United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued September 9, 2002 Decided October 22, 2002

No. 01-1198

WorldCom, Inc.,

Appellant

v\.

Federal Communications Commission,

Appellee

Verizon New England Inc., et al.,

Intervenors

Consolidated with

Nos. 01-1206 and 01-1209

Appeals of an Order of the

Federal Communications Commission

Mark D. Schneider argued the cause for appellants and intervenor AT&T
Corp. With him on the briefs were Thomas F. O\'Neil III, William Single
IV, Karlen J. Reed, Assistant Attorney General, Attorney General\'s
Office of Commonwealth of Massachusetts, Charles C. Hunter, Catherine M.
Hannan, David W. Carpenter, Mark E. Haddad, and David L. Lawson. Mark C.
Rosenblum and Peter D. Keisler entered appearances.

James M. Carr, Counsel, Federal Communications Commission, argued the
cause for appellee. With him on the brief were John A. Rogovin, Deputy
General Counsel, and John E. Ingle, Deputy Associate General Counsel.

Michael E. Glover argued the cause for intervenors Verizon New England
Inc., et al. With him on the brief were Mark L. Evans, Donna M. Epps,
Colin S. Stretch, and Scott H. Angstreich.

William P. Agee and Albert P. Halprin were on the brief for amicus
curiae Massachusetts Department of Telecommunications and Technology,
urging affirmance.

Before: Tatel and Garland, Circuit Judges, and Williams, Senior Circuit
Judge.

Opinion for the Court filed by Senior Circuit Judge Williams.

Williams, Senior Circuit Judge: On January 16, 2001 Verizon submitted an
application to the Federal Communications Commission under § 271 of the
Telecommunications Act of 1996, 47 U.S.C. § 271, seeking authority to
offer long distance service to customers in Massachusetts. The
Com-mission approved the application on April 16, 2001, just within the
statutory 90-day time limit. In Re Application of Verizon, et al. for
Authorization to Provide In-Region, InterLATA Services in Massachusetts,
16 FCC Rcd 8988 (2001) (\"Order\"). WorldCom, AT&T and a number of
similarly situated firms acting through a trade association
(\"appellants\" or \"WorldCom\") challenge the approval. The parties\'
main dispute revolves around the Commission\'s conclusion that
Verizon\'s rates for unbundled network elements (\"UNEs\") complied with
the \"TELRIC\" standard (total-element long run incremental cost).
Appellants\' challenge in essence attacks as unreasonable the
Commission\'s use in combination of two devices that it had employed
separately, one in its § 271 approval for Oklahoma, which we upheld in
Sprint Comm. Co. v. FCC, 274 F.3d 549 (D.C. Cir. 2001), and the other in
its § 271 approval for New York, which we upheld in AT&T Corp. v FCC,
220 F.3d 607 (D.C. Cir. 2000). We are not persuaded. As for the two
remaining issues, one requires a remand because the relevant record is
not materially distinguishable from that in Sprint; we lack jurisdiction
over the other.

\* \* \*

Because our opinions in AT&T and Sprint set out the statutory background
in some detail, our treatment here will be brief. The decree settling
the AT&T antitrust litigation, the Modification of Final Judgment
(\"MFJ\"), see United States v. American Telephone and Telegraph Co.,
552 F. Supp. 131 (D.D.C. 1982), aff\'d sub nom. Maryland v. United
States, 460 U.S. 1001 (1983), split the sale of long distance services
from the sale of local telephone services, so that the Bell Operating
Companies (spun off from AT&T by the MFJ) could provide local service
but were barred from offering long-distance service in their local
markets. But § 271 of the 1996 Act allows those firms\--now, together
with their successors, commonly known as incumbent local exchange
carriers or \"ILECs\"\--to secure FCC approval to sell long-distance
service to customers in the region for which they are the dominant
local-service providers. To receive § 271 approval an ILEC must show
(among many other things) compliance with a list of fourteen conditions,
termed the \"competitive checklist,\" designed to ensure that an ILEC
will be permitted to sell long-distance service in its local region only
when it has opened up the local service market to competition. 47 U.S.C.
§ 271(c)(2)(B).

