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If you need the complete document, download the WordPerfect version or Adobe Acrobat version, if available. ***************************************************************** Before the FEDERAL COMMUNICATIONS COMMISSION Washington, D.C. 20554 In the Matter of ) ) MCI TELECOMMUNICATIONS CORPORATION, ) WESTERN UNION INTERNATIONAL, INC., ) and TELECOM*USA, INC., ) ) Complainants, ) ) v. ) ) PACIFIC TELEPHONE COMPANY, NEVADA ) File No. E-96-5 BELL TELEPHONE COMPANY; ) ) ILLINOIS BELL TELEPHONE COMPANY, ) File No. E-96-6 INDIANA BELL TELEPHONE COMPANY, INC., ) MICHIGAN BELL TELEPHONE COMPANY, OHIO ) BELL TELEPHONE COMPANY, WISCONSIN ) BELL, INC., d/b/a AMERITECH OPERATING ) COMPANIES; ) ) US WEST COMMUNICATIONS, INC., THE ) File No. E-96-7 MALHEUR HOME TELEPHONE COMPANY, EL ) PASO COUNTY TELEPHONE COMPANY; ) ) BELLSOUTH TELECOMMUNICATIONS, INC.; ) File No. E-96-8 ) NEW YORK TELEPHONE COMPANY, NEW ) File No. E-96-9 ENGLAND TELEPHONE AND TELEGRAPH ) COMPANY; ) ) SOUTHWESTERN BELL TELEPHONE COMPANY; ) File No. E-96-10 BELL ATLANTIC-PENNSYLVANIA, INC., ) File No. E-96-11 BELL ATLANTIC-WASHINGTON, D.C.,INC., ) BELL ATLANTIC-MARYLAND, INC., ) BELL ATLANTIC-VIRGINIA, INC., ) BELL ATLANTIC-WEST VIRGINIA, INC., ) BELL ATLANTIC-DELAWARE, INC., ) BELL ATLANTIC-NEW JERSEY, INC., d/b/a ) BELL ATLANTIC TELEPHONE COMPANIES; ) ) Defendants ) MEMORANDUM OPINION AND ORDER Adopted: August 25, 1997; Released: August 28, 1997 By the Deputy Chief, Common Carrier Bureau: I. INTRODUCTION 1. MCI Telecommunications Corporation and two of its affiliated companies (together referred to as MCI) have filed complaints against the above-captioned local exchange carriers (LECs) alleging that between 1988 and 1991, the defendant LECs improperly included lobbying expenses in their interstate access rate determinations in violation of Section 201(b) of the Communications Act of 1934, as amended (the "Act") and Part 32 of the Commission's Rules, 47 C.F.R. Part 32. MCI further contends that the initial price cap indices (PCIs) established by the LECs in November 1991 under the Commission's price cap regulatory scheme, as well as the PCIs calculated by the defendants in subsequent years, were inflated as a consequence of the defendants' improper treatment of lobbying expenses. MCI seeks an order declaring the defendants' interstate access rates unlawful due to improper inclusion of lobbying expenses and granting MCI monetary damages allegedly incurred as a consequence of the defendants' unlawful actions. This Memorandum Opinion and Order resolves the threshold question raised by the LECs in their answers and motions to dismiss of whether the damages relief requested by MCI is barred by the two-year statute of limitations contained in Section 415(b) of the Act. For the reasons discussed below, we find that MCI's complaints are barred, in part, by Section 415. II. BACKGROUND 2. MCI and other IXCs use defendants' interstate access service to secure necessary interconnection with their customers. Prior to January 1, 1991, interstate access rates were under rate-of- return regulation whereby LECs were allowed to set rates to cover their "revenue requirements," as determined by the reasonable and necessary costs of providing interstate access service, plus a prescribed rate of return on invested capital. In CC Docket No. 87-313, the Commission replaced its rate-of-return regulatory scheme with "price cap" regulation, an "incentive-based" system designed to reward companies that become more productive and efficient, while ensuring that productivity and efficiency gains are shared with ratepayers. Under price cap regulation, a ceiling, or cap, is set on the prices, subject to an annual adjustment that ensures prices will drop in real, inflation-adjusted terms. Initial price cap indices, or PCIs, were developed by the LECs in 1991 based on their projected interstate access revenue requirements for the period July 1, 1990 through June 30, 1991. Pursuant to the Commission's price cap orders, PCIs have been adjusted annually based on a measure of inflation that reflects productivity gains and price changes in the national economy, minus an "X-Factor," which is a number that reflects the amount by which the growth in the telephone carriers' unit costs have historically been lower than the level of inflation for the national economy. 