ACS of Anchorage, Inc.,
Federal Communications Commission and
General Communication, Inc.,
On Petition for Review of an Order of the
Federal Communications Commission
Richard P. Bress argued the cause for petitioner. With him on the briefs were Karen Brinkmann and Richard R. Cameron.
Jeffrey J. Peck and David W. Zesiger were on the brief for amicus curiae Independent Telephone and Telecommunications Alliance in support of petitioner. Lewis A. Tollin entered an appearance.
John E. Ingle, Deputy Associate General Counsel, Federal Communications Commission, argued the cause for respondents. With him on the brief were Laurel R. Bergold, Counsel, Federal Communications Commission, and Charles A. James, Assistant Attorney General, and Robert B. Nichol-son and Robert Wiggers, Attorneys, U.S. Department of Justice. Laurence N. Bourne, Counsel, Federal Communications Commission, entered an appearance.
Joe D. Edge argued the cause and filed the brief for intervenor General Communication, Inc. With him on the brief were Tina M. Pidgeon and Kathleen S. O'Neill.
Before: Edwards and Randolph, Circuit Judges, and Williams, Senior Circuit Judge.
Opinion for the Court filed by Senior Circuit Judge Williams.
Circuit Judge: Petitioner ACS of Anchorage,
Inc. challenges a Federal Communications Commission order finding that ACS
exceeded its permissible rate of return for 1997-98. As a remedy, the Commission ordered ACS to
pay damages plus prejudgment interest to a complaining customer, General Communications,
Inc. ("GCI"). See In re
General Communication, Inc. v. Alaska Communications Systems Holdings, Inc.,
Memorandum Opinion and Order, FCC 01-32, at 2, p 1 (
* * *
ACS is the
incumbent local exchange carrier ("LEC") in
Three tariff filings by ACS are pertinent. In April 1996 it filed tariff rates for the two-year period from July 1, 1996 to June 30, 1998 (the "1997 Tariff"), and in December 1997 a "mid-course correction" tariff covering the balance of that period (January 1, 1998 to June 30, 1998) (the "January 1998 Tariff"). See 47 C.F.R. § 69.3(b) (permitting mid-course corrections); Southwestern Bell Telephone Co. v. FCC, 10 F.3d 892, 893-94 & n.1 (D.C. Cir. 1993) (describing use of mid-course corrections). ACS filed the January 1998 Tariff under the streamlined tariff provisions of 47 U.S.C. § 204(a)(3), which in this instance required a 15-day notice period. Order at 4, p 8. During this notice period, apparently, the Commission took no action to suspend the tariffs and initiate a hearing on the rates, see 47 U.S.C. § 204(a)(3) (cross-referencing 47 U.S.C. § 204(a)(1)), and the tariffs went into effect without any hearing being ordered.
In June 1998, ACS
filed its rates for the two-year period from
1999, ACS filed its final monitoring report for the two-year period from
In August 2000, GCI filed a complaint with the Commission alleging that ACS had improperly calculated its interstate costs by treating ISP calls as interstate, and had violated its prescribed rate of return during the 1997-98 monitoring period. Order at 6-7, p 13. The Commission agreed with GCI, id. at 10, p 22, 20, p 48, and ordered ACS to pay damages of about $2.7 million plus prejudgment interest assessed at the Internal Revenue Service's corporate over-payment rate, id. at 31, p 77.
Petitioning for review, ACS challenges the Commission's classification of ISP calls, its failure to treat the § 204(a)(3) tariff filings as a bar to damages for 1998, and the rate selected for prejudgment interest.
