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Before the
Federal Communications Commission
Washington, D.C. 20554
In the Matter of )
)
GENERAL COMMUNICATION, INC., )
Complainant, )
)
v. ) EB-00-MD-016
)
ALASKA COMMUNICATIONS SYSTEMS )
HOLDINGS, INC. and ALASKA )
COMMUNICATIONS SYSTEMS, INC. )
d/b/a ATU TELECOMMUNICATIONS )
d/b/a ANCHORAGE TELEPHONE )
UTILITY, )
Defendants.
MEMORANDUM OPINION AND ORDER
Adopted: January 23, 2001 Released: January 24,
2001
By the Commission:
TABLE OF CONTENTS
Paragraph
I. Introduction 1
II. Background 4
III. Discussion 14
A. ATU Exceeded its Prescribed Rate of Return for the
1997-1998 Monitoring Period, in Violation of
Section 201(b) of the Act. 15
1. ATU's Allocation of ISP Traffic Costs to the
Interstate Jurisdiction for Separations
Purposes Was Unlawful. 16
a. ATU's Allocation of ISP Traffic Costs to
the Interstate Jurisdiction Violated
Commission Orders. 16
b. The Commission Has Jurisdiction to
Require Carriers to Assign ISP Traffic
Costs to the Intrastate Jurisdiction for
Separations Purposes. 23
c. Assigning ISP Traffic Costs to the
Intrastate Jurisdiction Is Consistent
With Separations Rules. 29
2. ATU Improperly Counted Only One, Rather Than
Two, DEMs for Each Minute of Intraoffice
Calls. 40
3. ATU's Improper Allocation of ISP Traffic
Costs and Counting of DEMs for Intraoffice
Calls Result in a Violation of the Rate-of-
Return Prescription for the 1997-1998
Monitoring Period. 49
4. Section 204(a)(3) of the Act Does Not
Preclude the Commission From Awarding Damages
to GCI Based On ATU's Violation of the Rate-
of-Return Prescription. 51
5. The Statute of Limitations Does Not Bar GCI's
Recovery for ATU's Overearnings in 1997. 65
B. GCI's Remaining Claims Are Dismissed As Moot. 69
C. ACS Holdings Is Dismissed From the Case. 70
D. We Calculate the Amount of Prejudgment Interest
Due On GCI's Damages Award Based on the I.R.S.
Interest Rate for Tax Overpayments. 72
IV. Conclusion 75
V. Ordering Clauses 76
I. INTRODUCTION
In this Order, we grant in part and deny in part a complaint
filed on August 24, 2000 by GCI Communication, Inc. (``GCI'')
against Alaska Communications Systems, Inc. d/b/a ATU
Telecommunications d/b/a Anchorage Telephone Utility
(collectively ``ATU'') and Alaska Communications Systems
Holdings, Inc. (``ACS Holdings'') pursuant to section 208 of the
Communications Act of 1934, as amended (``Act'').1 We find that
ATU unlawfully earned more than its allowable rate of return for
the period from January 1, 1997 through December 31, 1998
(``1997-1998 Monitoring Period'') by 1) improperly assigning to
the interstate jurisdiction for separations purposes the traffic-
sensitive costs of carrying Internet Service Provider (``ISP'')
traffic, and 2) improperly calculating dial equipment minutes
(``DEMs'') for intraoffice calls. ATU's violation of its
prescribed rate of return constitutes a violation of section
201(b) of the Act.2 Accordingly, we grant Counts 1 through 3 of
GCI's complaint. Given our ruling on Counts 1 through 3, we
dismiss the remaining Counts of GCI's complaint (Counts 4 through
6) as moot, because, although they allege different legal
violations, they seek the same relief for the same ATU conduct
specified in Counts 1 though 3.
In conjunction with our ruling in GCI's favor on Counts 1 through
3 of its complaint, we award damages, with prejudgment interest,
to GCI for ATU's overearnings. Further, we direct ATU to: 1)
revise its 1997-1998 Monitoring Report in accordance with this
Order; 2) allocate to the intrastate jurisdiction for separations
purposes the traffic-sensitive costs of carrying ISP traffic from
January 1, 1999 forward, until otherwise ordered by the
Commission; and 3) count each minute of intraoffice calls as two
DEMs from January 1, 1999 forward, until otherwise ordered by the
Commission.
Finally, we dismiss all of GCI's claims against defendant ACS
Holdings. GCI has not alleged that ACS Holdings overcharged it
for any services or overearned in violation of the Act or any
Commission order or rule.
II. BACKGROUND
ATU is the incumbent local exchange carrier (``LEC'') in
Anchorage, Alaska.3 ATU is wholly owned and controlled by ACS
Holdings.4 GCI provides facilities-based interstate and
intrastate interexchange services in the state of Alaska, and
competitive local exchange services in Anchorage, Alaska.5 GCI
purchased interstate access services from ATU throughout the
1997-1998 Monitoring Period for the origination and termination
of GCI's interstate interexchange traffic from and to customers
located in Anchorage.6 GCI continues to purchase interstate
interexchange services from ATU.
ATU is a ``rate-of-return'' carrier. Rate-of-return carriers are
permitted to earn no more than a Commission-prescribed return on
the investments they make in providing exchange access services.7
To comply with this prescription, rate-of-return carriers
estimate their costs of providing exchange access services and
project their demand for such services for a two-year period in
the future (i.e., the monitoring or enforcement period).8 They
then file tariffs containing rates for their access services that
they believe, given their estimate of costs and demand, will
result in earnings within the prescribed rate of return at the
end of the two-year forecast period. During the course of the
two-year monitoring period, rate-of-return carriers must review
how their actual costs and demand calculations compare to their
earlier projections, and make rate adjustments, if necessary, to
ensure that they do not exceed their prescribed rate of return.9
If a rate-of-return carrier ultimately exceeds its rate of return
at the end of the two-year monitoring period, the Commission may
then require refunds of any such overearnings to affected
customers.10
In estimating their access services costs to prepare their
tariffs in a manner that will allow them to earn no more than
their prescribed rate of return, rate-of-return carriers must
apply, inter alia, the Commission's jurisdictional separations
rules and Commission orders implementing and interpreting those
rules.11 Jurisdictional separations, generally speaking, is the
process by which carriers apportion the costs of providing
telecommunications services to either the intrastate or
interstate jurisdiction, depending on the use of their equipment
and other resources in providing those services.12
Pursuant to the foregoing regulatory regime, on April 2, 1996,
ATU filed an annual access tariff setting forth its rates for
interstate access service, effective from July 1, 1996 through
June 30, 1998 (``1997 Tariff'').13 ATU's 1997 Tariff contained
no statement indicating how ATU would allocate ISP traffic
costs14 for separations purposes or how it would count DEMs for
intraoffice calls.15
On December 17, 1997, ATU filed an access tariff containing
revised rates for interstate access service for the period from
January 1, 1998 through June 30, 1998 (``January 1998
Tariff'').16 This tariff was filed on 15-days' notice,
purportedly pursuant to the ``streamlining'' provisions of
section 204(a)(3) of the Act.17 Like its 1997 Tariff, ATU's
January 1998 Tariff did not indicate how ATU intended to assign
ISP traffic costs for separations purposes or how it would count
DEMs for intraoffice calls.18 During the course of the instant
proceeding, ATU has stated that it treated ISP traffic costs as
intrastate and counted each minute of intraoffice calls as two
DEMs in preparing its January 1998 Tariff.19
On March 31, 1998, ATU submitted a preliminary monitoring report
for the period January 1, 1997 to December 31, 1997.20 ATU noted
on the back of the report that ``THESE RESULTS REFLECT THE
FOLLOWING: 1. RECORDING OF INTRAOFFICE CALLS AS ONE DEM[;] 2.
INTERNET SERVICE PROVIDER TRAFFIC HAS BEEN CATEGORIZED AS
INTERSTATE.''21
On June 24, 1998, ATU filed an annual access tariff setting forth
its rates for interstate access service for the period from July
1, 1998 through June 30, 2000 (``July 1998 Tariff'').22 ATU
filed this tariff on seven-days' notice, also purportedly
pursuant to the streamlining provisions of section 204(a)(3).
The ``Description and Justification'' section of ATU's July 1998
Tariff indicated that ``[t]his filing reflects the recording of
intraoffice traffic as one (1) dial equipment minutes (DEM) and
the treatment of all identifiable Internet Service Provider (ISP)
traffic as interstate.''23 This was the first time that ATU had
indicated, in a tariff filing, how it intended to allocate ISP
traffic costs and count DEMs for intraoffice calls. Moreover,
these statements differed from the way that ATU had allocated ISP
traffic costs and counted DEMs for intraoffice calls in preparing
its January 1998 Tariff.24
On September 30, 1999, ATU filed its 1997-1998 Monitoring
Report.25 The reported cumulative rate of return for the
Switched Traffic Sensitive Category was 7.86 percent.26 On the
back of the 1997-1998 Monitoring Report, ATU stated: ``THESE
RESULTS REFLECT THE FOLLOWING: 1. INTRAOFFICE CALLS HAVE BEEN
COUNTED AS ONE DEM[;] 2. INTERNET SERVICE PROVIDER TRAFFIC HAS
BEEN CATEGORIZED AS INTERSTATE.''27
The parties agree that if, for the 1997-1998 Monitoring Period,
ATU had assigned the costs for ISP traffic to the intrastate
jurisdiction and counted two DEMs for each minute of intraoffice
calls, then ATU's rate of return for the interstate switched
traffic sensitive category would have been 32.12 %, far in excess
of the maximum allowable rate of return of 11.65%.28
GCI filed this Complaint on August 24, 2000. GCI alleges that
ATU's conduct during the 1997-1998 Monitoring Period violated the
Act in several ways. In Count 1, GCI alleges that ATU violated
Commission orders requiring ISP traffic costs to be assigned to
the intrastate jurisdiction for jurisdictional separations
purposes.29 In Count 2, GCI alleges that ATU violated section
36.125(a)(3) of the Commission's rules by counting only one DEM
for each minute of an intraoffice call.30 In Count 3, GCI
alleges that ATU unlawfully exceeded its prescribed rate of
return, in violation of 201(b) of the Act, by improperly
assigning ISP traffic costs for separations purposes and
improperly counting DEMs for intraoffice calls.31 In Count 4,
GCI alleges that ATU's tariffs are unjust and unreasonable in
violation of section 201(b) of the Act, because they permitted
ATU to exceed its prescribed rate of return.32 In Counts 5 and
6, respectively, GCI alleges that ATU's assignment to the
interstate jurisdiction of ISP traffic costs unjustly and
unreasonably imposed charges on GCI for a service to which it did
not subscribe, and violated the Commission's ``ESP exemption.''33
III. DISCUSSION
Counts 1 through 3 of GCI's Complaint collectively allege that
ATU unlawfully exceeded its prescribed rate of return, in
violation of section 201(b) of the Act, by improperly 1)
assigning to the interstate jurisdiction for separations purposes
the costs of ISP traffic, and 2) counting each minute of
intraoffice calls as one DEM, rather than two. For the following
reasons, we agree with GCI.
III.A. ATU Exceeded its Prescribed Rate of Return for the
1997-1998 Monitoring Period, in Violation of Section
201(b) of the Act.
For the reasons described below, we conclude that, by allocating
ISP traffic costs to the interstate jurisdiction for separations
purposes, and by counting one DEM rather than two DEMs for each
minute of intraoffice calls, ATU erroneously inflated its
interstate cost base. This enabled ATU to charge its interstate
access service customers, like GCI, more than it would have been
able to charge if it had properly allocated ISP traffic costs and
counted DEMs for intraoffice calls. These two practices
collectively resulted in ATU's unlawfully earning more than its
allowable rate of return during the 1997-1998 Monitoring Period.
