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HIGHLIGHT 1Italics and Boldldedd+. 2VG\11%DRAFT ONHeader A Text = DRAFT and Date X =8` (#FDRAFTă r  ` (#=D3 1, 43 12pt (Z)(PC-8))T2Dă  ӟDRAFT OFFTurn Draft Style off@@    LETTER LANDLetter Landscape - 11 x 8.5 3'3'Standard'3'3StandardLetter Portrait - 8.5 x 11 ;   LEGAL LANDLegal Landscape - 14 x 8.5f 3'3'Standard'A'AStandardZ K e6VE L"nu;   2ٟ11nXLETTER PORTLetter Portrait - 8.5 x 11L 3'3'Standard3'3'StandardZ K e6VE L"nU9   LEGAL PORTLegal Portrait - 8.5 x 14 3'3'StandardA'A'StandardLetter Portrait - 8.5 x 119   TITLETitle of a DocumentK\ * ăBLOCK QUOTESmall, single-spaced, indentedN X 2=d jo٠EHIGHLIGHT 2Large and Bold LargeB*d. HIGHLIGHT 3Large, Italicized and Underscored V -qLETTERHEADLetterhead - date/marginsu H XX  3'3'LetterheadZ K e VE L"n3'3'LetterheadZ K e VE L"nE9    * 3'3'LetterheadZ K e VE L"n3' II"n"Tv3'StandarddZ K e VE L"nU9 Ѓ   INVOICE FEETFee Amount for Math Invoice ,, $0$0  2-o88Ԧ MEMORANDUMMemo Page FormatD.   ! 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LL2 LL2L"",,2d""d<d<BBYYdBBddBYBdYzzzzBBBBqodYYYYYYYYYYY8888dddddddndddddddxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxNdddCYQQddddddFddddFCChhd44ddxxdddvooChdF"dhd9dCCxCddoddCdYds]xUvdYYCCCCx~oxoY~NYdYC8YooYdYxsdxdd~YYxoxxx~CdxYxxxxCCdddddddxCsdYC\   pxtll\tll@\@\`L"i~'^09FSS999Sq+9+/SSSSSSSSSS99qqqSggnxggxx9In]nxgxgS]xgg]]?/?FS9SSISI/SS//I/xSSSS??/SInII?C/CZ9+ZF999+999999S9S/gSgSgSgSgSnnIgIgIgIgI9/9/9/9/nSxSxSxSxSxSxSxSxS]IgSxSxSxS]IxSgSgSgSgSnInInZnIxdgIgIgIgIxSxSxSxZxSxZxS9/9S999SSZZnI]/]<]9]5]/nSanSnSxSxSng?g?g?S?S?S?ZZ]<]/]FxSxSxSxSxSxSn]Z]?]?]?xS]9nSS?]9]Sd+SS8%8WuuuuuuuuuuuuuuuuuuuuuuuuuuuuuuuuuuuuuuuuuuuuuuuuddddddddddddddddddddddddddddddddddddddddNd<d<BBoodBBddBoBddzzzzzzzzzzBBBBozdddddddYYYYY8888dddddddndddddYdey.C8*X/C\  P6QPf7PC2XXP\  P6QXP.g7UC2XXU4  pQX.hy.G8*X<G4  pQi5PC2X3f_XP*f9 xQXXjW!0(Xh0\  P6QhPI(!X,(\  P6Q,P28+.1\4"5^(1<O- {O"' x ԍ  West Ohio Gas Co. v. PUC, 294 U.S. 63, 74 (1935) (West Ohio Gas); Tennessee Gas Pipeline v. FERC, 606  {O#' x F.2d 1094, 1109 (D.C. Cir. 1979), cert. denied, 445 U.S. 920 (1980). See NAACP v. FPC, 425 U.S. 662, 668  {ON$' x (1976) ("illegal, duplicative, or unnecessary" costs must be disallowed); Litigation Costs Decision, 939 F.2d at 1043  x ("it is a legitimate aim of rate regulation to protect ratepayers from having to pay charges unnecessarily incurred;"  xQ "the FCC may disallow any expense incurred as a result of carrier conduct that cannot reasonably be expected to  x benefit ratepayers"), 1044 ("it is a legitimate aim of rate regulation to protect ratepayers from paying the costs a"&=,-(-(&"  x carrier incurs for an activity that is not undertaken for their benefit"), 1045 (a "'right' decision" [is] what the ratepayers would have decided in their own economic selfinterest").s Carriers argue that the treatment of litigation costs may not directly affect"O >,-(-(ZZ"  xrates for price cap carriers, but even for price cap carriers accurate cost accounting provides the  xbasic data for determining jurisdictional separations and for enforcing the Commission's  x<competitive policies. Additionally, the treatment of litigation costs does affect the calculation of  xVany sharing obligations a carrier may have under price caps. We have sought a result here that  xywill minimize the burden to carriers from this accounting change and, at the same time, avoid  xburdening ratepayers and possibly other telecommunications carriers from bearing the costs of anticompetitive misconduct.  XH' B. Adverse Antitrust Judgments  X 4 e J 22.` ` In the NPRM and earlier in the Litigation Costs Proceeding, the Commission stated  xthat anticompetitive behavior that leads to an adverse antitrust judgment "rarely, if ever produces  xany benefit for ratepayers," although the corporate strategy leading to the adverse judgment could  X 4 xbenefit shareholders if management successfully avoids liability.? - {O' x ԍ NPRM, 8 FCC Rcd at 665657,  9, quoting Litigation Costs Order, 2 FCC Rcd at 3244,  21. See also  {Or'Litigation Costs Decision, 939 F.2d at 1043.  MCI agrees, and NYNEX  X 4 xand the Pacific Companies do not dispute this view.@ |- yO' x ԍ NYNEX at 4, 7; Pacific Companies at 4; MCI at 4. NYNEX acknowledges that judgment costs can reasonably be presumed not to benefit ratepayers. U S West argues that this proceeding is  X 4 xunnecessary because antitrust judgments have always been subject to Commission scrutiny.TA - {O.'ԍ U S West at 45; accord, SWBT at 14.T  xOther commenters opposing the Commission's proposal, however, argue that antitrust judgments  X{4 xare operating expenses incurred in the normal course of business,aB{f - {O'ԍ See BellSouth at 67; COMSAT at 3; SWBT at 1213.a or result from changing  Xd4standards or the lack of a line between aggressive competition and anticompetitive conduct.]Cd - yO 'ԍ BellSouth at 2427; COMSAT at 910; SWBT at 10, 13.]  "23. We are not persuaded by opponents' arguments that adverse judgments should be  xrecorded in operating accounts. We do not share opponents' views that anticompetitive behavior  xNis the business of a carrier or that the cost of antitrust violations is a normal cost of doing  xbusiness. The Commission increasingly relies on competition to control prices and stimulate new  xcentrants and services, and has expended considerable effort to prevent anticompetitive conduct.  xAn antitrust judgment results only after a court concludes, on the basis of the evidence before  x4it, that the conduct at issue has violated the law. The antitrust laws define impermissible  xconduct, and carriers, like other businesses, push the line between aggressive competition and  xanticompetitive conduct at their own risk. Although, as BellSouth and SWBT argue, different"~ C,-(-(ZZ"  X4 xIfederal antitrust courts may draw different conclusions from seemingly similar circumstances,D^- {Oy' x ԍ BellSouth at 2526, comparing MCI v. AT&T, 708 F.2d 1081 (jury verdict against AT&T upheld), with  {OC' x Southern Pacific Comm. Co. v. American Tel. & Tel. Co., 740 F.2d 980 (D.C. Cir. 1984) (verdict in AT&T's favor  {O 'upheld), cert. denied, 470 U.S. 1005 (1985); SWBT at 10 (same).  xthe court is the appropriate forum for testing the evidence and arguing its weight, and the system  xprovides for appeals of an unfavorable judgment. While it may also be true that the  xVunderstanding of what constitutes anticompetitive conduct evolves as different types of conduct  X4 xIare scrutinized under the antitrust lens,?E- {OC 'ԍ See SWBT at 10.? we find that this is not a reason for this Commission to  x+make light of an adjudicated antitrust violation. Competition may be "a ruthless process," as  Xv4 x COMSAT advises,Fv- {O ' x ԍ COMSAT at 10, quoting Ball Memorial Hospital, Inc. v. Mutual Hosp. Ins., 784 F.2d 1325, 1338, reh'g  {Oq 'denied, 788 F.2d 1223 (7th Cir. 1986). but the antitrust laws place limits, as COMSAT acknowledges. We consider  xit inappropriate to use our accounting prescription and the accompanying ratemaking  XH4 xypresumptions to lessen the compliance incentives created by the antitrust laws,hGH- yO'ԍ For a description of compliance incentives, see SWBT at 1314.h which could  x_occur if we placed some or all of the monetary risk of an adjudicated violation on ratepayers  xrather than shareholders. U S West's and SWBT's argument that the expense may be disallowed  xpon a casebycase basis does not take into account the burden on ratepayers or the Commission  xwhen seeking disallowance in a ratemaking proceeding after a carrier has been adjudicated to be  xJa wrongdoer. In our view, where anticompetitive conduct occurs, the burden is more  xyappropriately placed on the carrier, which has the information about its conduct. This is fully  X 4 xconsistent with the Commission's requirement in Litton Accounting Proceeding that the adverse  X4judgment be accounted for belowtheline.Hl - yO' x7 ԍ American Tel. and Tel. Co., Ameritech, Bell Atlantic, BellSouth, NYNEX, Pacific Telesis, Southwestern Bell  {Ow' x2 and U.S. West Accounting instructions for the judgment and other costs associated with the Litton Systems antitrust  {OA' x lawsuit, 98 FCC 2d 982, 983986, 988 (1984), recon. denied, 3 FCC Rcd 500 (1988) (Litton Accounting Proceeding),  {O ' xQ appealed and rev'd on other grounds sub nom. Mountain States Tel. & Tel. Co. v. FCC, 939 F.2d 1021 (D.C. Cir.  {O'1991) (Litton Accounting Appeal).Ľ  "N24. SWBT argues that antitrust liability may be imposed even when the conduct at issue  xconsists of the carrier adhering to its tariffs, which it is required by law to do, and even when  xhconduct such as underallocating the costs of some services is required of carriers by the  X4 xCommission or state regulators to achieve policy goals.8I$- yO"'ԍ SWBT at 1112.8 This argument is akin to the implied  x}immunity defense sometimes raised in antitrust litigation involving a regulated entity. If a carrier  xis caught between incompatible regulatory requirements and antitrust enforcement, or if its  x_conduct resulted from good faith adherence to regulatory requirements, it should make these  xpoints as a defense in the antitrust litigation where they can be weighed along with the challenged"I,-(-(ZZ1"  X4 xpconduct.RJ(- {Oy' xx ԍ For a discussion of regulation and the antitrust laws, see generally MCI v. AT&T, 708 F.2d at 11001111; see  {OC' x also Southern Pacific Communications Co. v. American Tel. & Tel. Co., 740 F.2d at 9991000; MidTexas  {O ' x Communications Systems, Inc. v. American Tel. & Tel. Co., 615 F.2d 1372, 13771382 (5th Cir. 1980), cert. denied  {O'sub nom. Woodlands Telecommunications Corp. v. Southwestern Bell Tel. Co., 449 U.S. 912 (1980).R Tariffs filed with the Commission are initiated by the carriers, however. The pricing  xdecisions contained in the tariffs should reflect regulatory policy, but also the specific decisions  X4 xcgenerally reflect the carrier's business judgment rather than regulatory coercion,KZ- {O;' x ԍ Cf. Otter Tail Power Co. v. United States, 410 U.S. 366, 374, reh'g denied, 411 U.S. 910 (1973) ("When  x . . . relationships are governed in the first instance by business judgment and not regulatory coercion, courts must be hesitant to conclude that Congress intended to override the . . . antitrust laws.") and often are  xnot specifically approved by the Commission. When the streamlined tariff filing process becomes  X4 x_effective for ILECs in February 1997,ML- {O/ 'ԍ See 47 U.S.C.  204(a)(3).M advance review will be even less likely. Thus, even  xthough a carrier is required to adhere to its tariffs in order to avoid unlawful discrimination for  Xv4 xlike communications services,@Mvl - yO'ԍ 47 U.S.C.  202(a).