounting order. Petitioners have been on notice, since the
time those tariffs were filed, that the tariffs’ lawfulness is in
doubt and that they may not contain just and reasonable rates.
“That a carrier is made subject to refunds, accompanied by
liability for interest, is part of the price it pays for the flexibility
in a scheme of carrier-initiated rates. The carrier retains the
initiative to effect a rate increase, but it must account for its
increased revenues if those rates are later found unlawful.” TRT
Telecomm., 857 F.2d at 1553. This suspension process “is not
unique, nor is it new.” Ill. Bell, 966 F.2d at 1481-82 (noting that
section 4 of the Natural Gas Act, (“NGA”), 15 U.S.C. § 717c,
contains the same suspension and refund process, and that
19
section 5 of the NGA, 15 U.S.C. § 717d, like the
Communications Act, authorizes prospective relief only absent
suspension). And as we have explained with respect to the
analogous suspension process under the NGA, suspension
“changes what would be purely retroactive ratemaking into a
functionally prospective process by placing the relevant
audience on notice at the outset that the rates being promulgated
are provisional only and subject to later revision.” Columbia
Gas Transmission Corp. v. FERC, 895 F.2d 791, 797 (D.C. Cir.
1990).
Petitioners offer two minimal responses to the fact that their
tariffs were suspended under § 204—one in a footnote and one
in their reply brief. Their footnote contends that “[t]o the extent
the FCC’s [Tariff] Order can be read to suggest that the agency
has the right to create such new substantive rules in a section
204 proceeding, . . . such a rule would be unlawful because it
would create the same unfair retroactive effects that the Bell
Atlantic Court found that the 1995 Add-Back [Rulemaking]
Order carefully avoided by applying the add-back rule only
prospectively.” Whatever petitioners mean by “substantive
rule,” petitioners cannot be right that the Commission may not
suspend a tariff and then require, before accepting a revised
tariff, that it comply with add-back, an accounting rule, in order
to achieve a just and reasonable rate. We do not doubt that a
“‘failure to follow its own regulations’” during a § 204
proceeding would be “‘fatal to the deviant action.’” Way of Life
Television Network, Inc. v. FCC, 593 F.2d 1356, 1359 (D.C. Cir.
1979) (quoting Union of Concerned Scientists v. Atomic Energy
Comm’n, 499 F.2d 1069, 1082 (D.C. Cir. 1974)). But “[§] 204
grants the FCC ‘quasi-legislative authority to evaluate a carrier’s
proposals for new or revised rates.’” Global NAPs, 247 F.3d at
259 (quoting Hi-Tech Furnace Sys., Inc. v. FCC, 224 F.3d 781,
786 (D.C. Cir. 2000)). Given that the Commission is exercising
in these tariff suspension proceedings the same authority to
20
evaluate whether petitioners had submitted “just and reasonable”
charges that the Commission called upon in promulgating its
add-back regulation, it cannot be that the FCC may not address,
in determining what is a “just and reasonable” charge, various
LECs having taken inconsistent positions on an unforeseen
accounting issue. Rather, through these quasi-legislative
proceedings, the Commission has lawfully determined that these
suspended tariffs cannot be just and reasonable absent add-back,
just as it did in the Add-Back Rulemaking Order. Petitioners
alternatively contend that the FCC’s order “expressly rejected”
this understanding of § 204, but the record reveals otherwise.2
B. Applying Add-Back to the 1993 and 1994 Tariffs was
Neither Arbitrary Nor Unreasonable.
Petitioners argue that “in all events,” the “absence of
guidance from the FCC in the years preceding the issuance of
the Add-Back [Rulemaking] Order” means that “it was entirely
reasonable for carriers to decide not to use an add-back
methodology.” That is, even if the Commission’s § 204
determination was not retroactive, it was arbitrary and
unreasonable for the Commission to require add-back under its
2
See Tariff Order, 19 F.C.C.R. at 14,957 ¶ 17 (“Section
204(a) explicitly authorizes the Commission to investigate the
lawfulness of ‘any new or revised charge, classification, regulation or
practice’ contained in a filed tariff. This broad grant of authority
empowers the Commission to determine the reasonableness of
applying add-back in the tariffs under investigation whether or not the
Commission at the time the tariffs were filed had promulgated rules
explicitly requiring add-back. A tariff investigation is a rulemaking
of particular applicability under the Administrative Procedure Act and
the Commission, in the exercise of its section 204 authority, routinely
makes significant policy and methodological decisions based on the
records developed in tariff investigations.”) (footnotes and quotation
marks omitted).
21
authority to set “just and reasonable” rates, 47 U.S.C. §§ 201(b),
204(a)(1), “given the uncertainty that characterized the law at
the time and the plausible arguments against using add-back.”
