Southwestern Bell Telephone Co. v. Federal Communications Commission

United States Court of Appeals
FOR THE EIGHTH CIRCUIT
___________
No. 97-3446
___________
Southwestern Bell Telephone Company, *
*
Petitioner, *
*
Bell Atlantic Telephone Companies, * Petition for Review of An Order
* of the Federal Communications
Intervenor on Petition, * Commission.
*
v. *
*
Federal Communications Commission *
and United States of America, *
*
Respondents, *
*
New Valley Corporation, *
f/k/a Western Union, *
*
Intervenor on Petition. *
___________
Submitted: January 16, 1998
Filed: March 11, 1998
___________
Before RICHARD S. ARNOLD, Chief Judge, MORRIS SHEPPARD ARNOLD,
Circuit Judge, and SACHS,1 District Judge.
___________
MORRIS SHEPPARD ARNOLD, Circuit Judge.
I.
In the early 1980s, following the breakup of AT&T, the Federal Communications
Commission required local telephone companies, or local exchange carriers ("LECs"),
to provide long-distance companies, also called interexchange carriers ("IXCs"), with
access to local exchange facilities at a regulated and approved rate. Interexchange
service generally originates with LEC facilities through which the sending party is
connected to the IXC, and then terminates with LEC facilities. An IXC cannot provide
service without access to local facilities.
The LECs provided two types of service to meet the obligation that the FCC
imposed on them. First, they offered switched access services in which the IXCs used
the LECs' regular local service facilities for originating and terminating long-distance
telephone calls; second, they offered special access services in which an IXC would
have the exclusive use of certain dedicated LEC facilities linking the IXC with its
customers through the intermediary of LEC serving wire centers ("SWCs"). In return,
the IXCs would have to pay the LECs a reasonable fee, as determined by the FCC.
Only the special access charges are relevant to this case.
During the period that these special access rates were in effect, special access
circuits were used primarily to transmit telex, telegraph, video, voice, digital, and other
1
The Honorable Howard F. Sachs, United States District Judge for the Western
District of Missouri, sitting by designation.
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signals between end users and IXCs. At issue in this appeal are cost allocations
relating to only two of the nine generally available circuit or channel types, namely,
metallic and voice-grade channels. Metallic service was the lowest grade of service
offered, and a voice-grade circuit was, as its name suggests, a circuit capable of
carrying data in the frequency range of voices.
The rates charged for special access channels comprised three components. The
basic component was the charge for utilizing a "loop." The loop is the connection
between the end user's premises and a nearby SWC, as well as between an IXC's local
connection point and the appropriate SWC. All IXCs use some amount of loop service
in connecting interstate lines with end users. The second component of the rate was
the charge for utilizing a "trunk." The trunk is the connection between two SWCs,
necessary to facilitate connections between end users and IXCs associated by
proximity with different SWCs. (Thus a typical long-distance transmission would begin
with an end user connected by a LEC loop to a nearby SWC. The SWC would, if
necessary, be connected to another SWC via the LEC's trunk equipment, and another
loop would connect the SWC to the IXC's line. At the receiving end the same
sequence would be duplicated in reverse.) The third component of the rates,
denominated "optional features and functions," is not relevant to this case.
In the early 1980s, the FCC permitted LECs to charge only a "reasonable rate"
for this mandatory service, that is, a rate that enabled the LECs to recover the cost of
providing the service plus something called a "reasonable rate of return." Because the
LECs used the same facilities to provide different types of service to different
customers, the rate-setting process necessarily involved the allocation of shared costs
among disparate users. This case arose from a dispute over the method by which the
LECs allocated the costs in their tariffs.
In 1983, the FCC decided that the system of exchange access compensation then
in effect was unlawfully discriminatory. See 47 U.S.C. § 202(a). The FCC thus
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decided to replace that system with a more uniform rate structure. Over the course of
the next year and a half, in order to comply with new FCC guidelines, the LECs
proposed various revised special access tariffs. All of them were suspended and
eventually found unlawful by the FCC. In March, 1985, in accordance with a few
specified adjustments from their previous proposal, the LECs filed tariffs that were
accepted subject to investigation. Although the FCC never suspended these tariffs, it
did instruct the LECs to keep accurate accounts of the charges in order to facilitate
accurate refunds if they should prove necessary. These rates remained in effect for
about six months.
