CITY OF BROOKINGS MUNICIPAL TELEPHONE COMPANY, еt al., Petitioners, v. FEDERAL COMMUNICATIONS COMMISSION and United States of America, Respondents, National Exchange Carrier Association, Inc., American Telephone and Telegraph Company, the BellSouth Operating Companies, et al., National Telephone Cooperative Association, et al., Brindlee Mountain Telephone Company, Intervenors.
No. 86-1306.
United States Court of Appeals, District of Columbia Circuit.
Argued March 27, 1987. Decided July 7, 1987.
822 F.2d 1153 | 262 U.S.App.D.C. 91
Before EDWARDS and STARR, Circuit Judges, and SWYGERT, Senior Circuit Judge.
Jeffrey Blumenfeld, Washington, D.C., for petitioners.
John E. Ingle, Counsel, F.C.C., with whom Jack D. Smith, Gen. Counsel, Daniel M. Armstrong, Associate Gen. Counsel, Laurel R. Bergold, Counsel, F.C.C., Catherine G. O‘Sullivan and Andrea Limmer, Attys., Dept. of Justice, Washington, D.C., were on brief, for respondents. Linda L. Oliver, Counsel, F.C.C. and Robert J. Wiggers, Atty., Dept. of Justice, Washington, D.C., also entered appearances for respondents.
Timothy W. Bergin, with whom Herbert E. Marks, Kenneth A. Levy, Washington, D.C., and Thomas E. Taylor, were on brief, for intervenor, Nat. Exchange Carrier Assn.
Andrew G. Mulitz, David Cosson and Paul G. Daniel, Washington, D.C., were on brief for intervenors, Nat. Telephone Co-op. Ass‘n, et al.
Jonathan S. Hoak, Chicago, Ill., and J. Richard Devlin, Bedminster, N.J., entered appearances for intervenor, American Tel. and Tel. Co.
Vincent L. Sgrosso and R. Frost Branon, Jr., Atlanta, Ga., entered appearances for intervenors, The BellSouth Operating Companies, et al.
F. Thomas Tuttle, McLean, Va., entered an appearance for intervenor, Brindlee Mountain Telephone Co.
Opinion for the Court filed by Circuit Judge STARR.
STARR, Circuit Judge:
This case concerns the manner in which certain local telephone companies are reimbursed for providing their subscribers with access to long-distance common carriers. In the order under review, the Federal Communications Commission approved a modified system of reimbursement proposed by the National Exchange Carrier Association, the entity obligated under FCC regulations periodically to examine the formulas for compensation and to suggest revisions to those formulas.
Petitioners are twelve small “average schedule” companies, an appellation that we shall presently explain. They mount a two-pronged attack on the decision. First, they fault the Commission for failing to follow the notice-and-comment rulemaking procedures of the Administrative Procedure Act,
A
The path that an interstate telephone call takes as it wends its way from one subscriber to a user at the other end of the line raises two regulatory issues of significance to this case. To state the obvious, a caller uses some of the same facilities to telephone the neighbor next door as are necessary to place a call across the continent. And thus the first issue: because interstate calls originate and terminate over local telephone company (or “exchange company”1) facilities that also carry intrastate calls, the question arises as to how to apportion the costs of these exchange facilities (known as “local plant“) between intrastate and interstate jurisdictiоns. This apportionment is not of mere academic or internal bookkeeping interest but must be performed because the FCC enjoys jurisdiction over interstate rates, whereas the several States reign supreme over intrastate rates. See
To address the first issue, the FCC has devised the rather bureaucratic nomenclature of “jurisdictional separation” procedures. See MCI Telecommunications Corp. v. FCC, 750 F.2d 135, 137 (D.C.Cir.1984); see also MCI Telecommunications Corp. v. FCC, 712 F.2d 517, 523 n. 4 (D.C. Cir.1983). To address the second, it has developed a “settlement process.” Because of their bearing on this case, each warrants what we shall try to limit to a modest description.
For purposes of “jurisdictional separation” procedures, the Commission distinguishes traffic sensitive costs from non-traffic sensitive costs. As their names suggest, these terms refer respectively to exchange company costs that vary with the extent of phone usage and those that do not. See NARUC, 737 F.2d at 1104.3 In general, the FCC has separated traffic sensitive costs оf local plant attributable to the interstate jurisdiction on the basis of relative minutes of use. FCC Brief at 4-5.