One of the fourteen items on the checklist requires an ILEC to offer
access to \"network elements\" needed by competitors to provide
telecommunications service. See id. at § 251(c)(3) (incorporated into
the competitive checklist by § 271(c)(2)(B)(ii)). These elements, the
unbundled network elements or UNEs referred to earlier, must be offered
to competitive local exchange carriers (\"CLECs\") at rates that are
\"establish\[ed\]\" by state regulatory agencies pursuant to a \"pricing
methodology\" prescribed by the FCC. See AT&T Corp. v. Iowa Utilities
Bd., 525 U.S. 366, 383 (1999). The methodology chosen by the Commission
is called TELRIC, which requires that rates be based on \"the cost of
operating a hypothetical network built with the most efficient
technology available.\" Id. at 374 n.3. See also Verizon Communications,
Inc. v. FCC, 122 S. Ct. 1646 (2002) (upholding the TELRIC standard).

Application of the TELRIC standard has proved complex, involving
detailed fact-finding over years of litigation in state agencies. This
complexity has two important consequences for this case. First, because
the FCC has only 90 days to approve or reject a § 271 application, it
cannot independently determine the TELRIC compliance of an ILEC\'s UNE
rates. Rather, the FCC defers to the determinations of the state
agencies who \"possess\[ \] a considerable degree of expertise\" and who
typically perform \"a significant amount of background work\" during the
rate determinations. AT&T, 220 F.3d at 616. Thus, the FCC need only
ensure that the state proceedings \"comply with basic TELRIC
principles\" and are not infected with clear factual errors so
\"substantial that the end result falls outside of the range that the
reasonable application of TELRIC principles would produce.\" Id. at
615-16. Second, the Commission may base its finding of TELRIC compliance
on a comparison of the disputed rates with those of a neighboring state
which it had already approved under § 271, provided that the applicant
can demonstrate that local costs were at or above those in the benchmark
state. See Joint Application by SBC Communications, Inc. et al. for
Provision of In-Region InterLATA Services in Kansas and Oklahoma, 16 FCC
Rcd 6237 (2001) at p p 82-87 (determining that the Oklahoma loop charges
were TELRIC compliant based on a comparison with previously approved
Texas loop charges), aff\'d, Sprint, 274 F.3d at 561.

The Massachusetts § 271 controversy began when Verizon filed an initial
application in September 2000. Possibly because of various criticisms,
including FCC concern over its UNE pricing, it withdrew the application
in December. But before doing so it filed a tariff lowering its UNE
rates to levels substantially equivalent to the rates offered by Bell
Atlantic (Verizon\'s name before its merger with GTE) in New York, which
had already secured Commission approval under § 271. See AT&T, 220 F.3d
at 611-16.

These New York rates had themselves been the subject of challenge. CLECs
had offered evidence\--both before the New York Public Service
Commission (\"NYPSC\") and the FCC (during the § 271 proceeding)\--that
Bell Atlantic had understated the size of the discounts it received on
certain switch purchases, with the result that its UNE rates might in
fact not comply with TELRIC. The NYPSC re-opened its proceedings to
inquire into the claims, but the Commission nonetheless approved the §
271 application. In AT&T we rejected the CLECs\' attack on the approval,
finding that such newly discovered evidence was not in itself enough to
upset an otherwise valid approval. 220 F.3d at 617-18. In a move loosely
paralleling that of the NYPSC, the Massachusetts Department of
Telecommunications and Energy (\"DTE\") in January 2002 embarked on its
scheduled, quinquennial review of Verizon\'s UNE rates. Thus, as in New
York, at the times the relevant § 271 applications were pending before
the FCC, the disputed UNE rates were under challenge and review in the
state agency with immediate authority.