III.A.1. ATU's Allocation of ISP Traffic Costs to the
Interstate Jurisdiction for Separations Purposes
Was Unlawful.
III.A.1.a. ATU's Allocation of ISP Traffic
Costs to the Interstate Jurisdiction Violated
Commission Orders.
GCI argues that the Commission requires carriers to assign ISP
traffic costs to the intrastate jurisdiction for separations
purposes.34 In response, ATU asserts that the Commission has
never issued such a requirement, but has only expressed a
preference for such treatment of ISP traffic costs.35 We agree
with GCI that the assignment of ISP traffic costs to the
intrastate jurisdiction is a legal requirement, rather than
merely a suggestion.
Our requirement that ISP traffic costs be assigned to the
intrastate jurisdiction derives from our decision to exempt
enhanced service providers (``ESPs''), including ISPs, from
purchasing interstate access services from interstate access
tariffs. The Commission determined long ago that ESPs should
obtain interstate access services by paying the local business
exchange service rates contained in intrastate tariffs, rather
than the access rates contained in interstate tariffs. The
Commission made this determination to avoid severe rate impacts
that would affect the continuing viability of the ESP industry.36
The Commission recently retained that policy for the present,
largely because it would have been illogical to apply the
existing, inefficient interstate access charge rate structure to
ISP traffic for the first time, just as the Commission is
modifying that structure to eliminate implicit universal service
subsidies from access charges and to move such charges toward
competitive levels.37
In conjunction with affirming the ESP exemption, the Commission
has explained how the ESP exemption affects carriers' assignment
of costs for separations purposes. For example, in the ONA NPRM,
in a section entitled ``Analysis of the Existing Exemption,'' the
Commission stated:
ESP traffic over local business lines is
classified as local traffic for separations
purposes, with the result that TS [traffic
sensitive] costs associated with ESP traffic are
apportioned to the intrastate jurisdiction, and
are recovered through intrastate charges paid by
ESPs and other purchasers of intrastate
services.38
This statement stemmed from the Commission's examination and
tentative rejection of two alternatives to the ESP exemption.
Significantly, both alternatives that the Commission considered
encompassed the same separations treatment of ISP traffic costs
that ATU adopted in this case - assignment of ISP traffic costs
to the interstate jurisdiction rather than the intrastate
jurisdiction for separations purposes. The Commission
tentatively rejected these alternatives, noting that this
``reclassification of ESP traffic that has been deemed to be
intrastate for separations purposes would increase TS [traffic
sensitive] costs apportioned to the interstate jurisdiction,''
and would ``tend to increase the TS rates that other interstate
access customers would bear, at a pace proportionate to the
increase in ESP interstate traffic.''39 That is precisely what
ATU tried to accomplish here. ATU reclassified ISP traffic costs
from the intrastate to the interstate jurisdiction for
separations purposes, which increased the traffic sensitive costs
apportioned to the interstate jurisdiction. This, in turn,
increased the interstate access rates that GCI had to bear as ISP
traffic increased.
The Commission acted on the ONA NPRM and issued an order
``conclud[ing] that the best approach is the adoption of the
tentative conclusion of the Notice: retention of the current
form of the [ESP] exemption,'' which ``maintain[ed] the status
quo.''40 The Commission rejected the two alternatives described
in the ONA NPRM that would have allowed for the separations
treatment of ISP traffic costs implemented by ATU here.41
Although the Commission did not expressly discuss the separations
treatment encompassed in the tentative conclusion of the ONA
NPRM, the Commission implicitly adopted the separations treatment
set forth therein by adopting the tentative conclusion of the ONA
NPRM.
Moreover, in the First Access Charge Reform Order, the Commission
concluded that ``the existing pricing structure for ISPs should
remain in place. . . .''42 The Commission did not explicitly
reference the separations treatment of ISP traffic costs set
forth in the ONA NPRM and subsequently adopted in the ONA Order.
However, the ``existing pricing structure'' maintained by the
First Access Charge Reform Order necessarily encompassed that
separations treatment. Most recently, in the Reciprocal
Compensation Order, the Commission recognized this history of the
ESP exemption and did not disturb the attendant ``long-standing
determination'' by the Commission that, for jurisdictional
separations purposes, both the revenues and traffic-sensitive
costs of ISP traffic ``will continue to be accounted for as
intrastate.''43
On two recent occasions, the Commission's Common Carrier Bureau
has implemented the Commission's rulings regarding the ESP
exemption and concomitant separations requirements. In
particular, two local exchange carriers tried to do exactly what
ATU has done here - assign ISP traffic costs to the interstate
jurisdiction for separations purposes. In both situations, the
Common Carrier Bureau ordered the carriers to change their
conduct and assign ISP traffic costs to the intrastate
jurisdiction for separations purposes.44 The Bureau further
ordered the carriers to revise reports that they had previously
filed containing the incorrect assignment of ISP traffic costs.45
In our view, the foregoing refutes ATU's assertion that the
Commission has only expressed a preference, rather than a
requirement, concerning how ISP traffic costs should be allocated
for separations purposes.46 The Commission has made clear that
local exchange carriers must assign ISP traffic costs to the
intrastate jurisdiction for separations purposes.47 Accordingly,
we find that ATU's allocation of ISP traffic costs to the
interstate jurisdiction for separations purposes during the 1997-
1998 Monitoring Period violated Commission orders.48
III.A.1.b. The Commission Has Jurisdiction to
Require Carriers to Assign ISP Traffic Costs
to the Intrastate Jurisdiction for
Separations Purposes.
ATU next asserts that, even if the Commission has purported to
require that ISP traffic costs be assigned to the intrastate
jurisdiction, the Commission was (and is) without jurisdiction to
impose such a requirement. ATU relies on section 2 of the Act,
which restricts federal regulation to ``interstate''
communication and reserves to the states authority to regulate
``intrastate'' communication.49 According to ATU, because ISP
traffic is largely interstate, forcing ATU to characterize such
traffic as intrastate for separations purposes runs afoul of the
section 2 jurisdictional boundaries, because it permits states to
regulate or set rates for interstate communications.50 We
disagree, for the following reasons.
It is well-settled that when communications, such as ISP traffic,
are jurisdictionally mixed, containing both interstate and
intrastate components, the Commission has authority to regulate
such communications.51 This exercise of federal regulation over
jurisdictionally mixed traffic necessarily encompasses the
regulation and treatment of such traffic within the ambit of the
Commission's separations rules.52 Although the Commission's
exercise of its discretion in treating jurisdictionally mixed
communications in a particular manner under its separations rules
may be subject to challenge as arbitrary and capricious, the
Commission's authority to regulate such traffic in the first
instance cannot seriously be challenged.
The United States Court of Appeals for the Eighth Circuit
recently rejected essentially the same jurisdictional challenge
ATU presents here. In Southwestern Bell Tel. Co. v. FCC
(``SBC''), local exchange carriers appealed the Commission's
decision to retain the ESP exemption and argued, just as ATU does
here, that the ESP exemption unlawfully ``forces state regulators
to set rates for the recovery of interstate costs,'' because ISP
traffic costs are ``undeniably interstate costs.''53 The
carriers argued that the ESP exemption, and the concomitant
recovery by carriers of the costs of carrying ISP traffic only
from local business tariffs, ``amount[ed] to a dereliction of the
Commission's obligation to retain exclusive jurisdiction over
interstate communications and forces state regulatory commissions
to overstep their authority by recovering interstate costs.''54
The Eighth Circuit rejected these jurisdictional contentions.
The court noted that ISP traffic is jurisdictionally mixed and
includes both interstate and intrastate components.55 Because of
the jurisdictionally mixed nature of this traffic, and because
the Commission had valid policy reasons for creating the ESP
exemption in the first place (i.e., preserving the
competitiveness and vitality of the emerging ESP industry), the
court concluded that the Commission had ``appropriately exercised
its discretion to require an ISP to pay intrastate charges for
its line . . . but not to pay the per-minute interstate access
charge.''56 The court noted that the Commission's action left
states free ``to assess intrastate tariffs as they see fit.''57
Thus, the court concluded that the Commission had neither
``shirked its responsibility to regulate interstate
telecommunications nor . . . directed States to inflate
intrastate tariffs to cover otherwise unrecoverable interstate
costs, thereby exceeding its statutory authority [under section 2
of the Act].''58
Our well-established authority over jurisdictionally mixed
traffic requires rejection of ATU's jurisdictional argument here.
As in SBC, our requirement that ISP traffic costs be assigned to
the intrastate jurisdiction for separations purposes does not
result in an impermissible delegation of regulation of interstate
communications to the states. In particular, our action does not
impose any intrastate rates and states remain free to assess
intrastate tariffs as they see fit. Thus, our action does not
cross the jurisdictional line drawn by section 2 of the Act.59
At bottom, ATU's disagreement with the Commission's treatment of
ISP traffic costs for separations purposes is not so much a
challenge to the Commission's ultimate ``jurisdiction'' or
authority over such traffic under section 2 of the Act as it is a
challenge to the manner in which the Commission exercised its
jurisdiction over such traffic in the circumstances presented.
We address this challenge in the next section.
III.A.1.c. Assigning ISP Traffic Costs to the
Intrastate Jurisdiction Is Consistent With
Separations Rules.
ATU asserts that the Commission abused its discretion by
requiring carriers to allocate ISP traffic costs to the
intrastate jurisdiction for separations purposes.60 In ATU's
view, the Commission's decision to define ISP traffic as
intrastate for separations purposes, even while acknowledging
that such traffic is ``largely interstate,'' is arbitrary and
improperly ignores the actual usage of the local equipment that
processes ISP traffic.61 Because ISP traffic is largely
interstate, according to ATU, the costs of such traffic must be
assigned to the interstate jurisdiction, in accordance with the
holding of Smith v. Illinois Bell, the seminal case concerning
jurisdictional separations.62 ATU argues that the principles
espoused in Smith are contravened if ATU is required, merely as a
matter of convenience, to allocate entirely to one jurisdiction
its costs of providing ISP services, and this allocation bears no
relationship to the actual usage of its equipment used in
providing such services.63
ATU's argument reflects an overexpansive reading of Smith. Smith
concerned a situation in which a state commission failed to
require a carrier to make any separations at all of equipment
costs between interstate and intrastate uses. The Supreme Court
stated that the state commission's failure to require any
allocation at all violated the statutory predecessor to section 2
of the Act.64 Here, the Commission has not failed to require ATU
to allocate the costs of its local switching equipment between
jurisdictions. Moreover, ATU does not contend that it has made
no allocation of the costs of its local switching equipment
between the interstate and intrastate jurisdictions. Instead,
ATU's concern is that the Commission has allegedly required ATU
to assign too much of certain traffic passing through its
equipment to the intrastate jurisdiction for separations
purposes. Thus, Smith does not help ATU.
In fact, Smith supports our conclusion here, because Smith
recognizes that it is inherently difficult, if not impossible, to
apportion with mathematical precision the uses of exchange plant
equipment. The Court stated that, in ascertaining the proper
apportionment of costs, ``extreme nicety is not required, only
reasonable measures being essential.''65 Further, as the D.C.
Circuit has recognized, ``[c]ost allocation is not purely an
economic issue - it necessarily involves policy choices that are
not constitutionally prescribed.''66
Assigning ISP traffic costs to the intrastate jurisdiction is a
``reasonable measure'' based on sound ``policy choices.'' First,
as explained above, the Commission was justified in treating ISP
traffic-sensitive costs as intrastate for separations purposes,
in conjunction with the ESP exemption, to preserve the viability
of the still-growing ISP industry. More recently, the Commission
retained this policy because it would have been illogical to
apply the admittedly inefficient access charge rate structure to
ISP traffic for the first time, when the Commission is in the
process of modifying that structure.67 The Commission's decision
to retain the ESP exemption has been affirmed as a lawful
exercise of the Commission's discretion.68 The assignment of the
traffic-sensitive costs of ISP traffic to the intrastate
jurisdiction that follows from the ESP exemption is also lawful,
because it derives from the application of our general
separations principles to ISP traffic in implementing the ESP
exemption. As explained below, the treatment of ISP traffic
costs as intrastate for separations purposes prevents a cost-
revenue mismatch that the separations rules are designed to
avoid.
