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MCI TELECOMMUNICATIONS CORPORATION v. FEDERAL COMMUNICATIONS COMMISSION AND UNITED STATES AMERICA </h1> <p class="docCourt"> </p> <p> August 1, 1995 </p> <p class="case-parties"> <b>MCI TELECOMMUNICATIONS CORPORATION, ET AL., PETITIONERS<br><br>v.<br><br>FEDERAL COMMUNICATIONS COMMISSION AND UNITED STATES OF AMERICA, RESPONDENTS</b><br><br> </p> <div class="caseCopy"> <div class="facLeaderBoard"> <script type="text/javascript"><!-- google_ad_client = "ca-pub-1233285632737842"; /* FACLeaderBoard */ google_ad_slot = "8524463142"; google_ad_width = 728; google_ad_height = 90; //--> </script> <script type="text/javascript" src=""> </script> </div class="facLeaderBoard"> <div class="numbered-paragraph"><p><br> Before: Edwards, Chief Judge; Wald and Ginsburg, Circuit Judges.</p></div> <div class="numbered-paragraph"><p> Ginsburg, Circuit Judge</p></div> <div class="numbered-paragraph"><p> FOR PUBLICATION</p></div> <div class="numbered-paragraph"><p> FOR THE DISTRICT OF COLUMBIA CIRCUIT</p></div> <div class="numbered-paragraph"><p> Argued April 11, 1995</p></div> <div class="numbered-paragraph"><p> Pacific Bell, et al., Intervenors</p></div> <div class="numbered-paragraph"><p> Consolidated with 93-1191, 93-1223, 93-1224, 93-1234, 93-1235, 93-1236, 93-1237, 93-1238, 93-1239, 93-1280, 93-1281, 93-1282, 93-1287, 93-1288, 93-1353, 93-1418, 93-1427, 93-1446, 93-1462, 93-1527, 93-1528, 93-1529, 93-1530, 93-1531, 93-1532, 93-1535, 93-1536, 93-1537, 93-1538, 93-1539, 93-1540, 93-1541, 93-1542, 93-1543, 93-1544, 93-1545, 93-1546, 93-1559, 93-1598, 93-1606, 93-1607, 93-1608, 93-1609, 93-1613, 93-1644, 93-1677, 93-1685, 93-1825, 94-1123, 94-1124, 94-1332</p></div> <div class="numbered-paragraph"><p> On Petitions for Review of Orders of the Federal Communications Commission</p></div> <div class="numbered-paragraph"><p> Opinion for the Court filed by Circuit Judge Ginsburg.</p></div> <div class="facAdFloatLeft"> <script type="text/javascript"><!-- google_ad_client = "ca-pub-1233285632737842"; /* FACContentLeftSkyscraperWide */ google_ad_slot = "1266897617"; google_ad_width = 160; google_ad_height = 600; //--> </script> <script type="text/javascript" src=""></script> </div class="facLeaderBoard"> <div class="numbered-paragraph"><p> In these consolidated cases, we review 21 orders of the Federal Communications Commission adjudicating damage actions filed by several interexchange carriers (IXCs) alleging that various local exchange carriers (LECs) overcharged them for interstate access services. The LECs ask us to set aside the 21 orders on the ground that the Commission's approach to awarding damages is unlawful and most of the IXCs' damages claims are barred by the statute of limitations. The IXCs want us to modify the Commission's orders only insofar as they allow the LECs to take "limited offsets" against the damage awards to the IXCs. One IXC (Allnet Communication Services, Inc.) argues in the alternative that if limited offsets are to be allowed, then the Commission should increase the interest rate payable on its award of damages. Because we conclude that the Commission's general approach to damages is not unlawful and that the IXCs' claims are not barred by the applicable statute of limitations, we deny the petitions of the LECs in their entirety. Because we agree with the IXCs that the Commission's limited offset policy is unlawful, we grant the IXCs' petitions with regard to that issue, vacate the Commission orders in part, and remand these matters to the Commission to recalculate the IXCs' damages. Allnet's petition is dismissed as moot in view of our decision invalidating limited offsets.</p></div> <div class="numbered-paragraph"><p> I. Background</p></div> <div class="numbered-paragraph"><p> Interexchange carriers such as petitioner MCI pay LECs for access to local telephone users. From the mid-1970's until the early 1990's the Commission's primary method for regulating the price of interstate access was to prescribe a maximum rate of return on equity that a LEC could earn from the sale of interstate access over a given period of time. See National Rural Telecom Ass'n v. FCC, 988 F.2d 174 (D.C. Cir. 1993) (reviewing the Commission's later switch from rate-of-return to price-cap regulation). The claims at issue here are based upon certain LECs' having earned rates of return above the maxima prescribed by the Commission. In order properly to understand those claims, however, the reader may find an abbreviated regulatory history helpful.