US Tele Assn v. FCC ( 1999 )

United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT
Argued January 20, 1999 Decided May 21, 1999
No. 97-1469
United States Telephone Association, et al.,
Petitioners
v.
Federal Communications Commission and
United States of America,
Respondents
AT&T Corporation, et al.,
Intervenors
Consolidated with
Nos. 97-1471, 97-1475, 97-1479, 97-1494, 97-1495,
97-1496, 97-1497, 97-1498, 97-1500, 97-1501, 97-1645
On Petitions for Review of an Order of the
Federal Communications Commission
Michael K. Kellogg argued the cause for Local Exchange
Carrier petitioners. With him on the briefs were Mark L.
Evans, William P. Barr, M. Edward Whelan, R. Michael
Senkowski, Robert J. Butler, Daniel E. Troy, James R.
Young, Michael E. Glover, Edward Shakin, James D. Ellis,
Robert M. Lynch, Liam S. Coonan, Durward D. Dupre,
Michael J. Zpevak, Thomas A. Pajda, Charles R. Morgan,
William B. Barfield, M. Robert Sutherland, Robert B.
McKenna, William T. Lake, John H. Harwood, II, Lawrence
Sarjeant and Linda Kent. Henk J. Brands, Betsy L.
Anderson and David W. Ogburn, Jr., entered appearances.
Carl S. Nadler argued the cause for petitioners MCI
Telecommunications Corporation and Ad Hoc Telecommuni-
cations Users Committee. With him on the briefs were
Donald B. Verrilli, Jr., Anthony C. Epstein, Maria L. Wood-
bridge, James S. Blaszak and Kevin S. DiLallo.
Laurence N. Bourne, Counsel, Federal Communications
Commission, argued the cause for respondents. On the brief
were Joel I. Klein, Assistant Attorney General, U.S. Depart-
ment of Justice, Catherine G. O'Sullivan and Robert J.
Wiggers, Attorneys, Christopher J. Wright, General Counsel,
Federal Communications Commission, John E. Ingle, Deputy
Associate General Counsel, and Brian M. Hoffstadt, Special
Counsel. Robert B. Nicholson, Attorney, U.S. Department of
Justice, entered an appearance.
Michael K. Kellogg argued the cause for Local Exchange
Carrier intervenors. With him on the brief were Mark L.
Evans, Michael S. Pabian, Donald M. Falk, James R.
Young, Michael E. Glover, Edward Shakin, Charles R. Mor-
gan, William B. Barfield, M. Robert Sutherland, James D.
Ellis, Robert M. Lynch, Liam S. Coonan, Durward D.
Dupre, Michael J. Zpevak, Thomas J. Pajda, Robert B.
McKenna, William T. Lake and John H. Harwood, II. Henk
J. Brands, Betsy L. Anderson and David W. Ogburn, Jr.,
entered appearances.
Gene C. Schaerr argued the cause for intervenor AT&T
Corporation. With him on the brief were Jules M. Perlberg,
Mark C. Rosenblum, and Peter H. Jacoby. Richard P. Bress
entered an appearance.
Douglas E. Hart was on the briefs for intervenor Indepen-
dent Telephone and Telecommunications Alliance on Behalf of
Small and Mid-Size Carriers.
Before: Edwards, Chief Judge, Williams and Randolph,
Circuit Judges.
Opinion for the Court filed by Circuit Judge Williams.
Williams, Circuit Judge: Long-distance telephone traffic is
ordinarily transmitted by a local exchange carrier ("LEC")
from its origin to a long-distance carrier (or interexchange
carrier or "IXC"). The IXC carries the traffic to its region of
destination and hands it off to the LEC there. The IXC
charges the customer for the call and pays "access charges"
to the LECs at either end. In a 1997 rulemaking the Federal
Communications Commission amended its methodology for
limiting these charges, as applied to the largest IXCs. The
rule is challenged on one side by a group of LECs, and on the
other by one IXC, namely MCI, and an Ad Hoc Telecommu-
nications Users Committee (collectively referred to here as
MCI).