@ the carrier may comply with this requirement of the  xpCommunications Act and still commit violations of the antitrust laws. For these reasons, we are  x8not persuaded that we should abandon our proposed requirement that antitrust judgments be  X14recorded belowtheline in a nonoperating account.  "u25. COMSAT argues that antitrust lawsuits are complex and often have no clear winner  xor loser as, for example, when a carrier is sued for a large amount but judgment is entered  X 4 xagainst it for a lesser amount.N - yO'ԍ COMSAT at 11. COMSAT argues that the underlying conduct may benefit ratepayers. Our concern, however, is with any judgment resulting from an  xantitrust violation. The possibility that the outcome could have been worse does not show how  xthe underlying conduct could be expected to benefit ratepayers and is not a sufficient basis for  xfinding that ratepayers should be responsible for paying any judgment costs through their rates.  Xy4 xyThe Court of Appeals in Litigation Costs Decision agreed "that it is a legitimate aim of rate  xlregulation to protect ratepayers from having to pay charges unnecessarily incurred, including  XM4 x[those incurred as a result of the carrier's illegal activity of whatever sort."bOM - {O'ԍ Litigation Costs Decision, 939 F.2d at 1043.b The court explained:  e )XX` ` The theory of the antitrust laws supports the FCC's observation that  e Yactivities that give rise to antitrust liability do not generally benefit  X4 e ratepayers. See R. Bork, The Antitrust Paradox 7 (1978) ("the only  e klegitimate goal of antitrust is the maximization of consumer  e b m"[ welfare"). . . . The Commission acted quite reasonably . . . in  e aligning the presumption (against recovery) with the majority of"O,-(-(ZZ"  e antitrust cases, in which consumers do not benefit from the conduct  X4occasioning liability.P- {Ob' x ԍ Id. SWBT disagrees, arguing that carriers are normally guided by the profit motive and that profits would normally benefit ratepayers. SWBT at 1213.x`  X4 "u26. COMSAT, USTA, and SWBT argue that reliance on the Litigation Costs Decision  X4 xpanel's analysis is misplaced because, under Litton Accounting Appeal, the success or failure of  xlthe litigation cannot be the sole determinant of the presumptive allowance or disallowance of  Xz4 xlitigation expenses, including the expenses of an adverse judgment.VQz"- yOM 'ԍ COMSAT at 4, 611; USTA at 68; SWBT at 89.V USTA adds that the result,  Xc4 x3not the language of Litigation Costs Decision, is controlling because the Commission's Litigation  XN4 xcCosts Proceeding was vacated in its entirety.>RN- yO 'ԍ USTA at 3, 5 & n. 7.> We disagree. The petitioners in Litton did not  xuchallenge the Commission's decision to disallow the judgment. The issue, therefore, as to  xwhether it is reasonable for the Commission to presumptively disallow antitrust judgments was  X 4 x&not before the court in the Litton Accounting Appeal. That issue, however, was before the court  X 4 xin the Litigation Costs Decision and the court in that case expressly concluded that it was  xreasonable for the Commission to presumptively disallow antitrust judgments. The court explains  X 4 x/why its remand was limited to two issues,\S B- {O'ԍ Litigation Costs Decision, 939 F.2d at 1042.\ which specifically did not include the Commission's  X 4 xcalignment of the presumption against recovery with the majority of antitrust cases.<T - {O8'ԍ Id. at 1043.< We reject,  X4 x moreover, USTA's suggestion that we interpret the Litigation Costs Decision in a manner that is contrary to the language and rationale of that decision.  XY4 "27. We also read Litton Accounting Appeal more narrowly than COMSAT, USTA, and  XD4 xSWBT do. Litton Accounting Appeal dealt only with an indirect cost of the carrier's conduct, i.e.,  xthe cost of defending against allegations of anticompetitive misconduct. The court questioned  xwhether the subsequent finding that the underlying conduct was illegal compels or warrants  xrejection of the defense expense in the ratemaking process, particularly when the carrier had  X4 x&properly tracked its expenditures in abovetheline accounts with the expectation that these would  X4 xbe treated as operating costs in ratemaking.^Uf - {O!'ԍ Litton Accounting Appeal, 939 F.2d at 102930.^ The Commission's accounting treatment of the  xadverse judgment, the direct cost of the misconduct, was not before it and, thus, not addressed  X4 xby, the court.BV - {ON%'ԍ Id. at 1026.B In reviewing the Commission's treatment of the carrier's defense costs, the court  xobserved that, in another context, the costs of defending a carrier's business activities have been  Xw4 xconsidered ordinary and necessary costs of the business. The court further observed that Litton"w V,-(-(ZZ"  xRdefense costs had previously been treated as properly incurred, and the Commission had not  xyscrutinized the reasonableness of those costs before concluding that they were not legitimate  X4 xyoperating expenses. We see no inconsistency between the admonition in Litton Accounting  X4 xAppeal that we consider the reasonableness of the costs of defending against an allegation of  xantitrust misconduct before presumptively excluding those costs from the ratemaking process and  X4 xthe presumption in Litigation Costs Decision that the direct costs of adverse antitrust judgments  x}do not benefit ratepayers. An adverse antitrust judgment is the outcome of court scrutiny of the  xcarrier's conduct and the finding that misconduct caused damages of a specified monetary value.  xWhen the judgment as to damages becomes final, the judgment costs are entered in the  xRappropriate account. There is no problem of later changing the accounting treatment, which  X 4 xconcerned the court in Litton Accounting Appeal. Also, any burden on the ILECs is more than offset by the benefits of protecting ratepayers against unnecessary costs.  "028. Bell Atlantic fears that rateofreturn carriers will be burdened by the need for a  X 4 xyseparate proceeding each time an antitrust action against a carrier is resolved by judgment.?W - yO?'ԍ Bell Atlantic at 12.?  X 4 xAccording to USTA and BellSouth, however, adverse judgments are rare,HX X- yO'ԍ USTA at 13; BellSouth at 20. H and the record  xcontains no information to the contrary. We do not see an unreasonable burden on carriers if  x&they seek to persuade the Commission that the underlying adjudicated misconduct was undertaken  Xj4in the interest of ratepayers.9YXj- yO' x ԍ According to COMSAT, the overwhelming majority of antitrust suits result in settlement, which it argues  x reflects the fine line between vigorous competition and activities that may be viewed as an antitrust violation. COMSAT at 13 & n.30. 9  X<4 "29. In conclusion, once a court has made an adverse determination, and that  xdetermination has become final, we will presume that the underlying conduct did not benefit  xIratepayers unless the carrier can make a showing to the contrary. The judgment costs must be  xpaccounted for belowtheline in Account 7370 as a nonoperating expense and, absent a showing  X4 xZof ratepayer benefit,,Z- {O' xQ ԍ See Litigation Costs Decision, 939 F.2d at 1043 (accepting ratepayer benefit test); see also note 60, supra; AT&T Communications, 5 FCC Rcd 5693, 5695,  17 (1990) (ratepayer benefit test is consistent with precedent)., presumptively removed from the ratemaking process. Carriers should make  xany showings in a request for special relief rather than burden the ratemaking process itself with the determination.  m"[   X4 C. Settlements X(#  XV4 "30. The Commission, in the Litigation Costs Order, required that all antitrust  XA4 xAsettlements be recorded belowtheline.[[Ab - {OT''ԍ Litigation Costs Order, 2 FCC Rcd at 3245. [ On reconsideration, the Commission created a"A [,-(-(ZZ8"  xpresumption that a portion of prejudgment settlements could be recoverable from ratepayers.  xThat portion was defined as "the amount corresponding to the additional litigation expenses,  xVexpressed in present value terms, which the carrier reasonably estimates it would have paid if it  xhad not settled and which the carrier would have allocated to the interstate jurisdiction under Part  X4 xE36 of our rules, 47 C.F.R. Part 36."d\- {O'ԍ Litigation Costs Recon. Order, 4 FCC Rcd at 409798.d Although the Litigation Costs Recon. Order and the  X4 xuNPRM]Z- {O' x ԍ NPRM, 8 FCC Rcd at 6656 & n. 9 (Uses the term "nuisance value" but cites the "avoided costs of litigation"  {Od 'definition in the Litigation Costs Recon. Order). both use the term "nuisance value" in connection with this presumption, they are  x4referring to the definition quoted above. Because the phrase "avoided costs of litigation"  xydescribes the portion of a settlement that is potentially recoverable in the ratemaking process  XL4 xlunder the definition in the Litigation Costs Recon. Order, we will use that term, rather than  X74"nuisance value," in this Order. hhC   X 4 " 31. In remanding Litigation Costs Order to the Commission, the court agreed with the  xCommission's reasoning that, once the agency requires a judgment to be recorded belowtheline,  x"failing to accord similar treatment to a settlement of the same action would create a strong  xincentive for a carrier to settle such a suit even if the settlement is for an amount greater than  X 4 x_the expected liability."