</p></div> <div class="numbered-paragraph"><p> A. Regulatory History</p></div> <div class="numbered-paragraph"><p> In 1972 the Commission decided that rather than prescribe the rates that AT&T could charge it would prescribe the maximum rate of return that AT&T could earn (8.5%) and leave it to the carrier to set its rates at a level designed to yield up to the prescribed rate of return. See American Tel. & Tel. Co. and the Assoc. Bell System Companies, Charges for Interstate Telephone Service, Decision and Order, Docket No. 19129, 38 F.C.C.2d 213 (1972). Upon review, we upheld this rate-of-return approach as an appropriate exercise of the Commission's general regulatory powers under Section(s) 4(i) of the Communications Act, 47 U.S.C. 154(i). See Nader v. FCC, 520 F.2d 182, 203-04 (1975).</p></div> <div class="numbered-paragraph"><p> In 1976 the Commission raised AT&T's allowable rate of return to 9.5%, American Tel. & Tel. Co., Charges for Interstate Telephone Service, Decision, Docket No. 20376, 57 F.C.C.2d 960, 972-73 (1976), plus a buffer of .5% inasmuch as it announced that it would not take enforcement action unless the Company's return actually exceeded 10%. Id. at 973. AT&T thereupon filed a tariff structure that produced a return below 10% for 1976 and 1977, but in 1978 the same rates produced a return above the 10% ceiling. The Commission responded by requiring AT&T (and the post-divestiture Bell Operating Companies) to return their excess earnings to customers by reducing future rates. AT&T Earnings of Interstate and Foreign Services During 1978, Decision, CC Docket No. 79-187, 102 F.C.C.2d 52, 62-63 (1984). AT&T challenged the Commission's statutory authority to require such a refund, but the court upheld the FCC's authority to impose that remedy, again pursuant to Section(s) 4(i). New England Tel. & Tel. Co. v. FCC, 826 F.2d 1101, 1106-09 (1987) (NETCO ).</p></div> <div class="numbered-paragraph"><p> By the time the court published its decision in NETCO, however, the Commission had already changed course, establishing a more comprehensive approach to regulating the LECs' rate of return. See Authorized Rates of Return for the Interstate Services of AT&T Communications and Exchange Telephone Carriers, Phase I, Report & Order, CC Docket No. 84-800, 58 Rad. Reg. 2d 1647 (P&F) (1985) (Prescription Order), recon., Memorandum Opinion & Order, 59 Rad. Reg. 2d 1592 (P&F) (1986) (Prescription Reconsideration). The Commission still prescribed a maximum rate of return that a LEC could earn from the sale of interstate access overall, but now it also set a maximum rate of return for each of three specific types of interstate access service (viz., "special," "common line," and "switched traffic sensitive") and established a refund mechanism whereby a LEC would automatically be required at the end of a monitoring period to refund all revenues that it had collected above the amount corresponding to its allowed rate of return for each category. Prescription Reconsideration, 59 Rad. Reg. 2d at 1604. Thus, a LEC could be required automatically to refund its excess earnings for one type of access service even if its earnings from the provision of access services overall were below the maximum rate of return allowed.</p></div> <div class="numbered-paragraph"><p> The Commission recognized this possibility, but explained that categorical (i.e., type-specific) rate-of-return prescriptions were necessary in order to prevent rate discrimination: without them, the LECs could charge an excessive rate to purchasers of one type of access in order to subsidize the rate charged to purchasers of another type. Id. at 1603. Upon review this court held, following NETCO, that the Commission has the statutory authority both to prescribe a rate of return and to order a refund when that prescription is violated; at the same time we held that the Commission's decision to require automatic refunds for each category in which a LEC overearned was arbitrary and capricious and therefore unlawful because that mechanism was inconsistent with what the court perceived to be the Commission's general approach to rate-of-return regulation. American Tel. & Tel. Co. v. FCC, 836 F.2d 1386, 1390-92 (1988) (AT&T).