Early in 1986, the FCC issued a final order concluding its investigation and
upholding these special access tariffs. In determining that the cost allocations in the
tariffs were reasonable, the FCC rejected arguments in particular from Western Union,
an IXC, that several specific costs allocated to the loop component of the rates should
be allocated exclusively to the trunk component. It later rejected Western Union's
argument that metallic service rates should be lowered to preserve their previous
relationship with low-quality voice-grade service, the rate of which was lowered as a
result of the FCC's order.
Western Union petitioned the D.C. Circuit for review of the FCC's order. In
1988 that court determined that the FCC had failed adequately to explain its rejection
of Western Union's arguments and remanded the case to the FCC for reconsideration
of three specific issues. See Western Union Corp. v. FCC, 856 F.2d 315, 316-17, 320
(D.C. Cir. 1988). Almost immediately thereafter the FCC's Common Carrier Bureau
invited interested parties to comment on how it should resolve the issues remanded to
it. It did not resolve those issues until nearly nine years later. In its order the FCC
reversed itself on two of the three matters remanded, on the ground that the LECs had
failed adequately to justify the cost allocations at issue.
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Southwestern Bell, an LEC, then filed a timely petition for review with this
court. We affirm.
II.
Both Southwestern Bell and the FCC raise threshold issues only tenuously
related to the merits of the case: Southwestern Bell argues that certain procedural
infirmities abrogated the FCC's authority to order these refunds, and the FCC posits a
procedural bar to this court's authority to consider Southwestern Bell's petition. We
find none of these arguments persuasive.
Southwestern Bell maintains that the FCC had no authority to order
Southwestern Bell to refund money to Western Union because the FCC violated two
procedural provisions of 47 U.S.C. § 204(a). The two provisions in question are the
statute's time limitations and its supposed requirement that before tariffs can be
retroactively altered they must first be suspended.
Section 204(a)(1) permits the FCC to suspend a proposed charge or tariff for a
period of up to five months beyond the time that it would otherwise go into effect,
during which period the FCC may conduct an investigation to assess the legality of the
proposed rates. If the FCC does not rule on the legality of the proposed tariffs within
the allotted time, those tariffs automatically go into effect until it does so. Section
204(a)(2)(A) limits the time period to five months for the issuance of such a ruling
(before the 1996 amendments, the period was 12 or 15 months, depending on the
complexity of the issues involved).
In this case, the FCC made the rates in question effective on April 1, 1985.
Then, in orders in January and November, 1986, it concluded that the tariffs were legal
and ended its investigation. After the D.C. Circuit remanded the matter to the FCC for
reconsideration, the FCC, as we have said, failed to act on the case for nine years,
neither ordering refunds nor confirming its earlier position. When the FCC did finally
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issue its order, more than 12 years had passed between the effective date of the tariffs
and the FCC's refund order. Southwestern Bell argues that the FCC is barred from
ordering these refunds now because of its excessively slow proceeding. We disagree
because we believe that the time constraint imposed by § 204(a)(2)(A) does not operate
as a statute of limitations and that its violation therefore does not end the FCC's
authority to act.
We have held that "[a]bsent specific statutory direction, an agency's failure to
meet a mandatory time limit does not void subsequent agency action." Newton County
Wildlife Ass'n v. U.S. Forest Service, 113 F.3d 110, 112 (8th Cir. 1997), cert. denied,
66 U.S.L.W. 3355 (1998). See also Brotherhood of Railway Carmen Division v.
Pena, 64 F.3d 702, 704-05 (D.C. Cir. 1995). Section 204(a)(2)(A) contains no
provision touching on the appropriate remedy, if any, for the FCC's failure to adhere
to the time limit that it imposes. Thus the section does not operate as a statute of
limitations, and the FCC does not lose its authority to act for having violated it.
Southwestern Bell also contends that in failing to suspend the proposed rates the
FCC failed to comply with a statutory requirement that it do so, and so lost its authority
to act. But we believe that § 204(a)(1) does not require the FCC to suspend the
proposed rates before it investigates them -- it only allows the FCC to do so. The
statute states that, either on its own initiative or upon complaint, and pending a hearing
concerning the lawfulness of a proposed charge, the FCC "may suspend the operation
of such charge ... in whole or in part but not for a period longer than five months
beyond the time when it would otherwise go into effect."
We believe that the primary purpose of the suspension is to mitigate the
transaction costs that might be incurred if the FCC eventually rejects the tariff: If the
investigation can be completed in five months, and the rates are found to be illegal, no
refunds are necessary if the tariffs were suspended, because the illegal rates were never
imposed. But in any case the language of § 204(a)(1) is permissive, not mandatory:
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it does not require the FCC to suspend proposed tariffs; it only gives it the authority to
do so. But see Illinois Bell Tel. Co. v. FCC, 966 F.2d 1478, 1481-82 (D.C. Cir. 1992).