* * *
ISP calls classification. Because the same telecommunications equipment is often used for both intrastate and interstate communications, carriers must apportion their costs (for regulatory purposes) through what is called the "separations" process. See generally 47 C.F.R. §§ 36.1-36.3. ACS argues that because FCC has previously recognized ISP calls as interstate for jurisdictional purposes under its "end-to-end" analysis, e.g., In re Implementation of the Local Competition Provisions in the Telecommunications Act of 1996, 14 FCC Rcd 3689, 3695-3703, p p 10-20 ("Reciprocal Compensation Order"), ISP calls should be interstate for separations purposes as well.
generally speaking, separations will follow jurisdiction. This basic norm is inherent in the
separations formulas found at 47 C.F.R. § 36.125(a)(3), (a)(5) & (b), the
Supreme Court's decision in Smith v. Illinois Bell Tel. Co., 282 U.S. 133,
150-51 (1930), and our decision in MCI Telecommunications Corp. v. FCC, 750
F.2d 135, 137, 140-41 (D.C. Cir. 1984).
But practical considerations may justify divergent treatment--at least
temporarily. See Smith, 282
While the Order
does not explicitly invoke the MCI exception, we can reasonably discern the
path from its reasoning and citations.
See Bowman Transportation, Inc. v. Arkansas-Best Freight System, Inc.,
419 U.S. 281, 285-86 (1974); Syracuse
Peace Council v. FCC, 867 F.2d 654, 665 (D.C. Cir. 1989). The interim nature of the decision is quite
explicit--and, of course, a natural concomitant of the novelty of the internet
itself. Compare, e.g., WorldCom v. FCC, No.
01-1218, 2002 WL 832541 (D.C. Cir.
The Commission's primary policy justification for the intrastate classification matches the language it has used for the ESP exemption. Rather than directly exempting ESPs from interstate access charges, the Commission defined them as "end users"--no different from a local pizzeria or barber shop. See Order at 16, p 37; In re Amendments of Part 69 of the Commission's Rules Relating to the Creation of Access Charge Subelements for Open Network Architecture, Notice of Proposed Rulemaking, 4 FCC Rcd 3983, 3988, p 39 & n.89 (1989) ("ONA NPRM"); see also 47 C.F.R. § 69.2(m). While this categorization exempted ISPs from interstate access charges paid by IXCs, it left them obliged to purchase access through intrastate tariffs--namely, local business line charges. The Commission contends that ACS's allocation of ISP costs to interstate service would thus create a cost-revenue mismatch. Order at 14-16, p p 32-37. The tariff revenue would be allocated to intrastate and the costs to interstate, disrupting rate-of-return calculations.
Commission has allotted the revenue to intrastate service, plainly it makes
sense to allocate the costs there as well.
But that might be said merely to relocate the question: as the functional significance of the ESP
exemption is to channel the revenue to intrastate service, one might ask if
such an allocation was reasonable.
Indeed, ACS's brief addresses the cost-revenue
matching principle in economic terms, i.e., the proposition that, in the
interest of aligning incentives correctly, costs should be borne by the
customers who cause them to be incurred.
See Union Elec. Co. v. FERC, 890 F.2d 1193, 1198 (D.C. 1989). Noting that in creating the ESP exemption the
Commission had recognized that it would cause economic distortions, making
non-ESP users of interstate access bear disproportionate costs, ACS argues that
the Commission cannot now rely on the cost-revenue matching principle. See ACS
We are left, then, with the Commission matching its separations treatment of costs for ISP-bound calls with its classification of those calls for tariffing and revenue purposes. Further, not only is the latter unchallenged here, but the Commission appears to be working on a number of interconnected parts of the puzzle. The ESP exemption itself is temporary. And the Commission has set out to reform the regime to which it is an exception, the regime of interstate access charges, see Order at 14, p 32; In re Access Charge Reform, First Report and Order, 12 FCC Rcd 15982, 16133, p 345 (1997), and is investigating future regulatory schemes for ISPs, In re Usage of Public Switched Network by Information Service and Internet Access Providers, Notice of Inquiry, 11 FCC Rcd 21354, 21490-93, p p 311-18 (1996). Further, it is fundamentally rethinking the separations process in light of ISPs and other market changes. In re Jurisdictional Separations Reform and Referral to the Federal-State Joint Board, Notice of Proposed Rulemaking, 12 FCC Rcd 22120 (1997); see also Report Filed by State Members of Joint Board of Jurisdictional Separations, Public Notice, 14 FCC Rcd 3482 (1999). Clearly, as we stated in MCI, the Commission is entitled to substantial deference "when it acts to maintain the status quo so that the objectives of a pending rulemaking proceeding will not be frustrated," MCI, 750 F.2d at 141, including the objective of implementing large-scale revisions "in a manner that would cause the least upheaval in the industry," id. Accordingly, we cannot find the Commission's interim intrastate classification of ISP-related costs to be arbitrary or capricious.