WorldCom\'s leading claim is even if the New York rates were acceptable
at the time, their age and their errors made them inadequate as
benchmarks, so that the Massachusetts § 271 approval was arbitrary and
capricious. In addition, they say that it was arbitrary and capricious
for the FCC to dismiss their argument that the Massachusetts UNE rates
created a \"price squeeze,\" i.e., were so high that a CLEC could not
use UNEs for profitable sale of local service.

Finally, WorldCom argues that the § 271 application was fatally
defective because, at the time it was filed, Verizon was not offering
its advanced services at resale discounts, in contravention of item 14
on the competitive checklist, see § 271(c)(2)(B)(xiv).

1\. Reasonableness of the New York Benchmark

WorldCom does not claim that there is anything inherently flawed in the
Commission\'s use of benchmarking (which we upheld in Sprint), even
where the previously approved rates had been seriously called into
question, as was true of the rates approved in the New York § 271
process (which we upheld in AT&T). Rather, it contends that the
Commission\'s deference under AT&T is owed to a process, not to a
result; deference by the Commission is therefore inappropriate where the
rates under review were adopted by a state agency (that of
Massachusetts) that did not conduct its own fact finding. Second,
WorldCom argues that if the FCC chooses to use a benchmark to evaluate
the UNE rates before it in the § 271 proceeding, it must ensure that the
chosen benchmark is reasonable, based on all available evidence.

WorldCom\'s first point completely overlooks the facts of Sprint. There
the ILEC had simply given a certain class of Oklahoma charges \"an
arbitrary 25% \'haircut,\' \" 274 F.3d at 558, which had the effect of
bringing them into line with rates approved by the Commission for Texas,
id. at 561. We see no principled distinction between Oklahoma\'s
\"process,\" accepting arbitrarily trimmed rates that matched ones
approved in Texas (and blessed by the Commission under § 271) and
Massachusetts\'s similar adoption of ones matching those approved in New
York (and similarly blessed by the Commission).

Moreover, many of the elements of the \"process\" that merited deference
under AT&T are present here, both in Massachusetts process itself and
the Commission\'s clear recognition of the link between the ongoing New
York proceedings and the Massachusetts rates. WorldCom points to the
critical role of the \"active review and modification of Bell
Atlantic\'s proposed \[UNE\] prices.\" In re Application by Bell
Atlantic New York to Provide In-Region, InterLATA Service, 15 FCC Rcd
3953 (2000), at p 238. But such active review is present here as well.
The NYPSC is itself continuing to review its own UNE prices, and as the
FCC stated in the Order, New York\'s rate revisions could \"undermine
Verizon\'s reliance on those \[old\] rates in Massachusetts and its
compliance with the requirements of section 271,\" if the revisions were
not also adopted in Massachusetts. 16 FCC Rcd 8988, at p 30. In
addition, the Commission noted that DTE itself was \"endeavoring to
reset UNE rates\" and observed that if \"prices are not set in
accordance with our rules and the Act, \[the Commission\] retain\[s\]
the ability \... to take appropriate enforcement action.\" Id. In light
of these precautions, it was perfectly reasonable for the Commission to
review the UNE rates in Massachusetts under the same deferential
standard as it used in evaluating rates for New York and Oklahoma.

But WorldCom also argues that the Commission\'s chosen benchmark was
unsuitable, having become radically detached from TELRIC. The causes of
such detachment, according to WorldCom, range from the age of the rates
(rates that passed muster in the December, 1999 § 271 proceeding for New
York were more than a year older in April 2001), the flaws that had
infected the rates from the beginning, and additional evidence brought
to bear against them not present in the New York determination.

At some point, WorldCom\'s argument plainly must become a winner. In a
market with falling costs, ancient UNE rates cannot serve as a valid
benchmark. Nor could ones that had been convincingly shown, for example,
to have been based on fraudulent ILEC submissions. Moreover, WorldCom is
surely right to suggest that a challenger might tender evidence of
benchmark unreasonableness so strong as to preclude FCC approval without
a hearing.