\^ - {O'ԍ Litigation Costs Decision, 939 F.2d at 1046.\ The court accepted the concept of a nuisance value exception, also  xNknown as the avoided costs of litigation exception to the presumption against recovery of  X4 xsettlement costs?_H- {Oz'ԍ  Id.? but faulted the Commission for failing to address the incentives it created by  x'treating the value of the avoided costs of litigation of pre and postjudgment settlements  XS4disparately, because "the economics of the two situations are identical."<`S- {O'ԍ Id. at 1047.<  "32. Relying on the court's analysis, the Commission again proposed that carriers record  xantitrust settlements belowtheline, in Account 7370 because "this approach is most consistent  x"with the underlying principle that expenses not incurred for the benefit of ratepayers should not  X4 x<be routinely passed on to ratepayers."Ral - {O 'ԍ NPRM, 8 FCC Rcd at 6657,  11.R It also asked for comment on readopting an exemption  xfrom this treatment for the litigation expenses saved by prejudgment settlements, but not for such  X4expenses saved by postjudgment settlements.Lb - {Oa$'ԍ Id. at  1215.L  " 33.   The treatment of settlements poses a more complex problem than does the treatment  xVof adverse judgments, for, as commenters remind the Commission, liability is neither established"m b,-(-(ZZ"  xnor admitted. MCI argues that all settlement costs should be accounted for belowtheline and  xpresumed not recoverable from ratepayers unless the carrier can show that the settlement was in  xthe interests of ratepayers. If the avoided litigation costs are allowed in the revenue requirement,  X4 xMCI advocates that a low dollar limit on that value should be set.]cX- yO4' x ԍ MCI at 79. In Reply Comments at 16, MCI posits that settlements should be excluded from the ratebase  x unless the carrier can demonstrate that it was in the interest of ratepayers to engage in the conduct that led to the lawsuit and that settlement is in the public interest.] Other commenters assert  x=that settlement is a business decision and should be evaluated only on the basis of the  X4 xreasonableness of that decision in light of all the factors affecting the decision.Dd- {O& 'ԍ E.g., USTA at 2324.D They oppose  xany rule that requires accounting for settlement costs belowtheline, particularly where this  X_4 xtreatment would result in disallowing these costs from a carrier's revenue requirements.Me_z- {O 'ԍ E.g., Pacific Companies at 5.M In the  xalternative, they argue that the Commission, in ratemaking, should at least allow carriers to  xrecognize the litigation costs that are avoided because of a settlement, regardless of whether the  X 4settlement occurs before or after any adverse judgment.bf - {O'ԍ E.g., BellSouth at 2930; Pacific Companies at 11.b  "!34. Our ultimate objective in resolving the accounting treatment of antitrust settlements  xis to ensure that ratepayers obtain just and reasonable rates and ensure that expenses not incurred  xfor the benefit of ratepayers are not recovered from them. In pursuing this objective, we are also  x"mindful that rates are not just and reasonable if a carrier cannot recover legitimate and prudent  x}expenses incurred in operating the business for the benefit of ratepayers, plus a fair return on its  xinvestment. We also seek a resolution that avoids burdening carriers and their ratepayers with  xpunnecessary administrative costs and avoids creating regulatory incentives to litigate or settle on the part of carriers and their adversaries.  "m"35. With these goals in mind, we conclude that the Commission's accounting rules  x/should treat monetary settlements of antitrust litigation like adverse antitrust judgments. As the  X4 xcourt acknowledged in Litigation Costs Decision, failing to do so could create an incentive to  X4 xsettle antitrust litigation even if the settlement exceeds the expected liability.\g- {O) 'ԍ Litigation Costs Decision, 939 F.2d at 1046.\ We also agree with the court that:  e XX` ` [F]ailing to require settlements to be recorded belowtheline would  e  obviously compromise the integrity of the regulatory scheme: if  e the activity resulting in the lawsuit was for the benefit of the  XP4 e carrier, rather than for that of the ratepayers, there is no reason for"P0 g,-(-(ZZh"  e Lrequiring ratepayers to pay the cost of the settlement, even if it is  X4in an amount less than the carrier's expected liability.3h- {Ob'ԍ Id.3x`  "#36. Most commenters argue that a settlement cannot be used as an admission of  X4 xumisconduct,}iZ- {O'ԍ NYNEX at 8; BellSouth at 3031; COMSAT at 1415; see also SWBT Bell at 1415.} and they object to any implication that a carrier settles a lawsuit because a  X4 xviolation occurred.j- {O* ' xD ԍ Pacific Companies at 56; see also COMSAT at 16 (any limit on presumptive allowance of settlement costs  x in ratemaking treats a settlement as tantamount to an adjudication of liability). According to Pacific Companies at  xk 7, however, "the company's belief in its own guilt or innocence" is one of several factors that would be weighed.  xx In MCI's view, a carrier is likely to settle to avoid the presumed greater costs of the ultimate judgment, whether or not the "nuisance" or avoided litigation costs are recognized. MCI at 8. The Commission does not presume that the conduct at issue in a lawsuit  xis unlawful until a judgment to that effect becomes final. We do not intend to dismiss allegations  xof anticompetitive misconduct by accepting antitrust settlements, no matter how large, as business  XH4 xgas usual. The Pacific Companies argue that settlement6kH- yO'ԍ NYNEX at 9. 6 conserves judicial resources and reduces  xbusiness uncertainty, and that settlement benefits ratepayers by permitting parties to resolve their  X 4 xdifferences at reduced costs and freeing business to spend resources on providing services.\l . - {O'ԍ Pacific Companies at 7; accord COMSAT at 14.\  xSuch benefits may follow from settlements, but this does not eliminate our special concern that  xantitrust settlements should be shown to benefit ratepayers before ratepayers are required to pay  x for them. NYNEX argues that the Commission can always disallow settlement costs in  xratemaking if there is evidence of improper incentives, such as agreeing "to a settlement that is  xjudged excessive when compared to the probability of a violation being found and the expected  X4 xlitigation expenses and judgment."9m - yO'ԍ NYNEX at 89. 9 MCI questions whether this is likely in light of Litton  X{4 xAccounting Order in which an allowance and subsequent disallowance were overturned.;n{P - yO|'ԍ MCI Reply at 15. ;  xNYNEX also argues that competitive marketplace forces provide a disincentive for bearing  xunnecessary costs. We note that the NYNEX test for an excessive settlement could require  xyCommission evaluation of the underlying lawsuit, we therefore reject it as unduly subjective.  xThe Pacific Companies argue that ratepayer benefit is found in the general policy favoring  X 4 xsettlement.Co - yO$'ԍ Pacific Companies at 67.C This policy benefits courts and litigants by reducing caseloads, but does not explain  xVwhy ratepayers should bear the full burden of settlement. The majority of commenters strongly  xIprefer that all settlement costs be treated as operating expenses. As a fallback, however, they"po,-(-(ZZ"  xsupport adoption of a presumption that at least the avoided litigation costs of a lawsuit is recoverable from ratepayers.  "$37. We recognize that litigation involves risks, uncertainties and expense. We also  xlrecognize that carriers consider factors other than fear of an adverse judgment in reaching a  X4 x<settlement,Hp&- {O' x ԍ See Litigation Costs Order, 2 FCC Rcd at 3245  26. See also USTA at 2324 (listing factors); COMSAT  xk at 14 (same); Pacific Companies at 78 (same). For a discussion of factors affecting settlement, see Steven Salop  {O' x & Lawrence White, Economic Analysis of Private Antitrust Litigation, 74 Geo. L.J. 1001, 101730 (1986); Robert  {Ob 'Halper, The Unsettling Problems of Settlement in Antitrust Damage Cases, 32 Antitrust L.J. 98 (1966).H and that there may be benefits to ratepayers from avoiding litigation costs in some  xinstances. Settlement payments beyond the avoidable costs of litigation, however, raise questions  xabout whether such payments would be reasonable or necessary if there were not a possibility  xIthat the carrier would be found to have engaged in anticompetitive conduct. In light of our duty  X14 xto prevent ILECs from charging rates based upon "illegal, duplicative, or unnecessary" costs,q1- {O'ԍ See NAACP v. FPC, 425 U.S. at 668, cited in Litigation Costs Decision, 939 F.2d at 1043.  xwe again conclude that carriers must justify recovery of payments to settle a lawsuit by showing the factors inducing the carrier to settle and demonstrating the benefit to the ratepayers.  "%38. SWBT objects to the Commission's proposal, arguing that allowing recovery of the  xavoided litigation costs of settlements entered before judgment creates an artificial incentive to  xsettle early, before much is spent on discovery and pretrial motions for summary decision are  xresolved. One alleged harm is that a carrier will have less incentive to settle as the case proceeds  xtoward trial, because fewer future costs will be available for inclusion in the calculation of  Xb4 xVavoided litigation costs.8rbH- yO['ԍ SWBT at 1617.8 This argument fails to take into account the numerous factors SWBT  xyand other commenters advise will affect settlement decisions, particularly as trial preparation  xcontinues and the parties gain insight into the strengths and weaknesses of each other's positions.  xAnother alleged harm is that limiting ratemaking recognition to the avoided litigation costs will  xdiscourage carriers from aggressively litigating nuisance suits in order to deter future suits,  X4 xthereby creating an artificial incentive for adversaries to bring suits of dubious merit.=s- {Ox'ԍ  Id. at 1718.= Absent  xthe limitation to the avoidable litigation costs of settlements, SWBT argues, a carrier might  xlitigate aggressively to deter meritless suits or excessive claims in the future, even though a case  xNcould be settled for less than the litigation costs, in order to keep future settlement claims  xreasonable. If limited to the avoidable costs of litigation, SWBT continues, a carrier would be  xVinclined to pay up to the avoidable costs limit, even if that is excessive under the circumstances.  Xe4 xIn the Litigation Costs Decision, however, the court stated that "we do not accept the intervenors'  xVclaim that the rule providing for a prejudgment settlement to be recorded abovetheline only to  xthe extent of its 'nuisance value' (that is, in the amount of estimated litigation expenses avoided"9j s,-(-(ZZ+"  X4 xby reason of the settlement) provides an undue disincentive for carriers to settle lawsuits."]t- {Oy'ԍ Litigation Costs Decision, 939 F.2d at 1046. ] An  x"adversary who knows that the carrier's incentive is either to settle quickly for no more than the  xavoidable costs of the litigation or to litigate aggressively may be more inclined to settle,  xhowever. Our proposal would not hinder a carrier from either settling for less than the avoidable  X4 xIcosts of litigation, where warranted, or to litigating aggressively. As discussed later,PuZ- {O'ԍ See  4952, infra.P the costs  xof the litigation will be borne by the ratepayers if not recovered from the adversary, and, if the  xsuit lacks merit as SWBT contends, there should be no judgment adverse to the carrier. While  xSWBT might prefer that recognition of the costs of settlements be unlimited, we find its criticism  xof the proposal to limit recognition of the settlement costs of antitrust lawsuits to the avoidable costs of litigation to be unpersuasive.  "h&39. The Commission previously limited only to prejudgment settlements the presumption  xthat avoidable costs of litigation should be allowed and, although the court had directed it to  X 4 xconsider the incentive effects of any pre and postjudgment distinction, the Commission again  xproposed to limit the presumption of recoverability for the avoidable costs of litigation to pre X 4 xjudgment settlements.Rv - {OD'ԍ  NPRM, 8 FCC Rcd at 6657,  15.R It reasoned that a postjudgment settlement occurs only after a court has  xmade findings that a carrier engaged in illegal activity. Most commenters oppose this distinction.  xThey argue that, while many of the same considerations that impel settlement at the trial level  Xb4 xNare relevant to settlement at the appeal level,w"b~- {O' x ԍ E.g., BellSouth at 3031, citing and quoting Notice of Proposed Rulemaking to Amend Part 31 Uniform  x3 System of Accounts for Class A and Class B Telephone Carriers to Account for Judgments and Other Costs  x| Associated With Antitrust Lawsuits, and Conforming Amendments to Annual Report Form M, CC Docket No. 8564, Reply Comments of the Section of Antitrust Law of the American Bar Association, filed July 15, 1985, at p. 7. the outcome can change as a result of an  XK4appeal,Ux&Kh - {Od' x< ԍ COMSAT at 18; Pacific Companies at 10. We note that, in MCI v. AT&T, 708 F.2d 1083, on which  x Pacific Companies rely, retrial was ordered on the damages issue, not the question of antitrust liability. The finding  {O' x7 of liability became final before the retrial with the denial of certiorari. See generally American Tel. & Tel. Co. v.  {O'MCI Communications Corp., 748 F.2d 799 (7th Cir. 1984) (appeal from evidentiary ruling prior to retrial denied).U and the distinction creates an incentive for protracted postjudgment litigation.zyKV - yOR 'ԍ BellSouth at 31; NYNEX at 10; Pacific Companies at 10; SWBT at 18; COMSAT at 17.z  X4 "'40. On further analysis, we have decided to abandon the distinction between pre and  xRpostjudgment settlements in cases where a finding of antitrust liability has not become final.  X4 xyAs the court advised in Litigation Costs Decision, "the economics of the two situations are  X4 xidentical."\z- {Oq&'ԍ Litigation Costs Decision, 939 F.2d at 1047.\ Furthermore, we are presumptively allowing abovetheline accounting for all  xdefense costs, including those incurred after an adverse judgment. Creating a presumption in"xz,-(-(ZZ1"  xfavor of allowing recovery of the avoided costs of litigation of postjudgment settlements in  xpratemaking is consistent with this treatment of defense costs. As a result, recovery of the costs  xof defending litigation should not weigh heavily in the carrier's analysis of the pros and cons of  xsettling a case and should not offer adversaries any special leverage against a carrier. Avoiding  x/the impact of the accounting and ratemaking treatment of an adverse judgment is likely to have  xa stronger influence on a carrier's settlement decisions, because the cost of an adverse judgment  Xv4 xEwill not be presumptively recoverable through rates.O{Zv- {O' xD ԍ See NYNEX at 9. According to BellSouth, however, the entry of an adverse judgment is simply one factor  x a carrier must evaluate. It "must still weigh the costs of continuing the litigation against the probability of success on appeal." BellSouth at 30. O Refusal to create a presumption that  x8ratemaking should treat the value of a settlement up to the avoidable costs of litigation as an  XH4 xallowable expense may detract somewhat from the carrier's incentive to settle,>|H- yO 'ԍ BellSouth at 30, 31.> but this will not  X14 xbe the only or even a primary consideration, according to some commenters.} 1z- yO\' x ԍ NYNEX at 8 (settlement "is merely an economic decision."); Pacific Companies at 78 (listing factors and  xo acknowledging that including settlement costs in operating accounts "will certainly not be the primary consideration  x! in management's decision to settle or to defend a case."); COMSAT at 14; USTA at 24 ("settlements themselves are prudently made, but not because of nuisance value considerations."). By refusing to  xIpermit ratemaking recognition of antitrust settlements, except for the portion that represents the  xavoidable costs of litigation, we are not burdening ratepayers with settlements and will not create  xan incentive to use postjudgment settlements as a way to avoid the consequences of an adverse  xfinal judgment. We find that this is a better balance of the ratepayers' and carriers' interests in  X 4 x&just and reasonable rates than our NPRM proposal, because the fact of carrier misconduct has not  X 4 xbeen finally resolved. This result also responds to both the court's concern in Litton Accounting  X4 xAppeal that carriers defend themselves and to the court's questions in Litigation Costs Decision  x8about the reasonableness of incentives created by the Commission's previous pre and postjudgment distinction.  "4(41. Settlements entered into after an adjudication of liability for an antitrust violation has  xbecome final by the termination of all appeals cannot be recovered in the ratemaking process,  xeven if litigation over damages continues. This applies even to the avoided costs of litigation.  xVOnce the fact of the violation has been conclusively established, ratepayers should not be asked  xto pay for the consequences, even in part and even if the carrier is able to negotiate a settlement  xon more favorable terms than the verdict. Absent a showing of ratepayer benefit from the  xcadjudicated misconduct, the carrier should be responsible for its misconduct. We recognize that  xthis accounting treatment might encourage postjudgment settlements before the appeal process  xAbecomes final, but this incentive is no different than the incentive to settle created by our treatment of final adverse judgments.  ")42. The Pacific Companies argue that the Commission should broaden the definition of  xEthe avoidable costs of litigation "to recognize the fact that a settlement avoids the hazards of "&b },-(-(ZZ"  X4 x[litigation, conserves scarce employee resources (e.g. the time of both legal and nonlegal  X4 xEemployees to continue to litigate), and saved lost opportunity and other hidden costs."u~X- yOd' x ԍ Pacific Companies at 9. In contrast, BellSouth and NYNEX refer to nuisance value as saved litigation costs.  x BellSouth at 30 (recovery of incremental litigation costs and counsel fees avoided by settlement is consistent with congressional policy in Alternate Dispute Resolution Act); NYNEX at 910.u We  xAdisagree, for there would be no realistic limit to the amount of a settlement that would be  X4 xcrecognizable in the ratemaking process with so broad and imprecise a definition. In Alascom,- yOV' x ԍ Alascom, Inc., Request for Ratemaking Recognition of an Antitrust Settlement, 5 FCC Rcd 654 (Common  {O 'Car. Bur. 1990) (Alascom), modified, 6 FCC Rcd 3636 (1991) (Alascom Recon. Order).  