Under Commission rules, separations is ``[t]he process by which
telecommunications property costs, revenues, expenses, taxes and
reserves are apportioned among the [carrier's] operations.''69
Further, ``[t]he fundamental basis on which separations are made
is the use of the telecommunications plant in each of the
[carrier's] operations.''70 Finally, ``operations'' is defined
as ``the general classifications of services rendered to the
public for which separate tariffs are filed, namely exchange,
state toll and interstate toll.''71 Thus, our rules generally
link the apportionment of ``operations'' and the filing of
tariffs. The ``operation'' at issue here is local exchange
service, of which ISP services are a part pursuant to the ESP
exemption. Local exchange service is provided under intrastate
tariffs. Thus, as the ``operation'' at issue is tariffed at the
intrastate level, the carrier should also allocate the costs
associated with that operation to the intrastate jurisdiction.72
To do otherwise would result in the carrier incurring costs for a
service in one jurisdiction, while charging rates to recover
those costs in the other jurisdiction, thereby creating a
mismatch that the foregoing rules were designed, in part, to
prevent.73
The Commission has previously considered the advisability of
permitting such a jurisdictional mismatch between the costs and
revenues associated with ISP traffic, and has expressly rejected
it. In the ONA NPRM, several parties supported allowing ISP
traffic costs and revenues to be apportioned to different
jurisdictions as an alternative to the ESP exemption.74 The
Commission tentatively rejected this proposal, noting that it
would lead to a cost-revenue mismatch between the
jurisdictions.75 Because the Commission had, for valid policy
reasons, already required that carriers earn revenues for ISP
traffic from the intrastate jurisdiction, the Commission
continued to require that costs for such traffic be allocated to
the intrastate jurisdiction.76 Subsequently, in the ONA Order,
the Commission formally rejected the cost-revenue mismatch
proposal.77
Similarly, in the Reciprocal Compensation Order, the Commission
acknowledged that one objective of assigning ISP traffic costs to
the intrastate jurisdiction for separations purposes is to avoid
a cost-revenue mismatch associated with such traffic.
Significantly, the Commission did not alter this separations
treatment even though it acknowledged that ISP traffic is
``largely interstate.''78 Indeed, the Commission saw no reason
to depart from the ``long-standing determination'' that, for
purposes of jurisdictional separations, ``both the costs and the
revenues associated with such [ISP traffic] will continue to be
accounted for as intrastate.''79 The Commission was mindful of
concerns that a different separations treatment of ISP traffic
``may result in allocation to different jurisdictions of the
costs and revenues associated with ISP-bound traffic,'' and the
Commission emphasized the undesirability of permitting such a
``mismatch'' to occur.80
ATU does not dispute that its conduct caused a cost-revenue
mismatch, but argues that the proper remedy is elimination of the
ESP exemption, not allocation of ISP traffic costs to the
intrastate jurisdiction.81 ATU's contention ignores the many
policy reasons supporting the ESP exemption, which we need not
repeat here. Moreover, elimination of the ESP exemption could
have prospective effect only, and thus would have no bearing on
GCI's damages claims.82 Thus, we decline ATU's invitation to
alter the existing rule in the context of this adjudication.
ATU also argues that the Commission's requirement that ISP
traffic costs be assigned to the intrastate jurisdiction for
separations purposes contravenes section 36.125(b) of the
Commission's rules, which generally requires that traffic
sensitive costs be separated based on the relative number of
interstate and intrastate minutes that pass through the carrier's
local switching equipment.83 However, because the Commission has
determined previously that end user access charge rules apply to
ISP-bound traffic,84 and that ISPs must, therefore, purchase
their access services pursuant to intrastate tariffs,85 ISP
traffic cannot be considered interstate for purposes of section
36.125.
Finally, ATU argues that, if it must assign ISP traffic costs to
the intrastate jurisdiction, then it will not recover revenues
adequate to compensate it for the costs of carrying ISP
traffic.86 The Commission addressed this same contention in the
First Access Charge Reform Order, and rejected it as a basis for
eliminating the ESP exemption. There, the Commission considered
whether continuing to preclude local exchange carriers from
assessing access charges on ESPs imposed uncompensated costs on
local exchange carriers. The Commission observed that, in
addition to the business line rates and subscriber line charges
that local exchange carriers receive from ISP customers, local
carriers earn additional revenue from ISP usage ``through higher
demand for second lines by consumers, usage of dedicated data
lines by ISPs, and subscription to incumbent LEC Internet usage
services.''87 Although the Commission acknowledged that
intrastate rates might insufficiently compensate local exchange
carriers, like ATU, for the costs of carrying ISP traffic, the
Commission expressly noted that carriers could address their
concerns in this regard to state regulators.88 The Eighth
Circuit affirmed this analysis in SBC.89 ATU has apparently
chosen not to seek such relief from the state regulatory
authority for any revenue shortfall it may be experiencing.90
In sum, we conclude that ATU's assignment of traffic-sensitive
ISP traffic costs to the interstate jurisdiction for separations
purposes during the 1997-1998 Monitoring Period violated valid
Commission orders that the Commission had jurisdiction to issue
and that are consistent with separations principles and rules.
This improper assignment permitted ATU erroneously to increase
its interstate costs for the 1997-1998 Monitoring Period and
thereby unlawfully to earn more than its prescribed rate of
return.91
III.A.2. ATU Improperly Counted Only One, Rather Than
Two, DEMs for Each Minute of Intraoffice Calls.
DEMs are one of the factors that a local exchange carrier must
consider in determining how to allocate for separations purposes
the costs of local switching equipment. Section 36.125(a)(3) of
our rules defines DEM as follows:
Dial equipment minutes of use (DEM) is defined as
the minutes of holding time of the originating and
terminating local switching equipment.92
The Glossary for Part 36 defines ``Holding Time'' as:
The time in which an item of telephone plant is in
actual use either by a customer or an operator.
For example, holding time includes conversation
time as well as other time in use. . . .93
As part of the separations process, a local exchange carrier must
determine how many DEMs it incurred to carry interstate traffic
and how many DEMs it incurred to carry intrastate traffic. For
rate-of-return carriers, such as ATU, the greater the proportion
of interstate DEMs to the total DEMs, the greater the revenues
that the local exchange carrier can obtain from its interstate
access customers, such as GCI.
The parties disagree concerning how section 36.125(a)(3) of the
separations rules should be interpreted and applied to
intraoffice calls. Intraoffice calls are intrastate calls that
originate and terminate in the same central office. ATU argues
that the proper application of section 36.125(a)(3) differs
depending on whether the central office at issue employs a
digital or an analog switch.94 According to ATU, when a call
originates and terminates at the same central office served by an
analog switch, two separate pieces of equipment are actually used
(a piece for originating traffic and a piece for terminating
traffic), and section 36.125(a)(3) requires that a one-minute
call be counted as two DEMs; however ``when a call originates and
terminates at the same central office served by a digital switch,
the relevant `item of telephone plant' that is `in actual use' is
the single digital switch. . . . Because that single digital
switch is the `originating and terminating' equipment for
intraoffice calls, the plain text of Section 36.125 requires that
one minute of holding time on that switch be counted as one
DEM.''95 ATU asserts, therefore, that because its central
offices use digital switches, it properly counted each minute of
intraoffice calls as one DEM.
We disagree with ATU's approach. The text of section
36.125(a)(3) makes no distinction between digital and analog
switches, and it requires carriers to count each minute of
intraoffice calls as two DEMs in all circumstances. In
particular, the rule requires carriers to count the holding time
for both the originating and the terminating equipment. Thus,
for an intraoffice call lasting one minute, the holding time of
the originating local switching equipment is one DEM, and the
holding time for the terminating local switching equipment is one
DEM, regardless of whether or not the originating and terminating
equipment is the same physical device. Accordingly, under
section 36.125(a)(3), a one-minute intraoffice call generates two
DEMs, not one.
Indeed, in 1987, the Federal State Joint Board on Separations
(``Joint Board'')96 interpreted DEM and its application to
intraoffice calls in precisely the manner described above:
DEM is a measurement of local dial central office
switching equipment for jurisdictional separations
purposes, where one minute of use is recorded per
minute of an originating interoffice or
intraoffice call and one minute of use is recorded
per minute of a terminating interoffice or
intraoffice call.97
The Joint Board recognized that this definition meant that each
minute of use would be counted as two DEMs for intraoffice
calls.98
Moreover, the Joint Board considered the same argument that ATU
asserts here - that it is inappropriate to count two DEMs for
each minute of intraoffice calls where a single digital switch,
rather than two analog switches, is employed to originate and
terminate intraoffice calls.99 However, instead of accepting
that argument and recommending to the Commission that DEM be
defined or construed differently to accommodate the
digital/analog distinction, the Joint Board sought comment on
whether a different cost allocator - Switched Minute of Use
(SMOU) - should be adopted for digital central office
equipment.100 The effect of using SMOU as a cost allocator would
have been exactly that advocated by ATU here - one minute of use
would be counted for each minute of an intraoffice call.101 As
even ATU acknowledges, the Commission subsequently declined to
take any action to adopt the SMOU cost allocation factor. Thus,
DEM has remained the applicable factor for all kinds of local
switching equipment since 1987.102
Finally, ATU challenges the consistent, thirteen-year history of
DEM allocation and treatment under section 36.125(a)(3) by
arguing that requiring DEM to be counted twice for intraoffice
calls using a single digital switch would somehow contravene the
general principle that rates be cost-based.103 ATU essentially
contends that requiring carriers to count as two DEMs each minute
of intraoffice calls switched through digital equipment conflicts
with general separations principles, which provide that ``the
fundamental basis on which separations are made is the use of the
telecommunications plant in each of the operations.''104
According to ATU, if the costs are not properly allocated in the
separations process, then the rates set as a result of that
process will not be cost-based.
As we have previously held, however, the specific separations
rules govern the general principles: ``These general rules
[those contained in sections 36.1 and 36.2], are not intended . .
. to have primacy over the specific rules.''105 The general
separations principle of tying costs to actual usage for rate-
making purposes ``is intended to supplement, not override, the
more detailed procedures prescribed for apportioning specific
costs.''106 Thus, even assuming, arguendo, that some degree of
tension exists between sections 36.1(c) and 36.125(a)(3), section
36.125(a)(3) still governs.
In sum, we conclude that ATU's counting of one DEM, rather than
two DEMs, for each minute of intraoffice calls violated section
36.125(a)(3) of our rules. This improper counting of DEMs raised
the proportion of interstate DEMs to the total DEMs, which
permitted ATU erroneously to increase its interstate costs for
the 1997-1998 Monitoring Period. This, in turn, enabled ATU
unlawfully to earn more than its prescribed rate of return.
III.A.3. ATU's Improper Allocation of ISP Traffic
Costs and Counting of DEMs for Intraoffice Calls
Result in a Violation of the Rate-of-Return
Prescription for the 1997-1998 Monitoring Period.
