United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT
Argued January 7, 1999 Decided March 19, 1999
No. 93-1779
Southwestern Bell Telephone Company, et al.,
Petitioners
v.
Federal Communications Commission and
United States of America,
Respondents
MFS Communications Company, Inc., et al.,
Intervenors
Consolidated with
No. 97-1468
On Petitions for Review of Orders of the
Federal Communications Commission
Michael J. Zpevak argued the cause for petitioners. On
the briefs were James D. Ellis, Robert M. Lynch, Durward
D. Dupre, Darryl Howard, and Jeffrey B. Thomas. Nancy
C. Woolf and Thomas A. Pajda entered appearances.
John E. Ingle, Deputy Associate General Counsel, Federal
Communications Commission, argued the cause for respon-
dents. With him on the brief were Joel I. Klein, Assistant
Attorney General, U.S. Department of Justice, Robert B.
Nicholson, and Robert J. Wiggers, Attorneys, Christopher J.
Wright, General Counsel, Federal Communications Commis-
sion, Daniel M. Armstrong, Associate General Counsel, and
Laurel R. Bergold, Counsel.
Russell M. Blau argued the cause for intervenors Associa-
tion for Local Telecommunications Services, et al. With him
on the brief were Andrew D. Lipman, Robert V. Zener,
Frank W. Krogh, Mark Ehrlich, Peter D. Keisler, Peter H.
Jacoby, Richard J. Metzger, and Craig Joyce. Mark C.
Rosenblum entered an appearance.
Robert B. McKenna was on the statement in lieu of brief
for intervenor US West Communications.
Before: Silberman, Sentelle and Randolph, Circuit
Judges.
Sentelle, Circuit Judge: Southwestern Bell Telephone
Company and other local telephone companies (collectively
"Southwestern Bell") petition for review of orders issued by
the Federal Communications Commission ("FCC" or "Com-
mission") regulating the rates of local exchange carriers
("LECs") for physical collocation service. The FCC suspend-
ed a portion of the rates attributable to overhead loadings for
a five-month period, pending investigation. Before the sus-
pension period ended, the FCC issued an "interim prescrip-
tion" of maximum overhead loading factors while it continued
its investigation. At the end of the investigation, the FCC
disallowed costs which it determined Southwestern Bell had
not adequately supported to the extent that the costs exceed-
ed one standard deviation above the industry-wide average.
Southwestern Bell challenges (1) the authority of the FCC
to issue an interim prescription of rates, (2) the industry-wide
average methodology employed by the FCC, and (3) the
FCC's disallowance of certain direct costs. We hold that
Southwestern Bell's claim that the FCC exceeded its statuto-
ry authority by issuing an interim prescription is moot. We
further hold that the FCC's use of the industry-wide average
methodology and disallowance of certain direct costs were
within its discretion. As a result, we deny Southwestern
Bell's petition for review.
I. Background
The present controversy arises from the FCC's ongoing
effort to expand competition among providers of access for
long-distance telecommunications. Long-distance phone com-
panies, interexchange carriers ("IXCs"), must obtain access to
local telephone customers in order to sell their services. An
IXC connects to its long-distance customers by using either
special access or switched access facilities. See generally
Competitive Telecommunications Ass'n v. FCC, 87 F.3d 522
(D.C. Cir. 1996). Switched access involves transmission of
calls from the local customers' premises through the switch-
ing center or "central offices" of an LEC to the facilities of an
IXC, thence through the IXC's facilities to the central offices
of another LEC for delivery to the called party. Special
access removes the switching aspect from the commencement
of the process by the provision of a dedicated line running
directly from the customer to the facility of the IXC. See id.
at 524. The LECs for many years had the local access
market largely to themselves. During the 1980's, assisted by
technological breakthroughs, a growing number of competi-
tive access providers ("CAPs") entered the special access
market, particularly in large urban areas. Special access
tariffs of the dominant LECs limited the ability of the CAPs
to compete in the provision of facilities for special access. See
Bell Atlantic Tel. Cos. v. FCC, 24 F.3d 1441 (D.C. Cir. 1994).