xlthe only case for which the Commission scrutinized an antitrust settlement under its previous  xlitigation cost rules, only the documented estimates of costs saved as a direct result of the  x3settlement were presumptively recoverable. The Commission denied recovery of costs that would  xVhave been incurred without regard to the litigation, such as the salaries of employees already on  xpthe payroll or employee opportunity costs, because no additional payment of money would have  X54 xbeen required to support the litigation.5B- yO(' xU ԍ In contrast, costs associated with replacing inhouse counsel during the antitrust trial were recoverable where  {O'credibly supported. Alascom Recon. Order, 6 FCC Rcd at 363839,  21. The Commission also denied recovery under the  x8ratepayer benefit test of costs incurred as a result of deferred investment, because business  xdecisions regarding capital investment are ongoing for any carrier facing litigation, imposing these  xcosts under the guise of settlement recovery would render the litigation costs policy meaningless,  X 4 xEand the alleged saved costs were too speculative.H - {O&'ԍ  Id. at 364041,  36.H The definition of the avoidable costs of  xlitigation proposed by the Pacific Companies suffers from these same flaws. We continue to  xbelieve that the direct result test, which allows recovery of only the documented estimates of  xycosts saved as a direct result of the settlement, is the appropriate test for the recovery of the  xavoidable costs of litigation, because it is tied to estimates that can be attributed directly to the  xcosts of the litigation at issue and reasonably quantified. Furthermore, using a direct result test will discourage the recovery of excessive costs.  "*43. When the Commission previously allowed recovery for prejudgment settlements, it  x/stated that a prejudgment settlement would be "presumptively recoverable from ratepayers" to  X4 xthe extent of "the additional litigation expenses ... which the carrier reasonably estimates it  xVwould have paid if it had not settled and which the carrier would have allocated to the interstate  X4 xjurisdiction."j. - {O"'ԍ Reconsideration Order, 4 FCC Rcd 4092, 4097 (1989). j This was the standard for the avoidable costs of litigation established upon  xreconsideration in that proceeding. The court confirmed that the Commission acted within its  xauthority in allowing carriers to recover, for ratemaking purposes, the portion of the settlement  xof an antitrust lawsuit that represents its "nuisance value," otherwise known as the avoided costs  Xi4 xof litigation. Pointing to the Alascom proceeding, U S West argues that the administrative burden  xrequired on the parts of the Commission and the carriers in identifying the avoided costs of"T ,-(-(ZZh"  xlitigation outweighs any benefit that ratepayers may receive from this treatment of settlement  X4 x/expenses.&- {Ob' x ԍ U S West at 9; accord USTA at 13 (fact intensity of process justifies an individual case reasonableness  {O,' x assessment during ratemaking, not additional rules). See also Bell Atlantic at 2 (burden of lengthy and costly  x proceeding to prove ratepayer benefit); NYNEX at 8 ("the key issue should be reasonableness and prudency of costs  {O'as incurred."); id. at 11, n. 21.  Thus, U S West argues, all settlement costs should be treated as normal operating  xhexpenses. We agree that the Commission does not accomplish much if antitrust litigation  xgexpenses are subject to a burdensome Commission review that imposes heavy costs on ratepayers,  X4 xshareholders, the Commission, and taxpayers.|- yO ' x ԍ Commenters' preference for a study of the reasonableness of individual carrier decisions suffers from this  {O ' x same burden of ad hoc review, which could be complicated by the Commission's need for information from the  x7 carriers before initiating the review. We also doubt that most commenters mean to suggest that the Commission  {Oe ' x should second guess a carrier's decision to settle. But see NYNEX at 89. Furthermore, with streamlined regulation  x to be effective for all LECs in February 1997 pursuant to the Telecommunications Act of 1996, increasing emphasis  x; will be placed on complaints for enforcement of just and reasonable rates. Relying on advance review of challenged rate elements when tariffs are filed will be impractical.  But, we do not agree that the appropriate  X4 xresponse is to allow settlement costs in any amount as operating expenses,PJ - {O8' x3 ԍ The litigation reviewed by the Commission in Alascom Recon. Order was settled by Alascom for a net  x settlement payment of $17.5 million to the plaintiff. AT&T reimbursed Alascom for additional money. The  xo Commission determined that $6,873,030 of this, when discounted to present value using the authorized rate of return,  {O' x fell within the presumption of recovery in ratemaking. See Alascom Recon. Order, 6 FCC Rcd at 3636,  4, 3641  x  43. Costs not associated with a favorable verdict, estimated at $13 million for supersedeas bond, plaintiff's legal  {O$' x^ fees, and retrial expenses, were not allowed under the Litigation Costs Order and Litigation Costs Recon. Order  {O' x policy against recovery of the costs of adverse judgments. See Alascom, 5 FCC Rcd at 656  16,  Alascom Recon.  {O'Order, 6 FCC Rcd at 3639,  26.P for this could place  xall the burden of the settlement on ratepayers, whether or not they benefit from settlement. This  xalso could reduce a carrier's incentive to seek the most advantageous settlement terms, while  xZencouraging potential adversaries to seek profit from a carrier's perceived deep pockets. Although  xUSTA argues that market and customer pressures give carriers sufficient incentive to contain  X 4 xlitigation costs,5 - yO'ԍ USTA at 15.5 there is no guarantee that these pressures will prevent excessive settlements under all circumstances. These pressures and our action here are complementary.  "\+44. Instead, to minimize the burdens on all concerned, we will presume that all  xsettlements of lawsuits brought under federal antitrust laws are for the avoided costs of litigation  X 4 x"to the extent that the carrier makes the required showing, as defined infra in paragraph 46 and  X4 x47, and, while recorded below the line,- yO#' x ԍ The comments of Pacific Companies at 9, 10; SWBT at 17; U S West at 8; and COMSAT at 16 reflect  x confusion as to whether the avoided costs of litigation would be recorded above or belowtheline. Our proposal was  x to place all settlement costs belowtheline but to alter the usual presumption attaching to that placement for costs  {O7&' x| corresponding to the portion of the settlement that represents the avoided costs of litigation. See NPRM, 8 FCC Rcd  {O'' x at 6656  4, 6657  12. This was based on Litigation Costs Recon. Order, 4 FCC Rcd at 409798,  4344, 4101"',-(-('"  {O' x n. 17; see Alascom Recon. Order, 6 FCC Rcd at 3636,  23. In this way, the accounting for all antitrust settlements would be uniform; only the ratemaking treatment would differ. can be presumed recoverable in ratemaking. We"",-(-(ZZ8"  xrecognize that readopting this presumption will result in some imprecision in amounts  xpresumptively allowable as expenses. We think, however, that this treatment strikes a balance  xthat falls within the range of reasonableness allowed in setting rates, and strikes a more  xcreasonable and less burdensome balance than requiring a Commission determination of whether  xevery antitrust settlement carriers might claim in the ratemaking process was in the public  x interest. This treatment also acknowledges that lawsuits may be frivolous or unfounded and gives  xIcarriers leeway to dispose of such suits without incurring additional burdens at the Commission.  xFurthermore, it avoids creating any additional incentive for carriers' adversaries to use antitrust allegations for leverage against carriers.  ",45. To receive recognition of its avoided costs of litigation, a carrier must demonstrate,  xzin a request for special relief, the avoided costs of litigation by showing the amount  xcorresponding to the additional litigation expenses discounted to present value, that the carrier  xreasonably estimates it would have paid if it had not settled. Settlement costs in excess of the  x}avoided costs of litigation are presumed not recoverable unless a carrier rebuts that presumption  xpby showing the basic factors that induced the carrier to settle and demonstrating that ratepayers  X4 xbenefited from the settlement."- yOc' x ԍ This conclusion governs only a carrier's ability to recover through ratemaking for interstate services the interstate portion of these costs. Carriers should make any showings in a request for special  xrelief rather than with the tariff filing. Upon making such a showing, the carrier would receive  x}credit in the ratemaking process for the portion of the settlement costs allocated to the interstate  xdjurisdiction under Part 36 of the Commission's Rules, 47 C.F.R. Part 36. We make no  xdetermination about the portion of those settlement costs that would be assigned to the intrastate  x/jurisdiction and, additionally, we will not require the ILECs to make any exogenous adjustments to their price cap indexes because of these rule changes.  "-46. A carrier requesting recovery of the avoided costs of litigation must accompany its  xrequest with clear and convincing evidence that, without the settlement, it would have incurred  xthe expenses it estimates. The evidence will, of course, vary according to the circumstances.  