Allocation of non-traffic sensitive (“NTS“) costs of local plant, in contrast, has presented a thornier problem. See MCI, 750 F.2d at 137. Beginning in 1970, the Commission adopted for NTS separations a method based on the “subscriber plant factor” (“SPF“). See id. at 137-38 & n. 2. See generally
Recognizing that the shift from SPF to a fixed allocatur wоuld work a “major change[ ],” id. at 802, the Commission decided to delay implementation until January 1, 1986, two years from the date of its decision. In addition, the FCC determined that no exchange company subject to the new separation procedures would lose more than 5% of its interstate allocation per year. See MTS & WATS Market Structure & Establishment of a Joint Board; Amendment, 50 Fed. Reg. 939, app. A (1985) (amending part 67 of the Commission‘s rules,
Now all this assumes the availability of accurate cost data, the basic ingredient needed for the FCC‘s recipe. But this assumption is not borne out by reality, at least in respect of smaller telephone companies. Here is why. To determine interstate costs accurately, it is necessary to begin with reliable estimates of total intrastate and interstate costs, known collectively as “unseparated” costs. Most local telephone (or “exchange“) companies obtain data on their unseparated costs by periodically performing lengthy, expensive cost studies, thereby earning the name “cost companies.” However, the Commission traditionally has recognized that “[p]recise determination of a local company‘s costs in all relevant areas may require extensive data collection, analysis, reporting and auditing, which can be a difficult and costly burden for small telephone companies.” NARUC, 737 F.2d at 1127. Accordingly, the FCC permits certain small exchange companies to estimate costs through use of an average schedule that “adopts generalized industry data to reflect the costs of a hypothetical exchange company.” Id.; see also MTS & WATS Market Structure: Average Schedule Companies, 103 F.C.C.2d 1017, 1019 (1986) [hereinafter Average Schedule Order], Joint Appendix (“J.A.“) at 1, 2.
This, then, is the genesis of the term “average schedule companies,” a group which consists, in essence, of local telephone companies that are typically smaller than the sometimes behemoth members of the “cost company” species. It is NECA‘s efforts to adapt the changes in separations procedures that we have just discussed for application to these smaller, “average schedule” companies that form one aspect of the dispute now before us.
B
Before turning to the particulars of this dispute, however, we are well advised to dscribe--briefly--the settlement process by which revenues for interstate service are apportioned among participating carriers. Prior to the AT & T reorganization,4 exchange companies recovered their costs--both traffic sensitive and non-traffic sensitive--through charges imposed on interstate callers. NARUC, 737 F.2d at 1104-05. These charges were, in general, usage-sensitive, increasing with the distance and duration of calls. Id. AT & T was responsible for pooling these revenues and distributing them to exchange companies in proportion to their total (traffic sensitive and NTS) interstate investment. Id. at 1104-05 n. 5.
The Commission‘s reexamination led to the present system of “access charges.” Id. Under this new regime, exchange companies recover a large part of their interstate NTS costs through flat charges per access line6 billed to end users.7 To enable exchange companies to calculate access charges, the Commission promulgated detailed regulations that classify the cost components of providing interstate access into access elements and prescribe methods of calculating charges for each element. See generally
In adopting access charge regulations, the Commission addressed the anomaly of traffic sensitive charges for NTS costs that was embedded in average schedule formulas. This anomaly resulted from the “Average Revenue Per Message” (“ARPM“) methodology then in effect, which tied average schedule company settlements, covering NTS as well as traffic sensitive costs, to the number of interstate messages carried. See Average Schedule Order, 103 F.C.C.2d at 1019, 1023 n. 31, J.A. at 3, 8 n. 31. The Commission promulgated a rule requiring as follows:
Payments shall be made in accordance with a formula approved or modifiеd by the Commission. Such formula shall be designed to produce disbursements to an average schedule company that simulate the disbursements that would be received ... by a company that is representative of average schedule companies.
Under section 69.606, AT & T was responsible for submitting average company schedules for 1984.