In an effort to reduce these barriers to competition, the
Commission in 1992 adopted the "expanded interconnection
rules" requiring most major LECs to provide either physical
collocation, in which the LEC provides central office space for
the CAP to place and use its own equipment, or virtual
collocation, in which the interconnecting CAP has the right to
designate or specify LEC equipment dedicated to its use.
With modifications responsive to an order of this court vacat-
ing requirements of the original order, Bell Atlantic v. FCC,
24 F.3d 1441 (D.C. Cir. 1994), the Commission's basic require-
ments continue. Expanded Interconnection with Local Tele-
phone Facilities, 9 FCC Rcd 5154 (1994) (virtual collocation
order), remanded, Pacific Bell v. FCC, 81 F.3d 1147 (D.C.
Cir. 1996). Under the Commission's rules, the LECs are
required to file tariffs with unbundled rate elements designed
to recover the reasonable cost of providing the required
interconnection services. Expanded Interconnection with Lo-
cal Telephone Company Facilities, 7 FCC Rcd 7369, 7372,
7421-47, reconsidered, 8 FCC Rcd 127 (1992), reconsidered, 8
FCC Rcd 7341 (1993), vacated in part and remanded, Bell
Atlantic Tel. Cos. v. FCC, 24 F.3d 1441 (D.C. Cir. 1994).
On February 16, 1993, sixteen LECs filed the special
access expanded interconnection tariffs at issue in this case.
After reviewing the LECs' submissions, on June 9, 1993, the
Common Carrier Bureau (the "Bureau") of the FCC issued
its "Physical Collocation Tariff Suspension Order." See In
the Matter of Expanded Interconnection with Local Tele-
phone Facilities, CC Docket No. 93-162, 8 FCC Rcd 4589
(1993) ("Physical Collocation Tariff Suspension Order") (Joint
Appendix ("J.A.") at 424). That order advanced the effective
date of the tariffs by one day, suspended the tariffs in their
entirety for one day, then allowed them to take effect subject
to an accounting order and a modification that had the effect
of reducing the rates in the tariffs for the period of an
ensuing investigation, based upon the Bureau's preliminary
judgment that the petitioners had not adequately justified
overhead loadings. Thus, the Bureau substituted its own
overhead costing methodology and its reformulation of rates
for those of the LECs, and permitted its rates, not the rates
filed in the tariffs, to become effective subject to the account-
ing and refund provisions of the tariff suspension order.
On July 9, 1993, Southwestern Bell and the other LECs
filed an application for review of the Bureau order. After
considering submissions from the LECs, the FCC issued its
"First Report and Order" finding that the LECs had failed to
demonstrate that their proposed overhead loading factors
were just and reasonable. In the Matter of Local Exchange
Carriers' Rates, Terms and Conditions for Expanded Inter-
connection for Special Access, CC Docket No. 93-162, 8 FCC
Rcd 8344, pp 2, 26 (1993) ("First Report and Order") (J.A. at
37-38, 48). The FCC concluded that the record before it was
not adequate to permit a permanent rate prescription. How-
ever, it determined that the "public interest" required it to
take immediate action to ensure the availability of expanded
interconnection at rates that were based upon verifiable and
reasonable overhead loading factors while it continued its
investigation. Id. p 35 (J.A. at 52). The "immediate action"
the FCC chose to take involved issuance of an "interim
prescription" of rates that would remain in effect pending the
outcome of its investigation. Id. pp 35, 36, 38 (J.A. at 52-54).
