UNITED STATES COURT OF APPEALS FOR THE D.C. CIRCUIT


SW BELL TELE CO

v.

FCC


93-1779a

D.C. Cir. 1999


*	*	*


Sentelle, Circuit Judge: Southwestern Bell Telephone  Company and other
local telephone companies (collectively  "Southwestern Bell") petition
for review of orders issued by  the Federal Communications Commission
("FCC" or "Com- mission") regulating the rates of local exchange
carriers  ("LECs") for physical collocation service. The FCC suspend-
ed a portion of the rates attributable to overhead loadings for  a
five-month period, pending investigation. Before the sus- pension
period ended, the FCC issued an "interim prescrip- tion" of maximum
overhead loading factors while it continued  its investigation. At the
end of the investigation, the FCC  disallowed costs which it
determined Southwestern Bell had  not adequately supported to the
extent that the costs exceed- ed one standard deviation above the


Southwestern Bell challenges (1) the authority of the FCC  to issue an
interim prescription of rates, (2) the industry-wide  average
methodology employed by the FCC, and (3) the  FCC's disallowance of
certain direct costs. We hold that  Southwestern Bell's claim that the
FCC exceeded its statuto- ry authority by issuing an interim
prescription is moot. We  further hold that the FCC's use of the
industry-wide average  methodology and disallowance of certain direct
costs were  within its discretion. As a result, we deny Southwestern 
Bell's petition for review.


I. Background


The present controversy arises from the FCC's ongoing  effort to expand
competition among providers of access for  long-distance
telecommunications. Long-distance phone com- panies, interexchange
carriers ("IXCs"), must obtain access to  local telephone customers in
order to sell their services. An  IXC connects to its long-distance
customers by using either  special access or switched access
facilities. See generally  Competitive Telecommunications Ass'n v.
FCC, 87 F.3d 522  (D.C. Cir. 1996). Switched access involves
transmission of  calls from the local customers' premises through the
switch- ing center or "central offices" of an LEC to the facilities of
an  IXC, thence through the IXC's facilities to the central offices 
of another LEC for delivery to the called party. Special  access
removes the switching aspect from the commencement  of the process by
the provision of a dedicated line running  directly from the customer
to the facility of the IXC. See id.  at 524. The LECs for many years
had the local access  market largely to themselves. During the 1980's,
assisted by  technological breakthroughs, a growing number of competi-
tive access providers ("CAPs") entered the special access  market,
particularly in large urban areas. Special access  tariffs of the
dominant LECs limited the ability of the CAPs  to compete in the
provision of facilities for special access. See  Bell Atlantic Tel.


In an effort to reduce these barriers to competition, the  Commission
in 1992 adopted the "expanded interconnection 


rules" requiring most major LECs to provide either physical 
collocation, in which the LEC provides central office space for  the
CAP to place and use its own equipment, or virtual  collocation, in
which the interconnecting CAP has the right to  designate or specify
LEC equipment dedicated to its use.  With modifications responsive to
an order of this court vacat- ing requirements of the original order,
Bell Atlantic v. FCC,  24 F.3d 1441 (D.C. Cir. 1994), the Commission's
basic require- ments continue. Expanded Interconnection with Local
Tele- phone Facilities, 9 FCC Rcd 5154 (1994) (virtual collocation 
order), remanded, Pacific Bell v. FCC, 81 F.3d 1147 (D.C.  Cir. 1996).
Under the Commission's rules, the LECs are  required to file tariffs
with unbundled rate elements designed  to recover the reasonable cost
of providing the required  interconnection services. Expanded
Interconnection with Lo- cal Telephone Company Facilities, 7 FCC Rcd
7369, 7372,  7421-47, reconsidered, 8 FCC Rcd 127 (1992),
reconsidered, 8  FCC Rcd 7341 (1993), vacated in part and remanded,
Bell  Atlantic Tel. Cos. v. FCC, 24 F.3d 1441 (D.C. Cir. 1994).