It is well established that the Commission's rate-of-return
prescription has the force of a statute, so exceeding that
prescription subjects a carrier to liability:
We have repeatedly held that a rate-of-return
prescription has the force of law and that the
Commission may therefore treat a violation of the
prescription as a per se violation of the
requirement of the Communications Act that a
common carrier maintain ``just and reasonable''
rates. . . .107
If a carrier exceeds its prescribed rate of return, the
Commission can order refunds and award damages to aggrieved
customers.108 Damages may be based on the difference between the
amount the customer paid to the carrier and the amount the
customer would have paid to the carrier if the carrier had
charged and applied its rates in a manner that produced earnings
within the prescribed rate-of-return ceiling.109
The parties agree that, if ATU had assigned ISP traffic costs to
the intrastate jurisdiction and counted each minute of
intraoffice calls as two DEMs during the 1997-1998 Monitoring
Period, then ATU's rate of return would have been approximately
32%, well above its allowable rate of return of 11.65%.110 Thus,
absent some means of ``immunity,'' ATU owes GCI for the
difference between the amount of access charges GCI paid to ATU
during the 1997-1998 Monitoring period and the amount of access
charges that GCI would have paid to ATU during the 1997-1998
Monitoring Period if ATU had achieved earnings within the 11.65%
ceiling.
III.A.4. Section 204(a)(3) of the Act Does Not
Preclude the Commission From Awarding Damages to
GCI Based On ATU's Violation of the Rate-of-Return
Prescription.
ATU argues that the Commission cannot award damages to GCI for
ATU's rate-of-return violation in connection with its January
1998 and July 1998 Tariffs, because ATU filed those tariffs under
section 204(a)(3) of the Act.111 According to ATU, section
204(a)(3) and Commission precedent construing that provision
immunize ATU from any liability for damages for exceeding its
prescribed rate of return for the period covered by the January
1998 and July 1998 Tariffs.112 For the following reasons, we
disagree with ATU.
Section 402(b)(1)(A)(iii) of the Telecommunications Act of 1996
added a new section 204(a)(3) to the Communications Act.113
Section 204(a)(3) provides:
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 [204
(a)(1)] before the end of that 7-day or 15-day
period, as is appropriate.114
In 1997, the Commission addressed the meaning of the phrase
``deemed lawful,'' as used in section 204(a)(3) of the Act.115
The Commission concluded that this language provides certain new
protections to local exchange carriers who elect to file tariffs
on a streamlined basis pursuant to section 204(a)(3). In
particular, section 204(a)(3) ``immuniz[es] from challenge those
rates that are not suspended or investigated before a finding of
unlawfulness.''116 The Commission further concluded that,
although section 204(a)(3) does not preclude the Commission from
requiring a carrier, on a prospective basis, to change a rate or
practice that the Commission finds unlawful, section 204(a)(3)
does preclude the Commission from subjecting a carrier to
liability for damages in a section 208 complaint proceeding for
charging such a rate or engaging in such a practice during the
period that the streamlined tariff was in effect and prior to the
determination of unlawfulness.117 This conclusion stemmed, in
part, from judicial interpretations of the same ``deemed lawful''
language in other statutes.118 However, it also stemmed, in
part, from the fact that section 204(a)(3)'s notice periods
provide the Commission and the public with a meaningful, albeit
stringent, opportunity to contest filed rates and practices
before they become effective.119
We conclude that section 204(a)(3) affords ATU no relief from
GCI's rate-of-return claim in connection with either of ATU's two
1998 tariffs. Regarding the January 1998 Tariff, section
204(a)(3) does not protect ATU, because ATU's violation of the
rate-of-return prescription was not ascertainable from the
information contained in that Tariff. Regarding the July 1998
Tariff, section 204(a)(3) does not protect ATU, because that
Tariff failed to comply with the notice requirements of section
204(a)(3).
The text of section 204(a)(3) provides that a LEC ``may file with
the Commission a new or revised charge, classification,
regulation, or practice on a streamlined basis,'' and that any
such ``charge, classification, regulation, or practice shall be
deemed lawful'' within a specified time ``after the date on which
it is filed. . . .''120 Therefore, under the plain language of
section 204(a)(3), a practice can be ``deemed lawful'' only if it
is ``filed'' in a tariff pursuant to the requirements of that
section.
GCI's rate-of-return claim is predicated on two unlawful
practices (i.e., assigning ISP traffic costs to the interstate
jurisdiction and counting only one DEM for each minute of
intraoffice calls), and neither of these practices appeared in
any way in ATU's January 1998 Tariff.121 Thus, ATU's practices
of assigning ISP traffic costs to the interstate jurisdiction for
separations purposes and counting only one DEM for each minute of
intraoffice calls were not ``filed'' within the meaning of
section 204(a)(3). As a result, these practices cannot be
``deemed lawful'' under section 204(a)(3). Accordingly, GCI's
rate-of-return claim supports an award of damages, because it is
based on ``practices'' that were not ``filed'' in ATU's January
1998 Tariff in accordance with section 204(a)(3).
Our conclusion is supported by the Commission's and courts' prior
acknowledgments of the basic differences between a challenge to
the lawfulness of a carrier's tariffed rate and a challenge to
the lawfulness of a carrier's rate of return. A challenge to the
lawfulness of a rate focuses on the reasonableness of the rate in
question. A rate-of-return challenge, on the other hand, focuses
not on the reasonableness of an individual rate in a tariff, but
on the cumulative effect of the tariffed rates on the carrier's
earnings at the end of a monitoring period, well after the tariff
in question was filed.122 Thus, as the D.C. Circuit has pointed
out, a carrier's tariff typically will not provide notice of a
future rate-of-return violation, because it is usually difficult,
if not impossible, to determine, at the time a tariff is filed,
whether the rates set forth in the tariff will produce earnings
within the prescribed rate of return at some defined point in the
future.123 This is particularly true here, because ATU failed to
include in its January 1998 Tariff any information concerning the
two practices that enabled it subsequently to exceed its rate of
return. Accordingly, the requirement in section 204(a)(3) that
only practices that are ``filed'' in a tariff warrant ``deemed
lawful'' protection avoids the anomalous result of immunizing
from a damage award a violation that was not apparent from the
tariff filing involved.
ATU argues that the information it includes or fails to include
in its tariff is irrelevant for purposes of determining whether
section 204(a)(3) applies. In ATU's view, unless a customer or
the Commission acts to challenge a carrier's tariff within the
seven or fifteen-day period provided for pre-effective tariff
reviews in section 204(a)(3), then the carrier is immunized from
liability for any subsequent rate-of-return violation covering a
period in which the subject tariff was in effect.124 However,
neither the Commission nor the carrier's customers would have any
reason or basis to challenge a carrier's tariff filing unless the
tariff provides advance notice of a prospective rate-of-return
violation.125 Indeed, ATU's contention that section 204(a)(3)
protects it from a rate-of-return violation, regardless of
whether it identified certain practices in its tariff is belied
by the Commission's emphasis on pre-effective tariff reviews in
the Streamlined Tariff Order. As the Commission explained, the
pre-effective review of tariff filings protects against the
imposition of unjust and unreasonable practices and rates.
Although the Commission noted that customers and the Commission
must conduct swift pre-effective reviews of tariffs filed on a
streamlined basis under 204(a)(3), the Commission nevertheless
concluded that such reviews are available and meaningful.126 If
a carrier does not ``file'' in its tariff the practices that will
cause an excessive rate-of-return, then the pre-effective tariff
review process is rendered futile for purposes of identifying
potential rate-of-return violations, rather than merely
difficult.127
Our rejection of ATU's position finds additional support in the
fact that neither the text nor the legislative history of section
204(a)(3) even references, much less vitiates, the Commission's
long-standing rules concerning liability for rate-of-return
violations.128 Similarly, the Streamlined Tariff Order does not
address the impact of its interpretation of the phrase ``deemed
lawful'' on the rate-of-return prescription. The absence of any
discussion by Congress or the Commission of the potential impact
of section 204(a)(3) on the rate-of-return prescription strongly
suggests that neither Congress nor the Commission intended the
drastic change to rate-of-return regulation that ATU argues for
here.
Finally, our conclusion with respect to ATU's section 204(a)(3)
argument is not undermined by the fact that, in its July 1998
Tariff, ATU did state how it would allocate the costs of ISP
traffic and count DEMs for intraoffice calls. This is because,
as explained below, the July 1998 Tariff did not satisfy the
filing requirements of section 204(a)(3).
Under the Streamlined Tariff Order, tariffs ``that change terms
and conditions or apply to new services even where there is no
rate increase or decrease'' must be filed on 15-days' notice.129
In fact, ``all LEC tariff transmittals, other than those that
solely reduce rates, shall be filed on 15-day's notice.''130
ATU's July 1998 Tariff filing indicated, for the first time, that
ATU would engage in ``the recording of intraoffice calls as one
(1) dial equipment minutes (DEM) and the treatment of all
identifiable Internet Service Provider (ISP) traffic as
interstate.''131 ATU concedes that those practices differed from
those that ATU used in preparing its 1997 and January 1998
Tariffs: ``the 1997 and January 1998 Tariffs treated ISP traffic
as intrastate and counted intraoffice calls as two DEMs and the
July 1998 Tariff treated ISP traffic as interstate and counted
intraoffice calls as one DEM.''132 Thus, ATU's treatment of ISP
traffic costs and counting of DEMs for intraoffice calls were
``change[d] terms and conditions'' under the Streamlined Tariff
Order, and ATU was obligated to file the July 1998 Tariff on 15-
days' notice. ATU, however, filed its July 1998 Tariff on only
7-days' notice.133
It is clear, and the parties do not dispute, that failure to
comply with governing notice requirements renders a tariff
ineligible for ``deemed lawful'' treatment under section
204(a)(3).134 Because ATU failed to comply with the notice
requirements applicable to the July 1998 Tariff by filing the
tariff on only seven, rather than 15-days' notice, the July 1998
Tariff is not ``deemed lawful'' under section 204(a)(3).135
In sum, we conclude that section 204(a)(3) of the Act does not
immunize ATU from a damages award for exceeding its prescribed
rate of return during the 1997-1998 Monitoring Period. We so
conclude because (1) the rate-of-return violation was not
ascertainable from the information contained in the January 1998
Tariff, and (2) the July 1998 Tariff did not satisfy the notice
requirements of section 204(a)(3).
III.A.5. The Statute of Limitations Does Not Bar GCI's
Recovery for ATU's Overearnings in 1997.
Section 415(c) of the Act provides that complaints against
carriers for recovery of damages based on overcharges shall be
filed within two years from the time the cause of action
accrues.136 ATU argues that GCI's cause of action accrued in
March 1998, when GCI allegedly knew or should have known of the
conduct at issue here; ATU further argues, therefore, that the
two-year statute of limitations bars GCI's claims for damages for
any overcharges in calendar year 1997, because GCI failed to take
action as required until more than two years later.137
ATU's statute of limitations argument is premised on its
submission of a preliminary rate-of-return report, dated March
31, 1998, which covered the period January 1, 1997 to December
31, 1997 (Preliminary Monitoring Report).138 The Preliminary
Monitoring Report stated that ATU's preliminary earnings
reflected that each minute of intraoffice calls was recorded as
one DEM and ISP traffic costs were categorized as interstate.139
ATU asserts that, because it put GCI on notice on March 31, 1998,
as to how it was counting intraoffice calls and treating ISP
traffic for calendar year 1997, then GCI was obligated to serve
its complaint letter, under section 415(c), or file suit to
recover for any damages or overcharges relating to 1997, no later
than March 31, 2000.140 Because GCI did not serve ATU with its
complaint letter until April 4, 2000, GCI's claims relating to
1997 are barred, according to ATU.141
In MCI v. FCC, the D.C. Circuit considered when a cause of action
accrues for violation of a rate-of-return carrier's prescribed
rate of return.142 The defendant carriers made the same argument
that ATU makes here - that submission of a preliminary monitoring
report triggered the running of the statute of limitations. The
court squarely rejected this argument. The court noted that,
until the final monitoring report is submitted, the carrier has
the right and opportunity to adjust information contained in
preliminary reports.143 The court explained that ``it would be
passing strange to require [a complainant] to assume that the
preliminary report is a reliable indicator of whether the
[carrier] has earned more than allowed.''144 Thus, the court
``agree[d] with the Commission that a cause of action for damages
[ . . . ] does not accrue until after [the carrier] files its
final monitoring report.''145
MCI v. FCC provides ample support for our conclusion that the
statute of limitations did not begin to run until ATU submitted
its final monitoring report in September 1999.146 ATU had the
ability to adjust its practices at any time between the time it
filed its preliminary report in March 1998 and the time it filed
its final report in September 1999.147 Accordingly, it would be
inappropriate to bind GCI to the representations contained in
ATU's preliminary report, and we conclude that the statute of
limitations does not bar any portion of GCI's claims for damages
here.148
III.B. GCI's Remaining Claims Are Dismissed As Moot.