The FCC made its interim prescription subject to a two-
way adjustment mechanism: carrier recoupment if the FCC
found at the end of the investigation that the interim rates
were below a just and reasonable level, and refunds to
customers if the FCC finally concluded that the interim rates
were too high. Id. p 39 (J.A. at 54). As authority for its
issuance of the interim prescription, the FCC cited 47 U.S.C.
ss 154(i), 201, and 205. Id. p 37 (J.A. at 53). Contending
that the FCC had exceeded its statutory authority, South-
western Bell filed a petition for review of the First Report
and Order with this court on November 22, 1993. On Janu-
ary 12, 1994, the FCC filed a motion to hold the appeal in
abeyance, which this court granted on March 14, 1994.
After a four-year investigation during which the FCC's
"interim" prescription remained in effect, the FCC issued its
"Second Report and Order," finding that the LECs had failed
to establish the reasonableness of the rates, terms and condi-
tions in their expanded interconnection tariffs. In the Matter
of Local Exchange Carriers' Rates, Terms, and Conditions for
Expanded Interconnection Through Physical Collocation for
Special Access and Switched Transport, CC Docket No. 93-
162, 12 FCC Rcd 18730, p 4 (1997) ("Second Report and
Order") (J.A. at 79). The FCC disallowed certain direct costs
for physical collocation services, prescribed maximum permis-
sible overhead loading factors, ordered tariff revisions to
correct unreasonable rate structures, and struck down certain
tariff provisions on the grounds that they were unjust, unrea-
sonable, discriminatory, and anticompetitive. The FCC af-
firmed the Bureau's partial suspension of the expanded inter-
connection rates as well as its own interim prescription of
rates. Id. pp 413-20 (J.A. at 242-46). As authority for the
partial suspension, the Commission relied on Section 204(a),
which authorized it to suspend a rate "in whole or in part."
Id. p 415 (quoting 47 U.S.C. s 204(a)) (J.A. at 244). Again,
the FCC noted that its partial suspension fulfilled the goal of
ensuring the availability of expanded interconnection during
the suspension period at rates that did not reflect the legally-
suspect overhead loadings. Id. p 416 (J.A. at 244).
Similarly, the FCC affirmed the interim prescription it
adopted in its First Report and Order. Id. pp 404-10 (J.A. at
238-41). In doing so it cited this court's decision in Lincoln
Telephone & Telegraph Co. v. FCC, 659 F.2d 1092 (D.C. Cir.
1981), claiming that our holding in that case justified an
interim rate prescription accompanied by a two-way adjust-
ment mechanism under Section 4(i). Id .p 404 (J.A. at 238-
39). The Commission rejected the LECs' objection that it
had issued its interim prescription without an opportunity for
hearing. Id.p 408 (J.A. at 240-41). The Commission further
found that the interim prescription it had imposed was just
and reasonable. Id.
Having determined that it had authority to issue an interim
prescription, the FCC proceeded to analyze the LECs' direct
cost justifications on a case-by-case basis, making disallow-
ances where it believed an improper cost methodology had
been used. Id. p 67 (J.A. at 108). For example, the FCC
disallowed Pacific Bell's floor space costs to the extent that
they included a 30-foot "access area" outside the collocator's
enclosed physical collocation space, reasoning that the "com-
mon space" was not a direct cost of physical collocation
service. Id. p 96 (J.A. at 119-20). The Commission also
compared the direct costs among LECs on a "function-by-
function" basis by developing industry-wide average direct
costs for each function associated with the provision of physi-
cal collocation. Id. pp 124-25, 170 (J.A. at 131-32, 151). The
FCC then calculated one standard deviation from the aver-
age. If an LEC's direct costs for a particular function
exceeded one standard deviation from the industry-wide aver-
age, the FCC scrutinized the LEC's cost data and other
potential justifications for the LEC's high direct costs for that
function to ascertain whether the costs were reasonable. Id.
WW 125, 170 (J.A. at 131-32, 151-52). The Commission decid-
ed upon this particular methodology after concluding that the
use of industry-wide averages to prescribe physical colloca-
tion rates was within its discretion in selecting appropriate
ratemaking methods. Id. pp 144-49 (J.A. at 138-42).