On February 16, 1993, sixteen LECs filed the special  access expanded
interconnection tariffs at issue in this case.  After reviewing the
LECs' submissions, on June 9, 1993, the  Common Carrier Bureau (the
"Bureau") of the FCC issued  its "Physical Collocation Tariff
Suspension Order." See In  the Matter of Expanded Interconnection with
Local Tele- phone Facilities, CC Docket No. 93-162, 8 FCC Rcd 4589 
(1993) ("Physical Collocation Tariff Suspension Order") (Joint 
Appendix ("J.A.") at 424). That order advanced the effective  date of
the tariffs by one day, suspended the tariffs in their  entirety for
one day, then allowed them to take effect subject  to an accounting
order and a modification that had the effect  of reducing the rates in
the tariffs for the period of an  ensuing investigation, based upon
the Bureau's preliminary  judgment that the petitioners had not
adequately justified  overhead loadings. Thus, the Bureau substituted
its own  overhead costing methodology and its reformulation of rates 
for those of the LECs, and permitted its rates, not the rates  filed
in the tariffs, to become effective subject to the account- ing and
refund provisions of the tariff suspension order.


On July 9, 1993, Southwestern Bell and the other LECs  filed an
application for review of the Bureau order. After  considering
submissions from the LECs, the FCC issued its  "First Report and
Order" finding that the LECs had failed to  demonstrate that their
proposed overhead loading factors  were just and reasonable. In the
Matter of Local Exchange  Carriers' Rates, Terms and Conditions for
Expanded Inter- connection for Special Access, CC Docket No. 93-162, 8
FCC  Rcd 8344, pp 2, 26 (1993) ("First Report and Order") (J.A. at 
37-38, 48). The FCC concluded that the record before it was  not
adequate to permit a permanent rate prescription. How- ever, it
determined that the "public interest" required it to  take immediate
action to ensure the availability of expanded  interconnection at
rates that were based upon verifiable and  reasonable overhead loading
factors while it continued its  investigation. Id. p 35 (J.A. at 52).
The "immediate action"  the FCC chose to take involved issuance of an
"interim  prescription" of rates that would remain in effect pending
the  outcome of its investigation. Id. pp 35, 36, 38 (J.A. at


The FCC made its interim prescription subject to a two- way adjustment
mechanism: carrier recoupment if the FCC  found at the end of the
investigation that the interim rates  were below a just and reasonable
level, and refunds to  customers if the FCC finally concluded that the
interim rates  were too high. Id. p 39 (J.A. at 54). As authority for
its  issuance of the interim prescription, the FCC cited 47 U.S.C.  ss
154(i), 201, and 205. Id. p 37 (J.A. at 53). Contending  that the FCC
had exceeded its statutory authority, South- western Bell filed a
petition for review of the First Report  and Order with this court on
November 22, 1993. On Janu- ary 12, 1994, the FCC filed a motion to
hold the appeal in  abeyance, which this court granted on March 14,


After a four-year investigation during which the FCC's  "interim"
prescription remained in effect, the FCC issued its  "Second Report
and Order," finding that the LECs had failed  to establish the
reasonableness of the rates, terms and condi- tions in their expanded
interconnection tariffs. In the Matter  of Local Exchange Carriers'
Rates, Terms, and Conditions for  Expanded Interconnection Through
Physical Collocation for 


Special Access and Switched Transport, CC Docket No. 93- 162, 12 FCC
Rcd 18730, p 4 (1997) ("Second Report and  Order") (J.A. at 79). The
FCC disallowed certain direct costs  for physical collocation
services, prescribed maximum permis- sible overhead loading factors,
ordered tariff revisions to  correct unreasonable rate structures, and
struck down certain  tariff provisions on the grounds that they were
unjust, unrea- sonable, discriminatory, and anticompetitive. The FCC
af- firmed the Bureau's partial suspension of the expanded inter-
connection rates as well as its own interim prescription of  rates.
Id. pp 413-20 (J.A. at 242-46). As authority for the  partial
suspension, the Commission relied on Section 204(a),  which authorized
it to suspend a rate "in whole or in part."  Id. p 415 (quoting 47
U.S.C. s 204(a)) (J.A. at 244). Again,  the FCC noted that its partial
suspension fulfilled the goal of  ensuring the availability of
expanded interconnection during  the suspension period at rates that
did not reflect the legally- suspect overhead loadings. Id. p 416


Similarly, the FCC affirmed the interim prescription it  adopted in its
First Report and Order. Id. pp 404-10 (J.A. at  238-41). In doing so
it cited this court's decision in Lincoln  Telephone & Telegraph Co.
v. FCC, 659 F.2d 1092 (D.C. Cir.  1981), claiming that our holding in
that case justified an  interim rate prescription accompanied by a
two-way adjust- ment mechanism under Section 4(i). Id .p 404 (J.A. at
238- 39). The Commission rejected the LECs' objection that it  had
issued its interim prescription without an opportunity for  hearing.
Id.p 408 (J.A. at 240-41). The Commission further  found that the
interim prescription it had imposed was just  and reasonable. Id.