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Damages for rates filed in "streamlined tariffs". ACS next argues that 47 U.S.C. § 204(a)(3), as elaborated upon by the Commission in its Streamlined Tariff Order, is a bar to damages for its purported overcharges in 1998. 47 U.S.C. § 204(a)(3), part of the Telecommunications Act of 1996, states:
A local exchange carrier may file with the Commission a new or revised charge, classification, regulation, or practice on a streamlined basis. Any such charge, classification, regulation, or practice shall be deemed lawful and shall be effective 7 days (in the case of a reduction in rates) or 15 days (in the case of an increase in rates) after the date on which it is filed with the Commission unless the Commission takes action under paragraph (1) before the end of that 7-day or 15-day period, as is appropriate.
"legal" rate and "lawful" rate come to us burdened with (or
illuminated by) the Supreme Court's decision in Arizona Grocery Co. v.
Atchison, Topeka & Santa Fe Railway Co., 284 U.S. 370 (1932), as the
Commission recognized in its Streamlined Tariff Order, 12 FCC Rcd at 2181-82, p p 19-20 &
nn.62, 65. "Legality" mainly
addresses procedural validity.
"[T]o render rates definite and certain, and to prevent
discrimination and other abuses," rates must be filed and published, and
deviation from published rates is subject to criminal and civil penalties.
Informed by this
dichotomy, the Commission in its Streamlined Tariff Order interpreted the
"deemed lawful" language in § 204(a)(3) as "establish[ing] a conclusive presumption of reasonableness." Streamlined Tariff Order, 12 FCC Rcd at 2181-82, p 19.
Therefore, "a streamlined tariff that takes effect without prior
suspension or investigation is conclusively presumed to be reasonable and,
thus, a lawful tariff during the period that the tariff remains in
Clearly then, to the extent that the streamlined tariff provisions apply to ACS tariff filings, the Commission may not now impose refund liability for covered rates--even ones it concludes were unreasonable. The Commission, however, argues that the streamlined tariff provisions do not apply.
First it asserts
a critical distinction between rates and rates of return. Order at 23, p 57. It claims that since the Order found ACS in
violation of its prescribed rate of return, the fact that ACS's
rates might have been deemed lawful under § 204(a)(3) does not immunize it from
refund liability. In support, the
Commission relies on New England Telephone and Telegraph Co. v. FCC, 826 F.2d
1101 (D.C. Cir. 1987), in which we upheld the Commission's use of a refund remedy
for violations of prescribed rates of return.
position, however, overlooks the language of its statutory mandate. Under the Communications Act of 1934, it is
empowered to ensure just and reasonable rates ("charges"), not rates
of return. See 47 U.S.C. § 201(a). The Commission acquires the authority to prescribe
rates of return only as a means to achieve just and reasonable rates. See Nader v. FCC,
520 F.2d 182, 203 (D.C. Cir. 1975). As
we explained in Nader, rates of return are but one
element in the task of ratemaking, but the Commission can prescribe
them--sometimes in separate phases from the other necessary elements--if doing
so will help the Commission "carry out its functions in an expeditious
Here, of course, no proxy for (un)reasonableness is needed. Since § 204(a)(3) deems ACS's rates to be lawful, the inquiry ends. This situation is quite different from New England Telephone, which was decided before the passage of § 204(a)(3). In that case, the carrier's rates had gone into effect with neither a Commission finding of reasonableness, 826 F.2d at 1105, which under Arizona Grocery would bar refunds, nor a suspension of the rates and initiation of a hearing, for which § 204(a) (a precursor to the current § 204(a)(1)) specifically allowed refunds. Section 204 as it then read was silent as to the permissibility of refunds where the Commission simply allowed the company's filed rate to go into effect without suspension or initiation of a hearing, and in effect New England Telephone read the silence as permitting the Commission to order refunds (in certain circumstances). For the cases covered by § 204(a)(3), Congress has now broken the silence.