x}Among the data a carrier may provide are any available cost estimates provided by the law firm  x representing the carrier, an estimate of attorney hours needed to complete the case along with the  xhourly rates for the attorneys involved, information regarding the discovery remaining to be  x[completed, the amount of trial time scheduled by the judge, and information regarding the  xnumber of witnesses or documents that would have been introduced at trial, including any pretrial  xstatements filed with the court, costs of expert witnesses, travel time, saved inhouse counsel  xreplacement costs, and any other material the carrier considers relevant. The avoided costs of  xlitigation of a prejudgment settlement would include the anticipated costs of litigating until a  xhjudgment. The avoided cost of litigation of a postjudgment settlement would anticipate a successful appeal in the particular case. "!z,-(-(ZZ "Ԍ ".47. The Pacific Companies have asked how to treat settlements in cases involving  xcmultiple claims and settlements. Such settlements can include both monetary and nonmonetary  X4 xpterms in a multiple count case.A- yOK'ԍ Pacific Companies at 8.A Carriers should state how they propose to allocate settlement  x+costs between antitrust and other causes of action in their settlement agreements. Only the  xsettlement costs attributed to antitrust claims will be subject to the rules and policies adopted in  X4 xcthis Order.ZX- {O' x* ԍ In contrast, Litigation Costs Order, 4 FCC Rcd at 4092,  5, required judgments and settlements with both  xk federal and state claims to be booked in their entirety belowtheline. Portions that the carrier could convince the Commission were attributable to nonfederal claims could subsequently be allowed for ratemaking. The accounting treatment of matters that would ordinarily be treated as operating  xcosts should not change because these matters have been raised in complaints also alleging  X_4 xantitrust violations._z- yO ' x ԍ This should alleviate SWBT's concerns about artificially discouraging settlements in cases with multiple  {OR'claims. See SWBT at 1819. We recognize that adversaries may add antitrust allegations to otherwise  x_commercial disputes if they perceive an opportunity for gaining an advantage because of the  xoperation of the Commission's accounting rules and ratemaking presumptions. We caution  xcarriers, however, that this allocation should not attempt to circumvent the Commission's intention  xthat antitrust settlements are presumed to be disallowed in the ratemaking process absent a  xshowing of ratepayer benefit, and we remind carriers that they must make a showing to justify the allocation of costs to the various causes of action contained in a settlement.   X ' D. Litigation Defense Costs  "/48. For several years the Commission has questioned whether ratepayers should bear the  xexpenses of defending antitrust litigation when a carrier is found to have violated the antitrust  XK4 xZlaws. In both Litigation Costs Proceeding and Litton Accounting Proceeding, the Commission  xgconcluded that ratepayers should not, and directed carriers to recapture the defense costs recorded  X4 x"in operating accounts by transferring them to a nonoperating account. The court reviewing the  xVrulemaking decision agreed that the Commission could establish a presumption against recovery  X4 xof litigation expenses in situations where it was legally permitted to create such a presumption  X4 xwith respect to judgments and settlements.\- {O_'ԍ Litigation Costs Decision, 939 F.2d at 1043.\ It questioned the Commission's decision to recover,  xlin the year in which they were incurred, litigation expenses initially booked above the line but  xsubsequently disallowed because of an adverse judgment. The court criticized the decision  xbecause the Commission failed to explain why recapturing expenses does not constitute  X~4 xEretroactive ratemaking.<~f - {O$'ԍ Id. at 1044.< The court reviewing Litton Accounting Proceeding rejected the  xCommission's use of recapture, faulting the Commission for failing to consider factors other than  xsimply whether an antitrust violation occurred and whether the carrier succeeded or failed in the"R ,-(-(ZZh"  X4 x<litigation.^- {Oy'ԍ Litton Accounting Appeal, 939 F.2d at 103133.^ The court stated that the Commission should have examined the reasonableness of  x8allowing recovery for the litigation expenses even though an adverse antitrust judgment was  xissued against the carriers. The court also stated that the Commission inadequately explained  X4the reasons for its policy change from permitting to denying recovery of litigation expenses.?Z- {O'ԍ Id. at 103335.?  X4 "049. The NPRM addressed the retroactive ratemaking question raised in Litigation Costs  Xx4 xDecision by proposing that carriers should accrue antitrust litigation expenses in a balance sheet  Xc4 xdeferral account until the underlying antitrust litigation is resolved.Kc- {O 'ԍ NPRM, 8 FCC Rcd at 665758.K If the result is a final  xadverse judgment or a postjudgment settlement, the expenses would be entered in Account 7370,  xthe same account used for the underlying judgment or settlement. If the carrier prevails or enters  x<into a prejudgment settlement, however, the expenses would be amortized above the line. The  X 4 xVNPRM recognized that dicta in Litton Accounting Appeal contain language unfavorable to the  xproposal, but observed that the proposed result was not precluded by the court if accompanied  X 4by a sufficient rationale.y ~- {O 'ԍ See Id. at 6659, citing Litton Accounting Appeal, 939 F.2d at 1035.y  "150. This proposal drew considerable opposition. Although MCI and Rafferty generally  X4 xsupport it,"- yOW' xZ ԍ MCI at 910; Rafferty at 1. MCI argues that deferral accounting will not give carriers the expectation of  {O' x2 recovery they have when expenses are carried in operating accounts, a concern of the Litton Accounting Appeal court.  xD Rafferty recommends amendments to the Commission's cost allocation manual requirements and limits to billable costs for attorneys to $250 per hour, matters which are beyond the scope of this proceeding.  the remaining commenters offer many reasons why it would be both bad accounting  xcand bad policy. Commenters emphasize that adopting the proposal will impose significant direct  Xh4 x}costs on carriers to screen and track every lawsuit for antitrust allegations.rh - yO'ԍ USTA at 2729; BellSouth at 16, 1721; SWBT at 2325; COMSAT Reply at 8.r Even if the actual  xnumber of such allegations is small, the burden will not be. This will create artificial incentives  x8for competitors to threaten or assert antitrust claims for strategic advantage, leverage, or an  X#4 xundeserved settlement.u# - yO^!'ԍ BellSouth at 2223; NYNEX at 12; Pacific Companies at 1213; SWBT at 2226.u Commenters assert that lawsuits often are complicated by multiple  X 4 xcauses of action, multiple defendants, amended complaints, and piecemeal resolution of issues.P - yO#'ԍ USTA at 27; Pacific at 13; SWBT at 22.P  xCommenters also make other arguments in opposition. First, COMSAT claims that expenses  xmust be incurred before there has been any finding of illegal conduct, and recovery later is based  xentirely on the outcome of litigation, without any consideration of the carrier's prudence in",-(-(ZZe"  X4 xincurring the litigation expenses.:- yOy'ԍ COMSAT at 2122.: Yet, carriers have a right to defend themselves and the  X4 x<business they operate.EX- {O'ԍ E.g., at 2324.E Second, BellSouth argues that deferral accounting is onerous because  xlinvestors must bear the full cost of ongoing litigation while it is pending, without assurance of  X4 xcfuture cost recovery in an increasingly competitive environment.O- yOV'ԍ BellSouth at 32; COMSAT Reply at 67.O One result may be a higher  X4 x_cost of capital in order to compensate shareholders for their increased risk.:z- yO 'ԍ BellSouth at 21.: Third, several  xcommenters state that deferral accounting is inconsistent with generally accepted accounting  xprinciples (GAAP), which the Commission's accounting rules seek to require under the  X_4 xcompetitive model._ - yO' xM ԍ USTA at 1819; Bell Atlantic at 3; BellSouth at 1112; NYNEX at 1415; Pacific Companies at 14; SWBT at 2022; U S West 1011. Other commenters assert that the proposal will unfairly distort the earnings  XH4 xufor sharing purposes of price cap carriers,NHb - yO['ԍ Bell Atlantic at 3; BellSouth at 15.N shift the burden or benefit of the outcome of  X14 xlitigation to future ratepayers,51 - yO'ԍ USTA at 19.5 distort financial results over time,61 - yOd'ԍ NYNEX at 16.6 and discourage aggressive  X 4 xcompetition.> - yO'ԍ BellSouth at 21, 23.> Finally, four commenters note that a similar proposal was considered and  X 4abandoned by the Commission as unworkable.q - {OV'ԍ Id.at 12; NYNEX at 16; Pacific Companies at 15; COMSAT at 2223.q  "251. BellSouth's alternative suggestion, that the balance in the deferral account be  xpincluded in the rate base during the pendency of the litigation illustrates the difficulty in deviating  xpfrom the use of an operating account for operating expenses. BellSouth argues that it should be  xIallowed to charge the principal balance to operating expense upon successful termination of the  Xy4 xVlitigation.Ey4- {O^"'ԍ See BellSouth at 33.E Typically, the rate base includes items related to the company's capital investment,  xsuch as land, leases, equipment, and interest on funds borrowed to finance capital investment.  xRCapital investment not yet used and useful for the carrier's business are carried in a deferral  xaccount until brought into service, although interest on debt related to the capital investment  x"could be included in the rate base in the interim. BellSouth's proposal would capitalize litigation  xexpenses. BellSouth's second alternative suggestion, that the carrier be able to charge interest",-(-(ZZ"  xfor the deferred litigation expenses to an operating account upon successful termination of  xlitigation, may compensate the carrier partially for the delay in recovering costs, but would exacerbate the distortions to earnings for sharing purposes.  "352. After careful consideration of the comments, we conclude that we should not adopt  xVour earlier proposal to require the ILECs to record litigation expenses in a deferral account and,  x3after an adverse judgment, record them belowtheline. Rather, we conclude that we should allow  xall litigation defense costs to continue to be recorded in operating accounts. Although this is a  xdeparture from our previously adopted rule, an important part of our regulatory effort has been  xto eliminate, when possible, and always to minimize, costs imposed by regulation that burden one  xcompetitor more than another. Our proposal could create some incentive for adversaries to bring  xIantitrust suits or add antitrust claims to otherwise normal business litigation. Ratepayers, whom  xwe sought to protect from unnecessary costs, would still bear much of the expense of tracking  xIlitigation costs. These factors, as well as the potential distortions to reported earnings, cause us  xRto conclude that the public interest is better served by retaining the status quo. Although the  xcosts of defending litigation will continue to be accounted for as operating expenses, the Commission may still request data about such expenses.   Xb' E. Other Types of Litigation  X44 "453. The Commission tentatively concluded in the NPRM that its litigation cost rules  X4 xshould also apply to state antitrust lawsuitsN- {O'ԍ NPRM, 8 FCC Rcd at 6658.N and to lawsuits involving the violation of other  X4 xfederal statutes where the actions giving rise to the litigation did not benefit ratepayers.EZ- {O'ԍ Id. at 665859.E We  xproposed to implement the latter with either casebycase review of lawsuits involving judgments  x_or settlements exceeding some threshold amount or by compiling a list of federal statutes for  x4which it can reasonably be assumed that actions in violation of the statute did not benefit ratepayers. Neither a threshold amount nor a tentative list of statutes was proposed.  " 554. The Commission's previous attempt to extend litigation cost rules to violations of  Xg4 x[federal statutes beyond antitrust was reversed in Litigation Costs Decision because the  xCommission had not justified the application of its rules to costs incurred in nonantitrust  X;4 xlawsuits.\;- {O!'ԍ Litigation Costs Decision, 939 F.2d at 1046.\ All of the commenters addressing this proposal, except MCI, argue that the  xCommission still has not provided a justification and that rational implementation would be  xvirtually impossible. Carriers remind us of the wide variety of laws they encounter in their  xbusiness, including environmental, tax, securities, employment, and occupational and safety laws,  x+and argue that violations likely occur because of what a carrier might consider a reasonable"~,-(-(ZZ"  X4 x}interpretation of the law and one from which the ratepayers might have benefited.M- yOy'ԍ Ameritech at 3; Bell Atlantic at 4.M According to USTA:  e LXX` ` The Commission lacks the ability and the resources to determine,  e Yfor example, whether the level of preservative historically used in  e 2telephone poles should be viewed as environmentally appropriate  e in the future, whether a carrier's decisions among alternative ways  e to dispose of lead cable sheathing are prudent, or whether choices  e Mamong alternative methods to notify customers of rules  e contemplated by other agencies are cost effective in light of the  e ;requirements eventually adopted. All of these have been real  e situations confronted by both exchange and interexchange carriers  X 4. . . .8 X- yO'ԍ USTA at 2930.8x`  xBellSouth argues that compiling a list of statutes is impossible, because the reasonableness of the  xcarrier's conduct when it made the decision leading to the violation, not the fact of the violation  X4 x8of any particular statute, is the test for determining whether the ratepayers benefited.=- yO)'ԍ BellSouth at 3536.= No  xcarriers other than MCI suggest statutes other than antitrust for which a violation could be  Xb4presumed not to benefit ratepayers.bx- {O'ԍ See Bell Atlantic at 4 ("By the Commission's own reasoning, antitrust violations are unique . . . .").  "655. The Pacific Companies agree with the Commission that state antitrust actions can be  xtreated consistently with federal antitrust litigation costs, but only if the Commission clearly  X4 xdefines what is meant by state antitrust action.E - yO'ԍ Pacific Companies at 1516.E Because state unfair competition statutes vary  xyfrom state to state and many include business torts, which the Commission treats as ordinary  xexpenses, simply extending the litigation cost rules to state antitrust statutes may not give carriers clear enough guidance about how they are to record judgments and settlements in state litigation.  "#756. Upon further analysis, we conclude that we should not extend application of the  x}rules adopted in this Order to govern accounting treatment of judgments and settlements beyond  xycosts associated with federal antitrust lawsuits. We have inadequate information about state  XN4 xantitrust laws and did not intend to perform ad hoc analyses of the consistency between state and  xfederal antitrust laws. We also have no basis on this record to presume that conduct violating  xany other federal statutes "could not, at the time it was undertaken, reasonably be expected to"" ,-(-(ZZ""  X4 xproduce a net benefit to ratepayers."- {Oy' xD ԍ Litigation Costs Decision, 939 F.2d at 1044; accord Litton Accounting Appeal, 939 F.2d at 103233, citing  {OC'Appalachian Elec. Power Co. v. FPC, 218 F.2d 773, 777 (4th Cir. 1955).  The court reminds us that what "the ratepayers would  xhave decided in their own economic selfinterest" would be a "right" decision, even if it turned  X4 xout to be wrong after the law was interpreted.b$- {O'ԍ Litigation Costs Decision, 939 F.2d at 1045.b The few examples of possible violations the  xIrecord contains, found in the USTA Comments, support this analysis. Thus, for violations other  xthan federal antitrust violations, we will retain the existing presumption applying to all litigation  X4 xcosts; i.e., that they arise out of events occurring in the normal course of providing service to  x ratepayers, and that ratepayers benefit from provision of service. MCI argues that we should use  Xa4 xylitigation cost rules to provide carriers with an economic incentive to obey federal laws,5a- yO 'ԍ MCI at 45.5 but  xour authority is limited to implementing the Communications Act of 1934, as amended. We are  xauthorized to consider violations of other laws only to the extent that they directly bear on our  xdresponsibility to ensure just and reasonable rates, not because we have broad, general  X 4responsibility to ensure the public interest. F- {O'ԍ See NAACP v. FPC, 425 U.S. at 666, 668671, discussed in Litton Accounting Appeal, 939 F.2d at 103031.  X 4 "d857. MCI recommends that the Commission extend litigation cost rules to violations of  xthe Communications Act so that carriers cannot recover from ratepayers any expenses incurred  X 4 x}in cases brought by ratepayers to redress a carrier's Communications Act violation.B - yO2'ԍ MCI at 56, Reply at 12.B We have  x[concluded that we should not presumptively deny recovery of the costs of judgments and  x<settlements in lawsuits, with no exception for litigation before this agency. Proceedings before  Xd4 x/an agency regulating a carrier's business seem to be directly related to the carrier's business.)dh - {O}' x" ԍ See Drisoll v. Edison Light and Power Co., 307 U.S. 104, 12021, reh'g. denied, 307 U.S. 659 (1939)  {OG'(expenses of litigating rate case before commission recoverable); West Ohio Gas, 294 U.S. at 7274.)  x"This is not to say that the costs of judgments and settlements in proceedings alleging a violation  xIof the Communications Act may always be recovered from ratepayers, but only that the record  xin this proceeding does not justify erecting a presumption against recovery. Ratepayers believing  X4 xthat the costs in any proceeding are "illegal, duplicative, or unnecessary" - {O}!'ԍ NAACP v. FPC, 425 U.S. at 668; see id. at 666, 671; see generally West Ohio Gas, 294 U.S. at 7374.ĥ or otherwise excludable should make these assertions during the proceeding or in a complaint about rates.  m"[ "!V ,-(-(ZZn"  X'm"[   F. Interim Action  X4 "A958. In the NPRM, the Commission "require[d] carriers to record any antitrust judgments  X4 x/and settlements incurred during this interim period in Account 1439, Deferred charges."v- {O6'ԍ NPRM, 8 FCC Rcd at 665960,  30; see 47 C.F.R.  32.1439.v The  xCommission contemplated that, upon completion of the rulemaking, the carriers would be allowed  xto treat the expenses in accordance with the new rules. BellSouth and COMSAT strongly object  xto this direction, which BellSouth views as retroactive rulemaking, retroactive ratemaking, and  xa violation of the sixmonth notice requirement of 47 U.S.C.  220(g) and COMSAT views as  XJ4unauthorized because the previous rules were vacated in Litigation Costs Decision.KJZ- yOU 'ԍ BellSouth at 3637; COMSAT at 24.K  "q:59. Now that we have resolved this rulemaking, entries deferred in Account 1439 for  xantitrust judgments and settlements must be removed to the appropriate account. We advised  X 4 xcarriers in the NPRM that they would have to reclassify these costs once the rules on litigation  X 4 xcosts were finalized.I - {Ov'ԍ NPRM, 8 FCC Rcd at 6660.I In accordance with these requirements, carriers should clear Account  x1439 of these entries by moving them to Account 7370 when the rules adopted in this proceeding  X 4 xbecome effective in accordance with Section 220(g) of the Communications Act.