II. Analysis
A. The Interim Prescription
1. The LECs' Challenge
At issue in this case is whether the FCC's novel "interim
prescription" fits within the statutory framework governing
its authority, or whether the FCC has arrogated to itself new
power that it is not authorized to exercise under the Commu-
nications Act. The Communications Act of 1934, 47 U.S.C.
s 151 et seq. (the "Act"), provides the FCC statutory authori-
ty to review rates charged for interstate common carrier
communications services to assure that the rates are just and
reasonable. 47 U.S.C. s 201(b). Section 204(a)(1) of the Act
gives the FCC authority to investigate filed rates and to
suspend the effectiveness of those rates, "in whole or in part,"
while the investigation is pending, but not for longer than five
months. Id. s 204(a)(1). After full hearing, the FCC may
issue any order that would be proper in a proceeding initiated
after the rates had become effective. Id.
A separate section of the Act, 47 U.S.C. s 205, empowers
the Commission to deal with rates or practices of carriers
that it finds to be in violation of the Act. When acting under
Section 205, the Commission is empowered to "determine and
prescribe ... just and reasonable" rates for the performance
of the affected services. Section 205 proceedings begin with
a complaint or order for investigation and require a full
opportunity for hearing. Under Section 201, the Commission
is authorized to order the common carrier to physically
connect with other carriers and to set "charges applicable
thereto." 47 U.S.C. s 201. Finally, 47 U.S.C. s 154(i) pro-
vides a general power to the Commission to "perform any and
all acts, make such rules and regulations, and issue such
orders, not inconsistent with this chapter, as may be neces-
sary in the execution of its functions." Southwestern Bell
makes a powerful case that the Commission's interim pre-
scription exceeds its authority under this statutory scheme.
The statutory language at issue here is straightforward and
clear. Congress has directly spoken to the FCC's authority
to prescribe rates in various provisions of the Communica-
tions Act. The FCC relies on Sections 204, 205, and 154(i) as
authority for its interim prescription of rates. It contends
that Section 204's provision of authority to suspend rates "in
whole or in part" allows it to prescribe rates by suspending
parts of the rates that it finds potentially objectionable. It
further cites the Act's "necessary and proper" clause embod-
ied in 47 U.S.C. s 154(i) as an independent source of authori-
ty for its interim prescription of rates that is "ancillary" to its
authority to prescribe rates pursuant to Section 205. Having
considered the agency's arguments, we have strong doubts
that the FCC acted within its statutory authority when it
issued the interim prescription.
Section 204(a) gives the Commission the authority to ap-
prove or suspend a proposed charge that is part of an overall
tariff filing in its entirety, or to approve or suspend some
elements of a list of proposed tariff charges, but not to initiate
an entirely new charge for a proposed service outside of the
four corners of the carrier's tariff filing, while labeling its
interim prescription as a "partial suspension." "[It] is the
actual impact of the FCC's actions, rather than the language
it uses, which determines whether or not the FCC has
'prescribed' tariffs or other conditions under the statute."
MCI Telecommunications Corp. v. FCC, 627 F.2d 322, 337
(D.C. Cir. 1980); see also Nader v. FCC, 520 F.2d 182, 202
(D.C. Cir. 1975) (concluding that the FCC's setting of a
specific rate of return different than that which the carrier
used to formulate its tariff rates was an implicit prescription
of permissible charges); American Tel. & Tel. Co. v. FCC,
487 F.2d 865, 874 (2d Cir. 1973) (concluding that the FCC's
denial of permission to file a tariff revising charges for an
interstate service had the same effect as a Section 205 rate
prescription).
The LECs argue that the Commission may engage in rate
prescription only under Section 205 and only after a "full
opportunity for hearing" and a determination that the rates,
terms, and conditions are just and reasonable. 47 U.S.C.
ss 205(a), 201; see also American Tel. & Tel., 487 F.2d at 873
("Sections 203 through 205 of the Act ... establish precise
procedures and limitations concerning the Commission's pro-
cessing of carrier initiated rate revisions.").