In regulating access charges the FCC currently uses a
"price cap" method--mandatory for the largest LECs (the
regional Bell operating companies and GTE) and optional for
others. Under traditional rate-of-return regulation an agency
sets rates calculated to allow the utility to recover its costs,
including a reasonable rate of return on investment, with
adjustment as needed to reflect cost changes; here, however,
it sets rate ceilings and, with some qualifications, allows the
utilities to keep whatever profits they can make while charg-
ing rates at or under the cap. (A LEC may also file rates
above the caps, but for these the review process is cumber-
some and the substantive standards stringent.) The price
cap system is intended (among other things) to improve the
utility's incentives to cut costs and refrain from overinvest-
ment, incentives that are more blunted under the traditional
method. See generally National Rural Telecom Ass'n v.
FCC, 988 F.2d 174, 177-79 (D.C. Cir. 1993).
The price caps were initially set at the levels of each
carrier's rates on July 1, 1990. From the outset they have
been subject to various annual adjustments, including reduc-
tion by a "productivity offset," or "X-Factor." See 47 CFR
s 61.45. In the order under review, the agency revised the
method for determining the X-Factor, eliminated a "sharing"
mechanism that forced LECs to return some or all of the
profits above specified levels to ratepayers, and required
"reinitialization," i.e., a reduction in the price caps applicable
after July 1, 1997 so that they would be calculated as if the
new X-Factor had been in effect for the LECs' 1996 tariff
filings. In the Matter of Price Cap Performance Review for
Local Exchange Carriers, Fourth Report & Order, 12 FCC
Rcd 16,642 (1997) ("1997 Order"). Because the access
charges are in the aggregate so enormous, even small
changes in the X-Factor have a large monetary value; the
LECs claim (without dispute) that each 0.1% change in the
factor represents a $23 million change in the industry-wide
access charge.
I. The historic productivity component of the X-Factor
The X-Factor is aimed at capturing a portion of expected
increases in carrier productivity, so that these improvements,
as under competition, will result in lower prices for consum-
ers. In the Matter of Policy and Rules Concerning Rates for
Dominant Carriers, 3 FCC Rcd 3195, 3394 (1988). Apart
from a "consumer productivity dividend" ("CPD") described
below, it is based on an assumption that historic productivity
increases will be matched in the future. The agency resolved
in the 1997 Order that the X-Factor (apart from the CPD)
should be calculated as the sum of the difference in productiv-
ity growth and the difference in input price growth between
the LECs and the economy as a whole. See 12 FCC Rcd at
16,680, p 95. It can thus be expressed as follows: X = ( %
LEC TFP - % TFP) + ( % U.S. input prices - % LEC
input prices), where TFP = total factor productivity. See 12
FCC Rcd at 16,785.1 The formula may be more readily
conceptualized as X = ( % LEC TFP - LEC input prices) -
( % U.S. TFP - % U.S. input prices).
Several parties submitted estimates of historical X-Fac-
tors. In a determination unchallenged here, the FCC accord-
ed the greatest weight to its own estimates, although it also
gave "some weight" to AT&T's estimates (we discuss this
decision below). See 1997 Order, 12 FCC Rcd at 16,695, p 37.
The estimates the FCC considered, and the averages of those
estimates over specified periods, are the following:
Table 1
Year FCC AT&T
1986 -0.5% 0.2%
1987 5.0 4.1
1988 5.0 6.4
1989 7.9 8.8
1990 8.8 11.0
1991 5.8 6.0
__________
1 This equation is apparently derived as follows from the FCC's
general rule that the X-Factor is to "provide a reliable measure of
the extent to which changes in the LECs' unit costs have been less
than the change in level of inflation," see 1997 Order, 12 FCC Rcd
at 16,647, p 5: The general rule yields X = U - L, where U is the
"change in level of inflation," and L is the change in the LECs' unit
costs. The FCC then observes that "changes in a firm's unit costs
come from two sources: (1) changes in productivity, and (2) changes
in input prices," id. at n.16. Thus, L = % LEC input price - %
LEC productivity. Reading "change in level of inflation" as
"change in unit costs in the economy as a whole," we get the similar
expression: U = % U.S. input price - % U.S. productivity.
Substituting these values into the equation X = U - L, using
"TFP" for productivity, and performing a little algebraic manipu-
lation yields the equation in the text.
As the Commission also increases the cap by general price
inflation, see 12 FCC Rcd at 16,646, p 3, the net effect of these
adjustments is (roughly, subject to effects of the use of different
indices) to increase the cap by the LECs' estimated change in unit
costs. It is somewhat as if the overall adjustment ("A") were (using
the terms of the prior paragraph) A = U - X = U - (U - L) = L.