To the extent, however, that WorldCom argues simply that the Commission
could have chosen a better benchmark, it poses the wrong issue. The FCC
need not choose the \"optimal\" benchmark, only a reasonable one. Nor
can World-Com expect the § 271 process to grow into a full-scale
ratemaking on the part of the FCC, if for no other reason than the time
constraints imposed by the 90-day limit. The FCC is thus under no duty
to provide a detailed, point-by-point explanation of why it rejected the
claim that use of the benchmark was improvident. Rather, the record need
only show that the FCC reasonably concluded that it had, in light of
appellants\' claims and proffered evidence, reasonable grounds to be
satisfied that the disputed rates were unlikely to exceed the range of
TELRIC compliance. As we held in AT&T, 220 F.3d at 616, and reiterated
in Sprint, 275 F.3d at 555, TELRIC is not a single rate but a ratemaking
methodology that may yield a rather broad range of rates. We believe
that here the Commission\'s review of the new evidence was enough.

WorldCom, for instance, points to comparative studies that show that
other states have lower UNE rates than New York. But if TELRIC implies a
range of rates\--a point on which appellants themselves rely in pressing
their price squeeze argument\--then such variation by no means shows a
lack of TELRIC compliance. WorldCom also provides an alternative cost
study in support of their position, but this study was conducted in
1996, was rejected by DTE when presented to it in 1996, and does not
appear to have ever been accepted by the FCC. At best, this study proves
that the Commission and appellants have different opinions on the best
way to determine UNE prices; our deference, of course, is owed to the
Commission.

Appellants also make much of the fact that the New York rates were the
oldest UNE rates in the nation, and suggest that they were therefore
outdated. In addition, they point to evidence of a decline in switch
costs over time. While the New York rate may have exceeded theoretically
perfect TELRIC levels when the Massachusetts Order was issued, such a
lag does not render a rate invalid. Indeed, when element costs are
falling, such temporary deviations, or regulatory lags, are both
unavoidable and perhaps even desirable. In AT&T we recognized that a
state\'s TELRIC rates could not always reflect the most recently
available information, since rate determinations consume substantial
periods of time and cannot be constantly undertaken. 220 F.3d at 617-18.
Indeed, a process of Penelope-like unraveling and reinvention would,
like hers, prove endless. And in upholding TELRIC, the Supreme Court
affirmatively invoked the likelihood of a regulatory lag, saying that
such a lag would prevent TELRIC prices from dropping so low as to unduly
tempt CLECs to rely on ILEC-supplied UNEs rather than build their own
facilities. Verizon, 122 S. Ct. at 1669-70.

So the mere age of a rate doesn\'t render the FCC\'s reliance on it
unreasonable; we can reverse the Commission\'s judgment only if it
sufficiently disregarded the issue of the rate\'s age so as to adopt
rates that were unreasonably outdated. This, we are satisfied, the
Commission did not do. While it is true that the Commission made no
explicit findings that the New York rates were in line with current
costs, it adopted what is likely a far more workable approach to the
problem of timeliness\--namely, reliance on the state\'s own processes
of rate revision and correction. As noted above, the Commission observed
that Verizon\'s § 271 compliance in Massachusetts would be undermined if
its UNE rates fell out of line with TELRIC levels, as determined by the
active rate review processes under way in New York and Massachusetts. 16
FCC Rcd 8988, at p p 29, 30, 33, 35. Unless these determinations were
themselves unsupported or arbitrary and capricious\--and we see no
evidence that they are\--nothing else is required of the Commission on
this issue.