They further argue that the FCC's reliance upon Section
154(i) is unavailing. Section 154(i) provides the Commission
no independent substantive authority; it merely provides that
the Commission may issue orders that are necessary in the
execution of its functions as described under other provisions
of the Act, while not contravening any other provisions.
Under Section 205, the FCC may prescribe rates only after a
hearing and a determination that the prescribed rates are
just and reasonable. The FCC has not satisfied those statu-
tory requirements in this case. Under these circumstances,
an interim prescription under Section 154(i) would "defeat the
purpose of Section 205 and vitiate the specific statutory
scheme." American Tel. & Tel., 487 F.2d at 875.
Appealing as Southwestern Bell's logic may seem, we can-
not act unless the case is properly before us. That is, we
must first determine whether we have jurisdiction to review
the disputed agency action. Steel Co. v. Citizens for a Better
Env't, 118 S. Ct. 1003, 1020 (1998).
2. Jurisdiction
Those who seek to invoke the jurisdiction of the federal
courts must satisfy the threshold case or controversy require-
ment imposed by Article III of the Constitution. Flast v.
Cohen, 392 U.S. 83, 94-101 (1968). They must demonstrate a
"personal stake in the outcome" of the case in order to
"assure that concrete adverseness which sharpens the presen-
tation of [the] issues" to be decided by the tribunal. Baker v.
Carr, 369 U.S. 186, 204 (1962). Where an action has no
continuing adverse impact and there is no effective relief that
a court may grant, any request for judicial review of the
action is moot. O'Shea v. Littleton, 414 U.S. 488, 496 (1974).
As the Court noted in O'Shea, "[p]ast exposure to illegal
conduct does not in itself show a present case or controversy
... if unaccompanied by any continuing, present adverse
effects." Id. at 495-96.
There is, however, an "exception" to the general mootness
doctrine where a challenged action is "capable of repetition,
yet evading review." Steel Co., 118 S. Ct. at 1020; Southern
Pac. Terminal Co. v. ICC, 219 U.S. 498, 515 (1911) (noting
that consideration of agency orders "ought not to be, as they
might be, defeated, by short term orders, capable of repeti-
tion, yet evading review"); National Black Police Ass'n v.
District of Columbia, 108 F.3d 346, 349-51 (D.C. Cir. 1997);
American Tel. & Tel., 487 F.2d at 881 n.35.
Southwestern Bell's challenge to the FCC's lack of statuto-
ry authority in imposing the interim prescription appears
moot. The suspension period and the FCC's corresponding
interim prescription have expired since Southwestern Bell
filed this suit. As a result, Southwestern Bell does not suffer
any detrimental "continuing, present adverse effects," O'Shea,
414 U.S. at 495-96, from the FCC's imposition of an interim
prescription. Moreover, because the interim prescription is
no longer in effect, this court can grant Southwestern Bell no
relief other than declaring that the procedures employed by
the FCC were unlawful. Thus, Southwestern Bell's claim
lacks two of the elements necessary for our assertion of
jurisdiction--redressibility and a present, continuing injury-
in-fact.
Before making a final determination, however, we must
also consider whether the FCC's interim prescription is the
sort of agency action that falls within the exception to the
mootness doctrine for conduct that is "capable of repetition,
yet evading review." The FCC acknowledges that there have
been cases in the past where it has employed a similar
procedure. See, e.g., In the Matter of Lincoln Tel. & Tel.'s
Duty to Furnish Interconnection Facilities, 72 FCC2d 724
(1979), aff'd, Lincoln Tel. & Tel. Co. v. FCC, 659 F.2d 1092
(D.C. Cir. 1981); Western Union Tel. Co., FCC 79-812 (1979),
aff'd, FTC Communications, Inc. v. FCC, 750 F.2d 226, 231-
32 (2d Cir. 1984). Indeed, given the important policy goals
the FCC cites in support of its use of the interim prescription,
it is possible that the agency will attempt to impose this novel
mechanism upon other carriers in the future. Thus, on its
face, the FCC's interim prescription appears to be the sort of
agency action that is capable of repetition, yet evading re-
view, thereby falling within the exception to the mootness
doctrine.