1992 3.4 4.1
1993 4.7 6.0
1994 5.4 5.9
1995 6.8 9.4
Specified periods (averaged)
1986-95 5.2 6.2
1987-95 5.9 6.9
1988-95 6.0 7.2
1989-95 6.1 7.3
1990-95 5.8 7.1
1991-95 5.2 6.3
Range of Averages: 5.2-6.1 6.2-7.3
1997 Order, 12 FCC Rcd at 16,696, p 137.
The FCC consulted the moving averages to establish a
range of reasonableness from 5.2% to 6.3% and then selected
6.0% as the historical (i.e., non-CPD) component of the X-
Factor. See id. at 16,697, p 141. The LECs argue that the
FCC did not give a rational explanation of that choice, and we
agree. None of the reasons given for choosing 6.0% holds
water.
A.Devaluation of 1986-95 and 1991-95 averages
First, in choosing a point within the range of reasonable-
ness, the FCC determined that it was "reasonable to place
less weight" on two lowest averages, the ones for 1986-95 and
1991-95. It said that the first, 1986-95, "is heavily influenced
by the improbably low 1986 estimate of-0.5 percent." Id. at
16,697, p 139. But the Commission gave no reason for con-
demning the 1986 estimate as "improbable," and mere diver-
gence from the other numbers does not justify such a conclu-
sion. See Thomas H. Wonnacott & Ronald J. Wonnacott,
Introductory Statistics for Business and Economics 497 (2d
ed. 1977). The FCC invokes our cases upholding the elimina-
tion of outlying data points, but in them the agency explained
why the outliers were unreliable or their use inappropriate.
See Bell Atlantic Tel. Cos. v. FCC, 79 F.3d 1195, 1202 (D.C.
Cir. 1996) (study indicated outlier erroneous); Association of
Oil Pipe Lines v. FERC, 83 F.3d 1424, 1434 (D.C. Cir. 1996)
(skewed data distribution required outlier elimination to avoid
windfall profits to many oil pipelines).
As to the 1991-95 average, the Commission said it was the
one "most affected by the low 1992 estimate," which it in turn
diagnosed as "an artifact of a one-year jump in the measured
productivity of the national economy as economic activity
increased, rather than a change in the growth rate of LEC
productivity or input prices." 1997 Order, 12 FCC Rcd at
16,697, p 139. This is mystifying. If the productivity compo-
nent of the X-Factor is to reflect the difference between LEC
and overall productivity growth, a proposition that is built
into the Commission's formula, see 1997 Order, 12 FCC Rcd
at 16,785, there seems no reason to slight a datum because its
anomalous character stems from the unusual magnitude of
the second term rather than of the first.
B.Alleged upward trend
In justification of its choice of 6.0% the FCC also cites an
upward trend in the X-Factor during the last years it sur-
veyed. See 1997 Order, 12 FCC Rcd at 16,697, p 139
("[F]rom 1993 onward there has been an upward trend in the
X-Factor"); id. at p 141 ("[T]here appears to be a strong
upward trend in productivity growth from 1992 to 1995").2
The FCC's reliance on the upward trend necessarily reflects
the (unexplained) assumption that the trend will continue, at
least in the immediate future. Explanation might be reason-
ably omitted if there were no obvious reason to doubt contin-
uation of an observed trend. But two such reasons exist.
First, the trend appears to be part of a cyclical pattern.
Although the X-Factor did increase steadily in the 1992-95
period, it also decreased from 1990 to 1992, after rising from
1986 to 1990. See Table 1, supra. Perhaps there was reason
__________
2 The parties dispute whether the trend in question covers
1992-95 or 1993-95, with the FCC calling the reference to 1992-95
at p 141 a "typographical error," FCC Br. at 34, and the LECs
arguing that any typographical error should have been corrected in
FCC's errata, LEC Reply Br. at 10. The answer makes no
difference to our analysis.
to believe that there would be no cyclical downturn during the
expected life of this X-Factor determination, which was to be
reviewed about two years after being made. See 1997 Order,
12 FCC Rcd at 16,707, p 166. But the FCC offered no such
reason.
