Southwestern Bell Telephone Co. v. F.C.C.

• Citation: 168 F.3d 1344
• Decision Date: 19 March 1999
• Docket Number: 97-1468,Nos. 93-1779,s. 93-1779
• Parties: SOUTHWESTERN BELL TELEPHONE COMPANY, et al., Petitioners, v. FEDERAL COMMUNICATIONS COMMISSION and United States of America, Respondents. MFS Communications Company, Inc., et al., Intervenors.
• Court: United States Courts of Appeals. United States Court of Appeals (District of Columbia)

Page 1344

168 F.3d 1344

335 U.S.App.D.C. 44

SOUTHWESTERN BELL TELEPHONE COMPANY, et al., Petitioners, v. FEDERAL COMMUNICATIONS COMMISSION and United States of

America, Respondents.

MFS Communications Company, Inc., et al., Intervenors.

Nos. 93-1779, 97-1468.

United States Court of Appeals, District of Columbia Circuit.

Argued Jan. 7, 1999.

Decided March 19, 1999.

On Petitions for Review of Orders of the Federal Communications Commission.

Michael J. Zpevak argued the cause for petitioners. On the briefs were James D. Ellis, Robert M. Lynch, Durward D. Dupre, Darryl Howard, and Jeffrey B. Thomas. Nancy C. Woolf and Thomas A. Pajda entered appearances.

John E. Ingle, Deputy Associate General Counsel, Federal Communications Commission, argued the cause for respondents. With him on the brief were Joel I. Klein, Assistant Attorney General, U.S. Department of Justice, Robert B. Nicholson, and Robert J. Wiggers, Attorneys, Christopher J. Wright, General Counsel, Federal Communications Commission, Daniel M. Armstrong, Associate General Counsel, and Laurel R. Bergold, Counsel.

Russell M. Blau argued the cause for intervenors Association for Local Telecommunications Services, et al. With him on the brief were Andrew D. Lipman, Robert V. Zener, Frank W. Krogh, Mark Ehrlich, Peter D. Keisler, Peter H. Jacoby, Richard J. Metzger, and Craig Joyce. Mark C. Rosenblum entered an appearance.

Robert B. McKenna was on the statement in lieu of brief for intervenor US West Communications.

Before: SILBERMAN, SENTELLE and RANDOLPH, Circuit Judges.

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 "Commission") regulating the rates of local exchange carriers ("LECs") for physical collocation service. The FCC suspended a portion of the rates attributable to overhead loadings for a five-month period, pending investigation. Before the suspension period ended, the FCC issued an "interim prescription" 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 exceeded one standard deviation above the industry-wide average.

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 statutory 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 companies, 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 switching 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 competitive 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. Cos. v. FCC, 24 F.3d 1441 (D.C.Cir.1994).

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 vacating requirements of the original order, Bell Atlantic v. FCC, 24 F.3d 1441 (D.C.Cir.1994), the Commission's basic requirements continue. Expanded Interconnection with Local Telephone 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 Local 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 Telephone 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 accounting 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 Interconnection 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. However, 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 52-54).

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. §§ 154(i), 201, and 205. Id. p 37 (J.A. at 53). Contending that the FCC had exceeded its statutory authority, Southwestern Bell filed a petition for review of the First Report and Order with this court on November 22, 1993. On January 12, 1994, the FCC filed a motion to hold the appeal in abeyance, which this court granted on March 14, 1994.

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 conditions 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 permissible overhead loading factors, ordered tariff revisions to correct unreasonable rate structures, and struck down certain tariff provisions on the grounds that they were unjust, unreasonable, discriminatory, and anticompetitive. The FCC affirmed the Bureau's partial suspension of the expanded interconnection 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. § 204(a)) (J.A. at 244). Again, the FCC noted that its partial suspension fulfilled the...