In addition to the section 201(b) violation that GCI alleges for
ATU's violation of its prescribed rate of return, GCI also
alleges that: 1) ATU's tariffs are unjust and unreasonable in
violation of section 201(b) of the Act (Count 4); 2) ATU's
assignment of ISP traffic costs unjustly and unreasonably imposed
charges on GCI for services to which it did not subscribe (Count
5); and 3) ATU's assignment of ISP traffic costs violated the
Commission's ESP exemption (Count 6). As explained, supra, these
counts are based on the same facts and seek the same relief as
Counts 1 through 3, which we grant herein. Because we find in
favor of GCI and against ATU on Counts 1 through 3 and award the
relief GCI seeks in all its counts against ATU,149 Counts 4
through 6 of GCI's Complaint are rendered moot and are dismissed.
III.C. ACS Holdings Is Dismissed From the Case.
GCI named the parent company of ATU, ACS Holdings, as a party
defendant. GCI claims that ACS Holdings ``acted in concert''
with ATU in preparing the 1997-1998 Monitoring Report that
provided notice of ATU's overearnings.150 GCI claims that this
participation by ACS Holdings makes ACS Holdings a proper party
under section 411(a) of the Act, despite the fact that ACS
Holdings is not a carrier.151
GCI's allegation that employees of ACS Holdings assisted ATU in
the preparation and filing of the 1997-1998 Monitoring Report
that is the subject of the Complaint is insufficient to state a
claim against ACS Holdings. GCI does not allege that ACS
Holdings itself charged GCI for any services, that ACS Holdings
is subject to a rate-of-return prescription, or that ACS Holdings
unlawfully exceeded any applicable rate of return. Although the
preparation of the 1997-1998 Monitoring Report is relevant to
GCI's claims, it is not conduct that, by itself, injured GCI.
Because GCI has not alleged that ACS Holdings is responsible for
any overcharges to GCI or overearnings by ATU that damaged GCI,
we dismiss ACS Holdings from the case.
III.D. We Calculate the Amount of Prejudgment Interest
Due On GCI's Damages Award Based on the I.R.S. Interest
Rate for Tax Overpayments.
The parties agree that an award of prejudgment interest is
appropriate should GCI prevail on its overcharge claim, and that
such interest begins to accrue on the date the Monitoring Period
ended.152 The parties disagree, however, concerning which of the
following three I.R.S. interest rates should apply to GCI's
damages claim (listed here in ascending order of magnitude): 1)
the rate for tax underpayments; 2) the rate for tax overpayments;
or 3) the rate for large corporate tax overpayments exceeding
$10,000.153 GCI asserts that the first and largest rate is most
appropriate here, given that ATU engaged in ``willful
misconduct.''154 ATU counters that the Commission has never
applied the I.R.S. rate for tax underpayments in a case such as
this one, and there is no justification to do so here.155
Further, since the ``overpayment'' here exceeds $10,000, ATU
asserts that the I.R.S. rate for large corporate overpayments
should be applied.156
The award of interest in complaint proceedings under section 208
is a matter left to our sound discretion.157 In awarding
interest, we are guided by considerations of fairness. As part
of this analysis, we consider the defendant's conduct in
determining which interest rate to apply.158
We conclude that the I.R.S. rate for tax overpayments, but not
large corporate overpayments, is the most appropriate rate to be
applied in this case.159 First, this is the overpayment rate
that the Commission has most recently applied, despite the
apparent availability of the rate for large corporate
overpayments.160 Further, although we do not necessarily agree
with GCI that ATU engaged in ``willful misconduct,'' which might
merit awarding the highest interest rate as a penalty, we do note
that ATU had at least constructive knowledge, before it prepared
its final Monitoring Report, that the Commission had rejected
other carriers' attempts to assign ISP traffic to the interstate
jurisdiction, and would similarly reject ATU's attempt.161
Despite this knowledge, ATU improperly assigned its ISP traffic
costs to the interstate jurisdiction for separations purposes,
which enabled it to reflect an apparently lawful rate of return
on its 1997-1998 Monitoring Report. Because ATU acted in a
manner that it at least should have known the Commission had
already rejected as unlawful, it is proper to award interest at
the higher of the two rates for corporate overpayments. 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.
IV. CONCLUSION
As explained herein, we conclude that ATU violated Commission
orders and rules by assigning to the interstate jurisdiction for
separations purposes the costs of carrying ISP traffic, and
improperly counted each minute of intraoffice calls as one DEM.
These improper practices allowed ATU unlawfully to exceed its
prescribed rate of return for the 1997-1998 Monitoring Period, in
violation of section 201(b) of the Act. We award damages to GCI
for this violation and order additional relief as set forth
below.
V. ORDERING CLAUSES
Accordingly, IT IS ORDERED, pursuant to sections 4(i), 4(j),
201(b), 206, 207, 208, and 209 of the Communications Act of 1934,
as amended, 47 U.S.C. §§ 154(i), 154(j), 201(b), 206, 207, 208,
and 209, that Counts 1, 2, and 3 of the Complaint of GCI ARE
GRANTED as against defendant ATU.
IT IS FURTHER ORDERED, pursuant to sections 4(i), 4(j), 201(b),
206, 207, 208, and 209 of the Communications Act of 1934, as
amended, 47 U.S.C. §§ 154(i), 154(j), 201(b), 206, 207, 208, and
209, that ATU shall pay GCI damages in the amount of
$2,765,371,162 plus prejudgment interest computed from January 1,
1999 to the date of release of this Order at the I.R.S. rate for
corporate overpayments (but not large corporate overpayments
exceeding $10,000). ATU shall pay this amount to GCI within 90
days of the date of release of this Order.
IT IS FURTHER ORDERED, pursuant to sections 4(i), 4(j), 201(b),
and 208 of the Communications Act of 1934, as amended, 47 U.S.C.
§§ 154(i), 154(j), 201(b), and 208, that ATU shall revise its
1997-1998 Monitoring Report in accordance with this Order, and
submit the revised report within 90 days of the date of release
of this Order.
IT IS FURTHER ORDERED, pursuant to sections 4(i), 4(j), 201(b),
and 208 of the Communications Act of 1934, as amended, 47 U.S.C.
§§ 154(i), 154(j), 201(b), and 208, that, until further ordered
otherwise by the Commission, ATU shall (i) assign to the
intrastate jurisdiction for separations purposes the traffic-
sensitive costs of carrying ISP traffic, and (ii) count DEMs for
intraoffice calls in the manner specified herein.163
IT IS FURTHER ORDERED, pursuant to sections 4(i), 4(j), 201(b),
and 208 of the Communications Act of 1934, as amended, 47 U.S.C.
§§ 154(i), 154(j), 201(b), and 208, that Counts 4, 5, and 6 of
the Complaint of GCI ARE DISMISSED as moot.
IT IS FURTHER ORDERED, pursuant to sections 4(i), 4(j), 201(b),
and 208 of the Communications Act of 1934, as amended, 47 U.S.C.
§§ 154(i), 154(j), 201(b), and 208, that defendant Alaska
Communications Systems Holdings, Inc. IS DISMISSED as a defendant
in each and every count of the Complaint.
1. FEDERAL COMMUNICATIONS COMMISSION
2.
3.
4.
5. Magalie Roman Salas
6. Secretary
_________________________
1 47 U.S.C. § 208.
2 47 U.S.C. § 201(b).
3 Joint Statement of General Communication, Inc. and Alaska
Communications Systems Holdings, Inc. and Alaska Communications
Systems, Inc., File No. EB-00-MD-016 (September 29, 2000)
(``Joint Statement''), at ¶ 3.
4 Id. at ¶ 4.
5 Id. at ¶ 1.
6 Id. at ¶ 5.
7 See generally Represcribing the Authorized Rate of Return
for Interstate Services of Local Exchange Carriers, Order, 5 FCC
Rcd 7507, 7532 at ¶¶ 1, 216 (1990) (``Rate-of-Return
Prescription Order''); 47 C.F.R. § 65.700.
8 See 47 C.F.R. §§ 65.700-702; see also MCI Telecom. Corp. v.
FCC, 59 F.3d 1407, 1415 (D.C. Cir. 1995) (discussing the general
process carriers follow in setting rates to comply with the
rate-of-return prescription).
9 MCI, 59 F.3d at 1415; see In the Matter of Amendment of
Part 65, Interstate Rate of Return Prescription: Procedures and
Methodologies to Establish Reporting Requirements, Report and
Order, 1 FCC Rcd 952, 954 at ¶ 10 (1986).
10 MCI, 59 F.3d at 1414.
11 See 47 C.F.R. Part 36.
12 See generally 47 C.F.R. §§ 36.1 and 36.2.
13 Formal Complaint of General Communication, Inc., File No.
EB-00-MD-016 (August 24, 2000) (``Complaint''), at Exhibit 1.
14 ISP traffic consists of communications traffic from end
users dialing up connections to ISPs. Our references herein to
``ISP traffic costs'' refer only to the traffic-sensitive costs
of ISP traffic, unless otherwise indicated.
15 Id. Intraoffice calls are calls that originate and
terminate in the same central office. DEMs are defined as the
minutes of holding time of the originating and terminating local
switching equipment, where holding time is defined generally as
the time the equipment is in use. 47 C.F.R. § 36.125(a)(3).
16 Complaint at Exhibit 3.
17 47 U.S.C. § 204(a)(3) (providing that a local exchange
carrier may file a new or revised charge, classification,
regulation, or practice on a streamlined basis, and that such
charge, classification, regulation or practice shall be deemed
lawful and effective either 7 days or 15 days after the date on
which it is filed (depending on the contents of the filing),
unless the Commission takes action to suspend and investigate
the filing).
18 ATU has stipulated that its January 1998 Tariff did not
provide notice that ATU would assign to the interstate
jurisdiction for separations purposes the costs of ISP traffic
or would count each minute of intraoffice calls as one DEM. See
Letter from Christopher N. Olsen, Attorney, Market Disputes
Resolution Division, Enforcement Bureau, to Joe D. Edge, et al.,
Drinker Biddle & Reath LLP, and Karen Brinkmann, et al., Latham
& Watkins, File No. EB-00-MD-016 (October 6, 2000), at 1-2;
Stipulation of Defendants Alaska Communications Systems
Holdings, Inc. and ACS of Anchorage, Inc., File No. EB-00-MD-016
(October 20, 2000), at 1.
19 Reply Brief of Defendants Alaska Communications Systems
Holdings, Inc. and ACS of Anchorage, Inc., File No. EB-00-MD-016
(November 3, 2000) (``ATU Reply Br.'') at 12, n.11 (``the 1997
and January 1998 Tariffs treated ISP traffic as intrastate and
counted intraoffice calls as two DEMs. . .'').
20 Answer of Defendants Alaska Communications Systems
Holdings, Inc. and ACS of Anchorage, Inc., File No. EB-00-MD-016
(September 13, 2000) (``Answer''), at Exhibit 2. ATU, like
other rate-of-return carriers, is required to file a preliminary
monitoring report each year of the two-year monitoring period.
