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, 5 U.S.C. § 553 (1982). Second, they contend that approval of the reimbursement modifications proposed by NECA in the face of significant methodological flaws in NECA's approach constituted arbitrary and capricious decisionmaking in violation of the APA, Id. § 706(2)(A). We decline to reach petitioners' procedural objections for the simple reason that they were not raised before the Commission and thus cannot be advanced here. As to their second line of attack, however, we are constrained to conclude that the agency's approval of NECA's proposal was arbitrary and capricious. We therefore grant the petition for review.
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"
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.
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.
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 Prescription of Procedures for Separating & Allocating Plant Investment, 26 F.C.C.2d 247 (1970). Whatever its benefits, this approach had the "effect of assigning approximately 3.3 percent of the non-traffic sensitive costs of subscriber plant equipment to the interstate jurisdiction for every 1 percent of interstate calling." MCI, 750 F.2d at 137 (citation omitted). This skewing of cost allocation permitted exchange companies to recover through interstate revenues NTS costs properly recoverable through intrastate rates. See id. at 138. As an interim remedial measure, the Commission in 1982 froze the percentage of NTS costs allocable to the interstate jurisdiction at 1981 average levels. See id. at 139, aff'g Amendment of Part 67 of the Commission's Rules & Establishment of a Joint Board, 89 F.C.C.2d 1 (1982). In 1984, the Commission finally abandoned the SPF factor method entirely in favor of assigning to the interstate jurisdiction a flat 25% of the NTS costs of each exchange company. Amendment of Part 67 of the Commission's Rules & Establishment of a Joint Board, 96 F.C.C.2d 781 (1984), reconsid. denied, FCC No. 85-56 (Jan. 30, 1986), pet'n for review pending sub nom. Rural Telephone Coalition v. FCC, No. 84-1110 (D.C.Cir. filed Mar. 22, 1984).
Recognizing that the shift from SPF to a fixed allocatur would 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, 47 C.F.R. pt. 67); see also 47 C.F.R. § 67.124(d)(7) (1986). By virtue of the fact that since 1971 exchange companies employing the SPF separations procedure had been able to assign no more than 85% of their NTS costs to the interstate jurisdiction, this decision meant that some companies would take as long as twelve years to reach the much-reduced 25% limit. See NECA Modification of Average Schedules, app. B (Sept. 16, 1985), J.A. at 63-65; see also Petitioners' Brief at 8-9 & n. 18.
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.
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,
The Commission reexamined this traditional settlement process in light of technological advances and AT & T's impending divestiture. It determined that recovery of interstate NTS costs through usage-sensitive charges required heavy interstate users to pay more than their fair share of interstate NTS costs and therefore impeded growth and development in the nationwide communications network.
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 line
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:
47 C.F.R. § 69.606(a) (1986). This rule, in effect, required revision of average schedules to reflect the change in the way cost companies are reimbursed, which for NTS costs is no longer usage-sensitive.
Under section 69.606, AT & T was responsible for submitting average company schedules for 1984. Id. § 69.606(b) (1984). Since AT & T's role in the industry was to be drastically altered following divestiture, however, the Commission provided that after 1984, average schedules would be filed by an association of exchange companies. Id.
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.
NECA also outlined a three-part transition plan for implementation of its average schedule revisions. See id., app. A, at 12, J.A. at 55. First, the new formulas would apply immediately to exchange companies whose settlements would increase under the revision. Id. Second, under a so-called "flash cut" feature of the plan, companies that were recovering common line settlements that exceeded 85% of their unseparated (i.e., interstate and intrastate) common line revenue requirements would immediately be limited to 85%. This 85% cap, NECA claimed, was analogous to the 85% SPF limit that had been placed on cost companies in 1971. Id. at 18-19, J.A. 38-39. The third feature of the transition plan covered other companies whose settlements decreased because of the revisions; it provided that reductions would amount to no more than $1.25 per access line per month each year over a four-year period, resulting in a maximum reduction over four years of $5.00 per line per month. Id.
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.
Soon after notice was given, two average schedule companies asked the Commission to order NECA to release additional information on its proposal.
Dissatisfied with NECA's further efforts, petitioners renewed their motion for production of data and sought further extension of the comment period.