Second, the X-Factor is calculated as the sum of two
components, neither of which followed a trend during the
period in question. In fact, their year-to-year fluctuations
swamped the trend increments:
Table 2
Year Difference between Difference between
LEC & US changes in LEC and US changes
total factor in input prices
productivity
1992 0.21 3.21
1993 1.44 3.26
1994 3.69 1.71
1995 1.78 5.04
1997 Order, 12 FCC Rcd at 16,785. Where's the trend? As
the underlying variables appear to be thrashing about wildly,
the FCC's conclusion that the trend in the difference between
the two had some predictive value requires explanation.
C.Partial reliance on AT&T estimates
Finally, the LECs argue that in its treatment of AT&T's
X-Factor estimates the FCC "implicitly endorsed methodolo-
gies that it had earlier discredited." LEC Br. at 27. The
FCC incorporated the aspects of AT&T's method that it
deemed reasonable into its own method, see 1997 Order, 12
FCC Rcd at 16,658, p 33, and then gave independent weight
to AT&T's X-Factor estimates in deciding to extend the
range of reasonableness upward, see 1997 Order, 12 FCC Rcd
at 16,697, p 140, and to select a value near the top of the
range. Id. at p 141. We agree that both these uses of
AT&T's estimates appear irrational; any differences between
the FCC's and AT&T's estimates presumably resulted from
elements of AT&T's analysis that the FCC specifically reject-
ed. The FCC's argument that AT&T's estimates were "help-
ful" because AT&T's methodology was "similar," FCC Br. at
37, fails to overcome that logic. If there is an explanation--
for example, conceivably the Commission gave some weight to
AT&T's conclusions out of concern for the risk that it had
erred in rejecting specific elements of AT&T's analysis--the
FCC has failed to mention it.
The Commission having failed to state a coherent theory
supporting its choice of 6.0%, we remand for further explana-
tion.
II. Consumer productivity dividend
The second component of the X-Factor is a "consumer
productivity dividend" ("CPD") of 0.5%. At the time of the
1990 order instituting price-cap regulation, the FCC "expect-
ed ... that incentive regulation would result in greater
productivity gains than rate of return regulation," Bell Atlan-
tic, 79 F.3d at 1198, and instituted the CPD, as it said, to
"assure that the first benefits of price caps flow to customers
in the form of reduced rates," In the Matter of Policy and
Rules Concerning Rates for Dominant Carriers, 5 FCC Rcd
6786, 6799, p 100 (1990) ("Price Cap Order"). It retained the
0.5% CPD without specific explanation in a 1995 interim rule,
Bell Atlantic, 79 F.3d at 1204, and retained it again in the
current rule. See 1997 Order, 12 FCC Rcd at 16,690, p 123.
The LECs challenge the 0.5% CPD as based on an "obso-
lete" justification. The Commission's earlier data on historic
productivity improvement derived from the rate-of-return
era, so an adjustment to reflect the expected incentive effects
of price caps was in order; but the post-1990 data presum-
ably reflect those effects.
FCC counsel responds that the agency believes that an
innovation in the current rule--the Commission's elimination
of the "sharing" of profits exceeding certain benchmarks--
will give the LECs still further productivity incentives, and
that the FCC relied on that in retaining the CPD. Even if
the agency relied on this justification (which the LECs dis-
pute), it never explained retention of the old percentage, a
retention that required some comparison of the current
change with the initial one in terms of their likely impacts on
productivity. Thus we must remand for an explanation of the
Commission's choice of the amount--0.5%.
The LECs claim that the FCC did not rely on the expected
effects of sharing elimination and that it gave no other reason
justifying the retention of any CPD. We do not reach these
arguments because the FCC will be able to give a clearer
statement of its reasons in the remand on the amount and
since the LECs do not dispute the argument FCC's counsel is
presently making--that it is defensible to include a CPD
corresponding to whatever productivity increase may be ex-
pected from the elimination of sharing.