3. Several events relevant to our consideration of the defendants' statute of limitations claim occurred between February 1990 and November 25, 1995, the date MCI filed the instant complaints with the Commission. On February 23, 1990, Donald F. Evans, then Director of Technical Regulatory Affairs for MCI, wrote to the Chief, Common Carrier Bureau, purporting to "bring to [the Bureau Chief's] attention" what Evans described as a practice by the RBOCs of including lobbying expenses in their ratemaking. In the letter, Evans "strongly encourage[d] the FCC to conduct audits designed to determine the source of the millions of dollars that the RBOCs are spending on their lobbying efforts . . . ." The letter went on to request that "[s]hould these audits uncover unlawful or unjust and unreasonable practices . . . [MCI] would also strongly encourage that the FCC take actions similar to those it did in its most recent audit which concluded that interstate ratepayers had been harmed." At some point between February and June 1990, the Bureau's Accounting and Audits Division did in fact initiate inquiries concerning the RBOCs' treatment of lobbying expenses. 4. On June 21, 1990, in an action apparently unrelated to Evans' request for an audit, the Bureau, in reviewing the annual 1990 access tariff filings, ruled that five of the Regional Bell Operating Companies (RBOCs) had, inter alia, improperly included lobbying expenses in developing the revenue requirements reflected in their 1990 access tariff filings. The Bureau disallowed approximately $3.4 million of these expenses. 5. On September 14, 1990, Evans wrote a second letter to the Bureau Chief expressing concern that the RBOCs "may be still charging ratepayers for their lobbying efforts -in clear violation of the Commission's rules." Referring specifically to earlier inquiries into the RBOCs' treatment of lobbying expenses conducted by the Bureau's Accounting and Audits Division following the February 1990 Evans Letter, Evans applauded the Bureau's earlier efforts and requested that the Bureau "initiate another inquiry" concerning the RBOCs' treatment of lobbying expenses. 6. On January 27, 1995, Evans wrote a third letter to the Chief, Common Carrier Bureau, in which Evans once again applauded the Bureau's efforts in 1990 to audit the RBOCs lobbying expenses but further expressed the view that the "additional investigation and audits" MCI had requested in the September 1990 Evans Letter were necessary to address MCI's continuing concern that the RBOCs were including lobbying expenses in their regulated interstate expenses in violation of Part 32 of the Commission's rules. 7. On October 25, 1995, the Bureau's Accounting and Audits Division released a "Summary of Audit Findings." The summary concluded that, with one exception, the BOCs had applied very narrow definitions of what constituted lobbying; misclassified the costs of lobbying-related clerical and staff support, travel, and overhead; and failed to record some of their lobbying costs in the proper account in the years 1988, 1989, 1990 and 1991. The summary also concluded that "the BOCs [had] reduced their price cap indices to the extent necessary to eliminate the effect their past accounting practices would have had on future rates." 8. On November 29, 1995, MCI filed the instant formal complaints. Citing the Bureau's Summary of Audit Findings, MCI alleged that the defendant LECs' interstate access rates for 1988 and subsequent years were unlawful because defendants had improperly included lobbying expenses in their interstate revenue requirements. MCI requested damages equal to all excessive interstate access charges paid by MCI since the inception of the defendants' improper accounting practices for lobbying expenses. Bell Atlantic filed a motion to dismiss MCI's complaint on February 12, 1996, arguing that MCI's claims, filed in 1995, were barred under the two-year statute of limitations contained in Section 415 of the Act. Bell Atlantic cited the February 1990 Evans Letter and the September 1990 Evans Letter as evidence that MCI was aware of possible damages claims against the defendants for wrongful inclusion of lobbying expenses as early as 1990. On March 6, 1996, apparently in response to Bell Atlantic's motion to dismiss, MCI amended its complaints to include the September 1990 Evans Letter. According to MCI, the September 1990 Evans Letter constituted an "unsatisfied" informal complaint against the defendant LECs pursuant to Sections 1.716 through 1.718 of the Commission's rules. As such, MCI contended, the September 1990 Evans Letter tolled the two year limitations period because the Commission's rules specifically authorize complainants to file formal complaints based on unsatisfied informal complaints. 