The fact that the FCC customarily suspends proposed rates does not mean that
its failure to do so in any particular instance invalidates its subsequent action.
Furthermore, a possible secondary purpose of the suspension, that is, to put the
company with the proposed rates on notice of possible defects in the tariff, is served
by another provision in the section, namely, that the FCC may require the proposing
companies to keep an accounting during the period of investigation in order to facilitate
a refund should one be necessary. That is precisely what the FCC did in this case.
III.
The FCC also raises a procedural objection to our immediate adjudication of this
case. Its argument is that 47 U.S.C. § 405(a) requires Southwestern Bell to exhaust all
administrative remedies prior to raising an issue before the court. That statute forbids
judicial review of a dispute where the party seeking review "relies on questions of fact
or law upon which the Commission ... has been afforded no opportunity to pass." Id.Southwestern Bell's procedural issues relating to the interpretation of § 204(a) present
questions of law not yet passed on by the FCC. Thus, the FCC argues, Southwestern
Bell must present these issues to the FCC itself in an application for review before
raising them in this court.
But exhaustion is not required when unreasonable administrative delay would
render the administrative remedy inadequate. See Gibson v. Berryhill, 411 U.S. 564,
575, n.14 (1973) (noting that administrative remedies are deemed inadequate "[m]ost
often ... because of delay by the agency"), and Smith v. Illinois Bell Tel. Co., 270 U.S.
587, 591-92 (1926) (petitioner "is not required indefinitely to await a decision of the
rate-making tribunal before applying to a federal court for equitable relief"). In this
case, the FCC failed for nine years to adjudicate the issue before it on remand from the
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D.C. Circuit, in part, no doubt, because the tariffs at issue in this appeal were in effect
for only six months before they were replaced and are thus no longer relevant. The
resolution of the issues that this case raises will therefore have little or no future effect.
But precisely because the issues are stale and irrelevant from the FCC's point of
view, we believe that if we were to defer first to the FCC to resolve them, further delay
would be not only possible but inevitable. As the FCC's attorney noted at oral
argument, "There is a lot going on at the Commission -- this case is almost a relic."
The FCC's record of delay in this matter may not, as we have said, invalidate its action,
but it does render an administrative remedy manifestly inadequate.
IV.
When the D.C. Circuit remanded matters relevant to this case to the FCC, it
singled out three issues for further consideration: The misallocation of costs in the
determination of loop rates, the misallocation of plant investment to the rates for
metallic service, and the disproportionate rates charged to users of two-wire metallic
service. See Western Union Corp., 836 F.2d at 318-19. The court did not determine
that these allocations are unreasonable, merely that the FCC acted arbitrarily in
confirming them. Id. at 320. Upon review, the FCC reversed itself on the first two
issues and stood by its decision on the third. Southwestern Bell argues that in reversing
its earlier decisions on these two issues, the FCC acted arbitrarily and capriciously.
A.
Southwestern Bell bases this argument, in part, on an incorrect interpretation of
the FCC's order on remand. It contends correctly that the FCC merely requested
comments from interested parties on whether the record as it existed was adequate for
the FCC to determine how the costs should be allocated. But Southwestern Bell goes
on to maintain that because the FCC asked only whether supplemental information
might be necessary and did not actually request any supplemental information, its final
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determination that the LECs did not adequately justify their cost allocations was
arbitrary because this conclusion did not follow logically from the requests in its order.
That is, Southwestern Bell argues that the determination that the record was not
sufficient to justify the cost allocations should have been made only after the LECs
were asked to submit any necessary supplemental information, and that they did not do
so because the order on remand did not request it. The only proper determination that
the FCC could have made, Southwestern Bell argues, short of deciding that the record
was sufficient and that the costs were justified, was a determination on how the record
should be supplemented.
But this conclusion misses the point. The FCC was under no obligation to
inform the LECs how they might best supplement the record, or even to request that the
record be supplemented. The question on remand was whether the FCC was correct
in determining that the LECs properly justified their cost allocations in 1985, and the
FCC asked for comments relating to its ability to make this determination. But it did
not seek new justifications. It then determined that, in fact, the LECs did not meet their
burden of proof in justifying the relevant cost allocations. Southwestern Bell is off the
mark in arguing that it should have been told how it might supplement the record in
order to justify its allocations. Furthermore, the FCC notes in its refund order that if
the LECs can offer supplemental evidence to suggest that the refunds should be
reduced, they may do so. It is in this context that the LECs may attempt anew to justify
some or all of their 1985 allocations. But on the question addressed by the D.C.