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.
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.
NECA maintained, moreover, that its revisions represented a significant improvement over existing average schedules. For 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 47 C.F.R. § 67.1(c) (1986). Finally, NECA asserted, the revisions reflected the logic of the system of access charges outlined in part 69 of the Commission's Rules. See NECA Reply Comments at 24, 28, J.A. at 285, 289.
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 explained, 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.
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 47 C.F.R. § 69.607-.610 (1986).
In the wake of the Commission's decision, several parties sought relief or modification of the order in various respects.
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 5 U.S.C. § 553. Second, they contend that the FCC's decision was substantively flawed. In petitioners' view, NECA's description of the methodology underlying its proposal was so incomplete and the data supporting its revised formulas so riddled with errors and omissions that the Commission acted arbitrarily and capriciously in approving the revisions without addressing these shortcomings and without
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 5 U.S.C. § 553(b). In the notice it did provide, they complain, the Commission adequately described neither "the terms or substance" of the filing nor "the subjects and issues involved." Id. § 553(b)(3). Notice of NECA's filing was also deficient, according to petitioners, because the Commission did not disclose its views on the proposal or the alternatives it was considering. See, e.g., Home Box Office, Inc. v. FCC, 567 F.2d 9, 35 (D.C.Cir.), cert. denied, 434 U.S. 829, 98 S.Ct. 111, 54 L.Ed.2d 89 (1977). Finally, petitioners maintain that by failing to order NECA to produce more information on how it derived the average schedule revisions, the Commission ran afoul of the principle that an agency must disclose the data upon which a proposed rule is based. See, e.g., Connecticut Light & Power Co. v. NRC, 673 F.2d 525, 530-31 (D.C.Cir.), cert. denied, 459 U.S. 835, 103 S.Ct. 79, 74 L.Ed.2d 76 (1982).
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:
47 U.S.C. § 405 (1982). This court has construed section 405 to "codify the judicially-created doctrine of exhaustion of administrative remedies." Washington Association for Television & Children v. FCC (WATCH), 712 F.2d 677, 681-82 (D.C.Cir.1983) (interpreting § 405(2)); accord Office of Communication of the United Church of Christ v. FCC, 779 F.2d 702, 706-07 (D.C.Cir.1985) (interpreting § 405(1)); see also North Texas Media, Inc. v. FCC, 778 F.2d 28, 33-34 (D.C.Cir.1985). As incorporated in section 405, this doctrine "require[s] complainants, before coming to court, to give the FCC a `fair opportunity' to pass on a legal or factual argument." WATCH, 712 F.2d at 681 (quoting Alianza Federal de Mercedes v. FCC, 539 F.2d 732, 739 (D.C.Cir.1976)).
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 requirement. See WATCH, 712 F.2d at 682 & n. 9. Nowhere in the administrative proceedings did the Commission hint that it was wedded to the procedures that it employed. Cf. Action for Children's Television v. FCC, 564 F.2d 458, 469 (D.C.
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. at 683; 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.
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." 5 U.S.C. § 706(2)(A). This statutory mandate clearly applies to the Commission's decision, whether it constituted informal rulemaking or, as the Commission argues, merely implementation of a prior rule, namely section 69.606, 47 C.F.R. § 69.606. Under this "arbitrary-and-capricious" standard, courts are to conduct an inquiry that is "`searching and careful,' yet, in the last analysis, diffident and deferential." Natural Resources Defense Council, Inc. v. SEC, 606 F.2d 1031, 1049 (D.C.Cir.1979) (McGowan, J.) (quoting Citizens to Preserve Overton Park, Inc. v. Volpe, 401 U.S. 402, 416, 91 S.Ct. 814, 823, 28 L.Ed.2d 136 (1971)) (footnote omitted).
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 47 C.F.R. § 69.101-.115 (1986). This mind-numbing turn of phrase can best be described by borrowing NECA's own words. NECA conceived these factors as a means of "allocating total average schedule company amounts of major categories of expense, investment, and income adjustments to access categories," which are the categories into which access elements are grouped, namely common line (comprising NTS costs), traffic sensitive, and billing and collection. NECA Modification, app. A, at 1-3, J.A. at 44-46; see supra note 11; see also NECA Data Submission, J.A. at 767-85. To derive these factors, NECA began by selecting 255 cost companies that it considered representative of average schedule companies. NECA Modification at 14-15,
Second, the Association compiled "a representative selection of average schedule investment and expense data that was distributed to the access 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.