9. On April 12, 1996, the Bureau's Enforcement Division issued letter rulings that deferred discovery in these proceedings pending a ruling on the statute of limitations issue. Following a status conference on October 17, 1996, the Enforcement Division granted a motion by MCI to introduce into the record twelve letters previously filed by various individuals with the Commission, and handled by the Enforcement Division's Informal Complaints and Public Inquiries Branch, concerning the rates or practices of common carriers. MCI had proposed to submit the letters as evidence to support its claim that, even though the September 1990 Evans Letter was not styled as an informal complaint, the Commission routinely treats such letters as informal complaints under its rules. The staff further directed MCI to file additional documentation, along with a supporting affidavit, describing any other communications between MCI representatives between February 1990 and October 1995 with the Bureau or its Enforcement and Accounting Divisions pertaining to alleged misapplication of lobbying expenses by the defendant LECs. On January 8, 1997, MCI filed a "Response to Letter Ruling" stating that "other than a "follow-up" letter from Evans to Kathleen Wallman, formerly Chief of the Bureau, dated January 27, 1995, MCI "does not have and is not aware" of any correspondence with the Bureau or Divisions within the Bureau concerning alleged misallocations of lobbying expenses by the defendant LECs. MCI also filed a "Declaration of Donald F. Evans" in which Evans makes the following representation: Following the September 14, 1990 complaint, I have no specific recollection of individual conversations, meetings or communications with [Commission] personnel about the complaint or matters raised in the complaint, until my follow-up letter to Kathleen Wallman on January 27, 1995, except that I believe that at some point, Mr. Firestone informed me that the RBOCs' lobbying expense allocations were being audited or investigated, and I later called on Ken Moran of the Accounting and Audits Division to check on the status of such audit or investigation. 10. The defendant LECs responded with evidence and arguments to challenge MCI's contention that the September 1990 Evans Letter was in fact an informal complaint which effectively tolled the two-year limitations period on MCI's damages claims. Both Southwestern Bell Telephone Company (SWBT) and BellSouth submitted copies of a March 24, 1989, letter from Donald J. Elardo, Associate Regulatory Counsel, MCI, to Kathie Kneff, Chief, Informal Complaints Branch, FCC, specifically styled as an informal complaint. Ameritech submitted a copy of an October 30, 1996 letter from Frank Krogh, Appellate Counsel, MCI, to Milton Brown, Attorney, FCC, which, Ameritech maintains, "demonstrates how MCI styles and formats an informal complaint when MCI intends to file one." III. DISCUSSION 1. Contentions 11. Defendants assert that MCI's complaints are barred by Section 415 of the Act because they are based on misconduct that allegedly occurred more than two years before MCI filed its formal complaint for damages in November 1995. The defendants contend that MCI has effectively conceded in its amended complaint that it was aware of potential damages claims against the defendants based on alleged misallocations of lobbying expenses at least as early as February 1990. According to Bell Atlantic, MCI was aware of the manner in which the defendants accounted for expenses at least as early as February 1990 because it was Evans' February 1990 Evans Letter that triggered the audit by the Bureau's Accounting and Audits Division which led to the Bureau's October 1995 audit report. Bell Atlantic further submits that in 1990, MCI obtained from the Commission, through a Freedom of Information Act (FOIA) request, data on classification of lobbying expenses that Bell Atlantic had provided the Bureau in response to the Bureau's April 24, 1990, request. NYNEX notes that in the Annual 1990 Access Tariff Filing proceeding, MCI filed a petition requesting that the Bureau disallow certain claimed expenses on the grounds that the RBOCs were improperly including lobbying costs in interstate access rates. SWBT asserts that members of the telecommunications industry, including MCI, have been aware of the defendants' classification of lobbying costs since February 15, 1990, when Allnet Communications Services, Inc. (Allnet) filed a formal complaint against SWBT alleging that SWBT had improperly included lobbying costs in its rate base. SWBT argues that the allegations raised by MCI are substantially the same as those previously raised by Allnet in its complaint and publicized by the media in 1990. 