Mci Worldcom Communications v. Bellsouth Telecomm.

• Decision Date: 19 April 2006
• Docket Number: No. 05-12252.,05-12252.
• Citation: 446 F.3d 1164
• Parties: MCI WORLDCOM COMMUNICATIONS, INC., a Delaware Corporation, MCIMetro Access Transmission Services, LLC, a Delaware Corporation, Plaintiffs-Appellees, Cross-Appellants, Florida Digital Network, Inc., Intervenor-Appellee, Cross-Appellant, v. BELLSOUTH TELECOMMUNICATIONS, INC., a Georgia Corporation, Defendant-Appellant, Cross-Appellee, Florida Public Service Commission, E. Leon Jacobs, Jr. in His Official Capacity as Chairman of the Florida Public Service Commission, J. Terry Deason, Lila A. Jaber, Braulio L. Baez, Michael A. Palecki, in Their Official Capacities as Commissioners of the Florida Public Service Commission, Rudolph Bradley, Charles M. Davidson, Defendants-Appellants.
• Court: U.S. Court of Appeals — Eleventh Circuit

446 F.3d 1164

MCI WORLDCOM COMMUNICATIONS, INC., a Delaware Corporation, MCIMetro Access Transmission Services, LLC, a Delaware Corporation, Plaintiffs-Appellees, Cross-Appellants, Florida Digital Network, Inc., Intervenor-Appellee, Cross-Appellant, v. BELLSOUTH TELECOMMUNICATIONS, INC., a Georgia Corporation, Defendant-Appellant, Cross-Appellee, Florida Public Service Commission, E. Leon Jacobs, Jr. in His Official Capacity as Chairman of the Florida Public Service Commission, J. Terry Deason, Lila A. Jaber, Braulio L. Baez, Michael A. Palecki, in Their Official Capacities as Commissioners of the Florida Public Service Commission, Rudolph Bradley, Charles M. Davidson, Defendants-Appellants.

No. 05-12252.

United States Court of Appeals, Eleventh Circuit.

April 19, 2006.

Sean A. Lev, Kellogg, Huber, Hansen, Todd & Evans & Figel, P.L.L.C., Washington, DC, David E. Smith, Samantha McRae Cibula, Florida Pub. Serv. Com'n, Tallahassee, FL, Jack R. Reiter, Adorno & Yoss, P.A., Miami, FL, for Defendants-Appellants.

Jeffrey A. Rackow, MCI, Inc., Michael C. Sloan, Cole, Raywid & Braverman, Washington, DC, for Plaintiffs-Appellees.

Appeals from the United States District Court for the Northern District of Florida.

Before CARNES, WILSON and PRYOR, Circuit Judges.

PRYOR, Circuit Judge:

The key issue in this appeal is whether the Florida Public Service Commission complied with the Telecommunications Act of 1996 and corresponding federal regulations when it approved substantial parts of the pricing plan for the lease of telecommunications equipment urged by BellSouth Telecommunications, Inc. BellSouth and the Florida Commission appeal a declaratory judgment that invalidated part of the pricing plan approved by the Florida Commission. They argue that the district court erroneously held that the BellSouth Telecommunications Loop Model failed to adhere to the Telecommunications Act and federal regulations because the pricing plan used multiple "scenarios" instead of the single most efficient, lowest cost network configuration to calculate the rate for the lease of wire loops. MCI WorldCom Communications, Inc., and Florida Digital Network, Inc., cross-appeal and argue that the district court erroneously approved the inflation factor used in the BellSouth model. Florida Digital Network also argues that the district court erroneously approved the geographic cost-based deaveraging model adopted by the Florida Commission.

We conclude that the district court erred when it determined federal law forbids the use of multiple scenarios, and we remand this action to the district court to evaluate whether each scenario in the pricing model approved by the Florida Commission complies with federal law. We also conclude that the Florida Commission did not err when it approved the inflation factor and the geographic cost-based deaveraging model. We reverse and remand in part and affirm in part.

I. BACKGROUND

To explain the background of this appeal, we address four matters. First, we describe the technology relevant to this appeal. Second, we provide an overview of the regulatory scheme. Third, we describe the pricing model adopted by the Florida Commission. Fourth, we outline the procedural history of this appeal.

A. An Overview of the Relevant Technology

A local telephone network consists of several elements, and three of these components are central to this appeal. The first element of a local telecommunication network is its wire loops, also known as local loops. Wire loops are the telephone wires that connect each residential customer to the network of the local carrier. Loops are made of either copper or fiber optic wire, and the capabilities and cost of the loop are dependent on its type. Although copper wire is less expensive than fiber optic wire for short loops, fiber optic is more cost-efficient for longer loops. Some services such as Digital Subscriber Line technology (DSL, a type of high-speed internet service), can be offered only over copper wire, notwithstanding its potentially higher cost.

