A federal appeals court said telephone companies cannot be required to refund excess earnings to customers if the refund mechanism is inconsistent with regulatory policies. The U.S. Court of Appeals for the District of Columbia ruled that the refund mechanism adopted by the Federal Communications Commission in 1984 is arbitrary. "A carrier cannot be expected to receive earnings each year at precisely the prescribed rate of return, and from one two-year period to the next it must forfeit any excess in earnings while absorbing any deficiency," the court said. American Telephone & Telegraph Co. had challenged the refund rule. Under rate-of-return regulation, the FCC sets the rate a company may earn on capital. The companies then determine the rates they will have to charge to cover that return on capital, plus projected operating expenses.