III. Elimination of sharing
Before the rule at issue in this case, the FCC's price cap
regime included a "sharing" mechanism, which mandated
LEC rate reductions sufficient to return profits above speci-
fied levels to their customers, the IXCs. The most recent
sharing regime, enacted in the 1995 interim order, made the
sharing obligation dependent on the X-Factor, imposing no
obligation of firms choosing a 5.3% X-Factor, and the follow-
ing on ones choosing 4.7% and 4.0%:
Table 3
Chosen X- 50% Give-back 100% Give-back
Factor required for required for
rate-of-return rate-of-return
over over
4.7% 13.25% 17.25%
4.0% 12.25% 16.25%
In the Matter of Price Cap Performance Review for Local
Exchange Carriers, 10 FCC Rcd 8961, 9058, p 222 ("Perfor-
mance Review Order") (1995). Attacking the Commission's
elimination of the "sharing" mechanism, MCI first claims that
the statutory mandate of "just and reasonable" rates, 47
U.S.C. s 201(b), requires the FCC to impose a mechanism to
prevent "unreasonable" returns. In the absence of any indi-
cation that Congress directly addressed the issue, we defer to
the FCC's interpretation of the Communications Act unless it
is unreasonable. See Chevron U.S.A. Inc. v. NRDC, 467 U.S.
837 (1984). MCI cites no authority rejecting an FCC inter-
pretation of the statute contrary to the one MCI advances,
and in Time Warner Entertainment Co. v. FCC, 56 F.3d 151(D.C. Cir. 1995), we endorsed a pure price cap regime with no
sharing provision in the face of a statutory mandate to ensure
"reasonable" basic cable rates. See id. at 162, 164-74.
Next, MCI argues that elimination of sharing was arbitrary
and capricious. But the agency advanced two sound ratio-
nales for its decision. First, it found that "sharing severely
blunts the efficiency incentives of price cap regulation by
reducing the rewards of LEC efforts and decisions." 1997
Order, 12 FCC Rcd at 16,700, p 148. When all profits are
taken away, a firm has no incentive to make them; when
some proportion is taken away, firms will avoid at least some
otherwise desirable choices with a prospect of enhancing
profit but a risk of loss. Second, the FCC found that
eliminating sharing would remove the incentive to shift costs
to services that are subject to sharing and away from services
that are not, thus cross-subsidizing the latter. 1997 Order, 12
FCC Rcd at 16,700, p 148; id. at 16,701, p 151. MCI does not
contest these effects, nor does it question the Commission's
argument that monitoring to catch them would be administra-
tively burdensome and would increase its reliance on obsolete
embedded accounting costs. Id. at 16,701-02, pp 151-52.
Finally, MCI contends that it was arbitrary and capricious
for the FCC to scuttle sharing but at the same time retain its
"low-end adjustment," which gives the LECs some pricing
leeway to prevent their returns from falling below a given
level. There is clearly a literal asymmetry in protecting
LECs in lean conditions while not constraining them in
unexpectedly fat ones. But the FCC gave a good reason for
creating this asymmetry--the Constitution's takings clause,
which forbids the imposition of confiscatory rates without just
compensation. See 1997 Order, 12 FCC Rcd at 16,704, p 157;
Duquesne Light Co. v. Barasch, 488 U.S. 299, 307-08 (1989).
The Commission thus avoided raising a non-trivial constitu-
tional question, one that has no analogy at the upper end of
the range of allowable rates. See Time Warner, 56 F.3d at
170.
IV. Interstate v. total-company productivity
MCI argues that in calculating the X-Factor the FCC
arbitrarily used the LECs' productivity in all their telecom-
munications business rather than productivity only in their
interstate operations. Again, we disagree. The FCC reason-
ably concluded that "the record before us does not allow us to
quantify the extent, if any, to which interstate productivity
growth may differ significantly from total company productiv-
ity growth," 1997 Order, 12 FCC Rcd at 16,686, p 110, and
this determination was enough to justify using the total
company data.
In the first place, it is not clear that "interstate productivi-
ty," as opposed to total company productivity, is measurable,
or even economically well-defined. This is so because direct
productivity measurement requires measurement of inputs,
and there is no obviously meaningful way to segregate LEC
interstate and intrastate inputs because, as is undisputed,
"interstate and intrastate services are usually provided over
common facilities." 1997 Order, 12 FCC Rcd at 16,685, p 107.
The Commission had previously recognized this analytical
difficulty, questioning "whether it would be possible to devel-
op separate production functions for interstate and intrastate
services," id., and it never unambiguously declared the issue
resolved.