Circuit's remand and the FCC's order, namely, whether the allocations were properly
justified at the time that they were made, supplemental evidence was irrelevant. It is
worth pointing out, too, that all of the LECs that responded to the FCC's request for
comments argued that the record as it existed provided more than adequate support for
their cost allocations.
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Southwestern Bell also argues that the FCC simply did not provide any basis for
its opinion on remand that the LECs did not in fact adequately justify their original cost
allocations. It is to this question that we now turn.
B.
The first contested aspect of the LECs' special access rate structure is the
allocation of some of the costs associated with voice-grade performance investment
(VGP) and facilities interface equipment (FACIF) to the loop component of the rate.
The LECs contend that both of these are charges for equipment used to provide circuit
continuity between a customer's premises and its SWC. But it is not clear if, in fact,
the equipment is more properly associated with loop service or with trunk service.
Prior to the 1985 tariff-system shift, VGP charges were placed in a category
called "other special" along with investment costs in other sorts of equipment not
otherwise specifically categorized in the old system. The IXCs contend that this old
category contained charges properly attributable only to the trunk portion of a circuit.
FACIF charges were, in the pre-1985 system, allocated on a facility- and user-specific
basis. In the 1985 rate scheme, however, VGP charges were allocated to the loop
component, and FACIF charges were aggregated (i.e., no longer facility- and user-
specific) and allocated to the loop component of each service with which they were
associated (thus there was a separate FACIF charge in the loop component for metallic
service, for video service, etc.).
The LECs assert, of course, that these allocations were reasonable and justified.
But because certain IXCs (most notably for this appeal, Western Union) used no trunk
service (or very little trunk service), those IXCs objected to portions of the new
allocation system that saddled them with VGP and FACIF costs arguably associated
only with providing trunk service, and which were only newly allocated to the loop
component in the tariffs.
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Upon consideration of this argument, the FCC originally concluded that it was
indeed proper to allocate some VGP and FACIF costs to the loop rate element. In
reviewing this conclusion, however, the D.C. Circuit found that in approving the tariffs,
the FCC had failed to address the pertinent question raised by Western Union, which,
the court held, was not whether it was proper to allocate some of the VGP and FACIF
costs to the loop element, but rather how much of those costs was properly chargeable
to it.
In response to the order from the FCC inviting comments on this matter, the
LECs presented several justifications for the apparent shift in cost allocations. Several
LECs argued that the category that formerly included VGP and FACIF tariffs, the
"other special" category, was only a means for grouping costs and was not limited to
trunk equipment. Some argued that VGP and FACIF costs were in fact incurred in the
provision of both loops and trunks. And one LEC argued that the category in which
these charges were placed was not based on the function of the equipment at all, and
so that costs assigned to trunk categories were not necessarily even trunk costs.
Other LECs argued that they had allocated costs in the "other special" category
to loop and trunk rate elements on the basis of unit-cost studies, and that it was
impossible to disaggregate VGP and FACIF costs from other costs in the category.
(Unit-cost studies identify the cost to a LEC of providing one unit of a particular
service and recommend rates based on recovering that cost plus a reasonable portion
of overhead. Thus, costs determined by a unit-cost study will be determined by
reference to the aggregated costs for all of the equipment required to provide a service.)
But the FCC determined that the LECs did not offer sufficient engineering data
to demonstrate the extent to which they used VGP and FACIF equipment to provide
loop services. Furthermore, the FCC faulted the LECs for failing to explain how they
actually conducted their unit-cost studies and, notably, for failing to submit those
studies. These determinations find support in the record.
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The FCC then concluded that the specific allocations were unjustified because
in a § 204(a) investigation the carrier bears the burden of proving the reasonableness
of its charges. See 47 U.S.C. § 204(a)(1) ("the burden of proof to show that the new
or revised charge, or proposed charge, is just and reasonable shall be upon the carrier").
The FCC found that although the LECs did show that they used some amount of VGP
and FACIF equipment in providing loop service, their arguments did not provide a
reasonable basis for determining how much; the FCC further found that the LECs did
not carry the burden of demonstrating that the allocation that they used was in fact
reasonable. The FCC did not adopt Western Union's proposal that none of these costs
should be allocated to loop charges; it concluded only that the LECs did not properly
justify the costs as loop charges.
As the D.C. Circuit noted in its 1988 opinion, an agency's decision will be
overturned only if it is found to be "arbitrary, capricious, an abuse of discretion, or
otherwise not in accordance with law." Western Union Corp., 856 F.2d at 318. See
also 5 U.S.C. § 706(2)(A). We discern none of these defects in the FCC's order.