Having determined that it had authority to issue an interim 
prescription, the FCC proceeded to analyze the LECs' direct  cost
justifications on a case-by-case basis, making disallow- ances where
it believed an improper cost methodology had  been used. Id. p 67
(J.A. at 108). For example, the FCC  disallowed Pacific Bell's floor
space costs to the extent that  they included a 30-foot "access area"
outside the collocator's  enclosed physical collocation space,
reasoning that the "com- mon space" was not a direct cost of physical


service. Id. p 96 (J.A. at 119-20). The Commission also  compared the
direct costs among LECs on a "function-by- function" basis by
developing industry-wide average direct  costs for each function
associated with the provision of physi- cal collocation. Id. pp
124-25, 170 (J.A. at 131-32, 151). The  FCC then calculated one
standard deviation from the aver- age. If an LEC's direct costs for a
particular function  exceeded one standard deviation from the
industry-wide aver- age, the FCC scrutinized the LEC's cost data and
other  potential justifications for the LEC's high direct costs for
that  function to ascertain whether the costs were reasonable. Id.  WW
125, 170 (J.A. at 131-32, 151-52). The Commission decid- ed upon this
particular methodology after concluding that the  use of industry-wide
averages to prescribe physical colloca- tion rates was within its
discretion in selecting appropriate  ratemaking methods. Id. pp 144-49


II. Analysis


A. The Interim Prescription


1. The LECs' Challenge


At issue in this case is whether the FCC's novel "interim 
prescription" fits within the statutory framework governing  its
authority, or whether the FCC has arrogated to itself new  power that
it is not authorized to exercise under the Commu- nications Act. The
Communications Act of 1934, 47 U.S.C.  s 151 et seq. (the "Act"),
provides the FCC statutory authori- ty to review rates charged for
interstate common carrier  communications services to assure that the
rates are just and  reasonable. 47 U.S.C. s 201(b). Section 204(a)(1)
of the Act  gives the FCC authority to investigate filed rates and to 
suspend the effectiveness of those rates, "in whole or in part," 
while the investigation is pending, but not for longer than five 
months. Id. s 204(a)(1). After full hearing, the FCC may  issue any
order that would be proper in a proceeding initiated  after the rates


A separate section of the Act, 47 U.S.C. s 205, empowers  the
Commission to deal with rates or practices of carriers  that it finds
to be in violation of the Act. When acting under 


Section 205, the Commission is empowered to "determine and  prescribe
... just and reasonable" rates for the performance  of the affected
services. Section 205 proceedings begin with  a complaint or order for
investigation and require a full  opportunity for hearing. Under
Section 201, the Commission  is authorized to order the common carrier
to physically  connect with other carriers and to set "charges
applicable  thereto." 47 U.S.C. s 201. Finally, 47 U.S.C. s 154(i)
pro- vides a general power to the Commission to "perform any and  all
acts, make such rules and regulations, and issue such  orders, not
inconsistent with this chapter, as may be neces- sary in the execution
of its functions." Southwestern Bell  makes a powerful case that the
Commission's interim pre- scription exceeds its authority under this


The statutory language at issue here is straightforward and  clear.
Congress has directly spoken to the FCC's authority  to prescribe
rates in various provisions of the Communica- tions Act. The FCC
relies on Sections 204, 205, and 154(i) as  authority for its interim
prescription of rates. It contends  that Section 204's provision of
authority to suspend rates "in  whole or in part" allows it to
prescribe rates by suspending  parts of the rates that it finds
potentially objectionable. It  further cites the Act's "necessary and
proper" clause embod- ied in 47 U.S.C. s 154(i) as an independent
source of authori- ty for its interim prescription of rates that is
"ancillary" to its  authority to prescribe rates pursuant to Section
205. Having  considered the agency's arguments, we have strong doubts 
that the FCC acted within its statutory authority when it  issued the


Section 204(a) gives the Commission the authority to ap- prove or
suspend a proposed charge that is part of an overall  tariff filing in
its entirety, or to approve or suspend some  elements of a list of
proposed tariff charges, but not to initiate  an entirely new charge
for a proposed service outside of the  four corners of the carrier's
tariff filing, while labeling its  interim prescription as a "partial
suspension." "[It] is the  actual impact of the FCC's actions, rather
than the language  it uses, which determines whether or not the FCC
has  'prescribed' tariffs or other conditions under the statute." 