The Commission nonetheless declared itself ready to con-
sider some adjustment if it were shown that inclusion of
intrastate data systematically biased the X-Factor estimate
downward. 1997 Order, 12 FCC Rcd at 16,686, p 109. AT&T
offered claims of faster interstate productivity growth. It
based these on an assumption of equal growth rates for
interstate and intrastate inputs, but it offered no explanation
why that assumption was economically justified, much less
one so compelling that it would be error for the FCC to reject
it. See AT&T Comments, CC Docket No. 94-1, App. A at
23-30, 72-78; 1997 Order, 12 FCC Rcd at 16,686-87, p 110.
MCI argues that in the original 1990 LEC price cap order
the Commission inferred faster productivity growth in inter-
state services from the undisputed fact of faster output
increase in that sector. See Price Cap Order, 5 FCC Rcd at
6798, p 92 ("[T]he more rapid growth in interstate usage
results in higher apparent interstate productivity growth.").
This assumption should have continued, it says. But the 1990
method of measuring productivity had not depended on the
measurement of inputs at all; the Commission had simply
inferred productivity growth from prior trends in rate reduc-
tions. 1997 Order, 12 FCC Rcd at 16,648, p 8. Given the
shift to direct focus on input changes (a move that no one
questions) and the uncertainty over interstate input trends,
we do not see why the agency should have been bound to
retain the assumption of faster interstate productivity growth.
On this record, therefore, we do not find it unreasonable for
the agency to have relied on total company productivity
despite its theoretical shortcomings.
V. Reinitialization
"Reinitialization" is the name for the Commission's setting
a current price cap at what it would have been if past X-
Factors had been different. For instance, if the price cap
starts at 100 and the X-Factor is 1% for the first three years,
the cap would stand at approximately 97 at the end of those
years. 100 - (3 x 1) = 97. (The figure is only approximate
because of compounding.) If the regulator then changes the
X-Factor to 2% and imposes full reinitialization, it would
revise the cap to about 94 for the year immediately following.
100 - (3 x 2) = 94. In the 1997 Order, the FCC ordered
reinitialization for one year, 1996. See 12 FCC Rcd at 16,714,
p 179. Under our simple example, then, the cap would fall to
approximately 96. 100 - (2 x 1) [two years' reduction of
1%] - (1 x 2) [one year's reduction of 2%] = 96.
Both the LECs and MCI challenge this decision, seeking to
have it modified to favor their respective interests.
A.Reinitialization based on CPD
The LECs challenge the FCC's requirement that they
include the CPD in the X-Factor used for reinitialization. In
Part II, we explained the need to remand the case for further
explanation of size of the CPD. We agree with the LECs
that if the FCC retains the CPD because of the productivity
benefits expected from the elimination of sharing, no element
of reinitialization based on the CPD will be appropriate in the
absence of evidence linking productivity gains to the anticipa-
tion of sharing's elimination; the companies could not have
responded to that incentive before its creation.
B.Disparate impact of uniform reinitialization
The LECs argue that reinitialization fell more harshly on
carriers that chose low X-Factors with high sharing obli-
gations for 1996 than on ones that chose high X-Factors. As
a result of reinitialization, the low X-Factor carriers lost
some of the future benefits of that choice, but were not in a
position to recover any of sharing costs that they may have
borne because of it. Reinitialization imposed no such asym-
metry on companies that had elected a high X-Factor. The
LECs' specific complaint is that this was "an important
aspect of the problem" before the Commission, which it was
obliged to discuss. See Motor Vehicle Mfrs. Ass'n v. State
Farm Mut. Auto. Ins. Co., 463 U.S. 29, 43 (1983).
The Commission argues that it failed to discuss the dispari-
ty because the LECs never brought the subject up. It cites
s 405 of the Communications Act, 47 U.S.C. s 405, which
bars review of an issue on "which the Commission ... has
been afforded no opportunity to pass," see also United States
v. FCC, 707 F.2d 610, 619 (D.C. Cir. 1983), unless the
petitioners sought rehearing before the Commission--which
the LECs did not. The LECs in turn say they couldn't have
afforded the Commission a chance to pass on it; the Commis-
sion had never given notice of any intent to order reinitializa-
tion.
Section 405's "no opportunity to pass" clause does not in
terms exclude instances where the lack of opportunity is due
to some fault of the Commission--such as its springing a
novelty at the last minute. But we need not sort that out
here, because we find no fault in the Commission's procedure.