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.
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.
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 passed, it replaced a set of tables containing obvious errors with a corrected set.
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 onlooker 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
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. Nonetheless, the undisputed omissions in data and methodology appear to have made it impossible to reproduce how NECA translated these concepts into hard figures.
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). We dare not overlook the realities and exigencies of regulatory life in an imperfect world and demand from our lofty perch that which could not reasonably be delivered. What is more, we would face a much different situation as a reviewing court if, besides acknowledging these shortcomings frankly, the Commission had explained why these were merely start-up problems resolvable in future revisions and did not undermine the basic improvements in NECA's overall approach. Cf. National Cable Television Association v. Copyright Royalty Tribunal, 689 F.2d 1077, 1091 (D.C.Cir.1982).
Lacking any indication 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).
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 comments, petitioners submitted "the suggestions of two distinguished average schedule experts as to how revisions could be derived in a scientific
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).
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 attention. 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
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 proposed alternative.
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.
We do find merit, however, in petitioners' 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.
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 indication 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 concerns 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
The petition for review is
In 1985, the FCC amended § 69.606(b) to provide that any "proposed revision of the [average schedule] for each annual period subsequent to December 31, 1986" must be submitted "on or before June 30 of the preceding year." 47 C.F.R. § 69.606(b) (1986).
The third petition, filed by Brindlee Mountain, was based on the assertion that Brindlee had initially received an impact statement from NECA indicating that it would benefit from the revisions, but was informed in a later impact statement, received after the comment period ended, that it would actually suffer reduced settlement payments. Petitioners' Brief at 13 n. 39, 24. The Commission denied this petition in an order dated March 30, 1987. Petitioners' Letter Advising of Additional Authority (filed Apr. 14, 1987) (citing Memorandum Opinion & Order, FCC No. 87-72 (Mar. 30, 1987)).
Their primary contention is that Federal Power Comm'n v. Hope Natural Gas Co., 320 U.S. 591, 64 S.Ct. 281, 88 L.Ed. 333 (1944), precludes judicial review. Hope articulated an "end result" test under which courts may not review the method by which rates are set; they may only determine whether the results are unreasonable. Id. at 602, 64 S.Ct. at 287. Since petitioners have not impugned the end result of NECA's revisions, the argument runs, they may not take issue with the methods employed. See FCC Brief at 25-27; NECA Brief at 21-27. This argument fails for several reasons. First, the Commission itself classifies average schedule companies as such because it has determined that they have insufficient resources to conduct cost studies; they would therefore hardly seem to be in a position to determine whether NECA's revisions permit recovery of full costs. Second, the Hope doctrine applies to ratemaking; NECA's revisions affect the division of revenues among carriers, not rates. Third, assuming arguendo NECA and the FCC negotiated these logical hurdles, they would run up against City of Charlottesville v. FERC, 661 F.2d 945 (D.C.Cir.1981). In that case we held that the "end result" standard of review applicable to ratemaking had "evolved" since Hope was decided. "Experience has taught that a determination of whether the result reached is just and reasonable requires an examination of the method employed in reaching that result." Id. at 950.
In addition to advancing the "end result" rationale, NECA cites a line of precedent concerning review of ICC approval of industry-wide railroad rate increases. NECA Brief at 17-20. These cases, upon examination, are wholly inapposite. For one thing, like the "end result" line of precedent, these ICC cases concern ratemaking, not division of revenues. Furthermore, these decisions involve rate changes initiated by carriers; in contrast, the revisions before us for review were proposed by NECA, an entity created and shaped by Commission regulation. See, e.g., Arizona Elec. Power Co-op, Inc. v. ICC, 675 F.2d 303, 305-06 (D.C.Cir.1982). Thus, while it is true that the courts have determined that the ICC's decision whether to suspend or investigate carrier-initiated rate increases is "committed to ICC discretion and therefore ... not judicially reviewable," id. at 306, that precedent simply cannot be stretched to fit the different factual and legal setting of this case.