MCI Telecommunications Corp. v. FCC, 627 F.2d 322, 337  (D.C. Cir.
1980); see also Nader v. FCC, 520 F.2d 182, 202  (D.C. Cir. 1975)
(concluding that the FCC's setting of a  specific rate of return
different than that which the carrier  used to formulate its tariff
rates was an implicit prescription  of permissible charges); American
Tel. & Tel. Co. v. FCC,  487 F.2d 865, 874 (2d Cir. 1973) (concluding
that the FCC's  denial of permission to file a tariff revising charges
for an  interstate service had the same effect as a Section 205 rate 
prescription).


The LECs argue that the Commission may engage in rate  prescription
only under Section 205 and only after a "full  opportunity for
hearing" and a determination that the rates,  terms, and conditions
are just and reasonable. 47 U.S.C.  ss 205(a), 201; see also American
Tel. & Tel., 487 F.2d at 873  ("Sections 203 through 205 of the Act
... establish precise  procedures and limitations concerning the
Commission's pro- cessing of carrier initiated rate revisions.").


They further argue that the FCC's reliance upon Section  154(i) is
unavailing. Section 154(i) provides the Commission  no independent
substantive authority; it merely provides that  the Commission may
issue orders that are necessary in the  execution of its functions as
described under other provisions  of the Act, while not contravening
any other provisions.  Under Section 205, the FCC may prescribe rates
only after a  hearing and a determination that the prescribed rates
are  just and reasonable. The FCC has not satisfied those statu- tory
requirements in this case. Under these circumstances,  an interim
prescription under Section 154(i) would "defeat the  purpose of
Section 205 and vitiate the specific statutory  scheme." American Tel.
& Tel., 487 F.2d at 875.


Appealing as Southwestern Bell's logic may seem, we can- not act unless
the case is properly before us. That is, we  must first determine
whether we have jurisdiction to review  the disputed agency action.
Steel Co. v. Citizens for a Better  Env't, 118 S. Ct. 1003, 1020


2. Jurisdiction


Those who seek to invoke the jurisdiction of the federal  courts must
satisfy the threshold case or controversy require- ment imposed by
Article III of the Constitution. Flast v.  Cohen, 392 U.S. 83, 94-101
(1968). They must demonstrate a  "personal stake in the outcome" of
the case in order to  "assure that concrete adverseness which sharpens
the presen- tation of [the] issues" to be decided by the tribunal.
Baker v.  Carr, 369 U.S. 186, 204 (1962). Where an action has no 
continuing adverse impact and there is no effective relief that  a
court may grant, any request for judicial review of the  action is
moot. O'Shea v. Littleton, 414 U.S. 488, 496 (1974).  As the Court
noted in O'Shea, "[p]ast exposure to illegal  conduct does not in
itself show a present case or controversy  ... if unaccompanied by any
continuing, present adverse  effects." Id. at 495-96.


There is, however, an "exception" to the general mootness  doctrine
where a challenged action is "capable of repetition,  yet evading
review." Steel Co., 118 S. Ct. at 1020; Southern  Pac. Terminal Co. v.
ICC, 219 U.S. 498, 515 (1911) (noting  that consideration of agency
orders "ought not to be, as they  might be, defeated, by short term
orders, capable of repeti- tion, yet evading review"); National Black
Police Ass'n v.  District of Columbia, 108 F.3d 346, 349-51 (D.C. Cir.
1997);  American Tel. & Tel., 487 F.2d at 881 n.35.