See 47 C.F.R. §§ 65.600, 65.701. The final monitoring report,
which includes any required adjustments to the preliminary
reports, must be filed by September 30 of the year following the
conclusion of the monitoring period. 46 C.F.R. § 65.600.
21 Answer at Exhibit 2.
22 Complaint at Exhibit 4.
23 Id. at Description and Justification, Section 4 at 14.
24 See ATU Reply Br. at 12, n.11 (``the 1997 and January 1998
Tariffs treated ISP traffic as intrastate and counted
intraoffice calls as two DEMs and the July 1998 Tariff treated
ISP traffic as interstate and counted intraoffice calls as one
DEM'').
25 Complaint at Exhibit 5.
26 Rate-of-return carriers must compute their returns for
several access service categories. 47 C.F.R. § 65.702(a). The
switched traffic sensitive category, which includes services
provided by local exchange carriers to their access customers,
such as line termination and local switching, is the category
affected by ATU's allocation of ISP traffic costs and counting
of DEMs for intraoffice calls.
27 Complaint at Exhibit 5.
28 Joint Statement at ¶ 14. See Rate-of-Return Prescription
Order, 5 FCC Rcd at 7532, ¶ 216 (prescribing maximum rate of
return of 11.25%); 47 C.F.R. § 65.700(a) (providing that the
maximum allowable rate of return is determined by adding four
tenths of one percent to the maximum prescribed rate of return).
The total amount in dispute for the 1997-1998 Monitoring Period
is $2,765,371, excluding interest. Joint Statement at ¶ 15.
This amount represents the difference between the amount GCI
paid to ATU for interstate access services and the amount GCI
would have paid to ATU if ATU had not assigned ISP traffic costs
to the interstate jurisdiction or counted DEMs improperly and
had not thereby exceeded its prescribed rate of return.
29 Complaint at ¶¶ 25-31.
30 47 C.F.R. § 36.125(a)(3); Complaint at ¶¶ 32-35. ATU has
agreed, at the Commission's request, to count each minute of
intraoffice calls as two DEMs on a going-forward basis.
Complaint at Exhibit 10.
31 Complaint at ¶¶ 36-41.
32 Id. at ¶¶ 42-44.
33 Id. at ¶¶ 45-52. See Part III(A)(1)(a), infra.
34 Complaint at ¶¶ 27-30; Brief of General Communication,
Inc., File No. EB-00-MD-016 (October 27, 2000) (``GCI Br.'') at
3-6.
35 Answer at ¶ 76; ATU Reply Br. at 9-11.
36 MTS and WATS Market Structure, Memorandum Opinion and
Order, 97 FCC 2d 682, 715 at ¶ 83 (1983), aff'd, NARUC v. FCC,
737 F.2d 1095, 1137 (D.C. Cir. 1984). The Commission has
affirmed this ``ESP exemption'' several times. See, e.g.,
Implementation of the Local Competition Provisions in the
Telecommunications Act of 1996; Inter-Carrier Compensation for
ISP-Bound Traffic, Declaratory Ruling and Notice of Proposed
Rulemaking, 14 FCC Rcd 3689, 3702 at ¶ 20 (1999) (``Reciprocal
Compensation Order''); In the Matter of Access Charge Reform,
First Report and Order, 12 FCC Rcd 15982, 16133 at ¶ 344 (1997)
(``First Access Charge Reform Order''); Amendments of Part 69 of
the Commission's Rules Relating to the Creation of Access Charge
Subelements for Open Network Architecture, Report and Order and
Order on Further Reconsideration and Supplemental Notice of
Proposed Rulemaking, 6 FCC Rcd 4524, 4535 at ¶ 60 (1991) (``ONA
Order''); 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, 3987 at ¶¶ 33-34 (1989) (``ONA NPRM''); In the Matter of
Filing and Review of Open Network Architecture Plans, Memorandum
Opinion and Order, 4 FCC Rcd 1, 167-68 at ¶¶ 318-20 (1988);
Amendments of Part 69 of the Commission's Rules Relating to
Enhanced Service Providers, Order, 3 FCC Rcd 2631, 2635, nn. 8,
53 (1988).
37 See First Access Charge Reform Order, 12 FCC Rcd at 16133,
¶¶ 343-45; Southwestern Bell Tel. Co. v. FCC, 153 F.3d 523, 541-
42 (8th Cir. 1998) (``SBC''), petition for rehearing denied,
2000 U.S. App. LEXIS 16086 (June 7, 2000).
38 ONA NPRM, 4 FCC Rcd at 3987-88, ¶ 34. The Commission cited
section 36.125 of the separations rules as support for this
separations treatment. Id. at 3987, n.82 (citing 47 C.F.R. §
36.125). Section 36.125 governs the separations treatment of
local switching equipment.
39 Id. at 3988, ¶¶ 35-37.
40 ONA Order, 6 FCC Rcd at 4535, ¶ 60.
41 Id.
42 First Access Charge Reform Order, 12 FCC Rcd at 16133, ¶
344 (emphasis added).
43 Reciprocal Compensation Order, 14 FCC Rcd at 3710, ¶ 36.
We acknowledge that the D.C. Circuit Court of Appeals
subsequently vacated and remanded the Reciprocal Compensation
Order. Bell Atlantic Tel. Cos. v. FCC, 206 F.3d 1 (D.C. Cir.
2000). However, as both parties agree, the vacatur did not
affect the ESP exemption or the corresponding separations
treatment of ISP traffic costs addressed in the Reciprocal
Compensation Order. GCI Br. at 9-10; Brief of Defendants Alaska
Communications Systems Holdings, Inc. and ACS of Anchorage,
Inc., File No. EB-00-MD-016 (October 27, 2000) (``ATU Br.'') at
3, 7-9.
44 Common Carrier Bureau Issues Letter to SBC Regarding its
Jurisdictional Separations Treatment of Internet Traffic, Public
Notice, 14 FCC Rcd 8178 (Com. Car. Bur. 1999) (``SBC Letter''),
application for review pending; Common Carrier Bureau Issues
Letter to Bell Atlantic Regarding Jurisdictional Separations
Treatment of Reciprocal Compensation for Internet Traffic,
Public Notice, 14 FCC Rcd 13148 (Com. Car. Bur. 1999) (``Bell
Atlantic Letter'').
45 SBC Letter, 14 FCC Rcd at 8180-81; Bell Atlantic Letter, 14
FCC Rcd at 13149-150.
46 See generally In the Matter of Jurisdictional Separations
Reform and Referral to the Federal-State Joint Board,
Recommended Decision, CC Docket No. 80-286, FCC 00J-2 (July 21,
2000) (``Recommended Decision on Separations'') at n.66
(pointing out that the Reciprocal Compensation Order
acknowledged a Commission requirement that carriers assign the
traffic-sensitive costs of ISP traffic to the intrastate
jurisdiction for separations purposes).
47 We note that the Commission is currently considering a
recommendation from the Federal-State Joint Board on
Jurisdictional Separations that may address how ISP traffic
costs should be allocated for separations in the future. See In
the Matter of Jurisdictional Separations Reform and Referral to
the Federal-State Joint Board, Recommended Decision, CC Docket
No. 80-286, FCC 00J-2 (July 21, 2000). However, this does not
affect our enforcement of the existing separations rules.
48 ATU does not argue that it was unaware of the Commission
and Common Carrier Bureau pronouncements concerning how to treat
ISP traffic costs for separations purposes. Further, ATU
acknowledges that it complied with the Commission's requirements
at least until the time it filed its July 1998 Tariff. ATU
Reply Br. at 12, n.11. These facts strongly suggest that ATU
understood the Commission's requirements for the treatment of
ISP traffic costs for separations purposes. Nevertheless, ATU
now contends that the numerous Commission pronouncements
discussed herein have no merit or binding effect. Answer at ¶
76; ATU Reply Br. at 9-11.
49 Answer at ¶¶ 78-80 (citing 47 U.S.C. §§ 152(a), (b)); ATU
Reply Br. at 7-9.
50 Answer at ¶¶ 78-80; ATU Reply Br. at 7-9.
51 See, e.g., Louisiana Pub. Serv. Comm'n. v. FCC, 476 U.S.
355, 376 n.4 (1986) (stating that federal regulation of traffic
is appropriate where it is not possible to separate the
interstate and intrastate components of the asserted
regulation); SBC, 153 F.3d at 541-42 (holding that federal
regulation of ``jurisdictionally mixed'' traffic is
appropriate).
52 See, e.g., 47 U.S.C. § 221(c) (allowing the Commission to
classify the property used by wireline communications providers
for interstate communications services). The Commission's
separations rules were adopted pursuant to and in accordance
with section 221(c). See Crockett Tel Co. v. FCC, 963 F.2d
1564, 1566-67 (D.C. Cir. 1992) (describing that the Part 36
separations rules were adopted pursuant to section 221(c) and
pointing out that the separations rules necessarily have some
affect on state ratemaking authority to the extent that they
apply to companies operating within state jurisdictions).
53 153 F.3d at 541-42.
54 Id. at 542.
55 Id. at 543.
56 Id. at 543-44.
57 Id. at 543.
58 Id. See also Reciprocal Compensation Order, 14 FCC Rcd at
3700-01, ¶ 16 (citing with approval the jurisdictional analysis
employed in SBC and stating, ``[w]e emphasize that the
Commission's decision to treat ISPs as end users for access
charge purposes and, hence, to treat ISP-bound traffic as local,
does not affect the Commission's ability to exercise
jurisdiction over such traffic.'').
59 Louisiana Pub. Serv. Comm'n, relied upon by ATU (ATU Reply
Br. at 7-8), does not dictate a contrary result. Louisiana Pub.
Serv. Comm'n held that the Commission could not pre-empt state
regulation concerning depreciation of dual-jurisdiction property
for rate-making purposes. No such pre-emption is occurring
here, because the Commission is not directing states to set
rates to recover for interstate costs. As in SBC, ``states are
free to assess intrastate tariffs as they see fit.'' SBC, 153
F.3d at 543. ATU's other cited authority on the jurisdiction
issue is equally unavailing, as it merely supports the
uncontroverted proposition that the federal government regulates
interstate communications, while state governments regulate
intrastate communications. See, e.g., Crockett, 963 F.2d at
1569 (``[A]ny attempt to impose intrastate rates is beyond
federal authority; conversely, states may not trench upon
interstate matters.''); Competitive Telecommunications Ass'n v.
FCC, 117 F.3d 1068, 1075, n.5 (8th Cir. 1997) (same).
60 Answer at ¶¶ 77, 83-84; ATU Br. at 3-8; ATU Reply Br. at 9-
11.
61 Answer at ¶¶ 77, 83-84; ATU Br. at 7-9; ATU Reply Br. at 9-
11.
62 Answer at ¶ 78; ATU Reply Br. at 9-11 (citing Smith v.
Illinois Bell, 282 U.S. 133 (1930)).
63 Id.
64 Smith, 282 U.S. at 149-50.
65 Id. See also Recommended Decision on Separations at ¶ 12
(``Smith v. Illinois Bell does not require absolute precision
for cost allocation between the federal and state
jurisdictions''); In the Matter of Applications for Review of
the Common Carrier Bureau's Letter of Interpretation Regarding
the Clarification of the Role of Direct Assignment in the
Jurisdictional Separations Process, Memorandum Opinion and
Order, 8 FCC Rcd 1558, 1560-61 at ¶ 10 (1993) (``Direct
Assignment Order'') (concluding that Smith does not require an
exact apportionment of interstate and intrastate usages of
property, but only a reasonable apportionment; further,
separations procedures ``provide a balance between the need to
reasonably reflect cost causation principles and the goal of
simplification'').