12. MCI maintains that its damages claims are preserved under Section 415 by the September 1990 Evans Letter which, MCI asserts, constitutes an informal complaint under Section 208 of the Act and the Commission's rules. MCI concedes that the September 1990 Evans Letter is not specifically captioned or styled as an informal complaint but contends that the letter nevertheless satisfies all Commission criteria for treatment as an informal complaint. According to MCI, the letter alleged that defendants were improperly including lobbying expenses in their interstate access charges, and specifically requested that the Commission take corrective action. MCI asserts that the Evans Letter meets the criteria for an informal complaint under Section 1.716 because it: (a) identifies MCI as the complainant; (b) identifies the defendants as the carriers against which the complaint was being made; (c) provides a detailed statement of the facts tending to show the defendants were improperly charging ratepayers for lobbying expenses; and (d) describes the specific relief sought -- that defendants be required to exclude misclassified lobbying expenses from their revenue requirements. MCI argues that the Bureau's failure to forward the September 1990 Evans Letter to the defendants did not alter the letter's status as an informal complaint. MCI maintains that the Bureau's failure to serve the letter on the defendants also explains why the defendants have not advised the Commission of their satisfaction of the informal complaint, or their refusal or inability to do so as required by Section 1.717 of the Commission's Rules. Finally, MCI characterizes the letter sent by Donald Evans to the Bureau on January 27, 1995, as simply a follow-up to the September 14, 1990 Evans Letter. 13. The defendants dispute MCI's contention that the September 1990 Evans Letter constitutes an informal complaint under the Commission's rules and argue that Section 415 of the Act compels dismissal of MCI's damages claims, at least in part. The defendants characterize the September 1990 Evans Letter as a request by MCI that the Bureau's Accounting and Audits Division conduct an audit into the defendants' treatment of lobbying expenses in their ratemaking practices. BellSouth notes that the letter was referred to the Accounting and Audits Division per MCI's request, as opposed to the Enforcement Division, which is responsible for processing Section 208 complaints. Defendants further argue that the letter does not state that it is an informal complaint, nor does it cite to either Section 208 of the Communications Act or to Section 1.716 of the Commission's Rules. Moreover, defendants argue that the letter was not treated by the Commission as an informal complaint because it was not forwarded to defendants as such, and defendants were not required to respond to the letter as contemplated under Section 1.717 of the Rules. With respect to "form" requirements for informal complaints contained in the Commission's rules, defendants further state that the September 1990 Evans Letter does not satisfy those requirements because it does not name the carrier against which the complaint is made as required by Section 1.717(b) and does not specifically request damages as required by section 1.717(d). 2. Discussion 14. MCI's complaints against the defendant LECs have three related components, each of which forms a separate basis for a damages claim governed by the time limitations contained in Section 415 of the Act. First, MCI contends that the defendants improperly included lobbying expenses in their rate base determinations as reflected in the Bureau's Summary of Audits Finding for the years 1988 through 1991. Second, MCI asserts that defendants' initial PCIs in 1991 were unlawfully inflated as a consequence of the unlawful inclusion of the lobbying expenses in earlier rate base determinations. Finally, MCI claims the defendants' PCIs in subsequent years have been similarly inflated as a result of the defendants' original misapplication of lobbying expenses. 15. In examining each of these components, we note generally that Section 415 of the Act serves as a procedural and substantive bar to the Commission's consideration of complaints against common carriers seeking the recovery of damages in certain instances. Section 415(b), the provision upon which the defendants base their motions to dismiss, provides that complaints seeking the recovery of damages not based on overcharges must be filed within two years from the time the cause of action accrues and not thereafter unless certain conditions specified in Section 415(d), which are not applicable here, are met. The statute is not discretionary and the lapse of time beyond the two-year limitations period not only bars the remedy but extinguishes the liability. The U.S. Court of Appeals for the District of Columbia Circuit recently addressed the application of Section 415(b) in US Sprint Communications Co. v. FCC. The court recognized the "discovery-of-injury" rule as the general rule of accrual, that is, "a cause of action accrues and the limitations period begins to run when `the plaintiff discovers, or with due diligence should have discovered, the injury that is the basis of the action.'" 