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Verizon & AT&T, Inc. v. Federal Communications Commission

United States Court of Appeals, District of Columbia Circuit

October 31, 2014

VERIZON AND AT& T, INC., PETITIONERS
v.
FEDERAL COMMUNICATIONS COMMISSION AND UNITED STATES OF AMERICA, RESPONDENTS

Argued September 5, 2014

On Petition for Review of an Order of the Federal Communications Commission.

Helgi C. Walker argued the cause for petitioners. With her on the briefs were Gary L. Phillips, Bennett L. Ross, Brett A. Shumate, Michael E. Glover, and Christopher M. Miller. Christopher M. Heimann entered an appearance.

Richard K. Welch, Deputy Associate General Counsel, Federal Communications Commission, argued the cause for respondents. With him on the brief were William J. Baer, Assistant Attorney General, U.S. Department of Justice, Robert B. Nicholson and Nickolai G. Levin, Attorneys, Jonathan B. Sallet, General Counsel, Federal Communications Commission, Jacob M. Lewis, Associate General Counsel, and Laurel R. Bergold, Counsel.

Before: TATEL and BROWN, Circuit Judges, and SILBERMAN, Senior Circuit Judge. OPINION filed by Senior Circuit Judge SILBERMAN.

OPINION

Page 962

Silberman, Senior Circuit Judge

Petitioners Verizon and AT& T appeal the FCC's denial of their petition to forbear from applying the requirement that incumbent price cap carriers maintain a Uniform System of Accounts. The Commission insists that the statutory preconditions for section 10 forbearance are not met, nor was its refusal arbitrary and capricious. We agree that the FCC's interpretation and application of section 10 are permissible and deny the petition for review.

I.

Congress has required the FCC to establish rules prescribing a Uniform System of Accounts for use by telephone companies since 1935. Earlier rules were designed to facilitate rate determinations in the traditional monopoly model: expenses were aggregated and classified not by the particular activities or services, but rather according to the organization that incurred them. Peter W. Huber et al. , Federal Telecommunications Law § 2.2.2.9. (2d ed. 2014). The FCC collected company-wide financial and operating data in a world where a monopolized industry provided only two basic services -- local and long distance. The Commission adopted a new accounting system in 1986 -- Part 32 -- to respond to the introduction of competition and new services. The FCC made clear that Part 32 obligations were imposed only on incumbent local exchange carriers (those that operated exclusively within their local service area prior to the 1996 Act). Petitioners AT& T and Verizon are incumbent LECs subject to price cap regulation. (Price cap regulation governs a broader class of carriers than just incumbent LECs even though Part 32 applies only to incumbent LECs). The FCC classifies incumbent LECs as " dominant" on the basis of market power (encompassing market share and control of network facilities), which in most markets in the nineties, " amounted to a distinction between AT& T and everyone else." MCI Telecomms. Corp. v. Am. Tel. & Tel. Co., 512 U.S. 218, 221, 114 S.Ct. 2223, 129 L.Ed.2d 182 (1994).

This " new" Uniform System of Accounts was designed to complement the then-existing rate structure governing incumbent LECs, rate of return regulation. LECs reported their costs to establish a rate base and the Commission set prices that allowed LECs to earn a formulated rate of return. This way if a LEC spent money on, for example, a new operating plant, it had a right to charge enough to recover those expenditures. Part 32 was integral to this regime because it allowed the FCC

Page 963

to determine the costs of specific services; the accounting rules are specifically tailored to the telecommunications industry and require carriers to maintain 170 cost and revenue accounts setting forth disaggregate and geographically-specific data. The Commission relied upon the detailed cost data reflected in Part 32 accounts to set rates on the basis of cost estimates (derived from past costs).

Although Part 32 incorporated certain elements of GAAP, the two accounting systems are considerably different in terms of both content and purpose. Part 32 is tailored for disclosure to regulators, whereas GAAP is geared towards disclosure to investors. GAAP provides for much more flexibility than Part 32 because it is a set of accounting principles, concepts, and standards (as opposed to detailed cost accounting rules) pursuant to which a company can determine its own system of accounts, which will necessarily vary from carrier to carrier.

The data underlying Part 32 was also used by incumbent LECs to comply with rules requiring that they divide their costs and revenues in a specified manner. For example, Part 64's cost assignment rules require that carriers directly assign or allocate their investments, expenses, and revenues between regulated and non-regulated activities. Part 36 then requires carriers to separate regulated investment, expenses, and revenues between the interstate and intrastate jurisdictions. Incumbent LECs also submitted raw Part 32 data in the form of Automated Reporting Management Information System (MIS) Reports that they were required to file annually.[1]

In the early 1990s, the Commission abandoned rate of return regulation, recognizing that a too-high rate of return could prompt perverse incentives and induce inefficiencies. The Commission adopted price cap regulation in its place. Under the new regime, the Commission sets a maximum price and the firm selects rates at or below the cap. Nat'l Rural Telecom Ass'n v. F.C.C., 988 F.2d 174, 178, 300 U.S.App.D.C. 226 (D.C. Cir. 1993).

The rate-setting framework requires carriers to file tariffs that establish the rates, terms, and conditions of interstate services. Interstate access rates are the most commonly-filed tariff, and the FCC is charged with ensuring these rates are just and reasonable.[2] The tariff filing scheme is " the heart of the common-carrier section of the Communications Act" and is symbiotic with price cap regulation: in switching to price cap, the FCC modified the tariff review process to set a ceiling on the interstate access rates LECs can charge. MCI Telecomms. Corp., 512 U.S. at 229.

Interstate access rates are set for different groups of service categories known as baskets. When a LEC files interstate access rates that are at or below a basket's price cap and within specified pricing bands for service categories in that basket, the FCC presumes such rates are reasonable and reviews the tariff pursuant to " streamlined" procedures. LEC Price Cap Order, 5 FCC Rcd 6786, 6788 ΒΆ 11 (1990). Such rates ...


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