C
The controversy before us arose when in September 1985 NECA filed for Commission approval proposed modifications to average schedules to take effect June 1, 1986. The filing took the form of a forty-five page document in which NECA stated its determination that the usage-sensitive ARPM system for recovery of NTS costs should be abandoned.10 In its stead, NECA proposed to fix settlements for interstate NTS costs of local plant that carried interstate and intrastate calls (known as “common line settlements,” see supra note 9) at $8.06 per access line. See NECA Modification at 12, app. A, at 14, J.A. at 32, 57.11
D
Following the procedure it had employed the previous year for reviewing AT & T‘s average schedule filing, the FCC released public notice of NECA‘s proposal on October 9, 1985; it did not, however, publish this notice in the Federal Register. See FCC Mimeo 0189 (Oct. 9, 1985), J.A. at 67 (notice of NECA filing); see also FCC‘s Brief at 40 n. 51. The notice described the filing simply as “revised formulas and supporting data that update the schedules that are associated with average schedule company interstate settlement disbursements.” See Notice, J.A. at 67. The Commission invited comments within 30 days, with reply comments due 30 days thereafter.13
Soon after notice was given, two average schedule companies asked the Commission to order NECA to release additional information on its proposal.14 They sought, in particular, the data underlying NECA‘s composition of an “average” schedule company and further details on the calculations leading to NECA‘s flat rate common line settlements figure. Before the Commission ruled on the production requests, NECA volunteered to produce additional material and on November 18, 1985 released some 900 pages of data.15 NECA prefaced this additional submission by admitting that “certain deliberative steps” were never reduced to writing and could not be documented; likewise, it explained that some “critical calculations” had not been preserved at the time they were performed and had only been reconstructed in response to the request for more data. See NECA Data Submission, notes 2, 4 (Nov. 18, 1985), J.A. at 402. The Commission extended the comment period by 30 days--through December 6, 1985 for initial comments--to permit further examination of the released information. MTS & WATS Market Structure: Average Schedule Filing, CC No. 78-72, Mimeo No. 0757 (Nov. 7, 1985).
Dissatisfied with NECA‘s further efforts, petitioners renewed their motion for production of data and sought further extension of the comment period.16 They complained generally that “[t]he data wholly fail[ed] to provide the information necessary to ascertain whether NECA‘s proposed revisions have any reasonable relationship to average schedule costs or revenue requirements.”
Petitioners’ comments detailed their criticisms, faulting NECA‘s proposed revision for what it included as well as what it omitted. They noted several instances in NECA‘s data where basic calculations had been incorrectly performed; in several, for example, NECA had multiplied non-zero numbers by a factor of zero to arrive at non-zero results.17 Petitioners objected, furthermore, to NECA‘s omission of critical analytic steps in its derivation of the proposed flat rate figure for interstate common line settlements. Id. at 19-27, J.A. at 137-45. Adding insult to injury, in petitioners’ view, NECA had not even accurately informed average schedule companies what, if any, reductions they would suffer under NECA‘s revisions. According to petitioners, the “impact statements” furnished in July 1985 were flawed. See supra note 13. In an effort to correct what it admitted were “logical inconsistencies,” NECA had sent out a second set of impact statements in November 1985, but this second set, petitioners contended, was also inaccurate. Id. at 15-16, J.A. at 133-34; see also NECA Reply to Production Requests at 2, J.A. at 79. As a result, petitioners concluded, many companies could not meaningfully comment on the revisions.
Finally, petitioners attacked two aspects of NECA‘s transition plan for implementing the revisions. First, petitioners asserted, in proposing a “flash cut” NECA had not justified the manner in which it translated the 85% limit on cost companies’ allocation of interstate NTS costs into a measurement that could be applied to average schedule companies. Id. at 27-28, J.A. at 145-46. Second, NECA‘s proposal to limit reductions in settlements to $1.25 per access line per month over four years was, they charged, harshly discriminatory compared to the twelve-year period applicable to cost companies under the transition to a 25% fixed allocatur. Id. at 11-12, J.A. at 129-30.
NECA responded by submitting additional documents to correct the obvious errors that petitioners had discovered.18 In reply to charges that it had omitted important calculations and analytic steps from prior submissions, NECA chastised petitioners for holding the Association to an “unrealistic” standard of statistical precision.19 “[E]xpert judgment,” NECA explained, necessarily played a significant role in formulating the modifications and was not susceptible to rigorous statistical support. Id. at 9-10, J.A. at 270-71. NECA defended its revised formulas as “what realistically could be accomplished in the time frame and with the resources available.” Id. at i, J.A. at 259.
NECA maintained, moreover, that its revisions represented a significant improvement over existing average schedules. Fоr one thing, they were based on more recent data than existing schedules. See id. at 23-24, J.A. at 284-85. For another, the revisions took into account recent changes in separations procedures by classifying data according to the twenty-one categories of investment, expense, and income adjustments prescribed for cost companies in part 67 of the Commission‘s rules. See id. at 14, 24, J.A. at 275, 285; see also
NECA also defended its transition plan. To translate the 85% SPF applicable to cost companies into a measurement applicable to average schedule companies, NECA had determined that “the average point at which an average schedule company‘s common line settlement recovery exceeds 85% of its unseparated NTS costs is 15.9 messages per line.” Id. at 19, J.A. at 280 (footnote omitted). NECA dismissed petitioners’ charge that this equation was unjustified, contending that the two measurements were highly correlated. Id. NECA likewise waved off attacks on the four-year implementation of settlement reductions. This transition, NECA explainеd, was no harsher than that to which cost companies were subject, because average schedule formulas were based on cost company data and would necessarily incorporate the more gradual transition applied to cost companies. “Therefore, the transition of the average schedule companies ... is occurring on the same schedule as the cost companies.” Id. at 21, J.A. at 282.