Apart from suggestions that the New York rates were no longer current,
WorldCom points to additional flaws in the rates themselves. To a large
extent these claims simply duplicate the assertions of inaccuracy that
were at issue in AT&T. To that extent, obviously, appellants are simply
inviting us to reject the conclusion we reached there\--that the process
of administrative correction under way in New York was enough to assure
adequate TELRIC compliance for purposes of § 271\--an invitation we
could not accept even if we thought it wise (which we don\'t). In fact,
it turns out here that in January 2002, after the Commission granted the
Massachusetts § 271 approval, the NYPSC issued an order in large measure
accepting the CLECs\' position on the switch discounts, resolving
several other issues in their favor, and requiring a reduction of the
New York rates by more than 50%. See Proceeding on Motion of the
Commission to Examine New York Telephone Company\'s Rates for Unbundled
Network Elements, Order on Unbundled Network Element Rates, Case
98-C-1357 (NYPSC Jan 28. 2002). And the Massachusetts DTE followed suit
with an order broadly accepting the CLECs\' claims and in all likelihood
leading to a comparable reduction. See Investigation by the Department
of Telecommunications and Energy on its Own Motion in the Appropriate
Pricing, D.T.E. 01-20 (released July 11, 2002). These findings,
obviously unavailable to the Commission at the time of its decision,
seem more to establish the effectiveness of the process of agency
correction on which it relied\--rough though it may be\--rather than a
basic flaw in its approach.

WorldCom tries to distinguish our ruling in AT&T by noting that when
AT&T was decided, the flaws at issue were thought to be small and
difficult to recalculate, whereas they are now known to be large and
easily recalculable. We note, however, that WorldCom has not even tried
to take us through the math on this calculation; more tellingly, its
claim relies on data collected by the Commission for the purposes of
implementing its duties as to the Universal Service Fund\--information
that the FCC insists is unreliable for the determination of UNE rates.
In AT&T, we held that this single errant cost input value did not
justify a finding that basic TELRIC principles had been violated, and
the proffer of additional evidence that is at best uncertain and highly
contestable is not enough to justify a different conclusion.

More importantly, though, this attempted distinction misses the central
point of our prior holding in AT&T: that it is reasonable for the FCC to
rely on the states\' periodic rate revision process as a means of
correcting flaws in adopted rates. Indeed, if there now exists a
database of switch purchases that provides greater accuracy for use in
the TELRIC cost model, as WorldCom claims, it seems fair to assume that
this new information was incorporated in the new rates promulgated by
NYPSC and DTE, or will be if WorldCom seeks judicial review or invokes
the FCC\'s own monitoring process under 47 U.S.C. § 271(d)(6). WorldCom
may disagree with the wisdom of the strategy the Commission adopted
here, and may be skeptical that the states\' rate revision processes
will keep their rates within the range of TELRIC compliance, but it
hasn\'t demonstrated that the strategy is unreasonable.

WorldCom also notes that the New York rate revision procedure, unlike
the one recently undertaken in Massachusetts, ordered refunds to correct
for possibly incorrect cost inputs. But we didn\'t rely on the refund
procedure in our decision in AT&T, and for good reason: state
rate-setting procedures are complex systems aimed at balancing the
competing interests of customers and investors, and we will not upset
that balance ad hoc by requiring refunds (or requiring the Commission to
do so) unless they are clearly necessary to render the rates
TELRIC-compliant. Such was not the case in AT&T, and it is not the case
here. As for the last attempt to distinguish AT&T\--the claim that
retail rates are so low in Massachusetts that these UNE rates would
prove to be a greater entry barrier to CLECs than they did in New York
we note that this issue properly relates to WorldCom\'s price squeeze
argument discussed below.

