WorldCom v. Fed. Commun. Comm'n

• Decision Date: 02 February 2001
• Docket Number: No. 99-1395,99-1404,99-1395
• Citation: 238 F.3d 449
• Parties: (D.C. Cir. 2001) WorldCom, Inc., et al., Petitioners v. Federal Communications Commission and United States of America, Respondents United States Telephone Association, et al., Intervenors & 99-1472
• Court: U.S. Court of Appeals — District of Columbia Circuit

Page 449

238 F.3d 449 (D.C. Cir. 2001) WorldCom, Inc., et al., Petitioners
v.
Federal Communications Commission and United States of America, Respondents
United States Telephone Association, et al., Intervenors No. 99-1395, 99-1404 & 99-1472 United States Court of Appeals FOR THE DISTRICT OF COLUMBIA CIRCUIT Argued November 30, 2000
Decided February 2, 2001

Page 450

Copyrighted Material Omitted

Page 451

On Petitions for Review of an Order of the Federal Communications Commission

Page 452

Carl S. Nadler argued the cause for petitioners and supporting intervenors. With him on the briefs were Ian Heath Gershengorn, Thomas F. O'Neil, III, William Single, IV, Jeffrey A. Rackow, Mark C. Rosenblum, Peter H. Jacoby, Judy Sello, Gene C. Schaerr, James P. Young, Brian Conboy, Thomas Jones, Albert H. Kramer, Robert J. Aamoth, Charles C. Hunter and Catherine M. Hannan. Maria L. Woodbridge entered an appearance.

Lisa S. Gelb, Counsel, Federal Communications Commission, argued the cause for respondent. With her on the brief were Christopher J. Wright, General Counsel, and John E. Ingle, Deputy Associate General Counsel. Robert B. Nicholson and Robert J. Wiggers, Attorneys, U.S. Department of Justice, Daniel M. Armstrong, Associate General Counsel, Federal Communications Commission, and Laurence N. Bourne, Counsel, entered appearances.

Mark L. Evans, Rachel E. Barkow, M. Robert Sutherland, Dn L. Poole, Robert B. MeKenna, James D. Ellis, Alfred G. Richter, Jr., Roger K Toppins, Hope E. Thurrott, Charles J. Scharnberg, William P. Barr, M. Edward Whelan III, Michael E. Glover, Edward Shakin and Joseph DiBella were on the brief of interveners Bell South Corporation et al. John H. Harwood II and William R. Richardson, Jr. entered appearances.

Before: Edwards, Chief Judge, and Sentelle and Randolph, Circuit Judges.

Opinion for the Court filed by Circuit Judge Sentelle.

Sentelle, Circuit Judge:

Petitioners, WorldCom, AT&T, Time Warner Telecom, and other long distance telephone service providers, seek review of the FCC's Fifth Report and Order and Further Notice of Proposed Rulemaking in In Re Access Charge Reform, 14 F.C.C.R. 14,221 (1999) (hereinafter "Order" or "Pricing Flexibility Order"). That order grants local exchange carriers ("LECs") immediate pricing flexibility for some interstate access services and establishes procedures through which LECs may seek substantial additional relief from existing price cap regulation. Petitioners maintain that the Order is arbitrary, capricious, and contrary to law in that it violates the FCC's statutory mandate to ensure "just and reasonable" prices for telecommunication services and promote the public interest. Several LECs--BellSouth, Qwest, SBC Communications, and Verizon--intervene in support of the FCC.

We hold that the FCC's decision to grant additional pricing flexibility to incumbent LECs through a series of collocation based triggers, deregulation of new services, and deaveraging of rates was neither arbitrary and capricious nor contrary to law. The FCC made a reasonable policy determination that collocation was a sufficient proxy for market power in determining whether to grant pricing flexibility to LECs and sufficiently explained the basis for its decision to grant immediate pricing flexibility for some services. For these reasons, we uphold the FCC's order and deny the petitions for review.

I. Background

A. Legal and Regulatory Context

In recent years, the FCC has sought to facilitate greater competition in the provision of both long-distance and local telephone service. See, e.g., AT&T v. FCC, 220 F.3d 607 (D.C. Cir. 2000); Bell Atl. Tel. Cos. v. FCC, 79 F.3d 1195 (D.C. Cir. 1996); Nat'l Rural Telecom Ass'n v. FCC, 988 F.2d 174 (D.C. Cir. 1993). Competition for telephone services, where it exists, serves the FCC's statutory goal of ensuring fair and reasonable prices for telecommunications services. Therefore, as telephone markets become more competitive, the FCC has lessened regulatory control over those markets, including the market for interstate access services. It is within this evolving regulatory context that this case arises.

1. Interstate Access Services

Local telephone service is provided by local exchange carriers. 47 U.S.C.