66 MCI Telecom. Corp. v. FCC, 750 F.2d 135, 141 (D.C. Cir.
1984). The Commission's separations rules repeatedly reflect
such policy considerations. See, e.g., 47 C.F.R. § 36.125(f)
(DEM weighting for small carriers); 47 C.F.R. § 36.154(a) (the
ten percent ``contamination'' rule); 47 C.F.R. § 36.154(c)
(allocating 25 percent of local loop costs to interstate
jurisdiction).
67 First Access Charge Reform Order, 12 FCC Rcd at 16133, ¶¶
344-45.
68 SBC, 153 F.3d at 543-44.
69 47 C.F.R. Part 36, Glossary (emphasis added).
70 Id.
71 47 C.F.R. § 36.1(c); 47 C.F.R. Part 36, Glossary (emphasis
added).
72 Matching the costs with the revenues is not a perfect
process, and the separations rules do not require it to be. As
explained, supra, at n. 76, there may be a small amount of
costs, non-traffic-sensitive costs, associated with ISP traffic
that are assigned to the interstate jurisdiction pursuant to the
flat rate allocator rule embodied in rule 36.154(c) of our
rules.
73 Further, if costs are assigned to a particular
jurisdiction, but revenues cannot be recovered in that
jurisdiction to recover those costs, then a carrier may rely on
that cost-revenue mismatch to assert a ``takings'' claim (i.e.,
a claim that the Commission has, by regulation, prevented a
carrier from recovering the costs of providing its services).
74 ONA NPRM, 4 FCC Rcd at 3989, ¶ 44.
75 Id.
76 ONA NPRM, 4 FCC Rcd at 3987-88, ¶ 34. We note that this
separations treatment of ISP traffic costs applies to traffic-
sensitive costs of ISP traffic, which represent the bulk of
costs that local exchange carriers incur to process ISP traffic.
Any non-traffic-sensitive costs associated with ISP service,
such as local loop costs, are subject to a flat rate allocation
of 75% to the intrastate jurisdiction and 25% to the interstate
jurisdiction. 47 C.F.R. § 36.154(c). However, ATU's assignment
of non-traffic-sensitive costs is not at issue in this case.
Moreover, the Commission's separations treatment of ISP costs,
and the desire to avoid a cost-revenue mismatch, focuses on the
traffic-sensitive costs of ISP traffic, not the application of
the flat rate allocator to non-traffic-sensitive costs. ONA
NPRM, 4 FCC Rcd at 3987-88, ¶ 34.
77 ONA Order, 6 FCC Rcd at 4535, ¶ 65.
78 Reciprocal Compensation Order, 14 FCC Rcd at 3702, ¶¶ 18-
20.
79 Id. at 3710, ¶ 36.
80 Id.
81 ATU Br. at 9-10. Of course, in so arguing, ATU essentially
concedes, as it must, that the Commission has jurisdiction to
regulate ISP traffic, contrary to its assertions addressed above
based on section 2(b) of the Act.
82 See, e.g., Motion Picture Assn. of America, Inc. v. Oman,
969 F.2d 1154, 1156 (D.C. Cir. 1992) (holding that agencies are
not permitted to engage in retroactive rulemaking unless
expressly authorized by Congress); McElroy Electronics
Corporation For Authorization to Service Unserved Areas in
Metropolitan Statistical Area Market No. 2B, Memorandum Opinion
and Order, 10 FCC Rcd 6762, 6768 (1995) (``the Supreme Court
made clear . . . retroactive rulemaking is unlawful unless
permitted by statute'').
83 Answer at ¶ 77 (citing 47 C.F.R. § 36.125(b)); ATU Br. at
8-9; ATU Reply Br. at 3-4.
84 See, e.g., ONA NPRM, 4 FCC Rcd at 3988, ¶ 39.
85 Id. at 3988, n. 71.
86 Answer at ¶¶ 81-82; ATU Reply Br. at 7-8. ATU initially
appeared to argue that not allowing it to recover costs for ISP
traffic in the interstate jurisdiction would constitute
confiscatory rate-making. Id. Subsequently, ATU clarified that
it was not making such a ``takings'' claim here. ATU Reply Br.
at 8, n.7.
87 12 FCC Rcd at 16133-34, ¶ 346. ATU has not suggested that
it fails to earn such ancillary revenues from ISP traffic.
88 Id. at 16133, ¶ 345.
89 153 F.3d at 542.
90 ATU has not cited any evidence of such a request for relief
from state regulatory authorities. Similarly, ATU has not cited
any evidence that it has requested a waiver from the Commission
for the separations treatment of ISP traffic costs at issue here
or for a declaratory ruling that its proposed separations
treatment is permissible.
91 The parties do not dispute that, if ATU had assigned ISP
traffic costs to the intrastate jurisdiction for the 1997-1998
Monitoring Period, ATU would have exceeded its prescribed rate
of return. Joint Statement at ¶ 14.
92 47 C.F.R. § 36.125(a)(3).
93 47 C.F.R. § 36 at Appendix-Glossary.
94 Answer at ¶ 92; ATU Br. at 10-11.
95 ATU Br. at 10-11.
96 The Joint Board was convened in 1980, pursuant to section
410(c) of the Act, to consider various separations procedures
and issues and to make recommendations concerning the same to
the Commission. 47 U.S.C. § 410(c). It is comprised of three
members of the Commission and four state commissioners.
97 In the Matter of Amendment of Part 67 of the Commission's
Rules and Establishment of a Joint Board, Order Inviting
Comments, 2 FCC Rcd 3787, 3800, n.17 (1987) (``Order Inviting
Comments''). The Order Inviting Comments cited to former
section 67.138(c) of our rules for the definition of DEM. 47
C.F.R. § 67.138(c) (1987). Section 67.138 was later replaced by
section 36.125, with no substantive change to the definition of
DEM.
98 Id. at 3788, ¶ 7.
99 Id.
100 Id. at 3788, ¶¶ 6-12. SMOU was defined as follows: ``SMOU
is defined as a measurement of local dial central office
switching equipment for jurisdictional separations purposes
where one minute of use is recorded per minute of an originating
interoffice call, one minute of use recorded per minute of a
terminating interoffice call, and one minute of use is recorded
per minute of an originating intraoffice call.'' Id. at 3800,
n.20. See also, In the Matter of Amendment of Part 67 of the
Commission's Rules and Establishment of a Joint Board,
Recommended Decision and Order, 2 FCC Rcd 2551, 2560 at ¶¶ 53-54
(1987) (recognizing that various parties were arguing that SMOU,
rather than DEM, should be utilized as the allocation factor for
central offices employing digital switches).
101 Id. The Order Inviting Comments reveals that the
application of DEM to intraoffice calls over digital switches
that we affirm here was clear not only to the Joint Board, but
to those who disagreed with that application, as well. Had DEM
been interpreted as ATU suggests now (i.e., that intraoffice
calls using a digital switch would generate only a single DEM
for each minute of use), then it would have been unnecessary for
parties to argue that SMOU should be used instead of DEM as the
allocation factor for digital switches. The DEM factor, had it
been defined as ATU proposes, would have already provided for
the result the parties hoped to attain by employing SMOU as the
allocation factor. Thus, the fact that parties urged the
adoption of SMOU as an allocation factor for intraoffice calls
using digital switches, rather than relying on an expansive
construction of DEM, supports our conclusion that DEM has never
been defined or applied, and should not be defined or applied,
as ATU suggests it should be here.
102 ATU Br. at 11. ATU cites no rule, regulation, or order
suggesting that the interpretation of DEM discussed by the
Commission in 1987 has been altered or amended. Further, ATU
apparently understood, at least until recently, that section
36.125(a)(3) requires it to count each minute of intraoffice
calls as two DEMs. ATU concedes that even as late as its
January 1998 Tariff filing, it counted intraoffice calls as two
DEMs. Responses of Alaska Communications Systems Holdings, Inc.
and ACS of Anchorage, Inc. to Interrogatories, File No. EB-00-
MD-16 (filed October 20, 2000), at Response to Interrogatory No.
6. If ATU now believes that 36.125(a)(3) should be interpreted
differently than it has been in the past, ATU should seek such
relief through appropriate means, such as a petition for
declaratory ruling, rather than unilaterally adopting a new
interpretation of the rule.
103 Answer at ¶ 90; ATU Reply Br. at 11-12.
104 47 C.F.R. § 36.1(c). See 47 C.F.R. § 36.2(a).
105 Direct Assignment Order, 8 FCC Rcd at 1560, ¶ 8.
106 Id. at 1559, ¶ 4.
107 MCI, 59 F.3d at 1414 (citing and quoting 47 U.S.C. §
201(b)). See American Tel. & Tel. Co. v. FCC, 836 F.2d 1386,
1392 (D.C. Cir. 1988); New England Tel. & Tel. Co. v. FCC, 826
F.2d 1101, 1106-07 (D.C. Cir. 1987); Nader v. FCC, 520 F.2d 182
(D.C. Cir. 1975).
108 See New England Tel., 826 F.2d at 1107-08 (stating that
section 4(i) of the Act provides the Commission with the
authority to enforce the rate-of-return prescription by ordering
refunds); see also In the Matter of Amendment of Parts 65 and 69
of the Commission's Rules to Reform the Interstate Rate of
Return Represcription and Enforcement Processes, Report and
Order, 10 FCC Rcd 6788, 6848-49 at ¶ 137 (1995) (noting that the
complaint process embodied in section 208 of the Act provides a
useful tool in enforcing the rate-of-return prescription, and
that the Commission is authorized to award damages for
violations of the rate-of-return prescription).
109 MCI, 59 F.3d at 1415.
110 Joint Statement at ¶ 14. See Rate-of-Return Prescription
Order, 5 FCC Rcd at 7532, ¶ 216; 47 C.F.R. § 65.700(a).
111 Answer at ¶¶ 94-96; ATU Br. at 11-20; ATU Reply Br. at 14-
18.
112 ATU Br. at 11-20; ATU Reply Br. at 14-18. ATU concedes
that its arguments based on section 204(a)(3) afford no
protection against calendar year 1997 damages, because ATU filed
its 1997 Tariff prior to the effective date of section
204(a)(3). Answer at ¶ 96. The parties agree that the damages
amount for 1997, excluding interest, is $1,329,442. Joint
Statement at ¶ 15.
113 Telecommunications Act of 1996, Pub. L. No. 104-104, 110
Stat. 56, § 402(b)(1)(A)(iii); 47 U.S.C. § 204(a)(3).
114 Id. (emphasis added).
115 In the Matter of Implementation of Section 402(b)(1)(A) of
the Telecommunications Act of 1996, Report and Order, 12 FCC Rcd
2170 (1997) (``Streamlined Tariff Order'').
116 Id. at 2183, ¶ 21.
117 Id. at 2182-83, ¶¶ 20-21.
118 Id. at 2182, ¶ 19.
119 Id. at 2183, ¶ 24.
120 47 U.S.C. § 204(a)(3) (emphases added).
121 ATU acknowledges that its January 1998 Tariff did not
contain information that provided notice that it would assign to
the interstate jurisdiction for separations purposes the costs
of ISP traffic or would count each minute of intraoffice calls
as one DEM. See, Letter from Christopher N. Olsen, Attorney,
Market Disputes Resolution Division, Enforcement Bureau, to Joe
D. Edge, et al., Drinker Biddle & Reath LLP and Karen Brinkmann,
et al., Latham & Watkins, File No. EB-00-MD-016 (October 6,
2000), at 1-2; Stipulation of Defendants Alaska Communications
Systems Holdings, Inc. and ACS of Anchorage, Inc., File No. EB-
00-MD-016 (October 20, 2000), at 1.