Recall that the Streamlined Tariff Order
read § 204(a)(3)'s "deemed lawful" language to create a conclusive
bar to refunds. 12 FCC Rcd at 2175-76, p p 8-9, 2181-82,
p p 18-19. In
doing so, it reasoned that "deemed lawful" was "unambiguous"
in the "consistent" interpretation of the courts.
The Commission next suggests that § 204(a)(3) does not protect the January 1998 Tariff from refunds because neither of the two challenged cost allocation practices appeared in that filing. Order at 23, p 56. (Apparently, the earliest public disclosure was a March 1998 preliminary monitoring report, see Anchorage Telephone Utility, Rate of Return Report (Mar. 31, 1998); Order at 5, p 9.) Accordingly, the Commission contends that these " 'practices' were not 'filed' in [ACS's] January 1998 Tariff in accordance with section 204(a)(3)." Order at 23, p 56. We find this argument somewhat mystifying. By the Commission's own account, the methods used in the January 1998 Tariff were the proper ones. Surely the Commission cannot now criticize ACS for failing to use in January 1998 the new accounting methods that the Commission maintains are impermissible and which ACS had not yet adopted.
Alternatively, the Commission may be claiming that ACS's changes in computation, implemented between the January 1998 Tariff and the July 1998 Tariff, were changes in "practices" within the meaning of § 204(a)(3) (authorizing filing of "a new or revised charge, classification, regulation, or practice"), so that ACS's failure to file a tariff announcing the computational change nullified any right of ACS to rely on the previously filed January 1998 Tariff. But we see no basis for understanding § 204(a)(3)'s word "practice" to include internal computations underlying a rate. The Streamlined Tariff Order expressly addresses filings that are hard to classify as rate reductions or rate increases (thus entailing 7- or 15-day waiting periods), and reads the 15-day language of § 204(a)(3) broadly as covering any non-rate change in "terms and conditions" or even introduction of new service; yet it nowhere suggests that any of the words used by § 204(a)(3) encompasses purely internal changes in computation, as opposed to terms or conditions of service, which, like rate changes, are directly experienced by customers. See 12 FCC Rcd at 2200-03, p p 62-68.
The Commission may have been confused by its pre-s 204(a)(3) habit of retroactively assessing the lawfulness of a rate long after it had taken effect without advance suspension or initiation of hearing. See FCC Br. at 40. As we noted in our 1995 MCI decision, it is virtually impossible to tell in advance just what rate of return a given rate may yield. 59 F.3d at 1415-16. In a world where the lawfulness of a rate is in almost endlessly suspended animation, the Commission may understandably feel entitled to receive ongoing updates of a company's calculations showing the links between its rates and its rate of return. But that is not the world of § 204(a)(3), where the rate itself, if filed and not suspended, is "deemed lawful."
We do not, of course, address the case of a carrier that furtively employs improper accounting techniques in a tariff filing, thereby concealing potential rate of return violations. The Order here makes no claim of such misconduct.
Finally, the Commission argues that § 204(a)(3) does not protect the July 1998 Tariff because ACS failed to satisfy the statutory notice period. Order at 23, p 54. ACS filed the July 1998 Tariff on 7-days notice. The Commission contends that because the Tariff changed accounting methods, it altered "terms and conditions," and thus had to be filed on 15-days notice. Order at 25-26, p p 61-63; see also Streamlined Tariff Order, 12 FCC Rcd at 2203, p 68 (discussing treatment of "tariffs that change terms and conditions or apply to new services even where there is no rate increase or decrease"). Again, nothing in the statute or even the Streamlined Tariff Order supports the classification of a filing that changes only underlying calculations as an "increase in rate" requiring 15-days notice.