Nonetheless, the Supreme Court has made clear that in
order to fall within this exception, a named plaintiff must
make a reasonable showing that it will again suffer injury as
a result of the alleged illegality. City of Los Angeles v.
Lyons, 461 U.S. 95, 109 (1983) ("[T]he capable-of-repetition
doctrine applies only in exceptional situations, and generally
only where the named plaintiff can make a reasonable show-
ing that he will again be subjected to the alleged illegality.");
DeFunis v. Odegaard, 416 U.S. 312 (1974). It is not enough
that the challenged agency action might in the future be
taken against some other party. Rather, the court must
conclude that there has been a reasonable showing that the
challenged agency action may be taken against the same
petitioners sometime in the future.
We conclude that Southwestern Bell has failed to make the
required showing that any of the petitioners will again be
subject to the FCC's interim prescription procedure. The
FCC imposed the interim prescription because physical inter-
connection was a new service with no set cost formula for
rates and the agency concluded that the LECs had not
provided sufficient data after being requested to do so. The
FCC determined that it had enough information under the
circumstances to find that the overhead loadings claimed by
the LECs were unreasonable, but not enough to make a
timely definitive finding on what would be reasonable. First
Report and Order pp 34-35 (J.A. at 52). In the future,
physical interconnection will no longer be a "new" service for
these particular petitioners, making it unlikely that the FCC
will again seek to impose upon them its novel interim pre-
scription procedure for this service. Because petitioners have
not alleged that the FCC will impose its novel procedure upon
them for any other new service, we must conclude that the
capable-of-repetition exception to the mootness doctrine does
not apply. The challenge to the interim prescription is moot.
We have no jurisdiction over that challenge.
B. The FCC's Methodology
Having concluded that we do not have jurisdiction to review
whether the FCC's interim prescription has exceeded its
statutory authority, we proceed to Southwestern Bell's objec-
tions to the agency's ratemaking methodology. In particular,
we must consider the FCC's (1) use of industry-wide averages
in determining the reasonableness of rates and (2) disallow-
ance of certain direct costs. The FCC argues that these
challenges are not properly before the court, invoking Section
405 of the Communications Act, which bars judicial review of
issues of law or fact on which the Commission "has been
afforded no opportunity to pass." 47 U.S.C. s 405(a). On
the present record, however, the agency had ample opportu-
nity to address, and did indeed address, the objections raised
by Southwestern Bell in its First and Second Orders. We
therefore will proceed to consideration of the merits. See
Way of Life Television Network, Inc. v. FCC, 593 F.2d 1356,
1359 (D.C. Cir. 1979) (noting that the exception to review
under Section 405 should be "strictly construed"); National
Ass'n for Better Broad. v. FCC, 830 F.2d 270, 274 (D.C. Cir.
1987).
We review the FCC's actions to determine whether they
are "arbitrary, capricious, an abuse of discretion, or otherwise
not in accordance with law." 5 U.S.C. s 706(2)(A). Under
this deferential standard, we presume the validity of agency
action. Jersey Shore Broad. Corp. v. FCC, 37 F.3d 1531, 1537
(D.C. Cir. 1994). Moreover, because "agency ratemaking is
far from an exact science and involves 'policy determinations
in which the agency is acknowledged to have expertise,' "
courts are "particularly deferential" when reviewing ratemak-
ing orders. Time Warner Entertainment Co. v. FCC, 56
F.3d 151, 163 (D.C. Cir. 1995) (quoting United States v. FCC,
707 F.2d 610, 618 (D.C. Cir. 1983)). The FCC is accorded
broad discretion in "selecting methods ... to make and
oversee rates." MCI Telecommunications Corp. v. FCC, 675
F.2d 408, 413 (D.C. Cir. 1982); see also Aeronautical Radio,
Inc. v. FCC, 642 F.2d 1221, 1228 (D.C. Cir. 1980) ("[T]he
Commission has broad discretion in selecting methods for the
exercise of its powers to make and oversee rates."); Alltel
Corp. v. FCC, 838 F.2d 551, 557 (D.C. Cir. 1988). As long as
the Commission makes a "reasonable selection from the
available alternatives," its selection of methods will be upheld
"even if the court thinks [that] a different decision would have
been more reasonable or desirable." MCI, 675 F.2d at 413.