122 See, e.g., MCI, 59 F.3d at 1415; AT&T Corp. v. Telephone
Util. Exch. Carrier Assoc., Memorandum Opinion and Order, 10 FCC
Rcd 8405, 8409, n.20 (1995) (stating that an overearnings
complaint does not allege that any individual rates are
unlawful, but rather alleges that the cumulative application of
those rates produced an excessive rate of return). See also New
England Tel., 826 F.2d at 1107 (explaining the difference
between an order prescribing a maximum rate of return and an
order requiring a carrier to set individual rates at specific
levels).
123 MCI, 59 F.3d at 1415 (``[A]ny calculation of the rate that
will produce a targeted rate of return, whether it is done by
the Commission, [a customer], or for that matter a LEC, is
necessarily but an estimate. It is not possible to know
precisely the effect that any given rate, or change from a
prevailing rate, will have upon revenues (and therefore upon the
LEC's rate of return); that depends upon the elasticity of the
demand for the service, which cannot be known for certain. .
.'').
124 ATU Br. at 12-13; ATU Reply Br. at 15-17.
125 The D.C. Circuit has pointed out the difficulties inherent
in predicting rate-of-return violations from information
typically contained in tariffs: ``If the LEC, with its superior
information, could not (or did not) accurately establish such a
rate [that would lead to a lawful rate of return], then it seems
obvious that the [customer] could not (or should not be expected
to) establish such a rate from the outside looking in.'' MCI,
59 F.3d at 1415.
126 12 FCC Rcd at 2184, ¶ 24.
127 GCI asserts that the ``deemed lawful'' language of section
204(a)(3) has no application at all to a rate-of-return
violation, even where the tariff at issue describes the
practices that cause the violation. GCI Br. at 22-25; Reply of
General Communication, Inc., File No. EB-00-MD-016 (September
18, 2000) (``GCI Reply'') at 5-10. We need not and do not reach
this issue here. We conclude only that where, as here, the
tariff at issue failed to specify the practices that caused the
rate-of-return violation, the carrier who exceeded its
prescribed rate of return is not immunized by section 204(a)(3)
from a damages award in a complaint proceeding under section
208.
128 Joint Statement of Managers, S. Conf. Rep. No. 104-230,
104th Cong., 2d Sess. at Section 402 (1996); 141 Cong. Rec.
S7881-7902 at 7898 (1995); 141 Cong. Rec. S7926-27 (1995). ATU
does not dispute that, prior to the 1996 Act, the Commission had
long required a carrier who exceeds its allowable rate of return
to refund the excess to the affected customers.
129 12 FCC Rcd at 2202-03, ¶¶ 67-68.
130 Id. at 2203, ¶ 68 (emphasis added).
131 Complaint, Ex. 4 at 14.
132 ATU Reply Br. at 12, n.11. ATU's discovery responses state
that, for the January 1998 Tariff, ATU ``did not include ISP
traffic in its demand projections or the projected traffic
sensitive costs associated with such traffic in its revenue
requirement.'' ATU Response to Interrogatory No. 5. It is not
clear whether these two assertions by ATU are consistent (i.e.,
whether ATU treated ISP traffic as intrastate for purposes of
its January 1998 Tariff, or whether it simply failed to account
for ISP traffic at all in its January 1998 Tariff). Under
either scenario, however, ATU's treatment of ISP traffic as
interstate in its July 1998 Tariff represents a new or revised
treatment of such traffic by ATU, as compared to the January
1998 Tariff.
133 We need not determine whether the language ATU included in
the ``Description and Justification'' section of its July 1998
Tariff filing concerning ISP traffic and DEM counting for
intraoffice calls necessarily constitutes a ``charge,
classification, regulation, or practice'' within the meaning of
section 204(a)(3). We need only conclude that, if ATU's
statement is considered to be a ``charge, classification,
regulation, or practice'' within the meaning of section
204(a)(3), then ATU failed to comply with applicable notice
requirements and cannot, therefore, benefit from section
204(a)(3). Alternatively, if ATU's statement as to ISP traffic
costs and DEM counting for intraoffice calls is not considered
to be a ``charge, classification, regulation, or practice''
within the meaning of section 204(a)(3), then section 204(a)(3)
simply does not apply at all.
134 See 1997 Annual Access Tariff Filings, Memorandum Opinion
and Order, 13 FCC Rcd 5677, 5705-06 at ¶¶ 78-79 (Com. Car. Bur.
1997) (concluding that tariffs filed on eight and sixteen day's
notice not ``deemed lawful'' under section 204(a)(3));
Streamlined Tariff Order, 12 FCC Rcd at 2181-84, 2189 at ¶¶ 25-
34 and 62-71.
135 GCI also contends that the July 1998 Tariff is not deemed
lawful, because it allegedly reflected an increase in one of the
rates from that set forth in the January 1998 Tariff, and ATU
failed to file it on 15-days' notice, as is required for rate
increases. GCI Reply at ¶ 11; GCI Reply Br. at 14-16. ATU
disputes whether the July 1998 Tariff reflects a rate increase.
ATU Br. at 19-20. However, we need not and do not resolve this
dispute, because we have concluded that the July 1998 Tariff is
not ``deemed lawful'' for a separate reason.
136 47 U.S.C. § 415(c).
137 ATU Br. at 20-21. Although ATU failed to allege the
statute of limitations as an affirmative defense in its Answer
and may, therefore, have waived it, we address the argument, in
any event, because the statute of limitations might have
affected our jurisdiction to decide GCI's claims for 1997
damages.
138 Answer at Exhibit 2.
139 Id.
140 ATU Br. at 20-21.
141 Id.
142 59 F.3d at 1416-17.
143 Id.
144 Id.
145 Id. (emphasis added).
146 See also AT&T v. TUECA, 10 FCC Rcd at 8415 (``[T]he date of
the filing of the final monitoring report is dispositive with
regard to the date a complainant discovers the right or wrong or
the facts on which such knowledge is chargeable as a matter of
law''); Allnet Communications Serv., Inc. v. US West, Inc.,
Memorandum Opinion and Order, 8 FCC Rcd 3017, 3019 at ¶ 13
(1993); US Sprint Communications Ltd. Partnership v. Pacific
Northwest Bell Tel. Co., Memorandum Opinion and Order, 8 FCC Rcd
1288, 1291-92 at ¶ 16 (1993). The D.C. Circuit has also
previously rejected the notion that a rate-of-return violation
claim can be analyzed for a period less than the full monitoring
period. Virgin Islands Tel. Corp. v. FCC, 989 F.2d 1231, 1238-
39 (D.C. Cir. 1993) (``the target `authorized return' is a
number that has meaning only in relation to the full two-year
monitoring period. Thus, it makes no sense to speak of the
`authorized return' for [a six month period]. . . . In order to
assess the reasonableness of [the carrier's] earnings as against
the authorized rate of return, the Commission was required to
consider earnings for the entire period during which the
authorized rate was in effect.'')
147 See 47 C.F.R. § 65.600(b) (allowing final adjustments to be
made to the enforcement period monitoring report until September
30 of the year following the monitoring period in question).
148 ATU makes a half-hearted attempt to distinguish MCI v. FCC,
but ultimately ATU ``generally agrees that a cause of action in
an overearnings case accrues on the date the final monitoring
report was filed.'' ATU Reply Br. at 18. ATU argues that the
statute of limitations may bar GCI's claims that do not
constitute a claim for overearnings. Id. Because we dismiss
these other claims (i.e., Counts 4-6 of the Complaint) as moot,
see Part III(B), infra, we need not decide whether the statute
of limitations defense would have barred any portion of damages
to which GCI would otherwise have been entitled for such claims.
149 We do not find in GCI's favor, however, on its claims
against ACS Holdings, and we dismiss ACS Holdings from the case.
See Part III(C), infra.
150 Complaint at ¶ 4; GCI Br. at 29; GCI Reply at 11.
151 47 U.S.C. § 411(a) (providing that it is lawful to include
in any proceeding to enforce the provisions of the Act, ``all
persons interested in or affected by the charge, regulation, or
practice under consideration, and inquiries, investigations,
orders, and decrees may be with reference to and against such
additional parties in the same manner, to the same extent, and
subject to the same provisions as are or shall be authorized by
law with respect to carriers''). The parties apparently agree
that ACS Holdings is not itself a carrier within the meaning of
the Act.
152 Complaint at ¶ 61; Answer at ¶¶ 97-98. See, e.g., MCI
Telecom. Corp. v. Pacific Northwest Tel. Co., Memorandum Opinion
and Order, 8 FCC Rcd 1517, 1529-30 at ¶¶ 46-48 (1993).
153 See 2000-25 I.R.B. 1262 (GCI Reply at Exhibit 21).
154 GCI Reply Br. at 17-18.
155 ATU Br. at 22-23.
156 Id.
157 MCI, 8 FCC Rcd at 1529, ¶ 46.
158 See, Mile Hi Cable Partners, L.P. v. Public Serv. Co. of
Colorado, Order, 15 FCC Rcd 11450, 11458 at ¶ 14 (Cab. Serv.
Bur. 2000); Long Term Telephone Number Portability Tariff
Filings, 14 FCC Rcd at 17341, n.15 (suggesting that there may be
instances where the IRS tax underpayment rate is appropriately
applied as a penalty).
159 See 2000-25 I.R.B. 1262 (GCI Reply at Exhibit 21).
160 See Long Term Telephone Number Portability Tariff Filings
of Ameritech Operating Cos., Pacific Bell, Southwestern Bell
Tel. Co. and U.S. West Comm., Inc., Memorandum Opinion and
Order, 14 FCC Rcd 17339, 17341 at ¶ 5 (1999); Time Warner
Entertainment/Advance-Newhouse Partnership v. Florida Power &
Light Co., Order, 14 FCC Rcd 9149, 9154, n.36 (1999); In the
Matter of Section 208 Complaint Alleging Violations of the
Commission's Rate of Return Prescription, Memorandum Opinion and
Order, 12 FCC Rcd 4007, Attachment A (1997). ATU concedes that
it is not aware of any situation in which the Commission has
awarded interest at the rate for large corporate overpayments
(those exceeding $10,000) and suggests that this dearth of
precedent exists because the large corporate overpayment rate
was not established until 1995. ATU Br. at 23-24. However, the
decisions cited herein were rendered after the adoption of the
large corporate overpayment rate in 1995, and we assume that the
amount involved in the orders described herein, given the
significant rate actions described, exceeded $10,000.
161 See supra at ¶ 21.
162 The parties agree on the amount of damages at issue here,
excluding interest. The parties concluded that ATU's assignment
of ISP traffic costs to the interstate jurisdiction and
calculation of one DEM for each minute of interoffice calls
resulted in disputed charges of $2,765,371 to GCI for the 1997-
1998 Monitoring Period. Joint Statement at ¶ 15.
163 ATU initially challenged the Commission's authority to
order any relief other than damages in this case. Answer at ¶
102. ATU subsequently retreated from that position and agreed
to comply with any Commission order requiring it to submit a
revised monitoring report and to treat ISP traffic costs and
count intraoffice calls as dictated by the Commission. ATU Br.
at 24-25. In any event, we note that we do have broad
authority, under section 4(i) of the Act, to order relief other
than damages. See, e.g., Amendment of Rules Governing
Procedures to be Followed When Formal Complaints Are Filed
Against Common Carriers, Report and Order, 12 FCC Rcd 22497,
22566 at ¶ 159 and n. 464 (stating that the Commission has
authority under section 4(i) of the Act to award injunctive
relief); Streamlined Tariff Order, 12 FCC Rcd at 2182-83
(recognizing the Commission's ability to direct that a carrier
cease charging a particular rate for future periods); Ashtabula
Cable TV, Inc. v. Ashtabula Tel. Co., Decision, 17 FCC 2d 113,
119 at ¶ 16, recon. denied, 18 FCC 2d 193, Memorandum Opinion
and Order, (1969) (section 4(i) permits the Commission to tailor
remedies to ``best meet the particular factual situation before
[it]'').