Qwest Corp. v. Boyle

• Decision Date: 29 December 2009
• Docket Number: No. 08-3838.,08-3838.
• Parties: QWEST CORPORATION, Appellant, v. Anne C. BOYLE, in her official capacity as Commissioner of the Nebraska Public Service Commission; Gerald L. Vap, in his official capacity as Commissioner of the Nebraska Public Service Commission, Rod Johnson, in his official capacity as Commissioner of the Nebraska Public Service Commission; Frank E. Landis, Jr., in his official capacity as Commissioner of the Nebraska Public Service Commission; Timothy Schram, in his official capacity as Commissioner of the Nebraska Public Service Commission; Nebraska Public Service Commission, Appellees.
• Court: U.S. Court of Appeals — Eighth Circuit

589 F.3d 985

QWEST CORPORATION, Appellant, v. Anne C. BOYLE, in her official capacity as Commissioner of the Nebraska Public Service Commission; Gerald L. Vap, in his official capacity as Commissioner of the Nebraska Public Service Commission, Rod Johnson, in his official capacity as Commissioner of the Nebraska Public Service Commission; Frank E. Landis, Jr., in his official capacity as Commissioner of the Nebraska Public Service Commission; Timothy Schram, in his official capacity as Commissioner of the Nebraska Public Service Commission; Nebraska Public Service Commission, Appellees.

No. 08-3838.

United States Court of Appeals, Eighth Circuit.

Submitted: October 20, 2009.

Filed: December 29, 2009.

John Michael Devaney, argued, Washington, DC, for appellant.

Leonard Jay Bartel, AAG, argued, Lincoln, NE, for appellee.

Before RILEY, HANSEN and GRUENDER, Circuit Judges.

GRUENDER, Circuit Judge.

Qwest Corporation challenges an order issued by the Nebraska Public Service Commission setting the rates that competitors must pay to lease elements of Qwest's local telephone network in Nebraska. The district court,¹ applying a deferential standard of review, affirmed the Commission's order. For the following reasons, we affirm in part and remand to the district court with instructions to remand to the Commission for further proceedings concerning how Qwest will implement the order.

I. BACKGROUND

The Telecommunications Act of 1996 requires established local telephone companies such as Qwest to lease elements of their networks to rival companies seeking to enter a local market. The established companies are conventionally called "ILECs," which stands for "incumbent local exchange carriers."² The ILECs' rivals are called "CLECs," which stands for "competitive local exchange carriers." And the network elements that ILECs are required to lease to CLECs are called "UNEs, which stands for `unbundled network elements'."

The Act allows ILECs to negotiate and contract with CLECs regarding the rates for leasing UNEs. See 47 U.S.C. § 252(a). In the event that carriers cannot reach an agreement, the Act authorizes state public utilities commissions to set rates. See id. § 252(b); see also Implementation of the Local Competition Provisions in the Telecommunications Act of 1996, 11 F.C.C.R. 15499, ¶¶ 620, 693 (Aug. 8, 1996). State commissions must, in turn, follow implementing regulations issued by the Federal Communications Commission. See MPower Commc'ns Corp. v. Ill. Bell Tel. Co., 457 F.3d 625, 627 (7th Cir.2006).

Two FCC regulations are particularly relevant here. The first regulation provides that rates for UNEs must be based on a standard known as "total element long-run incremental cost," or "TELRIC." 47 C.F.R. § 51.505(a); see also Verizon Commc'ns Inc. v. FCC, 535 U.S. 467, 122 S.Ct. 1646, 152 L.Ed.2d 701 (2002) (holding that the FCC has authority under the Act to require state commissions to set rates based on TELRIC). Under TELRIC, rates "are calculated according to what it would cost today to build and operate an efficient network that can provide the same services as the ILEC's existing network." Qwest Corp. v. Koppendrayer, 436 F.3d 859, 863 (8th Cir.2006). In other words, "TELRIC obliges ... state regulators to set prices based on the long-run costs that would be incurred to produce the services in question using the most-efficient telecommunications technology now available, and the most efficient network configuration." AT & T Commc'ns of Ill., Inc. v. Ill. Bell Tel. Co., 349 F.3d 402, 405 (7th Cir.2003). TELRIC thus differs from "old-style rate regulation," in which a commission simply determined "how much capital a utility ha[d] reasonably invested in its plant and then set[ ] the reasonable rate of return on that investment." MPower Commc'ns, 457 F.3d at 629. As other courts have noted, TELRIC is a very flexible standard. See, e.g., id. at 630 ("Because the endeavor is hypothetical and prospective, it is impossible to find `right' answers; there are only better and worse estimates."); AT & T Commc'ns of Ill., 349 F.3d at 405 ("TELRIC is a framework rather than a formula; there is considerable play in the joints."); AT & T Corp. v. FCC, 220 F.3d 607, 616 (D.C.Cir.2000) ("[E]normous flexibility is built into TELRIC.").