The Commission approved NECA‘s modifications to average schedule formulas in a decision released April 18, 1986.20 It acknowledged at the outset that “improvements are possible in the studies, methodologies, and data that NECA employed in developing new average schedules.” Id. at 1023 (footnote omitted), J.A. at 8. Nonetheless, the Commission noted, revisions were necessary so that the average schedules reflected changes in the separation procedures and settlement process applicable to cost companies. Id. at 1024, J.A. at 8. Thus, the pertinent inquiry in the Commission‘s view was whether NECA‘s revisions were an improvement over existing schedules. The FCC concluded that they were, for “reasons ... stated in the supporting comments.” Id. (footnote omitted). Its reasoning is set out in full:
[T]he NECA revisions: (1) more closely simulate the principles that are contained in Part 69 of our rules; (2) take more fully into account the effects of changes in jurisdictionally separated costs under Part 67 of our rules that have occurred since the last revision to the average schedules; (3) use more recent data; and (4) employ a residue ratio that more closely parallels the residual risk sharing that occurs under cost company pooling.
Id. (footnote omitted). Thus, the first three reasons mirror those presented by NECA. The fourth refers to the process by which revenues that remain in the interstate pool after initial distribution of expenses (i.e., the residue) are distributed to companies in proportion to their share of the risk of the overall enterprise. FCC Brief at 30 n. 38; see also
The Commission addressed the transition plan with similar dispatch. The “flash cut” was reasonable, it found, because it affected only those companies that were receiving more than 100% of their total NTS revenue requirements from the interstate jurisdiction through average schedule settlements. Average Schedule Order, 103 F.C.C.2d at 1026, J.A. at 11. Those companies, in the Commission‘s view, were in no position to complain about immediate reductions. More generally, any аverage schedule company that believed itself adversely affected by the revisions could elect to be treated as a cost company and thereby recover its full costs. “No company,” the Commission observed, “has a legal or equitable right to obtain more than its full costs.” Id. at 1027, J.A. at 12.
F
In the wake of the Commission‘s decision, several parties sought relief or modification of the order in various respects.22 Three exchange companies sought waiver of the application of the average schedule revisions.23 The FCC denied two of the three requests and delayed ruling on the third pending further investigation.24 The Commission did decide, however, to grant limited relief to “small” average schedule companies.25 Specifically, it permitted average schedule companies with fewer than 5,000 local subscriber access lines to waive application of the revisions through July 31, 1986. In addition, small average schedule companies that elected by December 1, 1986 to become cost companies could choose to be compensated on a cost basis retroactively from August 1, 1986. Id. None of these subsequent rulings, it should be noted, is presently before us.
Shortly after the Commission‘s order on reconsideration, petitioners filed this petition for review. NECA, among others, has intervened.
Petitioners’ challenges to the Commission‘s decision fall into two broad categories. First, they argue that the proceedings were procedurally defective when measured against the requirements prescribed by the APA for informal rulemaking. See
A
Petitioners present a litany of objections to the manner in which the FCC conducted its proceedings. They fault the Commission because it did not publish notice of NECA‘s filing in the Federal Register. See
We decline to rule on petitioners’ procedural arguments, for they were not raised before the Commission. Our decision flows from section 405 of the Communications Act, which in relevant part provides:
The filing of a petition for reconsideration shall not be a condition precedent to judicial review of any ... order, decision, report, or action, except where the party seeking such review (1) was not a party to the proceedings resulting in such order, decision, report, or action, or (2) relies on questions of fact or law upon which the Commission ... has been afforded no opportunity to pass.
Although we have recognized the salutary, commonsense notion that the exhaustion doctrine is to be applied flexibly, none of the traditional exceptions to the requirement avails petitioners. Their objections do not fall within that class of issues which, “by their nature could not have been raised before the agency.” WATCH, 712 F.2d at 682. On the contrary, we have previously deemed procedural objections premised on the APA to be precisely the sort appropriately raised before the Commission in the first instance. American Radio Relay League, Inc. v. FCC, 617 F.2d 875, 879 n. 8 (D.C.Cir.1980).