Southwestern Bell mischaracterizes the order as holding that none of these VGP and
FACIF costs should have been allocated to the loop component of the tariff. But the
order actually states only that Southwestern Bell failed to meet its burden of proving
how much of these costs were properly allocated to that component. The order goes
on to require Southwestern Bell to refund the charges to Western Union because the
LECs did not justify their allocation to the loop element. It is of course open to the
LECs to supply that justification and to argue that full refunds are not in order. But
until they provide such a justification, there is nothing arbitrary about the FCC's order.
It merely applies the strict standard that Congress imposed in § 204(a)(1).
C.
The second contested substantive issue in this case is the LECs' allocation of
some of the costs associated with supplying station apparatus and large private branch
exchange (PBX) equipment (both located on customer premises) to Western Union's
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two-wire metallic and voice-grade services, and the LECs' allegedly excessive
allocation of central office equipment (COE) costs to providing Western Union's
metallic service. Western Union argues that, although station apparatus and PBX
equipment were not used at all to supply it with two-wire metallic and voice-grade
channel termination services, and although COE only very marginally contributed to
the provision of metallic service, Western Union was nevertheless charged for these
apparatuses. At the time that this allocation system was proposed, the FCC accepted
the notion that rates for a particular service, provided to a specific customer, should be
based on the pro-rated cost of providing that service to all of an LEC's customers, not
just on the cost of the specific equipment required to provide the service to that
particular customer. In fact, the FCC had previously rejected as needlessly expensive
a proposal for an allocation mechanism that distributed costs associated with voice-
grade service on the basis of individual use.
In reviewing these arguments, the D.C. Circuit found, first, that the FCC had
failed to address Western Union's allegation that the LECs allocated a disproportionate
part of COE costs to providing metallic service. See Western Union Corp., 856 F.2d
at 319. Second, the court found that, although the FCC explained why it had rejected
the user-specific allocation system with respect to the provision of voice-grade service,
it did not address Western Union's argument that such a system saddled customers of
metallic service with costs for which they received no benefits. Id.Upon reconsideration, the FCC concluded that the LECs did not meet their
burden of justifying the amount of PBX and station apparatus allocated to metallic
service rates. The FCC concluded that the record was at least inconclusive regarding
whether the LECs ever employed more than a de minimis amount of this equipment in
providing metallic service, and the LECs, in response, provided only general statements
indicating that they did in fact use this equipment to provide metallic service. In earlier
statements, however, and in connection with other complaint proceedings, the LECs
had indicated that they employed little or no "circuit equipment" in providing metallic
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service. Furthermore, the FCC pointed out that even if the LECs did use large amounts
of COE to provide metallic service, they had submitted no records from which it would
have been possible to determine whether the specific rate charged was reasonable.
The FCC concedes that it might very well have been reasonable, at times, to
provide metallic service over existing voice lines, thereby occasionally utilizing these
facilities. But the LECs have not indicated how often this was done, nor have they
indicated the portion of voice-grade COE costs actually attributable to providing
metallic service. Because the LECs bear the burden of justifying their rates, the FCC
concluded, they are liable for refunds to Western Union for some portion of these
unsupported cost allocations. We believe that nothing in this conclusion or its
reasoning even approaches the arbitrary and capricious. The FCC was again merely
following the relevant provisions of § 204(a)(1).
Southwestern Bell makes much of the fact that the FCC's order represents a
reversal of its earlier holding that found these allocations reasonable. In fact,
Southwestern Bell argues that "such an about-face is arbitrary and capricious
decisionmaking." But the mere change of an administrative opinion after a lawful
reconsideration can hardly be arbitrary and capricious on its face. In this case, the D.C.
Circuit ruled that the FCC's prior order accepting the LECs' cost allocations was
arbitrary and capricious. See Western Union Corp., 856 F.2d at 320. The court, as we
have been at pains to say, made no ruling on the actual reasonableness of the
allocations, but ruled only that the FCC accepted those allocations without proper
justification. Id. Neither the D.C. Circuit nor the FCC has declared that the cost
allocations are unreasonable, but both have declared them to be unjustified. This order
by the FCC, far from being arbitrary and capricious, incorporates a degree of court-
imposed reflection and, we believe, corrects previous arbitrary and capricious behavior.
V.
For the reasons indicated, we affirm the order of the FCC.
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A true copy.
Attest:
CLERK, U.S. COURT OF APPEALS, EIGHTH CIRCUIT.
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