The second regulation requires state commissions to "establish different rates for elements in at least three defined geographic areas within the state to reflect geographic cost differences." 47 C.F.R. § 51.507(f). The process of establishing different rates for UNEs in different areas is called "geographic deaveraging." According to the FCC, rates must be deaveraged to "more closely reflect the actual costs of providing ... unbundled elements." Implementation of the Local Competition Provisions, 11 F.C.C.R. 15499, ¶ 764.

In 2002, the Nebraska Public Service Commission set the leasing rates for Qwest's "local loops," a term of art referring to the "last mile" of copper wire or fiber-optic cable that connects customers to the local network. In Docket C-2516, the Commission used three economic cost studies to determine TELRIC for Qwest's loops. The Commission then used a statistical technique called cluster analysis to place "wire centers" (the connecting point for local loops and the carrier's central office) with similar cost characteristics into three geographically-deaveraged zones. The Commission's application of this methodology resulted in the following monthly leasing rates for individual loops in each zone: Zone 1, $15.14; Zone 2, $35.05; and Zone 3, $77.92. Qwest later moved to reduce these rates by 20 percent.³ The Commission granted Qwest's motion, resulting in monthly rates of $12.14, $28.11, and $62.49. The parties agree that these rates complied with the TELRIC standard.

In addition to its rate-setting responsibilities, the Commission is responsible for administering Nebraska's "universal service fund," which is intended to "ensure[ ] that all Nebraskans, without regard to their location, have comparable accessibility to telecommunications services at affordable prices." Neb.Rev.Stat. § 86-317. The Commission supports universal access by allocating subsidies to service providers. In 2004, the Commission adopted a new method of allocating these subsidies. The so-called "long-term universal service funding mechanism" that the Commission adopted in Docket NUSF-26 was designed to target subsidies to rural, out-of-town areas where the costs of providing service are highest. In particular, the Commission developed a model using econometric regression (another form of statistical analysis) to calculate subsidies based on the relationship between household density and "forward-looking costs."⁴ The Commission also ordered certain subsidies for leased UNEs to be "ported" (i.e., transferred) from the ILEC to a CLEC. The Commission adjusted the size of portable subsidies linked to loops providing service to residential customers and eliminated portable subsidies linked to many loops providing service to business customers.⁵ While this proceeding did not affect the leasing rates for Qwest's loops, the new method of allocating subsidies led to a competitive imbalance in Zone 2 and Zone 3.⁶

In 2006, the Commission opened an investigation into whether the three geographically-deaveraged zones established in Docket C-2516 remained appropriate in light of the funding mechanism announced in Docket NUSF-26. In Docket C-3554, the Commission's staff proposed adding in-town and out-of-town designations to the existing zones. According to the staff, further deaveraging leasing rates would account for geographic cost differences "on a more targeted basis." Furthermore, the staff suggested that adding in-town and out-of-town designations would restore competitive neutrality by harmonizing leasing rates with portable subsidies.

The Commission adopted the staff's proposal to deaverage leasing rates into four zones: Zone 1 (out-of-town); Zone 2 (out-of-town); Zone 3 (out-of-town); and a zone encompassing in-town areas. The Commission defined in-town areas as "cities, villages or unincorporated areas with 20 or more households and densities greater than 42 households per square mile" and defined out-of-town areas as the "remaining areas" in each zone "that have not been assigned to a town."

The Commission also adopted the staff's proposed deaveraging method, which had four basic steps. First, the existing leasing rates were multiplied by the number of loops in each zone to determine the "total cost" in each zone. Second, the percentage of "expected cost,"⁷ calculated using the econometric regression model from Docket NUSF-26, was allocated to in-town and out-of-town areas. Third, the total cost in each zone determined in step one was allocated to in-town and out-of-town areas according to the percentages determined in step two. Fourth, the aggregate costs for in-town and out-of-town areas were divided by the number of in-town and out-of-town loops to determine per loop costs for in-town and out-of-town areas in each zone. The Commission's application of this methodology resulted in the following monthly leasing rates for loops in each zone: In-town, $10.76; Zone 1 (out-of-town), $37.04; Zone 2 (out-of-town), $95.32; and Zone 3 (out-of-town), $210.90.⁸

The Commission ordered Qwest to implement its order by identifying in-town and out-of-town customers (as proxies for in-town and out-of-town loops) using the distribution model developed in Docket NUSF-26. Qwest moved for reconsideration and rehearing, asserting that the distribution model did not contain the data needed to classify many of its customers' addresses as in-town or out-of-town. Qwest requested permission to use municipal tax records, which were already integrated into Qwest's billing system, instead of the distribution model. Qwest described this alternative method of implementing the Commission's order as "a reasonable...