We note that
since § 204(a)(3) immunizes ACS's rates for 1998, it
is unclear how its rate of return should be calculated for 1997 in light of
Virgin Islands Telephone Corp. v. FCC, 989 F.2d 1231 (D.C. Cir. 1993). In
* * *
Prejudgment Interest. ACS lastly argues that the Commission erred in using the IRS's rate for corporate overpayment for the calculation of prejudgment interest. ACS contends that it should instead have used the rate for "large" corporate overpayments. See Order at 29-30, p p 72-74.
Under 26 U.S.C. §
6621, the IRS calculates five rates of interest, all functions of the
Treasury's rate for short-term borrowing.
The rates depend on whether taxes are overpaid or underpaid, whether the
party is an individual or a corporation, and whether the amount is
"large" (exceeds $10,000). See
2002-12 I.R.B. 637, 638-43 (2002). The
Commission apparently co-opts these rates for the calculation of prejudgment
interest. The following, for example,
are the rates for
Noncorporate over- and underpayment: 7%
Corporate overpayment: 6%
Large corporate overpayment: 4.5%
Corporate underpayment: 7%
Large corporate underpayment: 9%
The Commission found that the rate for non-large corporate overpayments was most appropriate because it was "the overpayment rate that the Commission has most recently applied, despite the apparent availability of the rate for large corporate overpayments." Order at 30, p 74. The precedents offered by the Commission generally support this position. See In re Time Warner Entertainment/Advance-Newhouse Partnership, 14 FCC Rcd 9149, 9154 n.36 (1999); In re Section 208 Complaints Alleging Violations of the Commission's Rate of Return Prescriptions, 12 FCC Rcd 4007, 4020-21 app. B (1997). The Ameritech case, in which the FCC held that the appropriate interest rate was the individual overpayment rate (as opposed to the corporate overpayment rate) is somewhat anomalous, but in any case offers no support for ACS's proposed use of the large corporate over-payment rate. See In re Long-Term Telephone Number Portability Tariff Filings of Ameritech Operating Companies, et al., 14 FCC Rcd 17,339, p p 1, 4 (1999). Indeed, ACS presents no cases in which the Commission has ever applied the large corporate overpayment rate. See Order at 30 n.160.
Fair enough. But the Commission acknowledged the possibility of applying the large corporate overpayment rate, in words contradicting its prior simple reasoning from precedent:
Although we might appropriately apply the rate for large corporate overpayments exceeding $10,000 when a defendant has simply miscalculated revenue or demand and accidently exceeded its rate of return, such is not the case here.
Order at 30, p 74.
The Commission went on to justify the higher rate by arguing that ACS
"had at least constructive knowledge" of the intrastate
classification rule because "the Commission had rejected other carriers'
attempts to assign ISP traffic to the interstate jurisdiction."
As the Commission
alleges no bad faith (or quasi-bad faith) in the 1997 tariff filings, we fail
to understand how this case differs from one in which "a defendant has
simply miscalculated revenue or demand and accidently
exceeded its rate of return."
* * *
We (1) deny ACS's petition for review of the Commission's classification of ISP-related traffic-sensitive costs as intrastate, (2) grant its petition regarding the Commission's failure to honor § 204(a)(3)'s bar on refunds as to ACS's 1998 rates and vacate the Order insofar as it grants damages for over-charges in 1998, and (3) remand the case to the Commission for (a) its consideration of the treatment of a rate-of-return violation for a monitoring period cut short by § 204(a)(3) filings, and (b) its reconsideration of the use of the IRS rate for non-large corporate overpayments for prejudgment interest.
 Commission regulations specify two-year monitoring reports running with the calendar year, even though the tariffs are filed for periods starting July 1. Compare 47 C.F.R. § 69.3(a) (specifying periodicity for rate-of-return monitoring reports), with 47 C.F.R. § 65.701 (specifying periodicity for rate-of-return monitoring reports).