Southwestern Bell's challenge to the FCC's lack of statuto- ry
authority in imposing the interim prescription appears  moot. The
suspension period and the FCC's corresponding  interim prescription
have expired since Southwestern Bell  filed this suit. As a result,
Southwestern Bell does not suffer  any detrimental "continuing,
present adverse effects," O'Shea,  414 U.S. at 495-96, from the FCC's
imposition of an interim  prescription. Moreover, because the interim
prescription is  no longer in effect, this court can grant
Southwestern Bell no  relief other than declaring that the procedures
employed by  the FCC were unlawful. Thus, Southwestern Bell's claim 
lacks two of the elements necessary for our assertion of 
jurisdiction--redressibility and a present, continuing injury-


Before making a final determination, however, we must  also consider
whether the FCC's interim prescription is the  sort of agency action
that falls within the exception to the  mootness doctrine for conduct
that is "capable of repetition,  yet evading review." The FCC
acknowledges that there have  been cases in the past where it has
employed a similar  procedure. See, e.g., In the Matter of Lincoln
Tel. & Tel.'s  Duty to Furnish Interconnection Facilities, 72 FCC2d
724  (1979), aff'd, Lincoln Tel. & Tel. Co. v. FCC, 659 F.2d 1092 
(D.C. Cir. 1981); Western Union Tel. Co., FCC 79-812 (1979),  aff'd,
FTC Communications, Inc. v. FCC, 750 F.2d 226, 231- 32 (2d Cir. 1984).
Indeed, given the important policy goals  the FCC cites in support of
its use of the interim prescription,  it is possible that the agency
will attempt to impose this novel  mechanism upon other carriers in
the future. Thus, on its  face, the FCC's interim prescription appears
to be the sort of  agency action that is capable of repetition, yet
evading re- view, thereby falling within the exception to the mootness


Nonetheless, the Supreme Court has made clear that in  order to fall
within this exception, a named plaintiff must  make a reasonable
showing that it will again suffer injury as  a result of the alleged
illegality. City of Los Angeles v.  Lyons, 461 U.S. 95, 109 (1983)
("[T]he capable-of-repetition  doctrine applies only in exceptional
situations, and generally  only where the named plaintiff can make a
reasonable show- ing that he will again be subjected to the alleged
illegality.");  DeFunis v. Odegaard, 416 U.S. 312 (1974). It is not
enough  that the challenged agency action might in the future be 
taken against some other party. Rather, the court must  conclude that
there has been a reasonable showing that the  challenged agency action
may be taken against the same  petitioners sometime in the future.


We conclude that Southwestern Bell has failed to make the  required
showing that any of the petitioners will again be  subject to the
FCC's interim prescription procedure. The  FCC imposed the interim
prescription because physical inter- connection was a new service with
no set cost formula for  rates and the agency concluded that the LECs


provided sufficient data after being requested to do so. The  FCC
determined that it had enough information under the  circumstances to
find that the overhead loadings claimed by  the LECs were
unreasonable, but not enough to make a  timely definitive finding on
what would be reasonable. First  Report and Order pp 34-35 (J.A. at
52). In the future,  physical interconnection will no longer be a
"new" service for  these particular petitioners, making it unlikely
that the FCC  will again seek to impose upon them its novel interim
pre- scription procedure for this service. Because petitioners have 
not alleged that the FCC will impose its novel procedure upon  them
for any other new service, we must conclude that the 
capable-of-repetition exception to the mootness doctrine does  not
apply. The challenge to the interim prescription is moot.  We have no


B. The FCC's Methodology


Having concluded that we do not have jurisdiction to review  whether
the FCC's interim prescription has exceeded its  statutory authority,
we proceed to Southwestern Bell's objec- tions to the agency's
ratemaking methodology. In particular,  we must consider the FCC's (1)
use of industry-wide averages  in determining the reasonableness of
rates and (2) disallow- ance of certain direct costs. The FCC argues
that these  challenges are not properly before the court, invoking
Section  405 of the Communications Act, which bars judicial review of 
issues of law or fact on which the Commission "has been  afforded no
opportunity to pass." 47 U.S.C. s 405(a). On  the present record,
however, the agency had ample opportu- nity to address, and did indeed
address, the objections raised  by Southwestern Bell in its First and
Second Orders. We  therefore will proceed to consideration of the
merits. See  Way of Life Television Network, Inc. v. FCC, 593 F.2d
1356,  1359 (D.C. Cir. 1979) (noting that the exception to review 
under Section 405 should be "strictly construed"); National  Ass'n for
Better Broad. v. FCC, 830 F.2d 270, 274 (D.C. Cir.  1987).


