Opinion for the Court filed by Senior Circuit Judge STEPHEN F. WILLIAMS.
Petitioner ACS of Anchorage, Inc. challenges a Federal Communications Commission order finding that ACS exceeded its permissible rate of return for 1997-98. As a remedy, the Commission ordered ACS to pay damages plus prejudgment interest to a complaining customer, General Communications, Inc. (“GCI”). See
In re General Communication, Inc. v. Alaska Communications Systems Holdings, Inc.,
Memorandum Opinion and Order, FCC 01-32, at 2, ¶ 1 (Jan. 24, 2001) (“Order”);
id.
at 31, ¶ 77. ACS poses three claims. First, it says that the Commission erroneously required it to allocate to its intrastate services the traffic-sensitive costs associated with calls to internet service providers (“ISPs”). Second, it argues that even if the Commission were right on that issue, ACS’s filing of tariffs under 47 U.S.C. § 204(a)(3), a provision for “streamlined tariffs,” barred any damages
ACS is the incumbent local exchange carrier (“LEC”) in Anchorage, Alaska. Order at 3, ¶ 4. As a “rate-of-return” carrier (i.e., one whose rates are limited in terms of the rate of return rather than via price caps, see 47 C.F.R. § 65.1(b)), ACS files tariff rates for a two-year period, 47 C.F.R. § 69.3(a); the rates must be chosen with a view to yielding a rate of return no greater than the Commission-prescribed maximum. See In re Amendment of Parts 65 and 69 of the Commission’s Rules to Reform the Interstate Rate of Return Represcription and Enforcement Processes, 10 FCC Red 6788, 6791-94, ¶ ¶ 7-12, 6847-48, ¶135 (1995). In addition, such carriers periodically submit monitoring reports showing their actual rates of return. 47 C.F.R. . § 65.600. These reports may lead carriers to file revised rates, see 47 C.F.R. § 69.3(b), or cause the Commission to start proceedings under 47 U.S.C. § 205 to prescribe new rates “to be thereafter followed.”
Three tariff filings by ACS are pertinent. In April 1996 it filed tariff rates for the two-year period from July 1, 1996 to June 30, 1998 (the “1997 Tariff’), and in December 1997 a “mid-course correction” tariff covering the balance of that period (January 1, 1998 to June 30, 1998) (the “January 1998 Tariff’). See 47 C.F.R. § 69.3(b) (permitting mid-course corrections);
Southwestern Bell Telephone Co. v. FCC,
In June 1998, ACS filed its rates for the two-year period from July 1, 1998 to June 30, 2000 (the “July 1998 Tariff’), also pursuant to the streamlined tariff provisions. The July 1998 Tariff, however, allocated to ACS’s interstate service the traffic-sensitive switching costs associated with ISP calls. Order at 5, ¶ 9. Previously, ACS had treated ISP calls as mirastate. See id. at 5, ¶ 8 & n. 18; see also ACS' Br. at 15. This accounting change had the effect of increasing ACS’s reported interstate costs, thereby making its expected rate of return lower than it otherwise would have been. See Order at 17, ¶ 39. Again, however, the Commission took no action during the notice period, and the tariffs went into effect without any hearing being ordered.
In September 1999, ACS filed its final monitoring report for the two-year period from January 1, 1997 to December 31, 1998.
1
The report continued to classify
In August 2000, GCI filed a complaint with the Commission alleging that ACS had improperly calculated its interstate costs by treating ISP calls as interstate, and had violated its prescribed rate of return during the 1997-98 monitoring period. Order at 6-7, ¶ 13. The Commission agreed with GCI, id. at 10, ¶ 22, 20, ¶ 48, and ordered ACS to pay damages of about $2.7 million plus prejudgment interest assessed at the Internal Revenue Service’s corporate overpayment rate, id. at 31, ¶ 77.
Petitioning for review, ACS challenges the Commission’s classification of ISP calls, its failure to treat the § 204(a)(3) tariff filings as a bar to damages for 1998, and the rate selected for prejudgment interest.
* * *
ISP calls classification. Because the same telecommunications equipment is often used for both intrastate and interstate communications, carriers must apportion their costs (for regulatory purposes) through what is called the “separations” process. See generally 47 C.F.R. §§ 36:1-36.3. ACS argues that because FCC has previously recognized ISP calls as interstate for jurisdictional purposes under its “end-to-end” analysis, e.g., In re Implementation of the Local Competition Provisions in the Telecommunications Act of 1996, 14 FCC Red 3689, 3695-3703, ¶ ¶ 10-20 (“Reciprocal Compensation Order”), ISP calls should be interstate for separations purposes as well.