Reinitialization may not have been a subject on which the
Commission explicitly elicited comment in its notices for this
rulemaking, but the prospect surely brooded over the pro-
ceeding. In its 1995 mid-course correction of the price caps it
had ordered reinitialization--in a form, in fact, that fell only
on those LECs that had chosen a low X-Factor in exchange
for greater risk of sharing, and not at all on those that had
chosen a high one. Performance Review Order, 10 FCC Rcd
at 9069-73, pp 245-54. If the perceived asymmetry was as
serious as the LECs now make out, we should have expected
them to alert the Commission in this proceeding in advance:
"If you do a reinitialization, at least avoid the dreadful
asymmetry of the 1995 order." No such alert was sounded.
C.Reinitialization for only one year
MCI claims that the FCC should have reinitialized the X-
Factor all the way back to 1991 (the first year of the price-cap
regime). It says the agency has a policy of correcting errors
in X-Factor determinations and that it decided in the current
rule that prior determinations were in error. In the alterna-
tive, MCI argues that the FCC should reinitialize back to
1995, the year in which the previous X-Factor was adopted.
In the 1995 interim price cap review, the FCC determined
that a single year's productivity estimate generated by its
former method was understated, based in large part on the
estimate's discrepancy with the results of a TFP study. See
Performance Review Order, 10 FCC Rcd at 9053, p 208. It
then calculated a new X-Factor designed to eliminate the
effects of the understatement and required LECs to set their
price caps as though the new X-Factor had been in effect
since the advent of price cap regulation. See id. at 9069,
p 245. In 1997 the Commission determined that its former
method had systematically understated productivity relative
to the TFP method, but required reinitialization for one year
only. See 1997 Order, 12 FCC Rcd at 16,713-14, pp 178-79.
The situations are somewhat similar, but the FCC ade-
quately distinguished them. It rested its 1997 decision to
limit reinitialization on the need to "limit harm to LEC
productivity incentives that could result from the perception
that our regulatory policies unnecessarily lack constancy."
1997 Order, 12 FCC Rcd at 16,714, p 179. It seems clear that
a second extensive reinitialization would considerably aggra-
vate such a perception. Universal, complete reinitialization
would impair the supposed incentive advantages of price
caps--which derive from firms' supposing that their efficien-
cies will not come back to haunt them.
VI. The rule's effects on small and mid-size LECs
The Independent Telephone and Telecommunications Alli-
ance, an intervenor, argues that the FCC acted arbitrarily
and capriciously in establishing a uniform X-Factor for all
LECs, regardless of size and economic characteristics, and in
failing to consider the disparate impact of its reinitialization
requirement on small and mid-size LECs. Because the peti-
tioners here have not raised these issues, ITTA is procedural-
ly barred from arguing them. See Illinois Bell Tel. Co. v.
FCC, 911 F.2d 776, 785-86 (D.C. Cir. 1990).
It is true, as ITTA points out, that this court in Synovus
Fin. Corp. v. Board of Governors, 952 F.2d 426, 434 (D.C. Cir.
1991), characterized the rule against consideration of issues
raised by intervenors and not by petitioners as "a prudential
restraint rather than a jurisdictional bar." But in deciding to
consider the intervenor's issue there, the court relied on the
fact that the relevant issue was "an essential predicate" to an
issue raised by a petitioner. Id. That circumstance is cer-
tainly not present here. The Synovus court offered a second
reason to hear the claim--that the intervenor was not "the
losing party in the administrative proceeding," and thus did
not have "every incentive to petition for review." Id. Here,
ITTA itself claims that it "through its members, participated
fully in the proceedings below," ITTA Reply Br. at 3, and that
its "members raised the issue of the necessity of multiple X-
Factors," the very issue it seeks to raise in this court.
Thus, neither of the special circumstances cited in Synovus
is present. Furthermore, ITTA presents no reason why it
could not have petitioned in its own right. We decline to
consider its arguments.
Conclusion
The FCC's decisions to select 6.0% as the first component
of the X-Factor and to retain the 0.5% CPD are reversed and
remanded to the agency for further explanation; the FCC
may of course request a stay of this order pending its
reconsideration. The petitions for review are otherwise de-
nied.
So ordered.