We review the FCC's actions to determine whether they  are "arbitrary,
capricious, an abuse of discretion, or otherwise 


not in accordance with law." 5 U.S.C. s 706(2)(A). Under  this
deferential standard, we presume the validity of agency  action.
Jersey Shore Broad. Corp. v. FCC, 37 F.3d 1531, 1537  (D.C. Cir.
1994). Moreover, because "agency ratemaking is  far from an exact
science and involves 'policy determinations  in which the agency is
acknowledged to have expertise,' "  courts are "particularly
deferential" when reviewing ratemak- ing orders. Time Warner
Entertainment Co. v. FCC, 56  F.3d 151, 163 (D.C. Cir. 1995) (quoting
United States v. FCC,  707 F.2d 610, 618 (D.C. Cir. 1983)). The FCC is
accorded  broad discretion in "selecting methods ... to make and 
oversee rates." MCI Telecommunications Corp. v. FCC, 675  F.2d 408,
413 (D.C. Cir. 1982); see also Aeronautical Radio,  Inc. v. FCC, 642
F.2d 1221, 1228 (D.C. Cir. 1980) ("[T]he  Commission has broad
discretion in selecting methods for the  exercise of its powers to
make and oversee rates."); Alltel  Corp. v. FCC, 838 F.2d 551, 557
(D.C. Cir. 1988). As long as  the Commission makes a "reasonable
selection from the  available alternatives," its selection of methods
will be upheld  "even if the court thinks [that] a different decision
would have  been more reasonable or desirable." MCI, 675 F.2d at 413. 
Applying these standards to the FCC's use of the industry- wide
average methodology, we conclude that the FCC did not  engage in


Southwestern Bell objects to the FCC's use of industry- wide cost
averages on two grounds. First, it asserts that the  use of
industry-wide averages was arbitrary, capricious and  contrary to law.
According to Southwestern Bell, the FCC in  implementing this approach
failed to take into account differ- ences in costing methodologies
LECs used in calculating their  costs as well as regional variations
among costs, such as the  costs of real property, office space, and
labor. Second, it  asserts that the FCC failed to comply with required
notice  and comment procedures in deciding to employ this approach. 
See 5 U.S.C. s 553; 47 U.S.C. s 205(a). Southwestern Bell  complains
that the Commission failed to give prior notice of  its intention to
prescribe rates based on industry-wide aver- age direct costs and
establish a presumption that direct costs 


in excess of one standard deviation above the industry aver- age were
unreasonable.


The use of industry-wide averages in setting rates is not  novel.
Indeed, the Supreme Court has affirmed ratemaking  methodologies
employing composite industry data or other  averaging methods on more
than one occasion. See, e.g., FPC  v. Texaco Inc., 417 U.S. 380, 387
(1974) (noting that agency  ratemaking does not "require that the cost
of each company  be ascertained and its rates fixed with respect to
its own  costs"); In re Permian Basin Area Rate Cases, 390 U.S. 747, 
769 (1968). The FCC adopted such an approach in this case  based on
its conclusion that the LECs generally use the same  assets and
perform the same tasks in providing physical  collocation service.
Second Report and Order p 131 (J.A. at  134). Nonetheless, it made
"adjustments" and "modifica- tions" to this general approach where
costs varied widely  among carriers. For example, the agency took into
account  differences in the way individual LECs provided physical 
collocation service and adjusted its average cost calculations  to
account for these differences. Id. pp 131-41 (J.A. at 134- 37).
Further, where an LEC's direct costs exceeded two  standard deviations
above the adjusted direct cost average,  the Commission excluded those
direct costs from the data it  used to calculate the industry average.
Id. pp 130, 158 (J.A.  at 133, 145). As a result, we conclude that the
FCC's use of  this particular methodology was well within its


Similarly, we reject Southwestern Bell's contention that it  was denied
an opportunity to comment on the FCC's use of  industry-wide averages
in evaluating the reasonableness of  the LECs' physical collocation
rates. We conclude that the  agency's use of industry-wide averages
did not constitute use  of "new criteria" that were not "foreshadowed
in the rules the  Commission had adopted to handle such issues."
Southwest- ern Bell Tel. Co. v. FCC, 28 F.3d 165, 172 (D.C. Cir.
1994).  Rather, as already noted, the use of industry-wide averages is
 one commonly-employed technique in evaluating the reason- ableness of
rates charged by regulated entities. Cf. Permian  Basin Area Rate
Cases, 390 U.S. at 788-89 (concluding that  the Federal Power
Commission did not err in failing to 