Page 453

S 153(26). Typically, one LEC is the dominant, or "incumbent," service provider in each local area. Until relatively recently, the incumbent LECs had virtual monopolies over the provision of local phone service in their territories.

Long distance service--that is, service between local access and transport areas ("LATAs") or "InterLATA" service--is, for the most part, provided by interexchange carriers ("IXCs"), such as petitioners WorldCom and AT&T. Long distance providers are reliant upon LECs to reach their customers. When a customer makes a long distance call, the IXC must have "access" to the local networks at both the originating and receiving end of the call in order to complete the connection. Generally, the LEC connects the call from the caller to a switch or "end office," which is in turn connected to a "serving wire center" (SWC), which is itself connected to an interconnection point, or "point of presence" (POP), with the long distance carrier. This same series of connections will also be made at the receiving end of the phone call--from POP to SWC to switch to call recipient. LECs charge the IXCs for providing this "access service" in accordance with 47 C.F.R. Part 69. IXCs then bill customers directly for long distance calls.

There are two types of access service: "switched access" and "special access." Switched access service requires the creation of a connection between the caller and the long distance company on a "call-by-call" basis. This entails (1) a connection between the caller and a local LEC switch, (2) a connection from the LEC switch to the SWC ("interoffice transport"), and (3) an entrance facility which connects the SWC and the long distance company's POP. Switched access can either be dedicated to a particular IXC ("dedicated transport" or "direct trunked transport") or shared among IXCs. "Special access" service, on the other hand, uses dedicated lines between the customer and the IXC's local POP. Switched access is used by most residential customers. Most users of special access services are companies with high call volumes.

For quite some time incumbent LECs dominated access service markets. In recent years, however, other companies have begun to enter these markets. Market entrants typically provide a portion of full access service, such as from the IXC POP to the SWC, in any given market. This development was facilitated by changes in FCC regulations. Beginning in 1992, the FCC required incumbent LECs to permit competitors to "collocate" their equipment at LEC wire centers and connect directly to the LEC networks as a means of spurring additional competition in access service. See Expanded Interconnection with Local Tel. Co. Facilities, 7 F.C.C.R. 7369, p P1-3, 39, reconsidered 8 F.C.C.R. 127 (1992), vacated in part and remanded in part, Bell Atl. Tel. Cos. v. FCC, 24 F.3d 1441 (D.C. Cir. 1994). Now, the FCC believes, there may be sufficient competition for access services to justify deregulatory measures.

2. Regulatory Framework

For years the FCC imposed traditional rate of return regulation on the LECs. Beginning in 1990, however, the FCC substituted "price cap" regulation for the largest LECs. See Nat'l Rural Telecom Ass'n, 988 F.2d at 178-79. Price cap regulation imposes a "cap" on aggregate prices charged by LECs for certain services in a given area. See 47 C.F.R. §§ 61.41-.49. For the purposes of setting the caps, services are grouped in various "baskets." See 47 C.F.R. § 61.42(d). These are the common line basket, traffic-sensitive basket, trunking basket, and special access basket, the latter two of which are at issue in this case. LECs are also required to charge averaged (i.e., uniform) rates in given service areas, absent substantial cost differentials. See 47 C.F.R. § 69.3(e)(7). This averaging requirement is designed to prevent price discrimination by LECs.

Page 454

Price cap regulation offers more pricing flexibility than rate of return regulation, as companies are relatively free to set their own prices so long as they remain below the cap. A company can raise the price for one service so long as that increase is offset by a price decrease in another. Prices that are below upper price "bands" for a given service are also presumed lawful and given streamlined review by the FCC. See Bell Atl. Tel. Cos., 79 F.3d at 1198. The FCC implemented price cap regulation for LECs as "a transitional regulatory scheme until actual competition makes price cap regulation unnecessary." Order p 11.

Price cap regulation is supplemented by tariff requirements for "dominant carriers" (including all regional Bell Operating Companies in their local service areas), under which companies are required to publish rate changes before they are implemented. 47 U.S.C. § 203(a), § 204(a). Tariffs must be filed fifteen days in advance of price increases and seven days in advance of price decreases. 47 U.S.C. § 204(a)(3). This allows both the FCC and affected customers to review and challenge price changes by LECs. The tariff requirement is waived for those carriers that are deemed non-dominant because they face substantial competition from other firms.

3. The 1996 Act

In 1996, Congress enacted the Telecommunications Act of 1996 to "promote competition and reduce regulation in order to secure lower prices and higher quality services for American telecommunications consumers and encourage the rapid deployment of new telecommunications technologies." Pub. L. No. 104-104, 110 Stat. 56, 56 (Introductory Statement). The 1996 Act requires incumbent LECs to grant competitors (such as the IXCs) greater access to their local networks through collocation of facilities, the purchase...