Nor do we find any evidence to suggest that it would have been “futile” for petitioners to lodge their procedural complaints in the agency proceedings, another basis for withholding application of the exhaustion
Assuming arguendo our discretion to craft an exception to the exhaustion requirement to accommodate petitioners, see WATCH, 712 F.2d at 683, we would decline to do so. For one thing, petitioners themselves are at least partly responsible for the agency‘s failure to address whether notice-and-comment rulemaking procedures were necessary, cf. id.; their motions and comments emphasized NECA‘s alleged failure to produce sufficient data rather than the FCC‘s role in the proceedings. For another, the question of the applicability of notice-and-comment procedures of the APA does not yield an obvious answer. Respect for the proper court-agency relationship, see Alianza, 539 F.2d at 739, therefore counsels against permitting petitioners to bypass the agency with respect to this issue.
B
Before addressing the particulars of petitioners’ substantive challenge, we take an obligatory pause to set forth the legal standard governing our review. In a familiar passage, the APA directs us to “hold unlawful and set aside agency action, findings, and conclusions found to be arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law.”
We have recently had occasion to observe the “wide range of reasons why agency action may be judicially branded as ‘arbitrary and capricious.’ ” FEC v. Rose, 806 F.2d 1081, 1088 (D.C.Cir.1986). Here, the focus of petitioners’ arguments is that the Commission failed to demonstrate that an adequate basis in the administrative record existed rationally to conclude that NECA‘s revisions represented “an improvement over the existing schedules.”30 Average Schedule Order, 103 F.C.C.2d at 1024, J.A. at 8. To withstand this assault, the FCC must demonstrate a “rational connection between the facts found and thе choice made.” Farmers Union Central Exchange, Inc. v. FERC, 734 F.2d 1486, 1499 (D.C.Cir.) (quoting Burlington Truck Lines v. United States, 371 U.S. 156, 168 (1962)), cert. denied, 469 U.S. 1034 (1984); accord Aeron Marine Shipping Co. v. United States, 695 F.2d 567, 577 (D.C.Cir.1982) (quoting
NECA‘s initial submission adumbrated a three-step process for arriving at average schedule formulas. See NECA Modification at 14, J.A. at 34. Because petitioners allege that deficiencies pervade the whole process, each step, unfortunately, requires some further description than was possible in our earlier recitation of the background underlying the present controversy.
First, NECA developed “access element allocation factors.” Id.; see also
Second, the Association compiled “a representative selection of average schedule investment and expense data that was distributed to the aсcess elements using the access element allocation factors.” Id. at 14, J.A. at 34. It collected data from 489 average schedule companies for the period 1981 to 1983, segregating this data into the same 21 investment, expense, and income adjustment accounts into which average schedule data had been classified in step one. Id. at 16, J.A. at 36. It projected 1983 data to reflect estimated growth for average schedule companies through 1986. Id. Then it applied the allocation factors to the data in each category. Through this calculation, NECA hoped to obtain investment and expense data in each access category that would, for an average schedule company, resemble the results that would be obtained through cost studies. Id.
Finally, NECA developed formulas “to relate the selected average schedule company costs results [obtained in the second step] to appropriate access demand quantities.” Id. at 17, J.A. at 37. For non-traffic sensitive, or “common line costs,” the demand quantity selected was the access line. Id.31 Based on these formulas, NECA determined that average schedule company common line settlements should be fixed аt $8.06 per access line per month. Id., app. A, at 14, J.A. at 57.
Having elaborated on the abstruse but important arcana of NECA‘s average schedule methodology, we may now turn to the particulars of petitioners’ complaints. Petitioners criticized every aspect of the first step of NECA‘s methodology. To begin with, they complained, NECA did not show how it selected the 255 cost companies studied.32 Although NECA described its selection criteria in its reply comments, this explanation was fatally inadequate in petitioners’ view because it came too late for them to comment. Even more importantly, they maintain, nothing in NECA‘s data submission shows that the criteria spelled out in NECA‘s reply comments were actually employed.33 Petitioners also faulted NECA‘s calculation
Petitioners were similarly thorough and scathing in their evaluation of the second step of NECA‘s methodology. They criticized NECA for treating 489 average schedule companies as representative of all such companies without justifying this homogenizing treatment.37 They also took issue with NECA‘s estimating average companies’ growth trends on the basis of data that included data from cost companies as well as from the former.38