Of course, generally speaking, separations will follow jurisdiction. This basic norm is inherent in the separations formulas found at 47 C.F.R. § 36.125(a)(3), (a)(5) & (b), the Supreme Court’s decision in
Smith v. Illinois Bell Tel. Co.,
While the Order does not explicitly invoke the
MCI
exception, we can reasonably discern the path from its reasoning and citations. See
Bowman Transportation, Inc. v. Arkansas-Best Freight Sys
The Commission’s primary policy justification for the intrastate classification matches the language it has used for the ESP exemption. Rather than directly exempting ESPs from interstate access charges, the Commission defined them as “end users” — no different from a local pizzeria or barber shop. See Order at 16, ¶ 37;
In re 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,
Once the Commission has allotted the
revenue
to intrastate service, plainly it makes sense to allocate the costs there as well. But that might be said merely to relocate the question: as the functional significance of the ESP exemption is to channel the revenue to intrastate service, one might ask if such an allocation was reasonable. Indeed, ACS’s brief addresses the cost-revenue matching principle in
economic
terms, i.e., the proposition that, in the interest of aligning incentives correctly, costs should be borne by the customers who cause them to be incurred. See
Union Elec. Co. v. FERC,
We are left, then, with the Commission matching its separations treatment of costs for ISP-bound calls with its classification of those calls for tariffing and revenue purposes. Further, not only is the latter unchallenged here, but the Commission appears to be working on a number of interconnected parts of the puzzle. The ESP exemption itself is temporary. And the Commission has set out to reform the regime to which it is an exception, the regime of interstate access charges, see Order at 14, ¶ 32;
In re Access Charge Reform,
First Report and Order,
Damages for rates filed in “streamlined tariffs”. ACS next argues that 47 U.S.C. § 204(a)(3), as elaborated upon by the Commission in its Streamlined Tariff Order, is a bar to damages for its purported overcharges in 1998. 47 U.S.C. § 204(a)(3), part of the Telecommunications Act of 1996, states:
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 (1) before the end of that 7-day or 15-day period, as is appropriate.
Id. (emphasis added).
The terms “legal” rate and “lawful” rate come to us burdened with (or illuminated by) the Supreme Court’s decision in
Arizona Grocery Co. v. Atchison, Topeka & Santa Fe Railway Co.,
Informed by this dichotomy, the Commission in its Streamlined Tariff Order interpreted the “deemed lawful” language in § 204(a)(3) as “establishing] a conclusive presumption of reasonableness.” Streamlined Tariff Order, 12 FCC Red at 2181-82, ¶ 19. Therefore, “a streamlined tariff that takes effect without prior suspension or investigation is conclusively presumed to be reasonable and, thus, a lawful tariff during the period that the tariff remains in effect.” Id. at 2182, ¶ 19. In accordance with Arizona Grocery, these “deemed lawful” tariffs are not subject to refunds. If a later reexamination shows them to be unreasonable, the Commission’s available remedies will be prospective only. Id. at 2182-83, ¶ ¶ 20-21. As the Commission emphatically recognized, § 204(a)(3) effected a considerable change in the regulatory regime: before, tariffs that became effective without suspension or investigation were only legal (not conclusively lawful), and thereby remained subject to refund remedies. Id. at 2176, ¶ 8 (describing no-refund rule as differing “radically” from past practice); id. at 2182-82, ¶20 (describing previous practice).
Clearly then, to the extent that the streamlined tariff provisions apply to ACS tariff filings, the Commission may not now impose refund liability for covered rates — even ones it concludes were unreasonable. The Commission, however, argues that the streamlined tariff provisions do not apply.
First it asserts a critical distinction between rates and rates of return. Order at 23, ¶ 57. It claims that since the Order found ACS in violation of its prescribed
rate of return,
the fact that ACS’s
rates
might have been deemed lawful under § 204(a)(3) does not immunize it from refund liability. In support, the Commission relies on
New England Telephone and Telegraph Co. v. FCC,
The Commission’s position, however, overlooks the language of its statutory mandate. Under the Communications Act of 1934, it is empowered to ensure just and reasonable rates (“charges”), not rates of return. See 47 U.S.C. § 201(a). The Commission acquires the authority to prescribe rates of return only as a means to achieve just and reasonable rates. See
Nader v. FCC,
Here, of course, no proxy for (unreasonableness is needed. Since § 204(a)(3) deems ACS’s rates to be lawful, the inquiry ends. This situation is quite different from
New England Telephone,
which was decided before the passage of § 204(a)(3). In that case, the carrier’s rates had gone into effect with neither a Commission finding of reasonableness,
Recall that the Streamlined Tariff Order read § 204(a)(3)’s “deemed lawful” language to create a conclusive bar to refunds. 12 FCC Red at 2175-76, ¶ ¶ 8-9, 2181-82, ¶ ¶ 18-19. In doing so, it reasoned that “deemed lawful” was “unambiguous” in the “consistent” interpretation of the courts.