Applying these standards to the FCC's use of the industry-
wide average methodology, we conclude that the FCC did not
engage in arbitrary or capricious decisionmaking.
Southwestern Bell objects to the FCC's use of industry-
wide cost averages on two grounds. First, it asserts that the
use of industry-wide averages was arbitrary, capricious and
contrary to law. According to Southwestern Bell, the FCC in
implementing this approach failed to take into account differ-
ences in costing methodologies LECs used in calculating their
costs as well as regional variations among costs, such as the
costs of real property, office space, and labor. Second, it
asserts that the FCC failed to comply with required notice
and comment procedures in deciding to employ this approach.
See 5 U.S.C. s 553; 47 U.S.C. s 205(a). Southwestern Bell
complains that the Commission failed to give prior notice of
its intention to prescribe rates based on industry-wide aver-
age direct costs and establish a presumption that direct costs
in excess of one standard deviation above the industry aver-
age were unreasonable.
The use of industry-wide averages in setting rates is not
novel. Indeed, the Supreme Court has affirmed ratemaking
methodologies employing composite industry data or other
averaging methods on more than one occasion. See, e.g., FPC
v. Texaco Inc., 417 U.S. 380, 387 (1974) (noting that agency
ratemaking does not "require that the cost of each company
be ascertained and its rates fixed with respect to its own
costs"); In re Permian Basin Area Rate Cases, 390 U.S. 747,
769 (1968). The FCC adopted such an approach in this case
based on its conclusion that the LECs generally use the same
assets and perform the same tasks in providing physical
collocation service. Second Report and Order p 131 (J.A. at
134). Nonetheless, it made "adjustments" and "modifica-
tions" to this general approach where costs varied widely
among carriers. For example, the agency took into account
differences in the way individual LECs provided physical
collocation service and adjusted its average cost calculations
to account for these differences. Id. pp 131-41 (J.A. at 134-
37). Further, where an LEC's direct costs exceeded two
standard deviations above the adjusted direct cost average,
the Commission excluded those direct costs from the data it
used to calculate the industry average. Id. pp 130, 158 (J.A.
at 133, 145). As a result, we conclude that the FCC's use of
this particular methodology was well within its discretion.
Similarly, we reject Southwestern Bell's contention that it
was denied an opportunity to comment on the FCC's use of
industry-wide averages in evaluating the reasonableness of
the LECs' physical collocation rates. We conclude that the
agency's use of industry-wide averages did not constitute use
of "new criteria" that were not "foreshadowed in the rules the
Commission had adopted to handle such issues." Southwest-
ern Bell Tel. Co. v. FCC, 28 F.3d 165, 172 (D.C. Cir. 1994).