Finally, petitioners maintained that NECA improperly failed to reveal the source of the demand data employed in the third stage of its revision process. They added that flaws appeared on the face of the data provided.39 Perhaps most damning, to petitioners’ mind, was that in describing this third step NECA did not disclose the calculations performed in proceeding from the data to the specific average schedules.40
In the face of these apparently substantial charges, NECA was largely unresponsive. It provided no data in addition to that supplied in November 1985. On December 12, 1985, however, after the deadline for filing initial comments had pаssed, it replaced a set of tables containing obvious errors with a corrected set.41 Still later, in its reply comments, NECA described how it had selected the 255 cost companies studied in the first step of its methodology. It also defended at that late stage its inclusion of cost company data in calculating average schedule company growth rates in the second step. It furnished no data to verify these explanations, which, in any event, came too late for petitioners to question them.42
When we look to the Commission‘s decision for its assessment of petitioners’ thoroughgoing assault, we find only the following unedifying remark: “[T]here is little doubt that improvements are possible in the studies, methodologies, and data that NECA employed in developing new average schedules.” Average Schedule Order, 103 F.C.C.2d at 1023, J.A. at 8. This is understatement in the extreme. But in any event, in the face of this acknowledgment the Commission arrived at the conclusion that NECA‘s revisions represented “an improvement over existing schedules” and accordingly approved them. Id. at 1024, J.A. at 8. Yet, rather than reveal the path it took to reach this conclusion by explaining why the shortcomings pointed out with such scorching heat by petitioners did not lead to seriously flawed results, the FCC directs the оnlooker to comments in support of NECA‘s proposal. Id. But this leads us into a cul de sac. The only detailed supporting comments are those of NECA itself, which, as we have seen, do not even respond directly to most of petitioners’ criticisms.43
This will not do as reasoned decisionmaking. It may well be that the concepts undergirding NECA‘s proposal--for example, shifting from a usage-sensitive basis for common line recovery to one based on access lines--were reasonable means of enhancing the accuracy of average schedules.
Obviously, the FCC could reasonably have accepted lacunae in data and methodology and even have forgiven ancillary analytic weak points, in light of the difficult time constraints within which NECA had to work, the undisputed need for revisions, and the formidable nature of the task of adapting average schedules to the sea changes in separations procedures and the settlements process. Cf. Public Citizen Health Research Group v. Tyson, 796 F.2d 1479, 1493-96 (D.C.Cir.1986); MCI Telecommunications Corp. v. FCC, 627 F.2d 322, 343 (D.C.Cir.1980)National Cable Television Association v. Copyright Royalty Tribunal, 689 F.2d 1077, 1091 (D.C.Cir.1982).
Lacking any indiсation of such a reasoned determination, however, we are forced to conclude that the FCC acted irrationally in glossing over gaping holes, especially in light of errors and anomalies evident in what NECA did submit. As it is not the task of a reviewing court to “rummage” through the record in search of a basis for upholding the Commission‘s conclusion, Connecticut Power & Light Co., 673 F.2d at 534-35, we are obliged to conclude that the FCC‘s approval of NECA‘s revisions was, on this record, arbitrary and capricious. See Celcom Communications Corp. v. FCC, 789 F.2d 67, 71 (D.C.Cir.1986) (“[T]he agency must consider the relevant evidence presented and offer a satisfactory explanation for its conclusion.“); Aeron Marine, 695 F.2d at 577-80 (finding arbitrary and capricious agency decision that lacked adequate factual predicate); see also Office of Communication, 779 F.2d at 707 (reasoned decisionmaking requires agency not employ means that undercut its ends).
C
In addition to asserting that the FCC did not articulate a rational basis for its decision, petitioners maintain that the Commission improperly failed to consider alternatives to the methodology employed by NECA. We are persuaded that petitioners advanced at least one alternative sufficiently detailed and of ample significance to merit the Commission‘s consideration.
As exhibits to their reply commеnts, petitioners submitted “the suggestions of two distinguished average schedule experts as to how revisions could be derived in a scientific and accurate manner.” ICORE Reply Comments at ii, J.A. at 207; see also supra note 36. Mr. Henry Coo outlined three alternative bases for average schedule revisions: (1) a full-scale cost study of a scientifically selected group of average schedule companies; (2) data from cost companies that, through matching of salient characteristics, would function as surrogates for average schedule companies; and (3) adaptation of current average schedules to a demand base reflective of the new access charges environment, which, among other things, would reimburse companies for NTS costs on an access line basis.44 Dr. Robert Brousseau, a second expert relied on by petitioners, elaborated on the first alternative proposed by Mr. Coo.45 The merits of a full-scale cost study alternative were also trumpeted in AT & T‘s comments.