@ |- yO'ԍ 47 U.S.C.  220(g).@ Carriers  xseeking ratemaking recognition of these costs should make an appropriate filing demonstrating  xhow ratepayers benefited. We disagree with BellSouth that this approach constitutes retroactive  xratemaking any more than transferring these charges to an operating account would, because this  x"action does not have as its purpose compensating for past charges that resulted in excessive or  X:4 xinadequate earnings.: - {O' x ԍ See Southern California Edison Co. v. FERC, 805 F.2d 1068,1070, n. 2 (D.C. Cir. 1986); Nader v. FCC, 520 F.2d 182, 202 (D.C. Cir. 1975). Rather, this action accomplishes an accounting correction, required to move the entries to the correct account.  ";60. We also disagree that the Commission's interim action improperly constitutes  x<retroactive rulemaking, because the Commission did not seek to change past accounting entries  xwith the interim rule. Rather, the interim rule became effective thirty days after publication of  X4 xthe NPRM in the Federal Register and applied prospectively to "antitrust judgments and  X4 xsettlements incurred in the interim period."Qf - {O#'ԍ NPRM, 8 FCC Rcd at 6660,  35.Q This distinguishes the interim action in this  X4 xproceeding from the invalid retroactive attempt to recoup monies previously paid in Bowen, on"" ,-(-(ZZ"  X4 xcwhich BellSouth relies.\- {Oy' xp ԍ  Bowen v. Georgetown Univ. Hosp., 488 U.S. 204 (1988). Bennett v. New Jersey, 470 U.S. 632 (1985);  {OC' x7 Greene v. United States, 376 U.S. 149 (1964); and de Rodulfa v. United States, 461 F.2d 1240 (1972), also cited by BellSouth at 37, n. 58, are distinguished for the same reason. The Commission had good cause for the interim actiona- yO'ԍ Administrative Procedure Act, 5 U.S.C.  553 (b)(B).a because of  x+its concern that, without litigation cost rules in place, carriers could recover from ratepayers  xjudgments and settlements that should not properly be borne by ratepayers during the period of  X4 xthe rulemaking.S|- {O 'ԍ NPRM, 8 FCC Rcd at 665960  30.S Absent interim action, charges to ratepayers for judgments and settlements  xduring the interim period could not be recouped without raising questions about retroactive  xcratemaking and retroactive rulemaking. Rather than requiring carriers to account for judgments  x<and settlements in accordance with the rulemaking proposal or to report and address judgments  x<and settlements in ratemaking proceedings arising during the interim, the Commission fashioned  xa neutral remedy that would defer accounting for the disputed sums pending the resolution of the  X14 xrulemaking. This is consistent with MidTex Electric Coop. in which interim FERC rules  X 4 xgoverning construction workinprogress were affirmed.r - {O'ԍ  MidTex Elec. Coop, Inc. v. FERC, 822 F.2d 1123 (D.C. Cir. 1987).r The interim rules in that case were  x_similar to ones approved in substantial measure by the court but vacated because FERC had  xfailed to consider anticompetitive consequences, and were fashioned to address the court's concerns while that commission conducted the rulemaking.  X '5  VI. FINAL REGULATORY FLEXIBILITY ANALYSIS \  X{4 e <61.` ` In the NPRM, the Commission certified that the rules it proposed to adopt in this  Xf4 xproceeding would not have a significant economic impact on a substantial number of small  XO4 xentities because the proposed rules did not pertain to small entities.UO- {O'ԍNPRM, 8 FCC Rcd at 6660.U No comments were  X84 xreceived specifically concerning the proposed certification. However, some comments were  X!4 xreceived generally concerning the impact of the proposed rules on small entities.a!2 - yO'ԍBellSouth Comments, at 16; USTA Comments, at 15.a For the  x reasons stated below, we certify that the rules adopted herein will not have a significant economic  X4 ximpact on a substantial number of small entities.F - yOf"'ԍ5 U.S.C.  605(b).F This certification conforms to the Regulatory  xFlexibility Act ("RFA"), as amended by the Small Business Regulatory Enforcement Fairness Act  X4of 1996 ("SBREFA").R - yO%' "V ԍ5 U.S.C.  601611. SBREFA was enacted as Subtitle II of the Contract With America Advancement Act of 1996 ("CWAAA"), Pub.L. No. 104121, 110 Stat. 847 (1996). "#,-(-(ZZ1"Ԍ X4 e ԙ=62.` ` The NPRM certified that no regulatory flexibility analysis was required because  xthe entities affected by the proposed rules were either large corporations, affiliates of such  X4 x8corporations, or were dominant in their field of operations and therefore not small entities.M- {OM'ԍNPRM at 5981,  14.M  X4 x/However, the rules we adopt in this Report and Order apply to all carriers providing interstate  X4 x&services, some of which may be small entities.Z- yO' " ԍThe SBA defines small telecommunications entities as those having fewer than 1,500 employees. 15 C.F.R.  121.201 SIC Code 4813 (Telephone Communications, Except Radiotelephone). Moreover, since the NPRM, we have stated that  xalthough we still consider small incumbent LECs to be dominant in their field of operations, we  X|4 xnow include such companies in our regulatory flexibility analyses.|- {O ' " ԍSee Implementation of the Local Competition Provisions in the Telecommunications Act of 1996, Report  {O '& Order,  132830, CC Docket No. 9698, FCC 96325 (rel. Aug. 8, 1996). Consequently, we cannot certify that no regulatory flexibility analysis is required for the reasons offered in the Notice.  X74 e >63.` ` Nonetheless, we still certify that no regulatory flexibility analysis is necessary here.  xAs the two parties commenting on small entity issues observed, it is unlikely that a substantial  X 4 xnumber of small LECs will be subject to federal antitrust litigation.\ - {O' " ԍSee USTA Comments, at 15; BellSouth Comments, at 16. Nonetheless, small LECs could violate the  {O' x antitrust laws, see paragraph 20, supra, and therefore we have not exempted small entities from our rules to provide certainty in the treatment of litigation costs in such an instance. Consequently, it does not  xappear that the rules will affect a substantial number of small entities. Even if a substantial  xnumber of small entities were affected by the rules, there would not be a significant economic  ximpact on those entities. These rules govern the accounting treatment of federal antitrust  xjudgments and settlements in excess of the avoid costs of litigation, but not for litigation  X4 xexpenses.D2 - {Oy'ԍSee para. 18.D BellSouth, in commenting on small entity issues, contended that the proposed rule  xwhich would have required all carriers, including small, to accrue litigation costs in a separate  xuaccount and record them below the line if the carrier lost its legal action, would be unduly  XQ4 xburdensome on small LECs.CQ - yO'ԍ BellSouth Comments at 16.C This Report and Order does not adopt that proposal, thereby eliminating this concern.  X%4  X4 e F?64.` ` We therefore certify pursuant to section 605(b) of the RFA that the rules adopted  x4in this order will not have a significant economic impact on a substantial number of small  X4 xentities. The Commission will publish this certification in the Federal Register, and will provide"$T ,-(-(ZZT"  X4 xa copy of the certification to the Chief Counsel for Advocacy of the SBA.F- yOy'ԍ5 U.S.C.  605(b).F The Commission  X4will also include the certification in the report to Congress pursuant to the SBREFA.LX- yO'ԍ5 U.S.C.  801(a)(1)(A).L  X' VII. ORDERING CLAUSES Đ\  "W@65. Accordingly, IT IS ORDERED, that pursuant to sections 4(i), 219 and 220 of the  xRCommunications Act of 1934, as amended, 47 U.S.C.  154(i), 219 and 220, Part 32 of the  xCommission's Rules IS REVISED as set forth in the Appendix below, effective six months after the date of publication of this Order in the Federal Register.  "A66. IT IS FURTHER ORDERED, that consistent with this Order, carriers SHALL  x3TRANSFER interim entries of antitrust settlements and judgments from Account 1439 to Account 7370, effective six months after the date of publication of this Order in the Federal Register.  X 4 "yB67. IT IS FURTHER ORDERED, that the Secretary SHALL SERVE a copy of this Order on each state commission.  "C68. IT IS FURTHER ORDERED that the Secretary shall send a copy of this Report and  xOrder including the Final Regulatory Flexibility Analysis, to the Chief Counsel for Advocacy of  xthe Small Business Administration in accordance with paragraph 605(b) of the Regulatory Flexibility Act, Pub. L. No. 96354, 94 Stat. 1164, 5 U.S.C.  601 et seq. (1981).  X4 "D69. IT IS FURTHER ORDERED, that the Secretary SHALL CAUSE a summary of this  X4Order to be published in the Federal Register.  "~E70. IT IS FURTHER ORDERED, the collections of information contained within are contingent upon approval by the Office of Management and Budget. XX` ` X XXhhCXqFEDERAL COMMUNICATIONS COMMISSION(# XX` ` X XXhhCXqWilliam F. Caton(# XX` ` X XXhhCXqActing Secretary(# " %,-(-(ZZH"  X'] APPENDIX Đ\ Part 32, Uniform System of Accounts for Telecommunications Companies is amended as follows: 1. The authority citation for Part 32 continues to read as follows:  XH' Authority: 47 U.S.C. 154, 47 U.S.C. 219, 220. 2. Section 32.7370 is amended by revising paragraph (d) to read as follows:  X ' 32.7370 Special charges. v*****  X4 "(d) Penalties and fines paid on account of violations of statutes. This account shall also  xinclude penalties and fines paid on account of violations of U.S. antitrust statutes, including judgments and payments in settlement of civil and criminal suits alleging such violations; and v*****