provide opportunities for comment on the size and boundaries  of a
regulatory area where there was no claim that it did not  fit with
prevailing industry practice or other programs of  state or federal
regulation). Indeed, the FCC noted in its  Second Report and Order
that it has used industry averages  in the past to establish a rate of
return for LECs' interstate  access service, as well as for creating a
productivity factor for  price cap LECs. Second Report and Order pp
146 (J.A. at  140). Moreover, the FCC issued orders in this case
foresha- dowing its intention to evaluate the reasonableness of the 
LECs' rates in light of industry average costs. For example,  the
Commission noted that overhead factors appeared to be a  significant
reason for "the high rates filed by certain compa- nies in comparison
with the industry average." Expanded  Interconnection with Local
Telephone Company Facilities,  CC Docket No. 93-162, 8 FCC Rcd 4589,
pp 31 (1993) (J.A. at  431). As a result, given the circumstances in
this case, we  cannot conclude that Southwestern Bell was unfairly
deprived  of notice that the FCC might employ such techniques in 
evaluating the reasonableness of the LECs' rates.


While the FCC's use of industry-wide averages is not  objectionable,
its use of a one-standard-deviation cutoff raises  greater concerns.
After calculating the industry-wide aver- ages, the FCC scrutinized
any costs exceeding one standard  deviation above the industry-wide
average in order to deter- mine whether any explanation in the record
supported the  cost. The Commission then disallowed the cost if it
found  that it was not justified by the record evidence. The Com-
mission generally disallowed costs to the extent they exceed- ed one
standard deviation above the industry-wide cost aver- age.
Southwestern Bell objects to this aspect of the FCC's  methodology,
arguing that disallowing costs that exceed one  standard deviation
above the industry average, while at the  same time making no
adjustment for costs that exceed one  standard deviation below the
industry average, results in the  prescription of rates that are less
than the average, which it  asserts is inconsistent with the FCC's
goal of establishing  rates based on the LECs' cost of service. It
further argues  that the choice of one standard deviation as the
cutoff point  was arbitrary. Again we conclude that this


choice falls within the FCC's discretion. The FCC has  merely
subjected costs exceeding industry-wide averages by  at least one
standard deviation to additional scrutiny, and has  not established a
per se rule of disallowance for such costs.  While it is not perhaps
the method this court would select  were we choosing the FCC's
methodology de novo, the FCC  reasoned that this approach was
appropriate given the need  for flexibility in taking into account
reasonable variations in  the LECs' levels of efficiency in providing
physical collocation  service. Second Report and Order pp 147-49 (J.A.
at 140-42).  Therefore, we conclude that the agency did not abuse its 
discretion in employing the one-standard-deviation cutoff.


Finally, we conclude that the FCC did not err by disallow- ing certain
direct costs Pacific Bell had incorporated in its  rate base. The FCC
concluded that Pacific Bell did not  adequately justify including an
additional 30 square feet of  floor space for collocator access as a
direct cost in light of the  fact that the other LECs were able to
satisfy their access  obligations without providing for an additional
30 square feet.  Id. pp 96-97 (J.A. at 119-20). After considering the
evidence  before it, the FCC concluded that the disputed access area 
was "common space" rather than space that was necessary  for the
interconnector to obtain access to its enclosed physical  collocation
space. The LECs assert that the Commission's  disallowance of these
costs was arbitrary and capricious and  should be vacated because
Pacific Bell presented evidence  indicating that the access area was
dedicated solely to physi- cal collocation. After examining the
record, we conclude that  the FCC did not abuse its discretion in
finding that Pacific  Bell had not made an adequate showing that the
claimed  access area costs constituted a direct cost of physical
colloca- tion. Indeed, the FCC has "cogently explain[ed] why it has 
exercised its discretion" in the way it has. Motor Vehicle  Mfrs.
Ass'n of the United States, Inc. v. State Farm Mut.  Auto. Ins. Co.,


III. Conclusion


For the reasons set forth above, we conclude that we do not  have
jurisdiction over Southwestern Bell's challenge to the 


FCC's interim prescription. We further conclude that the  methodology
employed by the FCC in evaluating the reason- ableness of petitioners'
rates was not arbitrary or capricious.  Thus, the petition for review
is denied.