</p></div> <div class="numbered-paragraph"><p> B. The Present Proceedings</p></div> <div class="numbered-paragraph"><p> Although the court overturned the automatic refund rule, it did not strike down the rates of return that the Commission had authorized, either for access service in general or for any specific type of access. The Commission therefore continued to set general and categorical rates of return that limited the amount that a LEC could earn over any given two-year monitoring period. For example, for the 1987-88 and 1989-90 monitoring periods, the Commission prescribed a maximum rate of return of 12% both for overall earnings and for each type of service, and added enforcement buffers of .25% for overall earnings and .4% for each category. See Authorized Rates of Return for the Interstate Services of AT&T Communications and Exchange Telephone Carriers, Phase III, Memorandum Opinion & Order, CC Docket No. 84-800, 60 Rad. Reg. 2d 1589, 1607 (P&F) (1986) (setting percentage rates of return for 1987-88); American Tel. & Tel. Co. v. Central Tel. Co., et al., Memorandum Opinion & Order, 8 F.C.C.R. 3546, 3547 (1993) (observing that rates of return for 1987-88 period were extended through 1989-90 period).</p></div> <div class="numbered-paragraph"><p> Shortly after the court's decision in AT&T, the IXCs began to file complaints with the Commission, pursuant to Section(s) 206-09 of the Communications Act, 47 U.S.C. Section(s) 206-09, seeking damages from each LEC that had allegedly overcharged the IXCs for access service because it had earned (either for a category of service or overall) more than the maximum allowable rate of return for the monitoring period. The IXCs based their allegations upon the reports that the LECs are required to file with the Commission after the end of each monitoring period; the IXCs alleged (and most LECs conceded) that they reported earnings in excess of the maximum prescribed levels. The complaints at issue here relate to the monitoring periods 1985-86, 1987-88, and 1989-90.</p></div> <div class="caseAdCopy"> <script type="text/javascript"><!-- google_ad_client = "ca-pub-1233285632737842"; /* Fac2Copy2 */ google_ad_slot = "0998899327"; google_ad_width = 300; google_ad_height = 250; //--> </script> <script type="text/javascript" src=""> </script> </div> <div class="numbered-paragraph"><p> Although the Commission adjudicated the complaints separately and the details of each differ somewhat, the agency set forth the general principles under review here in two orders, both of which pertain to the claims made by MCI. See MCI Telecommunications Corp. v. Pacific Northwest Bell Tel. Co., et al., Memorandum Opinion & Order, 5 F.C.C.R. 216 (1990) (MCI Liability Order); MCI Telecommunications Corp. v. Pacific Bell Tel. Co., et al., Memorandum Opinion & Order, 8 F.C.C.R. 1517 (1993) (MCI Damages Order). In those orders (as in the others under review) the Commission held that a LEC that earns in excess of the prescribed rate of return (either for a category or overall) for a monitoring period violates the Communications Act. MCI Liability Order, 5 F.C.C.R. at 223. The Commission further held that "the proper starting point for assessing damages based on violations of a rate of return prescription is to look at the difference between the amount [the IXC complainant] paid for [the defendant LEC's] interstate access services and the amount it would have paid if [the LEC] had charged rates that produced returns within the Commission's prescribed levels." MCI Damages Order, 8 F.C.C.R. at 1525. The Commission then allowed each defendant LEC to take "limited offsets," meaning that the defendant LEC could subtract from the amount that the IXC overpaid, as derived above, any amount that the same IXC customer had "underpaid" the LEC (i.e., insofar as it had paid a rate that yielded a return below the prescribed maximum) for any category of service during the same monitoring period. Id. at 1528.</p></div> <div class="numbered-paragraph"><p> II. Analysis</p></div> <div class="numbered-paragraph"> <p> The LECs and the IXCs both attack the Commission's rules, albeit from opposite directions. The LECs seek vacatur of some if not all of the damage decisions, while the IXCs ask us effectively to increase ...</p> </div> </div> </div> <div id="caseToolTip" class="caseToolTip" style="display: none;"> <div class="toolTipHead"> </div> <div class="toolTipContent"> <p> Our website includes the first part of the main text of the court's opinion. 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