Rather, as already noted, the use of industry-wide averages is
one commonly-employed technique in evaluating the reason-
ableness of rates charged by regulated entities. Cf. Permian
Basin Area Rate Cases, 390 U.S. at 788-89 (concluding that
the Federal Power Commission did not err in failing to
provide opportunities for comment on the size and boundaries
of a regulatory area where there was no claim that it did not
fit with prevailing industry practice or other programs of
state or federal regulation). Indeed, the FCC noted in its
Second Report and Order that it has used industry averages
in the past to establish a rate of return for LECs' interstate
access service, as well as for creating a productivity factor for
price cap LECs. Second Report and Order pp 146 (J.A. at
140). Moreover, the FCC issued orders in this case foresha-
dowing its intention to evaluate the reasonableness of the
LECs' rates in light of industry average costs. For example,
the Commission noted that overhead factors appeared to be a
significant reason for "the high rates filed by certain compa-
nies in comparison with the industry average." Expanded
Interconnection with Local Telephone Company Facilities,
CC Docket No. 93-162, 8 FCC Rcd 4589, pp 31 (1993) (J.A. at
431). As a result, given the circumstances in this case, we
cannot conclude that Southwestern Bell was unfairly deprived
of notice that the FCC might employ such techniques in
evaluating the reasonableness of the LECs' rates.
While the FCC's use of industry-wide averages is not
objectionable, its use of a one-standard-deviation cutoff raises
greater concerns. After calculating the industry-wide aver-
ages, the FCC scrutinized any costs exceeding one standard
deviation above the industry-wide average in order to deter-
mine whether any explanation in the record supported the
cost. The Commission then disallowed the cost if it found
that it was not justified by the record evidence. The Com-
mission generally disallowed costs to the extent they exceed-
ed one standard deviation above the industry-wide cost aver-
age. Southwestern Bell objects to this aspect of the FCC's
methodology, arguing that disallowing costs that exceed one
standard deviation above the industry average, while at the
same time making no adjustment for costs that exceed one
standard deviation below the industry average, results in the
prescription of rates that are less than the average, which it
asserts is inconsistent with the FCC's goal of establishing
rates based on the LECs' cost of service. It further argues
that the choice of one standard deviation as the cutoff point
was arbitrary. Again we conclude that this methodological
choice falls within the FCC's discretion. The FCC has
merely subjected costs exceeding industry-wide averages by
at least one standard deviation to additional scrutiny, and has
not established a per se rule of disallowance for such costs.
While it is not perhaps the method this court would select
were we choosing the FCC's methodology de novo, the FCC
reasoned that this approach was appropriate given the need
for flexibility in taking into account reasonable variations in
the LECs' levels of efficiency in providing physical collocation
service. Second Report and Order pp 147-49 (J.A. at 140-42).
Therefore, we conclude that the agency did not abuse its
discretion in employing the one-standard-deviation cutoff.
Finally, we conclude that the FCC did not err by disallow-
ing certain direct costs Pacific Bell had incorporated in its
rate base. The FCC concluded that Pacific Bell did not
adequately justify including an additional 30 square feet of
floor space for collocator access as a direct cost in light of the
fact that the other LECs were able to satisfy their access
obligations without providing for an additional 30 square feet.
Id. pp 96-97 (J.A. at 119-20). After considering the evidence
before it, the FCC concluded that the disputed access area
was "common space" rather than space that was necessary
for the interconnector to obtain access to its enclosed physical
collocation space. The LECs assert that the Commission's
disallowance of these costs was arbitrary and capricious and
should be vacated because Pacific Bell presented evidence
indicating that the access area was dedicated solely to physi-
cal collocation. After examining the record, we conclude that
the FCC did not abuse its discretion in finding that Pacific
Bell had not made an adequate showing that the claimed
access area costs constituted a direct cost of physical colloca-
tion. Indeed, the FCC has "cogently explain[ed] why it has
exercised its discretion" in the way it has. Motor Vehicle
Mfrs. Ass'n of the United States, Inc. v. State Farm Mut.
Auto. Ins. Co., 463 U.S. 29, 48 (1983).
III. Conclusion
For the reasons set forth above, we conclude that we do not
have jurisdiction over Southwestern Bell's challenge to the
FCC's interim prescription. We further conclude that the
methodology employed by the FCC in evaluating the reason-
ableness of petitioners' rates was not arbitrary or capricious.
Thus, the petition for review is denied.