The second element of a local telecommunications network is its switches. Local loops connect to switches, which are computers that route calls on the network. When the wire loop is fiber optic, the switch-loop combination can be either "integrated" or "universal." In an "integrated digital loop carrier," the switch and wire loop operate as one unit because the wire loop is integrated directly into the switch. In a "universal digital loop carrier," the local loop and the switch are independent. For universal digital loop carrier technology, the lessee of the loop may provide its own switch, but for integrated digital loop carrier technology, the lessee must use the switch-loop combination of the lessor because it is cost-prohibitive to decouple the wire loop from the switch.

The third element of a local telecommunications network is its wire centers. Wire centers are where the switches are located. Wire centers act as a bridge between the wire loops and the central office of the carrier, which allows long distance calls to be placed.

B. The Telecommunications Act

Before the Telecommunications Act became law, most areas were served by a single local exchange carrier, now known as the "incumbent local exchange carrier." See AT&T Corp. v. Iowa Utils. Bd., 525 U.S. 366, 371, 119 S.Ct. 721, 726, 142 L.Ed.2d 835 (1999). Over the years, the incumbent local carrier constructed hardware networks to deliver residential and commercial telephone service to the area. Id. Because they were without competition and were often compensated based on how much they spent (the "rate-of-return method"), incumbent local carriers had an incentive to construct networks that were inefficient. See Nat'l Rural Telecom Ass'n v. FCC, 988 F.2d 174, 178 (D.C.Cir.1993).

The Telecommunications Act was enacted to "uproot[ ] the monopolies that traditional rate-based methods had perpetuated." Verizon Commc'ns Inc. v. FCC, 535 U.S. 467, 488, 122 S.Ct. 1646, 1660, 152 L.Ed.2d 701 (2002). The Act preempted state laws that protected local monopolies, and it imposed on local carriers affirmative duties to facilitate market entry by new local carriers, known as "competitive local exchange carriers." See AT&T Corp., 525 U.S. at 371, 119 S.Ct. at 726. Central to this appeal is the duty of an incumbent local carrier to provide access to its network to competitive local carriers. See 47 U.S.C. § 251.

The Telecommunications Act requires incumbent carriers to make available to potential competitors their "unbundled network elements." Id. § 251(c)(3). The Act encourages incumbent and competitive local carriers to negotiate access rates. Id. § 251(c)(1). In the event an agreement cannot be reached, any party may petition the state telecommunications commission to arbitrate any open issues. Id. § 252(b)(1). Once arbitration has been invoked, the state commission must adhere to federal law when it sets the rates. See id. § 252(e)(1); Verizon Cal. Inc. v. Peevey, 413 F.3d 1069, 1071 (9th Cir.2005) (citing AT&T Corp., 525 U.S. at 385, 119 S.Ct. at 733).

Congress delegated to the Federal Communications Commission the authority to promulgate regulations that govern the setting of rates. See 47 U.S.C. § 251(d)(1). The methodology the FCC selected is called the Total Element Long-Run Incremental Cost method. 47 C.F.R. § 51.505. The TELRIC of an element is the "forward-looking cost over the long run" of an element, "taking as a given the incumbent LEC's provision of other elements." Id. § 51.505(b). The TELRIC must be measured "based on the use of the most efficient telecommunications technology currently available and the lowest cost network configuration." Id. § 51.505(b)(1). The regulations also require geographically-deaveraged rates: "State commissions shall establish different rates for elements in at least three defined geographic areas within the state to reflect geographic cost differences." Id. § 51.507(f). Congress delegated to each state commission the authority to approve the interconnection agreement, including the pricing of unbundled network elements. See 47 U.S.C. § 252(e).

The Telecommunications Act also allowed incumbent local carriers to participate in the long-distance service market upon approval of the FCC. Id. § 271(d)(3). In a section 271 proceeding, the FCC permits the incumbent local carrier to enter the long-distance market only after the carrier implements the "competitive checklist," one item of which is "[n]ondiscriminatory access to network elements in accordance with the requirements of sections 251(c)(3) and 252(d)(1) of this title." Id. § 271(c)(2)(B)(ii). Section 271 proceedings are streamlined; the FCC must approve or deny the petition of the local carrier within 90 days of receiving it. Id. § 271(d)(3).

C. The Pricing Model Adopted by the Florida Commission

This appeal arises from the pricing model approved by the Florida Commission that sets the rates for the use of the network elements of BellSouth. The pricing model adopted by the Florida Commission is largely based on the BellSouth Telecommunications Loop Model. Three aspects of the model adopted by the Florida Commission are relevant to this appeal. First, the BellSouth model employs three "scenarios" that model the different types of wire loops instead of a unitary network comprised of all three types of wire loops. Second, the BellSouth model incorporates an "inflation factor" to account for its cost of capital. Third, the model approved by the Florida Commission creates three tiers for geographic cost-based deaveraging.

The first aspect of the BellSouth model is its use of three scenarios to compute the TELRIC of each unbundled network element. The first scenario is "Copper Only": all loops in this hypothetical network are required to be copper. BellSouth maintains that this scenario reflects the type of network that a competitive local carrier would require to provide DSL...