This argument need not detain us long. Petitioners’ argument is
not faithful to §§ 201 and 204. Section 204(a)(1) places the
burden of proving that petitioners’ revised charges are just and
reasonable upon the LECs, and § 201 mandates that the FCC
only accept charges that are just and reasonable. The
Communications Act does not contemplate that any choices the
LECs make will be immunized from § 204(a)(1) and deemed
“just and reasonable” absent explicit guidance to the contrary
from the FCC.
We fail to see how the FCC’s determination on add-back
was arbitrary. Given the conflicting uses of add-back by various
LECs depending upon whether add-back would contribute to
their financial well-being, the Commission sought to take a
uniform, fair position on add-back, and reasonably chose the
position most consistent with its price cap regime. Bell Atl., 79
F.3d at 1206; see Capital Network Sys., Inc. v. FCC, 28 F.3d
201, 206 (D.C. Cir. 1994) (“Reviewing courts accord even
greater deference to agency interpretations of agency rules than
they do to agency interpretations of ambiguous statutory
terms.”). The Commission’s treatment of similarly situated
LECs in the same manner was not arbitrary and capricious.3
3
Perhaps recognizing that the suspension of their tariffs
undermines their retroactivity arguments, petitioners also argue that
the Commission’s decision to suspend their tariffs was wrong in the
first place because it conflicted, in their view, with the LEC Price Cap
Order. Petitioners argue that under that order, “tariffs that comply
with existing price-cap requirements (and thus fall within the ‘bands’
of lawful rates) are presumed to be just and reasonable and will not be
suspended under section 204.” We do not have jurisdiction to address
this “no-suspension zone” challenge, however, because it was not
22
IV.
Finally, petitioners make a series of arguments claiming that
it was inequitable for the Commission “to require refunds.” As
we have noted, the order petitioners have sought review of, and
the order we have jurisdiction to review, is a liability order. It
reaches a final determination that petitioners’ 1993 and 1994
tariffs did not contain just and reasonable rates because they
failed to utilize add-back. It does not, however, resolve the
refund issue. The Tariff Order only orders the parties to
“RECALCULATE their 1992 and 1993 earnings making such
an adjustment in compliance with this order, DETERMINE any
applicable sharing or lower formula adjustment . . . , COMPUTE
the amount of any resulting access rate decrease, and SUBMIT
PLANS for implementing any resulting refunds . . . .” Tariff
Order, 19 F.C.C.R. at 14,963 ¶ 34 (emphasis added). The
Commission has advised us that after the record and briefing
were filed in this case, the Commission’s staff, acting pursuant
to delegated authority, approved refund plans submitted by
BellSouth and Verizon. See 1993 Annual Access Tariff
Findings; 1994 Annual Access Tariff Findings, __ F.C.C.R. __,
2005 WL 1661860 (Pricing Policy Division 2005). BellSouth
has sought Commission review of that decision, explaining in its
application for review that it “seeks Commission review . . . in
order to ensure that the Commission’s refund decision will be
subject to judicial review if the D.C. Circuit concludes that
review is not available until the Commission issues an order
specifying the precise amount that BellSouth must pay in
refunds.” See Int’l Telecard Ass’n v. FCC, 166 F.3d 387, 388
(D.C. Cir. 1999) (“‘[t]he filing of an application for review [by
the full Commission] shall be a condition precedent to judicial
“raised . . . with sufficient clarity before the FCC.” Am. Family Ass’n,
Inc. v. FCC, 365 F.3d 1156, 1166 (D.C. Cir. 2004) (citing 47 U.S.C.
§ 405(a); AT&T Corp. v. FCC, 317 F.3d 227, 235 (D.C. Cir. 2003)).
23
review of any order [. . .] taken pursuant to’ delegated
authority”) (first and second alterations in original) (quoting 47
U.S.C. § 155(c)(7)). No party has advised the Court of what
action, if any, Verizon took in response to the staff decision.
Needless to say given our prior discussion of our appellate
jurisdiction to review the Commission’s lawfulness
determination, see supra Part II, the Tariff Order, from which
Verizon and BellSouth petitioned for review, is not the
Commission’s final determination regarding refunds. Because
the petitions for review do not seek to challenge a final agency
action on refunds, we do not have jurisdiction to consider
petitioners’ premature challenge to any future resolution of the
refund issue. See 47 U.S.C. § 402(a); 28 U.S.C. §§ 2342(1),
2344; see also Verizon, 269 F.3d at 1112 (“[T]he FCC has not
reached a conclusive determination that it will compel the LECs
to return all of the monies that they collected . . . . We will not
prejudge these issues in advance of the agency.”).
V.
For the foregoing reasons, we deny in part and dismiss in
part the petitions for review.
So ordered.