Id.
at 2181-82, ¶ 18; see also, e.g.,
Ohio Power Co. v. FERC,
The Commission next suggests that § 204(a)(3) does not protect the January 1998 Tariff from refunds because neither of the two challenged cost allocation practices appeared in that filing. Order at 23, ¶ 56. (Apparently, the earliest public disclosure was a March 1998 preliminary monitoring report, see Anchorage Telephone Utility, Rate of Return Report (Mar. 31, 1998); Order at 5, ¶ 9.) Accordingly, the Commission contends that these “ ‘practices’ were not ‘filed’ in [ACS’s] January 1998 Tariff in accordance with section 204(a)(3).” Order at 23, ¶56. We find this argument somewhat mystifying. By the Commission’s own account, the methods used in the January 1998 Tariff were the proper ones. Surely the Commission cannot now criticize ACS for failing to use in January 1998 the new accounting methods that the Commission maintains are impermissible and which ACS had not yet adopted.
Alternatively, the Commission may be claiming that ACS’s changes in computa
The Commission may have been confused by its pre-§ 204(a)(3) habit of retroactively assessing the lawfulness of a rate long after it had taken effect without advance suspension or initiation of hearing. See FCC Br. at 40. As we noted in our 1995
MCI
decision, it is virtually impossible to tell in advance just what rate of return a given rate may yield;
We do not, of course, address the case of a carrier that furtively employs improper accounting techniques in a tariff filing, thereby concealing potential rate of return violations. The Order here makes no claim of such misconduct.
Finally, the Commission argues that § 204(a)(3)' does not protect the July 1998 Tariff because ACS failed to satisfy the statutory notice period. Order at 23, ¶ 54. ACS filed the July 1998 Tariff on 7-days notice. The Commission contends that because the Tariff changed accounting methods, it altered “terms and conditions,” and thus had to be filed on 15-days notice. Order at 25-26, ¶ ¶ 61-63; see also Streamlined Tariff Order, 12 FCC Red at 2203, ¶ 68 (discussing treatment of “tariffs that change terms and conditions or apply to new services even where there is no rate increase or decrease”). Again, nothing in the statute or even the Streamlined Tariff Order supports the classification of a filing that changes only underlying calculations as an “increase in rate” requiring 15-days notice.
We note that since § 204(a)(3) immunizes ACS’s rates for 1998, it is unclear how its rate of return should be calculated for 1997 in light of
Virgin Islands Telephone Corp. v. FCC,
Prejudgment Interest. ACS lastly argues that the Commission erred in using the IRS’s rate for corporate overpayment for the calculation of prejudgment interest. ACS contends that it should instead have used the rate for “large” corporate over-payments. See Order at 29-30, ¶ ¶ 72-74.
Under 26 U.S.C. § 6621, the IRS calculates five rates of interest, all functions of the Treasury’s rate for short-term borrowing. The rates depend on whether taxes are overpaid or underpaid, whether the party is an individual or a corporation, and whether the amount is “large” (exceeds $10,000). See 2002-
Noncorporate over- and underpayment:
7%
Corporate overpayment: 6%
Large corporate overpayment: 4.5%
Corporate underpayment: 7%
Large corporate underpayment: 9%
Id.
The Commission found that the rate for non-large corporate overpayments was most appropriate because it was “the overpayment rate that the Commission has most recently applied, despite the apparent availability of the rate for large corporate overpayments.” Order at 30, ¶ 74. The precedents offered by the Commission generally support this position. See
In re Time Warner Entertainment/Advance-Newhouse Partnership,
Fair enough. But the Commission acknowledged the possibility of applying the large corporate overpayment rate, in words contradicting its prior simple reasoning from precedent:
Although we might appropriately apply the rate for large corporate overpay-ments 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.
Order at 30, ¶ 74. The Commission went on to justify the higher rate by arguing that ACS “had at least constructive knowledge” of the intrastate classification rule because “the Commission had rejected other carriers’ attempts to assign ISP traffic to the interstate jurisdiction.” Id. But those rejections happened in 1999, well after ACS filed its 1997 tariffs. See id. at 30 n. 161 (cross-referencing id. at 9-10, ¶ 21). And while the rejections did occur before ACS filed its 1997-98 Monitoring Report in September 1999, it is unclear why a company’s acquisition of “constructive knowledge” of Commission views after its collection of disputed rates should affect its culpability for that collection.
We (1) deny ACS’s petition for review of the Commission’s classification of ISP-related traffic-sensitive costs as intrastate, (2) grant its petition regarding the Commission’s failure to honor § 204(a)(3)’s bar on refunds as to ACS’s 1998 rates and vacate the Order insofar as it grants damages for overcharges in 1998, and (3) remand the case to the Commission for. (a) its consideration of the treatment of a rate-of-return violation for a monitoring period cut short by § 204(a)(3) filings, and (b) its reconsideration of the use of the IRS rate for non-large corporate overpay-ments for prejudgment interest.
So ordered.
Notes
. Commission regulations specify two-year monitoring reports running with the calendar year, even though the tariffs are filed for periods starting July 1. Compare 47 C.F.R. § 69.3(a) (specifying periodicity for rate-of-return monitoring reports), with 47 C.F.R.