16. With regard to each of the damages components contained in its complaints, MCI does not dispute the defendants' basic contention that the points of accrual for such damages claims under Section 415(b) are the dates on which the defendant LECs charged MCI rates, first under rate-of-return regulation and then under price cap regulation, that were allegedly improperly based on lobbying expenses that should have been excluded from the ratebase pursuant to Commission rules and orders. For example, MCI does not contend that it was unaware of, and could not have discovered through the exercise of due diligence, possible damages claims against the defendants for improper inclusion of lobbying expenses in the 1990-1992 time frame; nor would we find such a claim plausible under the facts of this case. The three Evans' letters, along with MCI's petition to reject the defendants 1990 annual access tariff filings, remove any doubt that MCI was aware of possible defects in the defendants' 1988-1991 rates possibly stemming from the wrongful inclusion of lobbying expenses and that those defects were carried over to the defendants' PCIs for 1991 and subsequent years long before it filed the instant complaints in November 1995. The question we must decide is whether, as MCI claims, the September 1990 Evans Letter effectively satisfied its obligation to file its claims for monetary damages against the defendant LECs within the prescribed two-year limitations period. We find that it did not. 17. We cannot accept MCI's claim that the September 1990 Evans Letter constituted an informal complaint for purposes of Sections 1.716 through 1.718 of the Commission's rules, particularly when that letter is read in conjunction with the earlier February 1990 Evans Letter and the subsequent January 1995 Evans Letter. There is no indication in either of the three letters that MCI was, by filing the letters, seeking private relief in the form of monetary damages, relief that can only be obtained from the Commission within the parameters established by Sections 206 - 209 of the Act and Sections 1.711 through 1.735 of the Commission's rules. Neither of the letters reference the Commission's authority under Sections 206-209 of the Act; nor do they contain a request, or even suggestion, by MCI that the Commission invoke its complaint procedures to determine damages that might be owed to MCI. To the contrary, the specific action requested by Evans was an audit. We credit the defendants' claim, and MCI does not contend otherwise, that in other instances in which MCI filed letters with the Commission as "informal complaints," it has specifically captioned and styled the letters as such. See Letter from Donald J. Elardo, Associate Regulatory Counsel, MCI, to Kathie Kneff, Chief, Informal Complaints Branch, dated March 24, 1989. 18. MCI's assertion that, because the Bureau has previously treated certain letters addressed to the Commission as informal complaints under the rules even though not specifically styled as such by the submitting parties, the September 1990 Evans Letter must be afforded the same treatment, is unavailing. The Bureau receives tens of thousands of letters each year concerning various matters and requesting various actions that fall within the Bureau's delegated responsibilities. The treatment or handling accorded such letters varies widely depending on their subject matter. In reviewing the facts and circumstances surrounding the three Evans letters, two facts become clear: (1) MCI did not consider the September 1990 Evans Letter to be a complaint for damages at the time it was filed; and (2) the Bureau did not treat the letter as a damages complaint. In the February 1990 Evans Letter, MCI specifically requested that the Bureau "audit" the lobbying expenses of the RBOCs for possible violations of Part 32 of the Commission's rules, a function customarily performed by the Bureau's Accounting and Audits Division. The September 1990 Evans Letter applauds actions taken by the Bureau's Accounting and Audits Division following the February 1990 Evans Letter and requests that the Bureau repeat its previous efforts to address continuing unlawful practices by the RBOCs. Similarly, the January 1995 Evans Letter expressed MCI's ongoing concern about the RBOCs' lobbying expenses and, once again, requested "additional investigations and audits to determine if the RBOCs were further violating the FCC's Part 32." Neither the February 1990 Evans Letter, the September 1990 Evans Letter, nor the January 1995 Evans Letter were served on any of the defendant LECs as informal complaints in the manner contemplated under Sections 1.716 through 1.718 of the rules; nor would it appear that the Bureau had any cause to, given the nature and substance of the three letters and