2\. Possible Price Squeeze and the Public Interest

Appellants argue, as did their counterparts in Sprint, 274 F.3d at
554-56, that the FCC failed to consider their claim that the ILEC\'s UNE
rates would create a \"price squeeze,\" i.e., prices for CLECs\' inputs
so high as to largely disable them from competing profitably in the
local market with the ILEC, the supplier of those inputs. See, e.g., FPC
v. Conway Corp., 426 U.S. 271 (1976) (requiring agency to consider
price-squeeze challenges to an electric utility\'s proposed wholesale
rates). Indeed, the FCC\'s justifications for not considering this
issue\--briefly, that the \"price-cost squeeze\" is irrelevant because §
271 directs the Commission only to examine costs rather than profits;
that compliance with the competitive checklist is enough to prove that
the market has been opened to competitive entry; that any deficiencies
in actual local competition may well be due to individual ILEC
strategies; and that the matter may turn largely on the level of purely
local rates that are entirely under the authority of state
regulators\--are virtually identical to the rationales we found
inadequate in Sprint. Compare Order, 16 FCC Rcd 8988, at p p 41, 234-35,
with Sprint, 274 F.3d at 554-56. The rationales are no more convincing
here than there.

The only apparent difference between the Order here and the
Kansas/Oklahoma Order remanded in Sprint is that here the record
indicates a higher volume of competitive entry. See Order, 15 FCC Rcd
8988, at p 41 & n.112. But this evidence alone, unanalyzed, is not
enough to discharge the Commission\'s duty to assure that ILEC entry to
the long distance market is in the public interest. After all, classic
price squeeze cases have never turned on a finding that competition by
the input-purchasing firms was absolutely precluded. See, e.g., Anaheim
v. FERC, 941 F.2d. 1234, 1238 (D.C. Cir. 1991) (describing price squeeze
inquiry as determining whether the challenged conduct \"has exerted any
anticompetitive effects\" (emphasis added)). Because of the range of
TELRIC-compliant UNE rates, a set of fully compliant rates might\--under
some analyses and policy judgments, not addressed by the Commission in
this record\--impede local competition enough to render a § 271 approval
in contravention of the \"public interest.\" Accordingly, we remand the
case for further consideration in the light of Sprint.

3\. Provision of Advanced Services at Wholesale Rates

Appellants\' final argument is that Verizon failed to satisfy checklist
item No. 14, see § 271(c)(2)(B)(xiv), in that it was not, on the date of
its application on January 16, 2001, offering CLECs DSL and other
advanced services at wholesale rates. In so doing Verizon had relied on
a justification that the Commission had formerly embraced, but that this
court rejected in Association of Communications Enterprises v. FCC, 235
F.3d 662 (D.C. Cir. 2001). That opinion was issued on January 9, 2001,
but the mandate issued only on March 6, 2001. In reliance on this delay
in the mandate, the Commission held that it would not consider
Verizon\'s failure to provide the services at wholesale rates, saying
that Verizon should not be faulted for complying \"with a Commission
order in effect at the time of the application.\" Order p 219 & n.707.

It is undisputed that three days before the issuance of the Order here,
Verizon (actually, its affiliate) had filed a tariff that brought it
into full compliance with checklist item 14. At oral argument counsel
for appellants admitted that the issue currently has no practical
significance. Although the issue was discussed at oral argument in the
context of possible mootness, it appears that nothing has happened
between the initial filing of the suit and oral argument that might
affect the significance of Verizon\'s delay. Thus we conclude that any
Commission error never inflicted an injury sufficient to give WorldCom
standing to bring the issue. WorldCom\'s half-hearted attempt to make
out a theory that the issue was \"capable of repetition, yet evading
review\" is therefore inapposite, as that familiar exception to mootness
cannot confer standing on a claim when injury in fact was missing at the
outset. Friends of the Earth, Inc. v. Laidlaw Envtl. Services, 528 U.S.
167, 191 (2000). In any case, the issue here does not even qualify as
\"evading review\" since the issue is clearly capable of remedy if
Verizon were to retract its resale discounts in this case, or were to
withhold resale discounts in other states with respect to which it files
a § 271 application. Thus, no matter whether the issue is a matter of
standing, mootness or both, we are sure that the complete want of effect
in the real world deprives us of jurisdiction over the intriguing
question of how the distinction between opinion and mandate might play
out in this context.

\* \* \*

We remand the price squeeze issue to the FCC for further consideration;
we dismiss the checklist item 14 issue for want of jurisdiction; and in
all other respects we affirm the Commission Order.

So ordered.