It is well settled that an agency has “a duty to consider responsible alternatives to its chosen policy and to give a reasoned explanation for its rejection of such alternatives.” Farmers Union, 734 F.2d at 1511 (footnote omitted).46 Of course, as the Commission emphasizes in its defense, this duty extends only to “significant and viable” alternatives, Farmers Union, 734 F.2d at 1511 n. 54, not to “every alternative device and thought conceivable by the mind of man ... regardless of how uncommon or unknown that alternative may have been,” id. (quoting Vermont Yankee Nuclear Power Corp. v. Natural Resources Defense Council, Inc., 435 U.S. 519, 551, 98 S.Ct. 1197, 1215, 55 L.Ed.2d 460 (1978)). But with that sensible caveat, the fact remains that “[t]he failure of an agency to consider obvious alternatives has led uniformly to reversal.” Yakima Valley Cablevision, Inc. v. FCC, 794 F.2d 737, 746 n. 36 (D.C.Cir.1986); see also National Black Media Coalition v. FCC, 775 F.2d 342, 357 (D.C.Cir.1985); International Ladies’ Garment Workers’ Union v. Donovan, 722 F.2d 795, 815-18 (D.C.Cir.1983), cert. denied, 469 U.S. 820, 105 S.Ct. 93, 83 L.Ed.2d 39 (1984). This court has been particularly reluctant to blink at an agency‘s ignoring ostensibly reasonable alternatives where it admits, as the Commission has here, that the choice embraced suffers from noteworthy flaws. Farmers Union, 734 F.2d at 1511.
In our view, the FCC has breached this duty in failing to consider the approach calling for a full-scale cost study of scientifically selected average schedule companies. This proposed alternative was certainly “significant.” More than suggesting minor improvements to subsidiary aspects of NECA‘s submission, it constituted an altogether different methodological approach. It was also sufficiently “obvious” to warrant the Commission‘s аttention. Not only was it prominently featured in Mr. Coo‘s submission, it was discussed further both by Dr. Brousseau and AT & T, the latter of the two having interests that sharply diverged from petitioners’ in many important respects. Finally, we cannot agree with the Commission‘s argument that none of these alternatives was sufficiently described to be viable. FCC Brief at 35. It is clear that the full-scale cost study alternative, at least, was adapted from prior revisions to average schedules and therefore (presumably) familiar to the Commission. See J.A. at 237; see also AT & T Comments at 4, J.A. at 184. This alternative, then, had sufficient detail and support, in light of its familiarity, to permit evaluation and warrant attention. Cf. National Citizens Committee for Broadcasting v. FCC, 567 F.2d 1095, 1114-15 (D.C.Cir.1977) (requiring agency on remand to evaluate proposed alternative details of which had not been included in initial proceedings), cert. denied, 436 U.S. 926, 98 S.Ct. 2820, 56 L.Ed.2d 769 (1978).
Besides criticizing the proposed alternatives as insubstantial, the FCC advances two other arguments to justify its failure to discuss them. Neither, upon examination, is persuasive. First, the Commission asserts that the proposals were not worthy of mention because petitioners did not present them until they submitted their reply comments. This, the FCC contends, came too late in the day. While we recognize full well that the timing of presentation of alternatives directly affects the agency‘s ability (and hence its duty) to consider them, we cannot fault petitioners under the circumstances at hand. Petitioners were afforded a mere eighteen days after NECA‘s 900-page data submission to submit initial comments. We credit petitioners’ explanation that this scant period barely enabled them to evaluate NECA‘s proposal and pinpoint their objections, much less formulate alternatives to it. Second, the Commission now belittles the alternatives as impractical, expensive, and time-consuming. This argument, however, posed for the first time in the Commission‘s briefs to this court, is the latest in an undistinguished line of post hoc rationalizations that the Supreme Court has clearly taught does not excuse failure to consider significant alternatives at the agency level. State Farm, 463 U.S. at 49-50, 103 S.Ct. at 2869-70.
It should go without saying that our determination that petitioners’ proposed alternative merited the Commission‘s consideration in no wise prevents the agency on remand from rejecting it as unworkable. We hold only that, in light of the admitted shortcomings of NECA‘s revisions, the Commission fell into the forbidden zone of arbitrary and capricious conduct in failing even to consider the propоsed alternative.
D
Petitioners aim their final salvo at the transition plan NECA proposed to implement average schedule revisions. Specifically, they target: (1) the “flash cut,” under which companies deemed to be recovering over 85% of their total NTS costs in common line settlements suffered immediate reductions; and (2) the limit of $1.25 per access line per month for four years placed on reductions otherwise experienced by companies whose settlements decreased under NECA‘s revisions. Petitioners contend that both features subject average schedule companies to harsher treatment than cost companies have experienced under analogous limitations. In addition, they argue that the “flash cut” was improperly calculated and consequently affects companies that are not in fact over-recovering.