their handling by the Bureau's Accounting and Audits Division. The three Evans letters reflect that MCI was fully aware of the nature of the Bureau's handling of its request for action concerning the defendants' treatment of lobbying expenses. MCI could have, at any time after the February 1990 and September 1990 Evans letters, filed claims for damages with the Commission based on the allegations in those letters if those were its intentions. At the very least, MCI could have acted to put the Bureau, and the defendant LECs, on notice that it viewed the February 1990 and September 1990 Evans letters as informal complaints that might entitle MCI to monetary damages to the extent the alleged violations were ultimately proven. Under these circumstances, it would be contrary to the policies underlying the statute of limitations to permit MCI, years after the fact, to transform the September 1990 Evans Letter into an informal complaint for purposes of pursuing monetary damages claims against the defendant LECs that could have been filed with the Commission within two years from the time MCI was assessed the charges that form the basis of such claims. 19. MCI faults the Bureau for not serving the September 1990 Evans Letter on the defendant LECs pursuant to the procedures for handling informal complaints specified in Sections 1.716 through 1.718 of the rules. This failure, according to MCI, explains why the defendant LECs were never called on to satisfy the complaint as specified under Section 1.717 of the rules, but does not alter the fact that the letter properly constituted an informal complaint. The logic of this argument fails. The Evans letters specifically requested the Bureau to initiate "audits," of the defendant LECs' lobbying expenses, the precise action taken by the Bureau as reflected in its Summary of Audit Finding. Given the specificity and level of detail in the three Evans letters, and the diligence exhibited by Evans regarding the subject matter of the letters, MCI's contention that the Bureau failed to properly handle the September 1990 Evans Letter as a claim for damages strains credulity. 20. For the foregoing reasons we find that Section 415(b) of the Act bars MCI's claims for damages to the extent such claims are based on misconduct that allegedly occurred more than two years prior to November 29, 1995, the date MCI filed the instant formal complaints. Accordingly, the first two components of MCI's complaints -- that the defendants' 1988-1991 rates and the rates assessed under the defendants initial price cap indices have been unjust and unreasonable under Section 201(b) of the Act due to improper lobbying expenses -- are untimely under Section 415(b) and will be dismissed. With respect to the third component of the complaints, however, MCI may properly pursue claims based on allegations that, for the two year period immediately preceding its November 29, 1995, complaint, the defendants' PCIs produced unlawful rates because of the defendant LECs' treatment of lobbying expenses. As is customary in Section 208 proceedings, MCI will have the burden of establishing both a violation of the Act by the defendant LECs and actual damages. The Chief, Formal Complaints and Investigations Branch, is hereby directed to establish a schedule for further proceedings on MCI's complaints consistent with this Memorandum Opinion and Order. IV. CONCLUSION 21. For the reasons stated above, we conclude that MCI's complaints are barred by the statute of limitations contained in Section 415(b) of the Act to the extent that they seek the recovery of damages based on causes of actions that accrued more than two years prior to November 29, 1995, the date MCI filed its Section 208 complaints. Consistent with this conclusion, the Chief, Formal Complaints and Investigations Branch, shall establish a schedule for further proceedings on MCI's surviving damages claims. V. ORDERING CLAUSES 22. ACCORDINGLY, IT IS ORDERED, pursuant to Sections 1, 4(i), 4(j), and 208 of the Communications Act of 1934, as amended, 47 U.S.C.  151, 154(i), 154(j), 208, and the authority delegated in Sections 0.91 and 0.291 of the Commission's rules, 47 C.F.R.  0.91, 0.291, that the above-captioned complaints filed by MCI ARE DENIED to the extent specified herein. 23. IT IS FURTHER ORDERED that the Motions to Dismiss filed by Pacific Bell and Nevada Bell, Ameritech, BellSouth, NYNEX, Southwestern Bell Telephone Company, and Bell Atlantic ARE GRANTED to the extent specified herein. 24. IT IS FURTHER ORDERED that the Chief, Formal Complaints and Investigations Branch, is directed to establish a schedule for further proceedings on MCI's complaints consistent with the rulings herein. FEDERAL COMMUNICATIONS COMMISSION Mary Beth Richards Deputy Chief, Common Carrier Bureau