We need not tarry long over petitioners’ charges of unfair treatment. To the extent NECA‘s “flash cut” affects companies that recover more than 85% of their unseparated (i.e., combined intrastate and interstate) common line revenue requirements in the form of interstate common line settlements, average schedule companies are being treated the same as cost companies.47 That some average schedule companies suffer greater reductions than cost companies does not, as petitioners would have it, betoken unfairly discriminatory treatment. It seems to us, rather, an indication that these average schedule companies have been overrecovering to a greater extent than cost companies. We also reject petitioners’ argument that the $1.25 reduction limit spread over four years is more draconian than the analogous limit, spread over fourteen years (including a two-year grace period), applicable to cost companies. In fact, as the Commission pointed out, average schedule companies will reap the benefit of the fourteen-year transition because average schedules under NECA‘s revisions are based on cost company data. Since that data will reflect the fourteen-year phase-in, cost companies and average schedule companies will proceed to the 25% allocatur proposed for jurisdictional separations at the same pace.48
We do find merit, however, in petitiоners’ concern over the way NECA translated the 85% cost company SPF into a measurement applicable to average schedule companies. As we have seen, NECA premised its “flash cut” on the determination that average schedule companies carrying more than 15.9 messages per line per month were transgressing the 85% SPF limit.49 The only relevant data submitted, however, belies this assertion. The data consisted of a graph plotting messages per line per month against subscriber plant factor. Of the thirteen companies shown to be exceeding 85% SPF, ten have fewer than 15.9 messages per line per month. Moreover, of six companies shown to have more than 15.9 messages per line per month, only three exceed 85% SPF.50 Although NECA claimed in its reply comments that the 15.9 figure accurately classifies 97% of average schedule companies, it points to no data to support this claim.51 The Commission, consistent with its approach to other anomalies described by petitioners, failed to address this issue.
Once again, our function as a reviewing court is not to canvass the record to resolve the dispute over the accuracy of NECA‘s surrogate measurement for an 85% SPF. See Home Box Office, Inc. v. FCC, 567 F.2d at 36. This is the Commission‘s job, not ours. Id. Wanting an indicatiоn that the Commission resolved this dispute in a reasoned fashion, we have no alternative but to hold its approval of this aspect of NECA‘s revisions arbitrary and capricious.
In summary, we conclude that the FCC acted arbitrarily and capriciously in failing to demonstrate a rational basis for approving NECA‘s revisions to average schedules. The Commission also violated the requirements of reasoned decisionmaking by not considering one of the alternatives to NECA‘s methodology brought to its attention by petitioners, namely a full-scale cost study of selected average schedule companies. Finally, it improperly ignored petitioners’ argument that the “flash cut” proposed by NECA was grounded on an inaccurate figure.
We reject petitioners’ argument that, under the APA, the Commission must adhere to informal rulemaking procedures in passing on NECA‘s revisions. Any such argument should have been advanced before the Commission prior to seeking judicial review; we see, moreover, no justification to excuse compliance with this sensible (and indeed vital) principle of administrative law.
In remanding this case to the Commission, we leave to its sound discretion to what extent, if any, it should reopen the record to satisfy the conсerns we have articulated. See Bowman Transportation, Inc. v. Arkansas-Best Freight System, Inc., 419 U.S. 281, 294-95, 95 S.Ct. 438, 446, 42 L.Ed.2d 447 (1974); Camp v. Pitts, 411 U.S. 138, 143, 93 S.Ct. 1241, 1244, 36 L.Ed.2d 106 (1973) (per curiam); see also Environmental Defense Fund, Inc. v. Costle, 657 F.2d 275, 285 (D.C.Cir.1981). Far be it from us even to pretend to understand the technical intricacies that loom so large in this case. We also forebear from ordering the reassessment of settlement payments made under the average schedules proposed by NECA and approved by the Commission. That sort of order at this late stage would disrupt the settlement process and would, among other things, cause economic hardship to many companies that are not parties to the petition for review.52 See Rodway v. Department of Agriculture, 514 F.2d 809, 817-18 (D.C.Cir.1975); Indiana & Michigan Electric Co. v. FPC, 502 F.2d 336, 343-48 (D.C.Cir.1974), cert. denied, 420 U.S. 946, 95 S.Ct. 1326, 43 L.Ed.2d 424 (1975); see also Western Oil & Gas Association v. EPA, 633 F.2d 803, 813 (9th Cir.1980). Accordingly, we leave to the Commission‘s judgment in the first instance how best to accommodate these various interests in light of the proceedings on remand.
The petition for review is
Granted.
Notes
Smith v. Illinois Bell Tel. Co., 282 U.S. 133, 148-49 (1930).The validity of the order of the state commission can be, and must be, tested by an appropriate determination of the fraction of the [exchange company] property employed in the intrastate business and of the compensation allowed for the intrastate service under the rates prescribed. As to the property employed in the interstate business and the compensation allowed for the interstate service, the state commission has no control.